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Donated Treasury Stock

Moneyzine Editor
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Moneyzine Editor
3 mins
January 16th, 2024
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Donated Treasury Stock

Definition

The financial accounting term donated treasury stock refers to those shares given back to a corporation by a shareholder without compensation. Once donated, the company has the option of retiring the shares or holding them as treasury stock if the company intends to reissue the securities to the market.

The company has three options to account for donated treasury stock: the memo, cost, and par methods.

Explanation

Companies will issue capital stock to raise funds used to expand business operations and create additional shareholder value. Although uncommon, a shareholder can donate the stock they own back to the issuing corporation. When this occurs, the company has the option of retiring those shares or reissuing them to the marketplace. If the company intends to reissue the shares, they are held as Treasury Stock until redistributed.

When a company reacquires treasury stock in this manner, it has three options to account for this transaction:

  • Memo Method: with this approach, the treasury shares are assumed to have no cost, and only a memorandum indicating the number of shares received is created. If the shares are subsequently reissued to the market, a credit is made to Donated Capital.

  • Par Method: with this approach, a debit to Treasury Stock is made using the par value of the securities, Paid-in Capital in Excess of Par is debited in an amount equal to the original premium (when first issued), and a credit is made to Donated Capital.

  • Cost Method: with this approach, a debit is made to Treasury Stock, while a credit is made to Donated Capital using the current market value of the shares received.

Note: Regardless of the method chosen, donated stock does not result in an increase to the company's total assets or equity.

Example

Ten years ago, Company A issued 1,000,000 shares of common stock with a par value of $0.01. When first issued, the stock sold for $20.00 per share. One of the company's original founders passed away and donated 100,000 shares back to Company A, which held the donation as treasury stock. At the time of donation, the market price of Company A's stock was $23.00 per share. Company A recently reissued the treasury stock to the market at $25.00 per share. The journal entries for each of the three methods are demonstrated below.

The memo method does not require a journal entry to record the donation; however, the journal entry to record the reissuance of treasury stock would be as follows:

Debit

Credit

Cash

$2,500,000

Donated Capital

$2,500,000

The journal entry to record the donation 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

Donated Capital

$2,000,000

The journal entry to record the reissuance of Treasury Stock under the par method would be as follows:

Debit

Credit

Cash

$2,500,000

Treasury Stock: 100,000 shares x $0.01 per share

$1,000

Paid-in Capital in Excess of Par: 100,000 shares x $24.99 per share

$2,499,000

The journal entry to record the donation using the cost method would be as follows:

Debit

Credit

Treasury Stock: 100,000 shares x $23.00 per share

$2,300,000

Donated Capital

$2,300,000

The journal entry to record the reissuance of Treasury Stock under the cost method would be as follows:

Debit

Credit

Cash

$2,500,000

Treasury Stock: 100,000 shares x $23.00 per share

$2,300,000

Paid-in Capital Treasury Stock: 100,000 shares x $2.00 per share

$200,000

Related Terms

The term par value stock refers to the accounting value assigned to a share of common stock, and is also referred to as its stated value or face value. The par value of common stock has no relationship to the market value of the security.
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