It is classified as treasury stock because it is a contra equity account. It is simply a reduction in the number of shares outstanding. I think an example will best illustrate the differences between the two methods.
Example:
MikeHoncho Co. repurchases 10 shares at $5.00 (Par Value: $2.00, Originally issued for: $10.00)
-Cost Method
At purchase, treasury stock is debited for COST and cash is credited. *Additional paid in capital is not affected until treasury stock is resold.
Treasury stock………50 (5*10)
…Cash…………………….50
-Par Value Method
At purchase, treasury stock is debited for PAR VALUE, additional paid in capital is debited for the original amount of additional paid in capital recorded on the issuance of common stock, and cash is credited. The additional paid in capital account from treasury stock will be debited or credited depending on how much was paid to reacquire the shares. The following journal entries illustrate the amount paid to reacquire the shares ($5.00 in this example) is less than the original price ($10.00 in this example).
Treasury stock……….20 (2*10)
APIC (common)………80 ((10-2)*10)
…APIC (treasury)…………..50 ((10-5)*10)
…Cash…………………………50 (5*10)
Done: 5/22/14
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- Ernest Hemingway
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