Definition
The financial accounting term donated treasury stock refers to those shares given back to a corporation by a shareholder without compensation. Once donated, the company has the option of retiring the shares or holding them as treasury stock if the company intends to reissue the securities to the market.
The company has three options to account for donated treasury stock: the memo, cost, and par methods.
Explanation
Companies will issue capital stock to raise funds used to expand business operations and create additional shareholder value. Although uncommon, a shareholder can donate the stock they own back to the issuing corporation. When this occurs, the company has the option of retiring those shares or reissuing them to the marketplace. If the company intends to reissue the shares, they are held as Treasury Stock until redistributed.
When a company reacquires treasury stock in this manner, it has three options to account for this transaction:
Memo Method: with this approach, the treasury shares are assumed to have no cost, and only a memorandum indicating the number of shares received is created. If the shares are subsequently reissued to the market, a credit is made to Donated Capital.
Par Method: with this approach, a debit to Treasury Stock is made using the par value of the securities, Paid-in Capital in Excess of Par is debited in an amount equal to the original premium (when first issued), and a credit is made to Donated Capital.
Cost Method: with this approach, a debit is made to Treasury Stock, while a credit is made to Donated Capital using the current market value of the shares received.
Note: Regardless of the method chosen, donated stock does not result in an increase to the company's total assets or equity.
Example
Ten years ago, Company A issued 1,000,000 shares of common stock with a par value of $0.01. When first issued, the stock sold for $20.00 per share. One of the company's original founders passed away and donated 100,000 shares back to Company A, which held the donation as treasury stock. At the time of donation, the market price of Company A's stock was $23.00 per share. Company A recently reissued the treasury stock to the market at $25.00 per share. The journal entries for each of the three methods are demonstrated below.
The memo method does not require a journal entry to record the donation; however, the journal entry to record the reissuance of treasury stock would be as follows:
Debit | Credit | |
Cash | $2,500,000 | |
Donated Capital | $2,500,000 |
The journal entry to record the donation using the par method would be as follows:
Debit | Credit | |
Treasury Stock: 100,000 shares x $0.01 per share | $1,000 | |
Paid-in Capital in Excess of Par: 100,000 shares x $19.99 per share | $1,999,000 | |
Donated Capital | $2,000,000 |
The journal entry to record the reissuance of Treasury Stock under the par method would be as follows:
Debit | Credit | |
Cash | $2,500,000 | |
Treasury Stock: 100,000 shares x $0.01 per share | $1,000 | |
Paid-in Capital in Excess of Par: 100,000 shares x $24.99 per share | $2,499,000 |
The journal entry to record the donation using the cost method would be as follows:
Debit | Credit | |
Treasury Stock: 100,000 shares x $23.00 per share | $2,300,000 | |
Donated Capital | $2,300,000 |
The journal entry to record the reissuance of Treasury Stock under the cost method would be as follows:
Debit | Credit | |
Cash | $2,500,000 | |
Treasury Stock: 100,000 shares x $23.00 per share | $2,300,000 | |
Paid-in Capital Treasury Stock: 100,000 shares x $2.00 per share | $200,000 |
Related Terms
- The term par value stock refers to the accounting value assigned to a share of common stock, and is also referred to as its stated value or face value. The par value of common stock has no relationship to the market value of the security.
Moneyzine EditorSeptember 20th, 2023 - The financial accounting term stock issuance costs refers to the expenses a corporation incurs when they issue securities to the market. Typical costs associated with issuing stock include fees for attorneys, accountants, as well as underwriting. Companies have the option of treating these expenses in two ways: as organization costs or a reduction to paid-in capital.Moneyzine EditorSeptember 21st, 2023
- The financial accounting term reacquisition of shares refers to a process whereby a corporation buys back shares of its common stock from existing shareholders. When a company reacquires shares of its own stock, a process that is also known as a stock buyback, these securities are classified as treasury stock unless retired by the company's board of directors.Moneyzine EditorSeptember 21st, 2023
- The financial accounting term treasury shares accounted for at cost refers to a process that treats the acquisition of treasury stock as the first step in a two-step transaction. The second step in the transaction involves the reissuance of the treasury stock back into the marketplace.Moneyzine EditorSeptember 21st, 2023
- The financial accounting term retirement of treasury stock refers to a process whereby a company decides it will not reissue stock held in treasury to the market. In addition to approval by the company's board of directors, there are a number of regulatory requirements a company must comply with before it can retire treasury stock.Moneyzine EditorSeptember 21st, 2023
- The financial accounting term treasury shares accounted for at par refers to a process that treats the reacquisition of treasury stock as effectively retiring shares. Since treasury stock is not considered an asset of the company, proponents of this approach believe they should be considered a retirement of shares or a reduction in the number of shares outstanding. Since outstanding shares are shown at par value, their reacquisition must also be shown at par.Moneyzine EditorSeptember 21st, 2023
