Treasury Shares Accounted for at Par

Definition

The financial accounting term treasury shares accounted for at par refers to a process that treats the reacquisition of treasury stock as effectively retiring shares.  Since treasury stock is not considered an asset of the company, proponents of this approach believe they should be considered a retirement of shares or a reduction in the number of shares outstanding.  Since outstanding shares are shown at par value, their reacquisition must also be shown at par.

Explanation

Companies will issue capital stock to raise funds that are used to expand business operations and create additional shareholder value.  Companies can choose to subsequently buy back shares from the market and will reacquire stock for a number of reasons including: increasing earnings per share, meeting stock option obligations, establishing a floor price for the stock, contracting the business, as well as preventing a hostile takeover.

When a company reacquires shares of common stock, it can use one of two methods to account for this transaction:  the cost and the par method.

Under the par method, the reacquisition of stock is viewed as a reduction in the capitalization of the company as well as the number of shares outstanding.  Since outstanding shares of stock are shown on the balance sheet at par value, transactions involving the reacquisition of shares held in treasury should touch the following accounts:

  • Cash:  a debit to Cash occurs when the stock is reissued, while a credit to Cash occurs when stock is reacquired.
  • Treasury Stock:  a debit to Treasury Stock occurs when stock is reacquired, while a credit to Treasury Stock occurs when reissued.
  • Paid-in Capital in Excess of Par:  a debit to Paid-in Capital in Excess of Par occurs when stock is reacquired, while a credit occurs when stock is reissued.

Note:  If Paid-in Capital from Treasury Stock has a zero balance, and the stock is reissued at a price lower than the reacquisition price, a debit is made to Retained Earnings.

Example

Ten years ago, Company A issued 1,000,000 shares of common stock with a par value of $0.01.  During the initial public offering, Company A was able to raise $20,000,000.  The journal entries to record the issuance of this common stock would be as follows:

  Debit Credit
Cash $20,000,000  
Common Stock: 1,000,000 shares, par value $0.01   $10,000
Paid-in Capital in Excess of Par   $19,990,000

Two years ago, Company A reacquired 100,000 shares at a price of $24.00.  The journal entry to record this transaction using the par method would be as follows:

  Debit Credit
Treasury Stock: 100,000 shares x $0.01 per share $1,000  
Paid-in Capital in Excess of Par: 100,000 shares x $19.99 per share $1,999,000  
Retained Earnings $400,000  
Cash   $2,400,000

Early last year, Company A reissued 50,000 shares of Treasury Stock at $26.00.  The journal entry to record this transaction using the par method would be as follows:

  Debit Credit
Cash $1,300,000  
Treasury Stock: 50,000 shares x $0.01 per share   $500
Paid-in Capital in Excess of Par: 50,000 shares x $25.99 per share   $1,299,500

Finally, late last year, Company A reissued the remaining 50,000 shares of Treasury Stock at $23.00 per share.

  Debit Credit
Cash $1,150,000  
Treasury Stock: 50,000 shares x $0.01 per share   $500
Paid-in Capital in Excess of Par: 50,000 shares x $22.99 per share   $1,149,500

Related Terms

par value stock, stock issuance costs, reacquisition of shares, treasury shares accounted for at cost, retirement of treasury stock, donated treasury stock