Question

Describe the method(s) used to account for treasury stock transactions.

Answer 1

A corporation may account for treasury stock transactions by cost method , par value method or constructive retirement method.

Under the cost method, the gross cost of the shares reacquired is charged to a contra equity account (treasury stock). The equity accounts that were credited for the original share issuance (common stock, paid-in capital in excess of par, etc.) remain intact. When the treasury shares are reissued, proceeds in excess of cost are credited to a paid-in capitalaccount. Any deficiency is charged to retained earnings (unless paid-in capital from previous treasury share transactions exists, in which case the deficiency is charged to that account with any excess charged to retained earnings.

Par value method : - Under the par value method, the treasury stock account is charged only for the aggregate par value of the shares reacquired. Other paid in capital accounts are relieved in proportion to the amounts recognized upon the original issuance of the shares .

Constructive retirement method : - This method is similar to the par value method, except that the aggregate par value of the reacquired shares is charged to the stock account rather than to the treasury stock account.