Par Value Method of Treasury Stock: A Guide

The par value method of treasury stock is a straightforward approach to accounting for treasury stock.

Treasury stock is recorded at its par value, which is the face value of the stock.

This method is often used by companies that have a relatively small amount of treasury stock.

The par value of treasury stock is typically $1 per share.

The Par Value Method is a way to account for treasury stock that assumes the shares acquired will eventually be retired. This approach is different from the cost method, which we'll discuss later.

To apply the Par Value Method, you debit Treasury Stock at the par value of the issued stock. For example, if you issued stock with a par value of $10, you would debit Treasury Stock for $10.

The Par Value Method also involves debiting the Additional Contributed Capital account for the amount received in excess of par value. If you received $15 for each share, you would debit Additional Contributed Capital for $5 ($15 - $10).

Cash is credited for the amount paid for the treasury shares. In the example, you would credit Cash for $15.

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Sunny reissues treasury shares at $7 and $3 per share, crediting Treasury Stock for the original par value and Contributed Capital in excess of par for the excess cash proceeds.

The reissuance of treasury stock is similar to issuing original stock, except the common stock at par is replaced with treasury shares.

Sunny reissues 200 shares at $7 per share, debiting Cash for $1,400, crediting Treasury Stock for $200, and crediting Contributed Capital in excess of par for $1,200.

Sunny reissues 300 shares at $3 per share, debiting Cash for $900, crediting Treasury Stock for $300, and crediting Contributed Capital in excess of par for $600.

If treasury stock is reissued below cost, the difference between the cash received and the original cost is recorded as a debit to the Paid-in Capital from Treasury Stock account, or as a reduction of Retained Earnings if the account has no balance.

La Cantina sells 100 shares of treasury stock at $23 per share, debiting Cash for $2,300, crediting Treasury Stock for $2,500, and recording a debit of $200 to the Additional Paid-in Capital from Treasury Stock account.

Recommended read: The Par Value per Share of Common Stock Represents

When a corporation issues common stock, it receives cash from investors. In the given example, a corporation issued 12,000 shares of common stock with a $4 par value and received $57,000.

The par value method of accounting for treasury stock involves journal entries to record the purchase and resale of treasury shares. The corporation bought back 1,000 shares for $4,500 and later resold 500 shares at $5 per share.

The initial journal entry for the purchase of treasury stock is shown below:

This entry records the purchase of 1,000 treasury shares at a cost of $4,500, which is $4 per share.