USCPA (FAR) – (3) Stockholder’s Equity

I would like to record about the key points of the US CPA exam content.

When the purpose of the appropriation has been achieved, it should be restored to unappropriated retained earnings.

The determination of the acquisition cost is typically based on the market trading price (fair value), rather than the par value of each share, with earnings allocated accordingly.

Property dividends are recorded at the fair value of the property distributed.
The effect of retained earnings is gain or loss on disposition of the property and the market value of the property dividends.

(DR) Retained earnings 900 / (CR) Inventory 1000

(DR) Loss on Inventory 100

Small Stock Dividend (usually less than 25% of the issued shares) : it is basically recorded at market value. However, as no market value is provided, it must be recorded at par value.
Large Stock Dividend (usually 25% or more of the issued shares) : it is recorded at the par value of shares.
Stock dividend increase the number of shares held and decreases the cost basis per share.

　　(DR) Retained earnings 1000 / 　　　　(CR) Common stock 500 (per common stock)

　　　　　　　　　　　　　　　　　/　　　　　 (CR) Additional paid-in-capital 500

Focus of Accounting Treatment: The Cost Method focuses on the acquisition cost, displaying the amount of treasury stock at its purchase price on the balance sheet. The Par Value Method, on the other hand, emphasizes the par value and the reduction in additional paid-in capital.
Impact on Equity: The Cost Method deducts the full amount of acquired treasury stock from total equity, while the Par Value Method results in a reduction of equity through the decrease in par value and additional paid-in capital.
Timing of Profit and Loss Recognition: The Cost Method recognizes profits or losses based on the difference between the acquisition cost and the selling price during the disposal of treasury stock. In contrast, the Par Value Method recognizes profits or losses through adjustments in par value and additional capital.
(Common) Neither method affects the P&L as both are capital transactions.
(Common) Common and Preferred stock are recorded at the number of shares issued times stated or par value. Amounts exceeding the par value are recorded in APIC – Common Stock. The resold case is also the same of using APIC- Common Stock.
(Common) Issued = Outstanding + Treasury stock. The treasury stock is also affected by the stock split assuming it is held to satisfy stock option commitments.

Issuance of Common Stock : (DR): Cash = 200,000 (CR) Common Stock 100,000 (Par value), Additional Paid-In Capital 100,000 (difference)
Purchase of Treasury Stock : (DR) Treasury Stock 100,000 (CR) Cash 100,000.
Sale of Treasury Stock to Officers : (DR) Cash 25,000 (CR) Treasury Stock 20,000(purchase price) APIC 5,000 (dif).

For test purposes, any excess amount paid over the original issue price for the acquisition of treasury stock is recorded in Retained Earnings. In practice, if additional paid-in capital is insufficient, a reduction from Retained Earnings is necessary.
Under the Par value method, the additional paid-in capital account is debited for losses when the treasury stock is repurchased; however, when the additional paid-in capital account does not have enough of a balance to absorb a loss, retained earnings is further reduced. For all transaction gains, the additional paid-in capital account (not retained earnings) is credited.
Issuance of Common Stock : (DR) Cash 7,000 (CR) Common Stock (par value) 1,250, APIC (Dif) 5,750.
Sale of Treasury Stock : (DR) Treasury Stock 375(par value), APIC 1,725 (Purchase value – par value), RE(dif) / (CR) Cash 2400. It should be noted that the retained earnings account is debited because there is no balance in the additional paid-in capital.