Q: My husband, brother-in-law, and father-in-law started a printing company in 1972. All shares of stock were owned by these family members. The corporation has purchased all of my father-in-law’s stock, which is now accounted for as treasury stock. We are ready to retire the stock, but I am not clear on the method. Par value of the common stock is $1. The associated APIC is $4 per share. Treasury stock is accounted for at cost of $14.98/share.
What is the correct way to enter this in the books?
A: In accordance with APB 6, Paragraph 12, when a corporation’s stock is retired or purchased, the excess of the purchase price over par or stated value may be allocated between capital surplus and retained earnings. The portion allocated to the capital surplus should be limited to the sum of the portion of the capital surplus relating to the initial sale of the stock. The remainder is allocated to retained earnings. Thus the journal entry would appear as follows:
|Cash for Treasury Stock||$14,980|
One additional point to consider is that the laws of some states govern the circumstances under which a corporation may acquire its own stock and prescribe the accounting treatment therefore. Where such requirements require different handling than rules of APB 6, the accounting should conform to the applicable law.
Kevin J. Hovorka
Partner, Crowe Chizek & Co. LLP
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