3. Acquisition of treasury stock below or above par.—A corporation sometimes acquires its capital stock in settlement of a debt due to it. The stock may be taken over at par value, or at a price above par, or at a discount. The laws of some states pro hibit a Corporation from acquiring its own capital stock while in other states this is permitted, with some restrictions. Thus in New York State a corporation may acquire its own stock provided it has a surplus and provided also that the action does not defraud the creditors. If the stock is acquired at a price above par it is evident that the premium paid for the stock constitutes in effect a distribution of so much of the surplus of the corporation to that par ticular stockholder. Consequently, if the stock is not to be retired and canceled, it is probably the better practice to show it at its par value and charge the premium paid directly against the surplus account. If the stock has been acquired at a discount, it is evident that the corporation has redeemed a part of its capital stock liability for less than par and in this ease if the stock is not to be canceled and retired the treasury stock should be shown at its cost price in the balance sheet. If the stock is to be retired, the corporation has sustained a profit equal to the differ ence between the par value and the price paid for the stock. This may be credited to the surplus ac count. VVhere -treasury stock that has once been is sued has come back into the treasury and is canceled, it ceases to be treasury stock and reverts to the status of unissued stock thereby reducing the outstanding capital stock liability.
Stock donated to cover a deficit.—The stock holders of a corporation might donate back part of their holdings of capital stock for sale so as to enable the corporation to wipe out a deficit. If the corpora tion is organimd under the laws of a state that does not permit corporations to acquire their own capital stock, the best way for -the transaction to be handled would be to have a trustee receive the stock for the benefit of the corporation. Then, when it has been sold, the proceeds will be ttu-ned over to the corpora tion, which would debit its cash account and credit the deficit account. If the corporation is organized un der the laws of a state that permits it to acquire its own capital stock, the treasury stock would be debited and capital surplus account would be credited until the stock was sold. When the stock is sold, cash would be debited and treasury stock credited. And the difference between the price at which the treasury stock was taken up upon the books and the price at which it was sold, would be adjusted thru the capital surplus account. Thus the treasury stock would al ways appear on the books for the same value as the amount standing at the credit of the capital surplus account. When the entire treasury stock has been disposed of, the credit balance in the capital surplus account could be transferred to the credit of the deficit account, thus wiping out the deficit.