Treasury Stock Par Value Method CPA Exam

In this session, I discuss treasury stock using the par value method
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Understanding Treasury Stock and the Par Value Method
Treasury stock refers to shares that were issued and subsequently reacquired by the issuing company. These shares do not confer any ownership rights and do not pay dividends. When it comes to accounting for treasury stock, companies can use two primary methods: the cost method and the par value method. Here, we'll focus on the par value method, which is less common but crucial to understand in certain accounting contexts.
1. Treasury Stock Overview
Nature of Treasury Stock: Treasury stock consists of a company's own shares that have been bought back from shareholders. These shares are considered issued but not outstanding and do not have voting rights or receive dividends.
Reasons for Buyback: Companies might buy back shares to boost the stock price by reducing supply, to use them for employee compensation plans, or to prevent hostile takeovers, among other strategic financial maneuvers.
2. Par Value Method of Accounting for Treasury Stock
Definition: Under the par value method, treasury stock transactions are recorded based on the par value of the shares. This method is based on the legal capital associated with the shares rather than the cost paid to reacquire them.
Accounting Entries:
When Shares are Reacquired: The treasury stock is debited (increased) and cash is credited (decreased) for the par value of the shares reacquired. Any excess paid over par is recorded as a deduction from additional paid-in capital (APIC) to the extent available, and then from retained earnings.
When Treasury Shares are Reissued: Cash is debited (increased) for the amount received, treasury stock is credited (decreased) for the par value of the shares, and any excess received over par is credited to additional paid-in capital.
3. Example of Treasury Stock Accounting Using the Par Value Method
Suppose a company reacquires 1,000 shares of its stock, each with a par value of $1, and the total payment made for these shares is $5,000. Here’s how the transaction would be recorded:
Debit Treasury Stock for $1,000 (1,000 shares x $1 par value)
Credit Cash for $5,000
The difference of $4,000 ($5,000 - $1,000) would typically be debited from additional paid-in capital if available.
4. Implications of Using the Par Value Method
Impact on Equity: The reacquisition of stock generally reduces shareholders' equity because it potentially uses cash resources that could be distributed to shareholders and reduces the number of shares contributing to equity.
Financial Reporting: Companies must disclose treasury stock transactions in their financial statements, including notes that explain the method used for accounting and the effects on shareholders’ equity.
5. Considerations and Limitations
Less Common Use: The par value method is not as commonly used as the cost method for accounting for treasury stock because it can be more complex and less reflective of the actual cash outlay for buying back shares.
Regulatory and Legal Compliance: Depending on the jurisdiction, certain regulations may govern how companies can buy back and account for their own shares, impacting the choice of accounting method.
Conclusion
The par value method for accounting treasury stock is a specific approach that focuses on the legal capital associated with the shares rather than their cost. While less common than the cost method, it is important for accounting professionals to understand all viable methods to ensure compliance and optimal financial reporting based on the company's strategic decisions and regulatory environment.
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[@marybellandry2975]

Thank you Professor Farhat!!! I have subscribed to your services before but this time I'm buckling down and took time off from work to study for the CPA exams. I don't usually follow lectures so I tend to read a lot but your videos are the exception! Truly a big help!

[@AccountingLectures]

Most welcome.

[@JI_453]

The most logical explanation I've seen, thank you!!

[@AccountingLectures]

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[@rajaaialhalabi9929]

Thanks this was helpful! Just one question, in the journal where Adam repurchased 20,000 Share for 3$, what would happen to the Additional paid in Captial - TS, when the shares are sold. Will this account continue to be carried indefinitely. In the sale journals, this account is not impacted. However, will those balances be released?

[@emmaoconnell6044]

Hello, I this video was very helpful. I understand why in a repurchase transaction the APIC-C/S and Retained Earnings accounts are used, but I don't understand why the balances are different. Which one comes first? How do you know Retained Earnings (or APIC-T/S if it had a positive balance) would be $20,000?

[@puja0830]

This was so helpful! Thank youuuuu

[@AccountingLectures]

Most welcome. Please check my website for more. Start your free trial : farhatlectures.com/

[@jaikrishnan6982]

Apic TS is debit or credit nature?

[@AbdulHai-lv1hw]

Thanks for the explanation Sir, just a small doubt, At re issue we are crediting APIC - CS why not APIC - TS

[@marybellandry2975]

If I'm following this correctly, the reissued shares were out of treasury to common stock. Therefore, the Treasury at Par gets a credit (contra-equity account decreases via credit), and the APIC CS gets a credit as well (similar to how you'd allocate original issue for common stock at par value).

[@CJ-zn4fd]

Remember, the amount of stock issued over par will be issued to APIC common stock

[@David-ro6te]

@@CJ-zn4fd so APIC - TS is only used when the company is repurchasing?

[@ahamedimtiaz]

Would you happen to have a similar video using the Cost Method to account for Treasury Stock transactions?

[@nidhinouseph7763]

Thank you sir for correcting the video..@farhatlectures

[@AccountingLectures]

Always welcome. Thank you and please visit the website for more farhatlectures.com/