300531 Flashcards
In 20X1, Seda Corp. acquired 6,000 shares of its $1 par value common stock at $36 per share. During 20X2, Seda issued 3,000 of these shares at $50 per share. Seda uses the cost method to account for its treasury stock transactions. What accounts and amounts should Seda credit in 20X2 to record the issuance of the 3,000 shares?
Treasury stock: $144,000; Retained earnings: $6,000
Treasury stock: $102,000; Additional paid-in capital: $42,000; Retained earnings: $6,000
Treasury stock: $108,000; Additional paid-in capital: $42,000
Treasury stock: $108,000; Common stock: $42,000
Treasury stock: $108,000; Additional paid-in capital: $42,000
Additional Paid-in Capital
Additional paid-in capital (APIC) is an increase in equity (net assets) in excess of par or stated value arising from transactions involving the enterprise’s own stock. Usually, it is reported for each class of stock or each type of transaction (e.g., APIC from common, from preferred, from treasury stock (both par and cost methods), from conversion of convertible shares, from retirement of callable or redeemable shares from payment of a liquidating dividend, and from quasi-reorganization).
Additional paid-in capital is sometimes called “paid-in capital in excess of par” or “contributed capital in excess of par.”
Common Stock
Common stock is ownership interest that is subordinate to all other classes of stock (and to all creditors) of the issuing corporation in participation rights and in dividend and liquidation preferences (i.e., holders of common stock are paid after debt and preferred stock obligations have been met). Common stock is also known as residual ownership interest and usually carries voting rights (at stockholders’ meetings), although some classes of common stock may be nonvoting. Common stock is often called common shares.
Contributed Capital
Contributed capital is increases in net assets received from outside the corporation, from transactions related to capital stock or donated assets, from financing provided in exchange for ownership interest, and from paid-in capital.
Sources of contributed capital:
Capital stock at par
* Common stock
* Preferred stock
Contributed capital in excess of par (CCEP)
Contributed capital from treasury stock
Contributed capital from donation of assets
Cost Method
The cost method is a method of accounting for the purchase and resale of treasury stock which uses the one-transaction view—views the purchase and subsequent resale of the shares as one extended transaction with two parts. It uses contra-equity account. The capital stock account is unaffected. It may also affect contributed capital and/or retained earnings and has the same effect on total stockholders’ equity as the par value method but does not apportion the amount to the component equity accounts.
Retained Earnings
Retained earnings are an increase in net assets from results of operations, retained by the corporation for use in the enterprise. They are internally generated financing or the corporation’s undistributed earnings. They are accumulated earnings, less accumulated losses and dividends paid, from inception. Retained earnings are a major source of owners’ equity and can be viewed as additional investments by the owners as foregone dividends.
Negative balance is called a deficit.
Retained earnings may also be decreased by purchase of treasury stock at a price higher than the amount originally received for the stock.
Retained earnings may be appropriated (i.e., restricted as to use) by:
- contractual specification (e.g., bond covenants),
- legal requirement (e.g., by state law), or
- management discretion (e.g., for future expansion).
Retained earnings are increased by net income, prior-period adjustments, and quasi-reorganization. Retained earnings are decreased by net loss, prior-period adjustments, cash, property, scrip, stock dividends, and treasury stock and stock retirement transactions.
Treasury Stock
Treasury stock is shares of the issuing corporation’s own stock (common or preferred) that were issued and were later reacquired in the open market by the issuing corporation and are still held by the issuing corporation. Treasury stock is considered issued but not outstanding. It may be obtained through purchase, settlement of an obligation, or donation, and it may be retired or resold. Treasury stock does not carry voting, dividend, preemptive, or liquidation rights.
Treasury stock may be accounted for under the par value or the cost method of accounting. Both methods are considered GAAP. Treasury stock is not an asset and does not affect income. It is a contra (negative) element of stockholders’ equity—it decreases total equity. Treasury stock may increase or decrease contributed capital and may also decrease (but rarely increases) retained earnings.
FASB ASC 505-30
2293.01
Treasury stock is a corporation’s own previously issued and outstanding stock that is reacquired but not retired. After being reacquired, the shares are still considered to be issued but not outstanding.
2293.02
Two methods are used to account for transactions involving treasury stock—the cost method and the par value method. Both methods are considered to be GAAP.
2293.03
The primary difference in the two methods is that the cost method subscribes to a single transaction concept, whereas the par value method adheres to a “two transactions” concept. The cost method views the reacquisition of the outstanding shares and their subsequent sale as a single transaction. The treasury stock account is carried at cost pending the outcome of the subsequent sale of the treasury shares. The par value method views the reacquisition of the shares and their subsequent sale as two separate transactions. The reacquired shares are accounted for in much the same manner as retired shares. The subsequent sale of the shares is accounted for essentially as if the shares were unissued shares.
2293.04
2293.05
The cost method is illustrated as follows for Delphi Company under two different assumptions as to additional paid-in capital:
Additional paid-in capital is treated as a homogeneous category with no distinction made among the various sources of additional paid-in capital.
Additional paid-in capital is accounted for as a heterogeneous category with distinction made among the various sources of additional paid-in capital.
The abbreviation PIC is henceforth used for the term “additional paid-in capital.”
2293.06
The Treasury Stock account is carried at cost under both of the assumptions regarding additional paid-in capital. Under assumption 2, the sale of treasury stock below cost can reduce additional paid-in capital only to the extent of any balance in the PIC—Treasury Stock account arising from previous treasury stock transactions.
2293.07
2293.08
