Accounting Problem 2

 (CREDIT):

--written by thewirter197
--employed by Ashford University



------------------------------------------PROBLEM--------------------------------------------------------------

• The difference between the cost, par and constructive retirement method.
• For the cost and par value methods, prepare journal entry examples of each using the following information:
• 1000 shares of $5 par stock were sold for $7.
• 500 shares were repurchased at a price of $6.
• The 500 shares were later sold for $3500.
• For the constructive retirement method prepare the following journal entry:
• The shares were retired. 

------------------------------------------ANSWER---------------------------------------------------------------


(The Cost Method):

The cost method used for the repurchased of stock (Bragg). First, you record the entire amount of purchase in the treasury stock account (Bragg). Then, you make sure the sale profit is higher then the repurchase stock price (Bragg). If the sale profit is lower then the repurchase of stock cost, then you make adjustments and add additional fees to upscale the ratio for the repurchase of stock (Bragg). If management decides to retire a stock completely, then take the paid in capital and charge it to retained earnings. The cost method is used for making sure the sale outweighs the repurchase value. If companies use this method, they will most likely try to make adjustments to make a profit. They do not want to purchase a stock when they are losing money. So, they usually re-purchase a stock after a profit. They try to do things to make sure there is a profit for re-purchase value.

(Par Method):

Is a method used for purchase and resale of treasury stock (Jan). The treasury stock is debited by the total par value of shares (Jan). Cash account is only credited by the actual amount paid for the treasury stock (Jan). The left over amount used for treasury stock is credited to paid in capital account (Jan).

(Retirement Method):

Method used for stock that is not going to be repurchased in the future (Bragg). You reverse the amount of the original price for the treasury stock (Bragg). The stock is usually not issued again after the stock ran its course (Bragg). This method is basically for stock that is not going to be repurchased related tot eh treasury stock. So, people or companies who do not plan to repurchase a stock would use this method.


Par Value Journal Entry 1:

Cash                                         $7,000
Treasury Stock-Par Value $5                $5,000
 Additional Paid-in Capital                    $2,000

Par Value Journal Entry 2:

Treasury Stock       $3,000
Cash                                        $3,000

Par Value Journal Entry 3:

Cash                                                                                              $3,500
Treasury Stock - Repurchased Price                                                          $3,000
Additional Paid - in Capital  from Treasury Stock Transaction                $50        

Retirement Journal Entry 1:

Treasury Stock- $6 Par                                                               $3,000
Additional Paid - in Capital from Treasury Stock Transaction               $500
Treasury Stock - 500 shares at $7 cost                                                   $3,500          






Reference:

Bragg, S. (n.d.). Treasury stock accounting - Cost method and constructive retirement method. Retrieved from http://www.accountingtools.com/treasury-stock-accounting
Jan, I. (n.d.). Treasury stock – Par value method. Retrieved from http://accountingexplained.com/financial/equity/treasury-stock-par-value-method