Par value method of accounting for treasury stock is one of the two techniques of accounting to record the purchase and resale of treasury stock. Treasury stock refers to shares which have been bought by the issuing company itself.
Under par value method, purchase of treasury stock is recorded by debiting treasury stock by the total par value of the shares. Cash account is credited for the actual amount paid to purchase the treasury stock. Any additional paid-in capital or discount on capital relating to treasury shares is cancelled by a debit or credit respectively. At this point, if the sum of credit side of the journal entry is less than the sum of debit side, additional paid-in capital account will be credited for the difference. Alternatively if the sum of credit side exceeds the sum of debit side of the journal entry, the difference will be debited to additional paid-in capital account up to the available balance and the rest, if any, will be debited to retained earnings account.
The resale of treasury stock is recorded
by debiting cash account for the actual amount received, crediting treasury stock for the par value of the treasury shares and if the cash received on resale is:
- more than the total par value of treasury shares, the excess is credited to additional paid-in capital account.
- less than the total par value of treasury shares, the difference is debited to additional paid-in capital from treasury stock provided it has sufficient credit balance otherwise retained earnings account is debited.
The following example shows the journal entries to record the purchase and resale of treasury stock under par value method.
A corporation issued 12,000 shares of common stock of $4 par value and received $57,000 from investors. It then bought back 1,000 of the shares and paid a sum of $4,500 for the purchase. Later it resold 500 of the treasury shares at a price of $5 per share.
Journalize the above transactions according the par value method of accounting for treasury stock.
Issuance of Common Stock: