How does the par value method for treasury stock differ from the cost method?

The par value method treats the repurchase of shares as if the original issuance is being reversed. Instead of simply recording treasury stock at cost, the par value method breaks the repurchase into its component parts.

Key Difference from Cost Method:

Feature	Cost Method	Par Value Method
Treasury Stock account	Recorded at repurchase cost	Recorded at par value
APIC impact at repurchase	No immediate impact	Original APIC reversed
Balance sheet	Single deduction from equity	Treasury stock only at par

Journal Entry — Repurchase:

When shares originally issued at $25 (par$1) are repurchased at $30:

Cost Method:

Account	Debit	Credit
Treasury Stock	$30
Cash		$30

Par Value Method:

Account	Debit	Credit
Treasury Stock	$1
APIC (original excess)	$24
Retained Earnings	$5
Cash		$30

The $24 APIC reversal represents the original premium over par ($25 − $1). The$5 debit to retained earnings represents the excess of repurchase price ($30) over original issue price ($25).

Worked Example — Duneridge Inc.:

Duneridge originally issued 100,000 shares at $18 each (par value$2):

• Common Stock: $200,000 (100,000 ×$2)
• APIC: $1,600,000 (100,000 ×$16)

Duneridge repurchases 10,000 shares at $22 each.

Par Value Method Entry:

Account	Debit	Credit
Treasury Stock (par)	$20,000
APIC (original: $16 × 10,000)	$160,000
Retained Earnings ($22 −$18 = $4 × 10,000)	$40,000
Cash		$220,000

If repurchase price ($22) < original issue price ($18 per share), the difference would credit APIC — Treasury Stock instead of debiting retained earnings.

Reissue Under Par Value Method:

When reissuing, it is treated like a new issuance:

Account	Debit	Credit
Cash	$XX
Treasury Stock		$2/share
APIC		Excess over par

Balance Sheet: Under the par value method, treasury stock appears at par value as a deduction from the common stock line, rather than as a lump deduction from total equity.

Key Exam Points:

1. The par value method is less common in practice but more transparent about the economic substance.
2. Total stockholders' equity is the same under both methods.
3. The par value method can result in either retained earnings decreases or APIC increases on repurchase, depending on whether the repurchase price exceeds the original issue price.

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