FAR CPA Practice Questions: Journal Entries for Treasury Stock Transactions

In this video, we walk through 5 FAR practice questions covering the journal entries for treasury stock transactions. These questions are from FAR content area 2 on the AICPA CPA exam blueprints: Select Balance Sheet Accounts.

The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.

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Journal Entries for Treasury Stock Transactions

In this post, we’ll cover the accounting treatment for various treasury stock transactions under both the par value method and the cost method, as well as the correct treatment when stock is donated or gifted back to a corporation. Each method and situation has unique journal entries that reflect the correct way to record these equity transactions.

Repurchase of Treasury Stock (Par Value Method)

Under the par value method, treasury stock is recorded at its par value. Any difference between the repurchase cost and the par value is adjusted through Additional Paid-In Capital (APIC), and if APIC is insufficient, Retained Earnings is used to absorb the remaining amount.

Example:
Company ABC issued 2,000 shares of $5 par value stock for $15 per share. Later, ABC repurchased 500 shares at $18 per share.

1. Initial Issuance:
   • Debit Cash $30,000 (2,000 shares × $15)
   • Credit Common Stock $10,000 (2,000 shares × $5 par)
   • Credit APIC $20,000 ($15 – $5 par = $10 APIC per share)
2. Repurchase of 500 Shares:
   • Par Value of Repurchased Shares: 500 × $5 = $2,500
   • Total Repurchase Cost: 500 × $18 = $9,000
   • Excess Amount: $9,000 – $2,500 = $6,500
   Journal Entry:
   • Debit Treasury Stock $2,500 (500 shares at par)
   • Debit APIC $5,000 (500 shares at $10 APIC per share)
   • Debit Retained Earnings $1,500
   • Credit Cash $9,000

Reissuance of Treasury Stock (Par Value Method)

When reissuing treasury stock under the par value method, the par value is credited to Treasury Stock. If the reissue price differs from the par value, any excess or deficit is adjusted through APIC.

Example Continued:
ABC then reissues 300 of the repurchased shares at $16 per share.

1. Reissuance of 300 Shares:
   • Reissue Price: 300 × $16 = $4,800
   • Par Value of Reissued Shares: 300 × $5 = $1,500
   • Excess Amount Credited to APIC: $4,800 – $1,500 = $3,300
   Journal Entry:
   • Debit Cash $4,800
   • Credit Treasury Stock $1,500 (300 shares at par)
   • Credit APIC $3,300 (difference between cash and treasury stock)

Repurchase of Treasury Stock (Cost Method)

Under the cost method, treasury stock is recorded at the price paid for the repurchase. There’s no immediate impact on APIC or Retained Earnings at the time of repurchase.

Example:
XYZ Corp. issued 3,000 shares at a par value of $4 per share for $10 per share. Later, it repurchased 1,000 shares at $12 per share.

1. Initial Issuance:
   • Debit Cash $30,000 (3,000 shares at $10)
   • Credit Common Stock $12,000 (3,000 shares at $4 par)
   • Credit APIC $18,000
2. Repurchase of 1,000 Shares at Cost:
   • Total Repurchase Cost: 1,000 × $12 = $12,000
   Journal Entry:
   • Debit Treasury Stock $12,000
   • Credit Cash $12,000

Reissuance of Treasury Stock (Cost Method)

When reissuing treasury stock under the cost method, treasury stock is credited at its original repurchase cost. If reissued above the repurchase cost, any gain is credited to APIC; if reissued below cost, the deficit is debited to APIC or to Retained Earnings if APIC is insufficient.

Example:
XYZ Corp. reissues 500 of the repurchased shares at $14 per share.

1. Reissuance of 500 Shares Above Cost:
   • Reissue Price: 500 × $14 = $7,000
   • Original Cost of Treasury Stock: 500 × $12 = $6,000
   • Excess Credited to APIC: $7,000 – $6,000 = $1,000
   Journal Entry:
   • Debit Cash $7,000
   • Credit Treasury Stock $6,000
   • Credit APIC $1,000

If the shares were reissued at $10 (below the repurchase cost of $12), APIC would be debited for the difference.

Donated or Gifted Stock to a Corporation

When a shareholder donates shares back to the corporation without compensation, these shares are recorded as treasury stock at fair market value (FMV) on the date of donation. This transaction doesn’t affect total stockholders’ equity since it simply reallocates value between Treasury Stock and APIC.

Example:
Sunrise Corp. issued 4,000 shares at a par value of $3 per share for $9 per share. Later, a shareholder gifted back 500 shares when the FMV was $10 per share.

1. Initial Issuance:
   • Debit Cash $36,000 (4,000 shares at $9)
   • Credit Common Stock $12,000 (4,000 shares at $3 par)
   • Credit APIC $24,000
2. Gifted Back Shares Recorded at FMV:
   • FMV of Returned Shares: 500 × $10 = $5,000
   Journal Entry:
   • Debit Treasury Stock $5,000
   • Credit APIC $5,000

Explanation:
This entry has no net effect on total stockholders’ equity, as the increase in treasury stock is offset by an equal increase in APIC.

Summary

Each method and situation results in unique journal entries:

• Par Value Method (Repurchase & Reissuance): Treasury stock is recorded at par, with adjustments made to APIC and possibly Retained Earnings.
• Cost Method (Repurchase & Reissuance): Treasury stock is recorded at the repurchase cost, and reissuance adjustments are made to APIC if shares are reissued above or below cost.
• Donated/Gifted Stock: Donated stock is recorded at FMV, with no net effect on total stockholders’ equity, as the transaction is offset by APIC.