Question

The most used method of accounting for treasury stock is the ________ method.

A) par value

B) cost

C) fair value

D) A and B are utilized equally

Answer 1

Answer to Question:

The most used method of accounting for treasury stock is the B) Cost method.

Treasury Stock or reacquired stock is the stock brought back by the issuing Company ,reducing the amount of outstanding stock on the open market. Stock repurchases are used as a tax efficient method to put cash into shareholders hands rather than paying dividend in jurisdictions that treat capital gain more favourably or when Companies opt for buyback when they feel that their stock is undervalued in the open market.

Cost Method:Under the Cost Method, simply Debit Treasury Stock Account and Credit Cash/Bank Account. Both this accounts are Balance Sheet Items, there are no gain or losses in Income Statement. Treasury Stock is not an Asset Account rather it is a Contra entry Account meaning it reduces the amount of Equity . The dual entry reduces Cash and Equity for the same amount.

When Treasury Stock is re-issued at a price higher than its cost, the difference is recorded as a component of additional paid in Capital in our Consolidated Balance Sheets.

When Treasury Stock is re-issued at a price lower than its cost, the difference is recorded as a component of additional paid in Capital to the extent that there are previously recorded gain to offset the losses.

If there are no treasury stock gains in additional paid in capital, the losses upon reissuance of treasury stock are recorded as a reduction of retained earnings

Par Value Method:

Under this method, treasury stocks are carried at par value which might be nominal in amount as par value as usually kept at lower end. Difference between reacquisition price and par value is charged to additional paid in capital and the balance is any after exhausting such account is charged to Retained Earnings. This method is obsolete method and not used by most Companies. It is used for Stock retirement.

Fair Value Method:

Under this method, treasury stocks are carried at fair value or marker value. This method similar to Cost method