Treasury Stock: Cost Method vs. Par Value Method for the CPA Exam

Treasury Stock Accounting

Treasury stock represents shares of a company's own stock that have been issued and subsequently reacquired by the company but not retired. Treasury stock is reported as a contra-equity account on the balance sheet, reducing total stockholders' equity. Two methods are used to account for treasury stock: the cost method and the par value method. Both are tested on the CPA FAR exam, and candidates must be proficient in the journal entries for each method.

The Cost Method

The cost method is the more commonly used method and records treasury stock at the cost of reacquisition. No distinction is made between par value, additional paid-in capital (APIC), or original issuance price when the stock is reacquired.

Acquisition

When shares are reacquired, the entity debits Treasury Stock at the reacquisition cost and credits Cash. For example, if a company repurchases 1,000 shares at $25 per share, it debits Treasury Stock for $25,000 and credits Cash for $25,000.

Reissuance Above Cost

When treasury shares are reissued at a price above cost, the entity debits Cash, credits Treasury Stock at cost, and credits APIC--Treasury Stock for the excess. If the 1,000 shares (cost $25 per share) are reissued at $30, the entry is: debit Cash $30,000, credit Treasury Stock $25,000, credit APIC--Treasury Stock $5,000.

Reissuance Below Cost

When treasury shares are reissued at a price below cost, the entity debits Cash, debits APIC--Treasury Stock to the extent of any prior credit balance in that account, debits Retained Earnings for any remaining excess, and credits Treasury Stock at cost. If the shares (cost $25) are reissued at $20, the entry is: debit Cash $20,000, debit APIC--Treasury Stock (or Retained Earnings if APIC is insufficient) $5,000, credit Treasury Stock $25,000.

Retirement Under the Cost Method

When treasury stock accounted for under the cost method is formally retired, the entity eliminates the par value (debit Common Stock), eliminates the related APIC from original issuance (debit APIC--Common Stock), credits Treasury Stock at cost, and any difference is charged to APIC--Treasury Stock or Retained Earnings (if the cost exceeds the sum of par and original APIC) or credited to APIC--Treasury Stock (if the cost is less).

The Par Value Method

The par value method treats the reacquisition of treasury stock as though the shares are being effectively retired at the time of repurchase, but without reducing the authorized share count. Treasury stock is carried at par value rather than at reacquisition cost.

Acquisition

When shares are reacquired under the par value method, the entity debits Treasury Stock at par value, debits APIC--Common Stock for the original excess over par received at issuance, and credits Cash for the reacquisition cost. If the reacquisition cost exceeds the sum of par and original APIC, the excess is debited to Retained Earnings. If the reacquisition cost is less, the difference is credited to APIC--Treasury Stock.

For example, if shares with a par value of $10 were originally issued at $18 and are repurchased at $25, the entry is: debit Treasury Stock $10,000, debit APIC--Common Stock $8,000, debit Retained Earnings $7,000, credit Cash $25,000. If repurchased at $15 instead: debit Treasury Stock $10,000, debit APIC--Common Stock $5,000, credit Cash $15,000 (the remaining $3,000 of original APIC stays in APIC--Common Stock).

Reissuance Under the Par Value Method

Reissuance of treasury stock under the par value method is accounted for similarly to a new issuance. The entity debits Cash, credits Treasury Stock at par value, and credits APIC--Treasury Stock for any excess received over par. If the reissuance price is below par, the difference is debited to APIC--Treasury Stock.

Key Differences Between the Methods

• Under the cost method, Treasury Stock is carried at the reacquisition cost; under the par value method, it is carried at par value.
• The cost method defers the recognition of the difference between cost and original issuance price until reissuance or retirement. The par value method recognizes this difference at the time of reacquisition.
• The balance sheet presentation differs: under the cost method, Treasury Stock is shown as a single deduction from total stockholders' equity. Under the par value method, Treasury Stock is shown as a deduction from the specific class of stock.

Exam Preparation Tips

• Practice journal entries for both methods at each stage: acquisition, reissuance above cost/par, reissuance below cost/par, and retirement.
• Know the ordering: under the cost method, when reissuing below cost, APIC--Treasury Stock is reduced first, then Retained Earnings.
• Understand the balance sheet presentation difference between the two methods.
• Remember that treasury stock reduces total stockholders' equity and is not an asset.
• Be prepared for questions that combine treasury stock transactions with EPS calculations, as treasury shares reduce shares outstanding.