[salena786]

Hi guys, I haven’t been able to figure this out and I’ve been trying for a long time now. I understand the cost method, but am having some trouble with the journal entries of par method. When we use the par method the entries are:

Buy back about Issue Price

Dr. Treasury Stock

Dr. APIC-C/S

Dr. Retained Earnings

Cr. Cash

Reissue shares

Dr. Cash

Cr. Treasury Stock.

Cr. APIC-C/S

I do NOT understand where APIC for common stock is coming from? If we reissue shares of treasury stock shouldn’t we have APIC for TS? When repurchasing, where does APIC from CS come from? I just don’t understand the logic behind why they have APIC for CS. If anyone could help I would truly appreciate it a lot.

Thanks!

[Anonymous]

Not a fan of the par value method (especially since it is so rarely used). I have just tried to memorize what I can on this one. Try posting your question in the FAR Study Group. Might get a decent explanation there.

[Anonymous]

i'm not 100% sure but i think it's because cost method is a contra equity as a whole, whereas par value method is a contra cs

[Broag]

For the repurchase of stock, the APIC – C/S comes from the original issuance of the common stock. When the entity buys stock back, it turns into Treasury Stock. So an original issuance of C/S would look like this:

30,000 shares of $10 par Common Stock is issued at $12.

Initial Issuance:

DR: Cash 360,000

CR: Common Stock 300,000

CR: APIC -C/S 60,000 *Plug*

Then, the APIC – C/S is REVERSED with a debit on the repurchase (for example, 10,000 shares repurchased for $15):

DR: Treasury Stock 100,000

DR: APIC – C/S 30,000 [10,000 shares x $3 ($15-12)]

DR: Retained Earnings 20,000 *Plug*

CR: Cash 150,000

I think that answers your one question. As for why APIC – T/S isn't used…it is used, but only when the buy back issue price is LOWER than the original issuance price. In the example I gave above, the buy back is ABOVE $15>$12. If the buy back is lower, then I think the AJE would look like this:

Say buy back is $11

DR: Treasury Stock 100,000

DR: APIC – C/S 20,000 (10,000 shares x $2)

CR: Cash 110,000

CR: APIC – T/S 10,000 *Plug*

Please feel free to correct me cause I'm learning this stuff too. This is just how I understood it.

Hope this helps…Good Luck!

REG - 79
FAR - ?
AUD - ?
BEC - ?

[salena786]

Thank you so much guys, really appreciate the feedback.

Broag your explanation makes perfect sense, and helps me understand it a lot better, thanks a lot!

[confusedcandidate]

Cost method you put the entire cost (cash paid) into treasury stock. Debit TS, Credit Cash. Easy peasy.

Par value method you only put the amount of the shares into treasury stock (# of shares times par obviously). Then Debit the original APIC associated with each share (issue price minus par) and hit Retained Earnings if there is still a difference: Dr TS at par times shares, Dr Apic at original amount per share times shares purchased, plug the difference with Retained Earnings. Make sure you remember to calculate how much APIC per share you received in the original issue. Just because your total APIC balance is high enough doesn't mean you get to use it all – only the apic associated with the shares when it was issued. They'll probably try to trick you into forgetting about RE because your APIC is so high, but don't believe their lies.

Weekends are meaningless to a CPA candidate

[Anonymous]

Then, the APIC – C/S is REVERSED with a debit on the repurchase (for example, 10,000 shares repurchased for $15):

DR: Treasury Stock 100,000

DR: APIC – C/S 30,000 [10,000 shares x $3 ($15-12)]

DR: Retained Earnings 20,000 *Plug*

CR: Cash 150,000

Why isn't APIC debited for $20,000 (10,000 shares x$2 ($12-10)) and RE debited for the plug of $30,000? I thought when a repurchase of TS happens, we use the original $/share APIC number which would be $2 ($12-10) to get the APIC in the repurchase entry. Am I wrong?

[excel monkey]

I'm with you e_griffin87. When we repurchase the shares we reverse the initial APIC related to the shares. The debit for APIC should have been $20,000 (10,000 * ($12-$10)) and retained earnings should have been plugged for $30,000.

FAR - 91
AUD - 88
BEC - 86
REG - 79

[confusedcandidate]

I didn't actually read Broag's example until now. You guys are right: the APIC debited is only 20000 because only 1/3 of the original shares issued are repurchased. 1/3 of the 60,000 initial apic is 20,000, or $2/sh.

Weekends are meaningless to a CPA candidate

[salena786]

Thanks guys, Broag your explanation completely cleared up all my confusion!!

[Broag]

You're welcome, Salena.

And sorry guys, my mistake on the APIC – C/S. Sometimes when you conceptualize too much you shoot yourself in the foot. Thanks!

REG - 79
FAR - ?
AUD - ?
BEC - ?

[confusedcandidate]

It happens, easy mistake. Those mistakes could be the difference between a 74 and a pass though 😉

Weekends are meaningless to a CPA candidate

[Author]

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