The shares of treasury stock are held by the issuing corporation which cannot exercise any of the rights of ownership apart from the right to sell them. With the exception of the possible impact on the amount of legal capital, these shares are in substance the same as unissued shares and should generally be accounted …
Accounting practice for treasury stock encompasses two general approaches: The cost method Par value method It is important to note that precise rules do not exist for either method. The following discussions focus on the most straightforward types of transactions; further, the equity accounts used are consistent with the simplified concept. That is, the general …
Definition The cost method is based on the assumption that the acquisition of treasury stock is essentially a temporary reduction in stockholders’ equity that will be reversed when the shares are reissued. It is widely used because of its simplicity. Explanation At the time of acquisition of the shares, the Treasury Stock account is debited …
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 …
Where state laws and the corporation’s bylaws allow it, the board of directors can vote to retire shares of stock. This action goes beyond the acquisition of treasury shares by actually removing them from the issued category. Shares acquired for retirement After appropriate approvals, the corporation may act to acquire shares for the purpose of …
On other occasions, the board may decide that shares of treasury stock should be formally retired and thus removed from the issued category. Whether this action is possible depends on state laws. If it is allowed, the journal entry depends on the method used to account for the acquisition of the shares. Cost method If the …
Conversion In some situations, stock of one class may be changed to stock of another class. The primary events producing this result are conversions and recapitalizations. Convertible preferred stock can be exchanged for shares of common stock at the request of the holder. Conversion can be forced, however, if the stock is also callable. Convertible …
What is Warrants? Corporations occasionally issue a special kind of equity security known as warrants. The holder of a warrant has the right to purchase a specified number of shares of stock at a stated price before an expiration date. Warrants, which are also known as stock rights and stock options, are often marketable and …
As a method of obtaining agreement between the personal goals of employees and the goals of the stockholders, many corporations provide their key employees with part of their compensation either in the form of equity securities or based upon the value of the firm’s stock. Compensation can be provided through shares of stock, warrants, and …
As an alternative to presenting employees with shares or warrants, many companies grant them stock appreciation rights. Under these arrangements, the employees do not have to buy shares but are rewarded just as if they owned them. For example, an executive might be entitled to receive a cash payment after four years equal in amount …
The overall objective of accounting is to provide information to investors and creditors to help them assess the likelihood, amounts, and timing of cash flows to be received from the firm. Accountants maintain that this objective is most likely to be met if the financial statements are presented in accordance with GAAP. However, if it …