The customary method of showing, as in entry (4) below, is theoretically incorrect, though it may be necessary to use it when the data needed for the other entry, i.e., (3) above, are not available.
| (4) | Cash | $1,000.00 | |
| Bonus | 100.00 | ||
| Bonds Payable | $1,000.00 | ||
| Treasury Stock | 100.00 |
If a bonus of treasury stock is given with the sale of preferred stock, similar treatment would make possible a showing of the portion which is really discount on stock and the portion, if any, which is true bonus. Inasmuch as discount on stock and bonus are very similar in kind and in manner of treatment on the books, nothing of real value is perhaps gained in making the separation. The ultimate disposition of the Bonus account is, as indicated above, to treat it as a deferred expense, charging it against profits as rapidly as conditions warrant. It is an undesirable item on the balance sheet or ledger and should be expunged as soon as possible.
Treasury Stock Purchased
Treasury stock which is created by purchase by the issuing company requires consideration. If the price paid is less than par, carrying the treasury stock on the books at par requires an offsetting credit account similar to the Donated Surplus account used above when the stock is created by donation. This credit account simply represents a book surplus and should not usually be made the basis for a dividend. This account may be called “Treasury Stock Surplus,” “Contingent Profit on Treasury Stock Bought,” or other title indicating the true nature of the item. When the treasury stock is resold and the discount or premium on it is charged against this surplus or credited to it, as the case may be, the balance of the Treasury Stock Surplus account will then show the realized profit or loss on the completed treasury stock transactions and may be disposed of as indicated above for Donated Surplus.
On the other hand, if the price paid by the company in the purchase of its own stock is more than par, the premium paid must be charged against general surplus because there is usually no other place for the charge unless there is still open on the books a Premium on Stock account arising out of a previous sale of stock at a premium. Purchase of stock at a premium may represent simply the payment to the owner of the stock of his share in the general surplus of the company, in which case the premium paid must be shown as a reduction of that surplus.
Redemption of Preferred Stock
Handling redemption of a preferred stock issue is exactly the same as handling treasury stock by purchase. If by contract agreement at the time the preferred stock was issued it can only be redeemed at a premium, the premium must be charged, as indicated above, to an open premium account or to general surplus. The effect is similar to the payment of a special or extra dividend at the time redemption is made.
Forfeited Stock
Payments made on stock which is declared forfeited constitute an item of surplus but of a permanent nature, i.e., not a surplus applicable to the declaration of dividends, though there may be no legal inhibition to that use. If the stock is resold any discount on the resale is properly charged against the surplus arising from the forfeiture. By way of illustration, assume that $1,000 worth of stock has been subscribed for and payments amounting to $400 have been made when the stock is forfeited for failure to pay further instalments. The stock is offered again for subscription and is sold for $900 and payment has been received in full. The entries necessary to show the above are: