Accordingly, in financing highly speculative ventures such as mining, oil, and other similar companies, it is customary to issue the entire capital stock of the company to the owner or owners of the mining or oil property taken over by the corporation as the basis for its operations. Inasmuch as the value of the properties taken over is not determinable, it is usually impossible to show that the stock issued for them does not represent their true value. Accordingly, such stock is legally fully paid stock and not subject to the liability for additional assessment which attaches to stock sold at a discount. Working capital is provided through the donation of a portion of the capital stock to the treasury of the corporation, which is then in a position to sell to others the stock now fully paid and non-assessable. It is easier to find purchasers for this stock because it can be sold at whatever discount is necessary to dispose of it and carries with it no liability for future assessment.
Treasury stock may arise also through repurchase by the company. It may sometimes be desirable for a company to buy back some of its own stock. This is not allowed in all states but where allowed such stock repurchased becomes treasury stock.
The student should distinguish carefully between treasury stock and unissued stock.
Accounting for Treasury Stock.—The record of treasury stock transactions is not complicated. They are discussed under three heads as follows:
1. Record at Time of Acquisition. Only the acquisition through donation will be explained here. Acquisition through purchase usually involves an adjustment of purchase price to par value and the vexed problem of valuation. This problem will be found discussed on page 18, Volume II.
Assume that a company has issued all its capital stock, $1,000,000 in amount, for the acquisition of a mining property, and that the shareholders donate to the treasury $400,000 of the stock to provide working capital. This stock donation will be recorded on the books as follows:
| Treasury Stock | 400,000.00 | ||
| Donated Surplus | 400,000.00 | ||
Like any other gift, this gift of stock in theory creates additional capital and must therefore be recorded in a proprietorship account. The title “Donated Surplus” is used to indicate the source of this additional capital. Capital arising from this source should never be recorded in the general Surplus account, largely because of its problematical value but also because of the information which it gives concerning the financing of the company by making a separate record.
2. Record at Time of Sale. Assume that $250,000 of the treasury stock is sold at 50. Inasmuch as the stock was brought on the books at par, the portion sold must be taken off at the same figure. The 50% discount, instead of being recorded in a Capital Stock Discount account, will be recorded as a charge against the Donated Surplus, thus adjusting a portion of this donated surplus, recorded originally at par value, to its realizable value. The following entry records the sale and adjustment:
| Cash | 125,000.00 | ||
| Donated Surplus | 125,000.00 | ||
| Treasury Stock | 250,000.00 | ||