Accounting Question

[Terry D EA]

A company authorized 100,000 SHS $10 Par common stock. During the year they had the following transactions:

1-5 Issued 75,000 SHS @ $14.00 per share

12-27 Purchased 5,000 SHS @ $11.00 per share.

The par value method is used to record the treasury stock purchase. At 12-31 what is the balance in the Paid-In Cap from Treasury Stock?

My take on this:

Treasury Stock (5,000 x $10 Par) $50,000

Paid-In Cap Excess Par Treasury Stock 0

Retained Earnings $ 5,000

Cash (5,000 x $11.00) $55,000

Can a paid-in capital account have a debit balance? I think not.

Wouldn't retained earnings be debited because of no credit balance in the PIC account?

If you record the stock issued the Paid-In Excess of Par Common account would have a credit balance of $300.00. Are the Paid-In Excess of Par Common account and the Paid-In Excess of Par Treasury essentially the same accounts? Would they be combined in the Owner's Equity Statement?

I am probably over thinking this questions substantially or I don't understand it at all. This is a homework assignment for an intermediate II class that I am taking. I missed the instruction due to a death in my family that took me out of town. Any help would be appreciated.

Thanks,

Terry D.

[Maribeth]

A company authorized 100,000 SHS $10 Par common stock. During the year they had the following transactions:

1-5 Issued 75,000 SHS @ $14.00 per share

12-27 Purchased 5,000 SHS @ $11.00 per share.

The original issuance of the stock would create the following entry:

Common stock 750,000 CR

Add'l paid-in capital 300,000 CR

The purchase of the treasury stock I am not too sure of the answer. In my state of Washington, a corporation cannot hold treasury stock so the entry I would book would be a 50,000 debit to common stock and then a 5000 debit to additional paid-in capital. If there was not enough add'l paid-in capital, then any left over debit would go to retained earnings.

In other states, were you can retain treasury stock, I believe the answer would still be a debit of 50,000 to common stock and then a 5,000 debit to add'l paid-in capital, resulting in a balance of 295,000 in add'l paid-in capital at year end.

I am a long, long way away from Intermediate Accounting but I seem to remember that at one time I learned that the entire purchase of treasure stock is recorded in its own account and then simply used as a one-line entry to reduce total stockholders' equity. But that way would not be the par value that your problem seems to require.

hth,

Maribeth

[OldJack]

>>The par value method is used to record the treasury stock purchase<<

It should be the actual price paid that is recorded for the treasury stock purchase. There is no paid-in capital with the transaction.

Retained earnings does not change.

[Terry D EA]

Maribeth,

I agree with your answer for other states except for the debit to common stock. I know the reacquisition treatement is state specific but for the majority we are told to debit "Treasury Stock". Your ending balance in the APIC is exactly what I would think.

What is confusing is there is another problem and other sample problems that use the same recording method using just a APIC account and not a specific APIC account for treasury stock. I guess I will have to question my instructor on the wording of the problem.

OldJack you are right as well if you are using the cost method. Debit to treasury stock, credit cash.

Terry D.

[RoyDaleOne]

http://www.cliffsnotes.com/WileyCDA/Cliffs...leId-21193.html

[OldJack]

OldJack you are right as well if you are using the cost method. Debit to treasury stock, credit cash.

Terry, the corporation accounting method has nothing to do with the purchase cost of treasury stock. Think of it as if the corporation purchased equipment at a bargain, you don't record it at a different price than what you paid for it. The cost of treasury stock as a debit account in the equity section is important in financial statements as it reflects a current value of the stock at the time of the treasury purchase. It is a no-no to reduce retained earnings for such purchase unless the corporation is reorganizing. And, you can't have paid in capital increase from a purchase of treasury stock as the selling shareholder is not making a contribution to the corporation.

It was not an issue in your post but I am sure you are aware that for small business corporation a partial redemption of a shareholders stock may be a taxable dividend rather than the capital gains from a sale of stock. If this is an issue you should check the 5 tests (#1) the substantially disproportionate test (this is the old 80% & 50% test) [code§ 302( b )(2)( C )]; (#2) the complete redemption test [code§ 302 ( b ) (3)]; (#3) the not essentially equivalent to a dividend test [Reg§ 1.302-2 ( b ) ] (#4) partial liquidation of a noncorporate shareholder [code§ 302 ( b )(4)] [code§ 302 (e)(1)] and (#5) a redemption of a decedent's stock to pay death taxes [code§ 302(a)].

[Terry D EA]

RoyDaleOne thanks for the cliff's notes as it really helped. OldJack, as usual, you are very helpful and thanks for reminding me about reducing the retained earnings account to make a stock purchase. The solution to the problem is as follows:

Treasury Stock (5,000 x $10.00 Par) 50,000

Paid-In Capital Excess Par Common (5,000 x (14.00 - 10.00) 20,000

Cash (5,000 x $11.00) 55,000

Paid-In Capital Treasury Stock (Plug to balance) 15,000

Again, thanks for all of the wonderful help with this. If I would have just remembered that if you credit a paid-in capital account, you must debit the account when you sell or purchase the stock. In this case, the number of shares reacquired had to be removed from the PIC par common for the difference between the purchase price and the FMV. To make the columns balance, the Paid-In Capital Treaury Stock account is credited and the figure is plugged in.

Thanks again

Terry D.