Treasury Stock Accounting: Par Value Method Explained

Treasury stock refers to a corporation’s own shares that were previously issued and outstanding but have been reacquired. Treasury shares are not considered outstanding and do not have voting rights, dividend rights, or EPS participation while held by the company.

There are two primary methods for accounting for treasury stock:

✦ Cost Method — most common in practice

✦ Par Value Method — alternative method, focusing on the original legal capital structure

This article provides a complete explanation of treasury stock accounting under the Par Value Method, including recognition, journal entries, practical examples, and financial reporting impacts under U.S. GAAP.

1. What Is the Par Value Method?

Under the Par Value Method, treasury stock transactions are accounted for by:

✦ Recording the reacquired shares by reducing the common stock account at par value

✦ Reducing additional paid-in capital (APIC) related to common stock

✦ Adjusting any difference through either Treasury Stock (as a contra-equity account) or Retained Earnings if necessary

The focus is on treating treasury stock transactions as a reverse of the original issuance — as if the shares were retired immediately.

2. Key Characteristics of the Par Value Method

✦ Treasury Stock is a temporary contra-equity account, used only for differences

✦ Common stock and APIC accounts are reduced

✦ Retained earnings may be adjusted only if APIC related to common stock is insufficient

✦ Treasury stock is presented in the equity section at cost (even under the par value method)

3. Initial Journal Entry – Issuance of Shares

When a company initially issues shares:

Example: Issues 1,000 shares at $10 per share, par value $1

Journal Entry:

Debit: Cash – $10,000

Credit: Common Stock – $1,000

Credit: Additional Paid-In Capital (APIC) – $9,000

4. Purchase of Treasury Stock Under Par Value Method

Suppose the company buys back 200 shares at $12 each.

Steps to Account:

✦ Reduce Common Stock for the par value of reacquired shares

✦ Reduce APIC for the amount originally received above par on these shares

✦ Any excess of repurchase price over original issuance goes to Treasury Stock

Calculation:

• Common Stock reduced: 200 × $1 = $200

• APIC reduced: 200 × ($10 – $1) = $1,800

• Total reduction = $2,000

• Cash paid = 200 × $12 = $2,400

Difference = $400 → Debit to Treasury Stock

Journal Entry:

Debit: Common Stock – $200

Debit: Additional Paid-In Capital – $1,800

Debit: Treasury Stock – $400

Credit: Cash – $2,400

5. Reissuance of Treasury Stock

If treasury stock is later reissued:

• Credit Common Stock for par value of shares reissued

• Credit APIC for any amount received above par

• If reissued below original cost, debit Treasury Stock and, if needed, debit APIC-Treasury or Retained Earnings

Example – Reissue Above Cost:

Company reissues 100 shares of treasury stock at $15 each.

Calculation:

• Par value = 100 × $1 = $100

• Sale proceeds = 100 × $15 = $1,500

Allocation:

• Common Stock credited: $100

• APIC credited: $1,400 (remainder)

Journal Entry:

Debit: Cash – $1,500

Credit: Common Stock – $100

Credit: Additional Paid-In Capital – $1,400

Example – Reissue Below Cost:

Company reissues 100 shares at $9 each.

Calculation:

• Par value = $100

• Cash received = $900

Difference from previous repurchase (cost was $12 per share):

• Original repurchase value = $1,200

• Shortfall = $300

First debit Treasury Stock (up to its balance). If insufficient, debit APIC-Treasury or Retained Earnings.

Journal Entry:

Debit: Cash – $900

Debit: Treasury Stock – $300

Credit: Common Stock – $100

Credit: Additional Paid-In Capital – $1,100

(assuming sufficient APIC balance to absorb the shortfall)

6. Retirement of Treasury Stock

If the company decides to retire the treasury stock, under the par value method, the shares are treated as immediately retired when repurchased. Therefore:

• No separate retirement entry is necessary.

• Treasury stock adjustments were already made at the time of repurchase.

7. Impact on Financial Statements

• Total Shareholders’ Equity is reduced by the amount paid for treasury stock

• Outstanding shares are reduced (treasury shares are not considered outstanding)

• Earnings Per Share (EPS) may improve (due to fewer shares outstanding)

• No impact on net income, unless Retained Earnings is adjusted due to insufficient APIC

8. IFRS Treatment vs. U.S. GAAP

Under IFRS (IAS 32):

✦ Treasury shares are recorded at cost

✦ Presented as a deduction from equity

✦ Gains or losses on reissuance are not recognized in income, only within equity

The principles under IFRS align more closely with the cost method of U.S. GAAP, but the presentation requirement — reducing equity directly — matches both methods.

9. Summary of Key Points

✦ Under the Par Value Method, treasury stock reduces Common Stock and APIC directly.

✦ Differences between cost and original issuance value are recorded to Treasury Stock or Retained Earnings.

✦ No income statement impact occurs upon acquisition or reissuance.

✦ Total equity decreases when treasury stock is purchased.