Chapter 15
Intermediate Accounting II
Otto Chang
Professor of Accounting
Issuance of stock
• Par value indicates minimum legal capital
• Par value or stated value stock
Cash 1100
Common Stock (Par value $5.00) 500
Paid-in Capital in excess of par
600
• No par value
Cash 1100
Common Stock--No Par Value 1100
Sale of Subscribed Stock
• 500 shares of stock subscribed, par value
$5, fair value $20, 50% cash down required
Subscriptions Receivable* ($20 x 500) 10,000
Common stock Subscribed ($5 x 500) 2,500
Paid-in Capital in Excess of Par
7,500
Cash
5,000
Subscriptions Receivable 5,000
*Subscriptions Receivable is not enforceable,
therefore, not an asset, but a contra-equity A/C
When Final Payment is Received
• Six months later, final payment is received
Cash
5,000
Subscriptions Receivable 5,000
Common Stock Subscribed
Common Stock
2,500
2,500
Defaulted Subscriptions
Accounts
• In states allow the down payment to be kept:
Common Stock Subscribed
Paid-in Capital in Excess of Par
Subscription Receivable
2,500
2,500
5,000
• In states require the excess of resale value
over balance due to be returned to subscriber:
Example: the 500 shares are resold at $20
Paid-in Capital in Excess of Par 5,000
Cash ($20-$10) x 500
5,000
Costs of Issuing Stock
• Examples: accountants’, attorneys’ and
underwriters’ fee, expense for printing,
advertising, and filing and registration
• Method 1: treat as a reduction of paid-in
capital in excess of par.
• Method 2: treat as an organization cost.
• Method 1 is more popular.
Reasons for Reacquisition of
Shares
•
•
•
•
For employee stock compensation contract
Meet Potential merger needs
To increase EPS
Reduce the number of share held by public
to thwart takeover
• To make a market in the stock
• To contract operation
Purchase of Treasury Stock
• Cost method
– Treasury Stock is debited at cost when required
Example 1: A company issued 1000 shares of
stock at $110 per share (par value is $100), later
100 shares are reacquired at $112
Cash ($112 x 100)
1120
Treasury Stock
1120
• Note: the original issue price is not used
Reissue of Treasury Stock: Cost
Method
• When reissued, credit Treasury Stock at its
purchase cost
• Example A: 10 shares reissued at $130/share
Cash
1300
Treasury Stock
1120
Paid-in Capital from T/S
180
• Example B: 10 shares reissued at $98/share
Cash
Paid-in Capital from T/S
Treasury Stock
980
140
1120
Retirement of Treasury Stock:
Cost Method
• Example C: retire 10 shares of treasury
stock (issued at $110; reacquired at $112)
Common Stock (10 x par $100) 1000
Paid-in Capital in Excess of Par
100
Retained Earning*
20
Treasury Stock
1120
* or Paid-in Capital from T/S, depending on the
state law
Retirement of Treasury Stock:
Cost Method
• Example D: retire 10 shares of treasury
stock (issued at $100; reacquired at $98)
Common Stock
1000
Paid-in Capital in Excess of Par 100
Paid-in Capital from Retirement 120
Treasury stock
980
Par Value Method
• Reacquired treasury stock treated as
“constructively retired”
• Example 2: 100 shares reacquired at $112
(originally issued at $110/share; par=$100)
Treasury Stock (100 x par $100)
Paid-in Capital in Excess of Par
Retained Earning
Cash
10,000
1,000
200
11,200
Purchase of Treasury Stock:
Par Value Method
• Example 3: same 100 shares reacquired at
$98
Treasury Stock(100 x Par $100) 10,000
Paid-in Capital in Excess of Par
1,000
Paid-in Capital from T/S
1,200
Cash
9,800
Reissue of Treasury Stock:
Par Value Method
• Treated as “new issue”
• Example (a): 10 shares treasury stock were
reissued at $130 /share (par=$100, issued at
$100, reacquired at $112)
Cash
1,300
Treasury Stock (10 x Par $100) 1,000
Paid-in Capital in Excess of Par
300
Reissue Treasury Stock:
Par Value Method
• Example (b): same 10 shares reissued at $98
Cash
980
Paid-in Capital from T/S
20
Treasury Stock (10 x Par $100) 1,000
Retirement of Treasury Stock:
Par Value Method
• “Constructive” retirement becomes actual
retirement of common stock
• Example (c): 10 shares of treasury stock
were retired
Common Stock (10 x par $100) 1,000
Treasury Stock (10 x par$100)
1,000
Balance Sheet Presentation
• Cost method: debit balance of Treasury
Stock is a contra-stockholders’ equity
account, subtracted from the total of
stockholder’s equity.
• Par value method: debit balance of Treasury
Stock is subtracted from the CapitalCommon Stock account
• Retained earning should be restricted to the
extent of balance in the Treasury Stock