Question

Posy Corp. acquired treasury shares at an amount greater than their par value but less than their original issue price. Compared with the cost method of accounting for treasury stock, does the par-value method report a greater amount for additional paid-in capital and a greater amount for retained earnings?

Answer 1

Explanation with constructive Scenario:

Just assume that the par value of the stock is $1 per share and the company has issued initially 1000 share at $2 which means the total cash received is $2,000. Now assume that these 1000 shares were reacquired at $1.5.

The double entry using the cost method would be as under:

Dr Treasury Shares $1,500

Cr Cash Account $1,500

The re-acquisition under the par value method would be as under:

Dr Treasury shares (at the rate $1) $1,000

Cr Additional paid-in capital (at the rate $2 - $1) $500

Cr Cash Account $1,500

Answer: This shows that under he par value method the additional paid-in capital is reduced by the amount paid above the par value, whereas the retained earnings remains the same.