Chapter 15

Intermediate Accounting II

Otto Chang

Professor of Accounting

Issuance of stock

• Par value indicates minimum legal capital

• Par value or stated value stockCash 1100 Common Stock (Par value $5.00) 500 Paid-in Capital in excess of par 600

• No par valueCash 1100 Common Stock--No Par Value 1100

Sale of Subscribed Stock

• 500 shares of stock subscribed, par value $5, fair value $20, 50% cash down requiredSubscriptions Receivable* ($20 x 500) 10,000 Common stock Subscribed ($5 x 500) 2,500 Paid-in Capital in Excess of Par 7,500Cash 5,000 Subscriptions Receivable 5,000*Subscriptions Receivable is not enforceable,

therefore, not an asset, but a contra-equity A/C

When Final Payment is Received

• Six months later, final payment is receivedCash 5,000

Subscriptions Receivable 5,000

Common Stock Subscribed 2,500

Common Stock 2,500

Defaulted Subscriptions Accounts

• In states allow the down payment to be kept:Common Stock Subscribed 2,500Paid-in Capital in Excess of Par 2,500 Subscription Receivable 5,000

• In states require the excess of resale value over balance due to be returned to subscriber:Example: the 500 shares are resold at $20Paid-in Capital in Excess of Par 5,000 Cash ($20-$10) x 500 5,000

Costs of Issuing Stock

• Examples: accountants’, attorneys’ and underwriters’ fee, expense for printing, advertising, and filing and registration

• Method 1: treat as a reduction of paid-in capital in excess of par.

• Method 2: treat as an organization cost.

• Method 1 is more popular.

Reasons for Reacquisition of Shares

• For employee stock compensation contract

• Meet Potential merger needs

• To increase EPS

• Reduce the number of share held by public to thwart takeover

• To make a market in the stock

• To contract operation

Purchase of Treasury Stock

• Cost method– Treasury Stock is debited at cost when required

Example 1: A company issued 1000 shares of stock at $110 per share (par value is $100), later 100 shares are reacquired at $112

Cash ($112 x 100) 1120

Treasury Stock 1120

• Note: the original issue price is not used

Reissue of Treasury Stock: Cost Method

• When reissued, credit Treasury Stock at its purchase cost

• Example A: 10 shares reissued at $130/shareCash 1300 Treasury Stock 1120 Paid-in Capital from T/S 180

• Example B: 10 shares reissued at $98/shareCash 980Paid-in Capital from T/S 140 Treasury Stock 1120

Retirement of Treasury Stock: Cost Method

• Example C: retire 10 shares of treasury stock (issued at $110; reacquired at $112)Common Stock (10 x par $100) 1000

Paid-in Capital in Excess of Par 100

Retained Earning* 20

Treasury Stock 1120

* or Paid-in Capital from T/S, depending on the state law

Retirement of Treasury Stock:Cost Method

• Example D: retire 10 shares of treasury stock (issued at $100; reacquired at $98)Common Stock 1000

Paid-in Capital in Excess of Par 100

Paid-in Capital from Retirement 120

Treasury stock 980

Par Value Method

• Reacquired treasury stock treated as “constructively retired”

• Example 2: 100 shares reacquired at $112 (originally issued at $110/share; par=$100)Treasury Stock (100 x par $100) 10,000

Paid-in Capital in Excess of Par 1,000

Retained Earning 200

Cash 11,200

Purchase of Treasury Stock:Par Value Method

• Example 3: same 100 shares reacquired at $98Treasury Stock(100 x Par $100) 10,000

Paid-in Capital in Excess of Par 1,000

Paid-in Capital from T/S 1,200

Cash 9,800

Reissue of Treasury Stock:Par Value Method

• Treated as “new issue”

• Example (a): 10 shares treasury stock were reissued at $130 /share (par=$100, issued at $100, reacquired at $112) Cash 1,300

Treasury Stock (10 x Par $100) 1,000

Paid-in Capital in Excess of Par 300

Reissue Treasury Stock:Par Value Method

• Example (b): same 10 shares reissued at $98Cash 980

Paid-in Capital from T/S 20

Treasury Stock (10 x Par $100) 1,000

Retirement of Treasury Stock:Par Value Method

• “Constructive” retirement becomes actual retirement of common stock

• Example (c): 10 shares of treasury stock were retiredCommon Stock (10 x par $100) 1,000

Treasury Stock (10 x par$100) 1,000

Balance Sheet Presentation

• Cost method: debit balance of Treasury Stock is a contra-stockholders’ equity account, subtracted from the total of stockholder’s equity.

• Par value method: debit balance of Treasury Stock is subtracted from the Capital-Common Stock account

• Retained earning should be restricted to the extent of balance in the Treasury Stock