The par value method is based on the assumption that the acquisition of treasury stock is essentially a permanent reduction in stockholders’ equity. The entries used in the method are thus structured as if the shares have been retired.
At the time of acquisition, the Treasury Stock account is debited for the par value of the shares and Capital in Excess of Par is debited for the original amount paid in excess of par at issuance. Cash is credited for the acquisition price. If the cost is less than the original issue price, Additional Paid-In Capital should be credited. If the cost exceeds the original issue price, Additional Paid In Capital or Retained Earnings should be debited.
When the shares are reissued, Cash is debited for the proceeds and Treasury Stock is credited for the par value of the shares. Any additional credit is recorded in Capital in Excess of Par, just as if the stock is being issued for the first time.
This entry reflects the position that treasury stock is in substance the same as any other unissued shares. If the capital stock in the previous example had an initial issue price of $25 per share, these entries would be recorded for the three events:
Under the par value method, the Treasury Stock account should be viewed as contra to the Capital Stock account. Its balance represents only the claims arising from the original investment of par value that were satisfied by distributing assets. The disclosure of the number of shares can be accomplished as follows:
If more than one class of stock exists, separate disclosures should be made for treasury stock of each class.
Entries for stock without par value
For no-par stock with a stated value, the entries for the purchase and sale of treasury shares are the same as those described above. However, if the stock does not have a par or stated value, the original full amount paid in substitutes for par value in the entry for acquisitions, as shown below (again assuming an original issue price of $25 per share):
Upon reissuance, any amount received in excess of the carrying amount of the treasury shares must be credited to the Capital Stock account as no other paid-in capital account exists for no-par-value stock. Further, this practice produces the same account balances that would be achieved if the stock had been retired and new shares issued. These reissuance entries would be recorded for the example: