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Briefly explain the cost method and the par (stated value) method of accounting for treasury stock, with examples.

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Briefly explain the cost method and the par (stated value) method of accounting for treasury stock, with examples.

Under the cost method of accounting for treasury stock, the cost of the shares of stock is debited to the treasury stock account.

Example:
50 shares of stock are acquired at $40 each. 50 * 40 = 2,000

The journal entry would appear as follows, to illustrate how the cost method works:
Treasury stock ...

Solution Summary

The expert briefly explain the cost method and the par (stated value) method of accounting for treasury stock, with examples.

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A proposal to invest in new white table wine-making equipment has been developed. The following information is now provided:

1. Equipment cost (installed) is $2 million

2. Revenues of $1M, $1.2M, 1.3 and $1.4M/yr for each of the next four years.

3. Satyr consulting generated the forecasts; their fee is $250,000

4. Operating costs are 30% of sales.

5. Net working capital is expected to be 20% of the following year's sales (ie-NWC at t=0 is 20% of t=1 sales).

6. Assume that all new equipment will be depreciated straight line to zero over the period of t=1-4 (25% per year)

7. Introduction of the white table wine is expected to increase sales of "complementary products" such as olive oil, corkscrews, and wine glasses produced by the firm, resulting in additional pre-tax operating profits of $50,000 per year.

8. Project acceptance will require that $250,000 of debt be issued, resulting in interest payments of $20,000 per year over the life of the project

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EXTRA CREDIT
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