Par value method

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  • #1769815 Reply
    SchruteBeet
    Participant

    Asp Co. was organized on January 2, 20X1, with 30,000 authorized shares of $10 par common stock. During 20X1 the corporation had the following capital transactions:

    January 5 – issued 20,000 shares at $15 per share.
    July 14 – purchased 5,000 shares at $17 per share.
    December 27 – reissued the 5,000 shares held in treasury
    at $20 per share.

    Asp used the par value method to record the purchase and re-issuance of the treasury shares. In its December 31, 20X1, balance sheet, what amount should Asp report as additional paid-in capital in excess of par?

    A. $100,000
    B. $125,000
    C. $140,000
    D. $150,000

    Explanation: B is correct. Summary journal entries:

    Dr. Cr.

    Jan. 5 Cash (20,000 x $15) 300,000
    Additional paid-in capital
    (20,000 x ($15 – $10)) 100,000
    Common stock (20,000 x $10) 200,000
    July 14 Treasury stock (5,000 x $10) 50,000
    Additional paid-in capital
    (5,000 x ($15 – $10)) 25,000*
    Retained earnings
    (5,000 x ($17 – $15)) 10,000
    Cash (5,000 x $17) 85,000
    Dec. 27 Cash (5,000 x $20) 100,000
    Additional paid-in capital
    (5,000 x ($20 – $10)) 50,000
    Treasury stock (5,000 x $10) 50,000

    Balance of additional paid-in capital 12/31/X1 =

    $100,000 – $25,000 + $50,000 = $125,000

    * (5,000 shares / 20,000 shares) x $100,000 = 25% x $100,000 = $25,000
    OR
    * 5,000 shares x ($15 original issue price per share –
    $10 par value share) = $25,000

    What I don't understand is why is APIC only reduced by 25,000 when it has a balance of 100,000?

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    #1770631 Reply
    Anonymous
    Inactive

    Seems pretty straightforward to me?

    Just reversing the original APIC, except for 5,000 shares x 5 instead of 20,000 x 5.

    #3314674 Reply
    mt
    Guest

    I literally had this exact same question. Is it because APIC is limited when repurchasing using the PAR method because that was not the case when reissuing shares (par method), or buying back/reissuing shares for cost method.

    #3314677 Reply
    mt
    Guest

    In another question, the book finally explains it by saying “under the par method, reacquisition of treasury stock is recorded by reducing APIC by the amount recorded when the shares were originally issued to investors”, so that's why you do the formula = # shares repurchasing * (original issue selling price – par value).

    #3314680 Reply
    mt
    Guest

    In another question, the book finally explains it by saying “under the par method, reacquisition of treasury stock is recorded by reducing APIC by the amount recorded when the shares were originally issued to investors”, so that's why you do the formula = # shares repurchasing * (original issue selling price – par value).

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