Par Value Method for Treasury Stock for and Retirement of Treasury Stock

In this video, we discuss par value method for treasury stock for and retirement of treasury stock. ✔️Check my website for additional resources: ✅✅https://farhatlectures.com/ Par Value Method for Treasury Stock and Retirement of Treasury Stock Introduction: When a corporation repurchases its own shares, it records the transaction using either the cost method or the par value method. This post focuses on the par value method—a less common but acceptable GAAP approach—and how it applies to treasury stock accounting and retirement of treasury shares. Understanding the par value method is especially important for CPA candidates and students preparing for equity-related exam questions. What Is Treasury Stock? Treasury stock represents shares that were previously issued but have been repurchased by the corporation. These shares are not considered outstanding and do not receive dividends or have voting rights. What Is the Par Value Method? Under the par value method, the company treats the repurchase of stock as if the shares are retired immediately, even if held as treasury shares. The entries reverse the original issuance accounts: Common stock (at par value) Additional Paid-In Capital (APIC) from the original issuance Differences are adjusted to APIC–Treasury Stock or Retained Earnings Par Value Method: Treasury Stock Purchase 📘 Scenario: XYZ Corp repurchased 1,000 shares of its $1 par value common stock for $12 per share. The original issuance was at $10 per share. Journal Entry (Par Value Method): bash Copy Edit Dr. Common Stock (1,000 × $1) .................... $1,000 Dr. APIC–Common Stock (1,000 × $9) ............... $9,000 Dr. Retained Earnings or APIC–Treasury (plug) .... $2,000 Cr. Cash (1,000 × $12) ................................. $12,000 📝 Note: If there is an APIC–Treasury Stock balance, use it before reducing retained earnings. Par Value Method: Reissuance of Treasury Stock 📘 Scenario: XYZ reissues 500 treasury shares for $14 per share. Journal Entry: Dr. Cash (500 × $14) ............................. $7,000 Cr. Common Stock (500 × $1) ....................... $500 Cr. APIC–Common Stock (500 × $9) .................. $4,500 Cr. APIC–Treasury Stock (plug) .................... $2,000 💡 Gain on sale is never recorded. Instead, excess is credited to APIC–Treasury. Retirement of Treasury Stock (Par Value Method) Sometimes, the company formally retires treasury shares—meaning they are permanently removed from circulation. 📘 Scenario: XYZ retires 1,000 treasury shares originally issued at $10, repurchased at $12. Journal Entry: Dr. Common Stock (1,000 × $1) .................... $1,000 Dr. APIC–Common Stock (1,000 × $9) ............... $9,000 Dr. Retained Earnings or APIC–Treasury ........... $2,000 Cr. Treasury Stock (remove if on books) ............. $12,000 Or if already using the par value method and no treasury stock asset is recorded: Same as above without removing a treasury stock account. Key Differences: Par Value Method vs. Cost Method Feature Par Value Method Cost Method Assumes immediate retirement? ✅ Yes ❌ No – treasury shares recorded at cost Treasury stock shown as an asset? ❌ No ✅ Yes (contra-equity) APIC adjustments? ✅ Required to reverse issuance ✅ May adjust APIC–Treasury More common in practice? ❌ Less common ✅ More widely used CPA Exam Tip Under the par value method, always reverse the original equity accounts If the reacquisition cost exceeds original issuance, the difference hits retained earnings Treasury stock never affects net income, even if sold above or below cost Conclusion The par value method of accounting for treasury stock emphasizes reversing the equity structure as if the repurchased shares are immediately retired. While less common than the cost method, it's an important GAAP-compliant approach tested on the CPA exam and relevant in corporate accounting practice—especially during complex equity restructuring or buyback scenarios. #cpaexam #cpaexaminindia #treasurystock #accounting #accountingeducatuon