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ACCOUNTING FOR TREASURY SHARES

The cost method is used in accounting for treasury shares.


The reason is the legal limitation on acquisition of treasury shares.

Treasury shares shall be recorded at cost, regardless of whether the shares are
acquired below or above the par or stated value.

If the treasury shares are acquired for CASH, the cost is equal to the cash
payment.

If the treasury shares are acquired for NONCASH CONSIDERATION, the cost is
usually measured by the carrying amount of the noncash asset surrendered.

ILLUSTRATION:
If an entity acquired 2,000 shares with par of P100 at P150 per share, the
journal entry is:

REISSUANCE AT COST
If the treasury shares are subsequently reissued at P150 per share, the journal
entry is:

REISSUANCE AT MORE THAN COST


If the treasury share are subsequently reissued at P200 per share, the journal
entry is:

*As stated, no gain or loss shall be recognized on the purchase, sale, issue or cancellation of an
entitys equity instrument. Thus gain from sale of treasury shares shall not be credited to income
but recognized directly in equity as share premium.

REISSUANCE AT BELOW COST


If the treasury shares are subsequently reissued at below cost, the excess of the
cost over the reissue price is charged to the following in the order mentioned:
a. Share premium from treasury shares of the same class
b. Retained earnings

If the treasury share are subsequently reissued at P100 per share, the journal
entry is:

ANOTHER ILLUSTRATION
Ordinary share capital, 10,000 shares, P100 par P1,000,000
Share premium original issuance 200,000
Share premium treasury shares 20,000
Retained earnings 500,000
Treasury shares, 2,000 shares at cost 300,000
If subsequently, the treasury shares are reissued at P100 per share, the journal
entry is:

RETIREMENT OF TREASURY SHARES


If the treasury shares are subsequently retired, the share capital account is
debited at par or stated value and the treasury shares account is credited at
cost.

If the retirement results in gain, meaning the par value exceeds the cost of
treasury shares, such gain is credited to share premium from treasury shares.

For example, if 1,000 ordinary shares with a par of P100 are held as treasury at
a cost of P80,000, and subsequently retired, the journal entry is:

If the retirement results in a loss, meaning the cost of the treasury shares
exceeds the par value, such loss is debited to the following in the order given:
a. Share premium from original issuance
b. Share premium from treasury share
c. Retained earnings
ILLUSTRATION:
> Ordinary share capital, 50,000 shares, P100 par P5,000,000
Share premium original issuance 500,000
Share premium treasury shares 100,000
Retained earnings 1,000,000
Treasury shares, 5,000 shares at cost 750,000
The subsequent retirement of the treasury shares is recorded as follows:

> The following capital accounts are shown in the balance sheet of Laft
Corporation:
Ordinary share, 10,000 shares, par value P100 P1,000,000
Premium on ordinary share 20,000
Share premium treasury share 30,000
Accumulated profits and losses 750,000
Treasury share, 2,000 shares at cost 250,000
The entire 2,000 shares were sold for P200,000.
What would be the balance of the accumulated profits and losses account after
this sale?
a. 250,000 b. 700,000 c. P730,000 d. 750,000

> The, analysis of shareholders equity of Peter Company at January 1, 2014


showed the following:
Ordinary share, par value P20, authorized 200,000
shares, issued and outstanding, 120,000 shares P2,400,000
Share premium 480,000
Accumulated profits and losses 1,540,000
The company uses the cost method of accounting for treasury share and the
following transaction took place:
Acquired 2,000 shares of its shares for P70,000. Sold 1,200 treasury shares at
P40 per share. Retired the remaining treasury shares.
What is the amount of the share premium at the end of the accounting period?
a. 462,000 b. 474,000 c. 476,800 d. 480,000

RETAINED EARNINGS
Retained earnings represent the cumulative balance of periodic net income or
loss, dividend distributions, prior period errors, changes in accounting policy
and other capital adjustments.

The IAS term for retained earnings is accumulated profits

Retained earnings are of two kinds, namely:


Unappropriated retained earnings represent that portion which is free and
can be declared as dividends to shareholders.
Appropriated retained earnings represent that portion which has been
restricted and therefore is not available for any dividend distribution

Dividends
Dividends are distributions of earnings or capital to the shareholders in
proportion to their shareholdings. Dividends are broadly classified into two
namely:
a. Dividends out of earnings
b. Dividends out of capital

Dividends out of earnings


When dividends are formally declared by the board of directors, three dates are
essential for accounting purposes, namely:
a. Date of declaration is the date on which the directors authorize the payment
of dividends to shareholders.
b. Date of record is the date on which the stock and transfer book of the
corporation will be closed for registration.
c. Date of payment is the date on which the dividend liability is to be paid.

*the liability for dividend must be recognized on the date of declaration.

The dividends out of earnings are usually in the form of the following
a. Cash dividends
b. Property dividends
c. Liability dividends in the form of bond and scrip
d. Stock dividend or bonus issue
Cash dividends
ILLUSTRATION
The board of directors at their meeting on November 30,2014 declared a dividend
of P20 per share, payable April 30, 2015, to shareholders of record on December
31, 2014. The entity had 20,000 shares issued and outstanding with par value of
P100.

Property dividends
Property dividends or dividends in kind are distribution of earnings of the
entity to the shareholders in the form of noncash assets.

There are two accounting issues with respect to property dividends, namely:
1. Measurement of the property dividend payable.
2. Measurement of the noncash asset to be distributed as property dividend.

Measurement of the property dividend payable


IFRIC 17, provides that an entity shall measure a liability to distribute noncash
asset as a dividend to its owners at the fair value of the asset to be
distributed.

This simply means that the dividend payable is initially recognized at the fair
value of the noncash asset on date of declaration and is increased or decreased
as a result of the change in fair value of the asset at year end and date of
settlement.

Settlement of property dividend payable


IFRIC 17, provides that when an entity settles the dividend payable
CA of the Dividend Payable
- CA of the asset distributed
gain/loss on distribution of property dividend

Measurement of Noncash asset distributed


PFRS 5, provides that an entity shall measure a noncurrent asset classified for
distribution to owners at the lower of carrying amount and fair value less cost
to distribute.

Accordingly, if the fair value less cost to distribute is lower than the carrying
amount of the asset at the end of the reporting period, the difference is
accounted for as impairment loss.

ILLUSTRATION:
>An entity owned 50,000 shares of another entity accounted for as nonmarketable
equity investment. The carrying amount of the investment is P1,000,000.

On December 1, 2014, the entity declared these shares as property dividend to be


distributed on January 31, 2015.

The investment had the following fair value less cost to distribute:
December 1, 2014 1,500,000
December 31, 2014 1,800,000
January 31, 2015 1,900,000
Journal entries
1. To recognize the dividend payable on the date of declaration on December 1,
2014:

2. To recognize the increase in dividend payable at the end of the reporting


period on December 31, 2014:

3. The carrying amount of the investment of P1,000,000 is not adjusted because


this is lower than the fair value of P1,800,000 on December 31, 2014. The
investment is measured on December 31, 2014 at carrying amount.

4. To recognize the increase in dividend payable on the date of settlement on


January 31, 2015:

5. To record the settlement of the dividend payable on January 31, 2015.


>On November 1, 2014, an entity declared a property dividend of equipment payable
on March 1, 2015. The carrying amount of the equipment is P3,000,000 and the fair
value is P2,500,000 on November 1, 2014.

However, the fair value less cost to distribute the equipment is P2,200,000 on
December 31, 2014 and P2,000,000 on March 1, 2015.
Journal entries
1. To recognize the dividend payable on the date of declaration on November 1,
2014:

2. To recognize the decrease in dividend payable at the end of reporting period


on December 31, 2014

3. To measure the equipment on December 31, 2014 at the lower of carrying


amount and fair value less cost to distribute:

4. To recognize the decrease in dividend payable on the date of settlement on


March 1, 2015:

5. To record the settlement of the dividend payable on March 1, 2015:

Liability dividends
Liability dividends are actually deferred cash dividends.
Such dividends are resorted to by the entity because retained earnings may be
sufficient but cash may be insufficient to cover working capital requirements.

Appropriation of retained earnings


In the absence of evidence to the contrary, all the retained earnings of an
entity can be declared as dividends.
In order to limit or restrict the payment of dividends, the entity may transfer a
portion of the retained earnings unappropriated to retained earnings
appropriated.
The appropriation of retained earnings may be described as follows:
a. Legal appropriation
b. Contractual appropriation
c. Voluntary or discretionary appropriation

BOOK VALUE PER SHARE


Book value per share is the amount that would be paid on each share assuming the
entity is liquidated and the amount available to shareholders is exactly the
amount reported as shareholders equity.

Where there is only one class of share capital, the formula:


Book value per share = Total shareholders equity
Number of shares outstanding

Where there are two classes of share capital, it is necessary to apportion the
shareholders equity between the preference share capital and ordinary share
capital.
Book value per preference share = Preference shareholders equity
Number of preference shares outstanding

Book value per ordinary share = Ordinary shareholders equity


Number of preference shares outstanding

Accounting Procedure
For purposes of apportionment between the PS and OS, the following procedure
should be observed:
a. An amount equal to the par or stated value is allocated to the PS and OS.
b. Any balance of the shareholders equity in excess of the par or stated value
is then apportioned taking into account the liquidation value and dividend
rights of the preference shareholders.
For book value purposes, the following are assumed to be available for dividends:
a. Retained earnings
b. Share premium
c. Revaluation surplus

Dividend Rights
Preference as to dividends
a. Noncumulative
b. Cumulative
c. Non-participating
d. Participating

Definitions
A noncumulative preference share is one on which the right to receive dividends
is forfeited in any one year in which the dividends are not declared. Thus, the
preference share is entitled only to current year dividends.

A cumulative preference share is one which any undeclared dividends accumulate


each year until paid. Thus, the cumulative preference share is entitled to all
dividends in arrears.

A nonparticipating preference share is one that is entitled, to receive only the


dividends equal to the fixed rate.

A Participating preference share is one which is entitled to receive dividends in


excess of the basic or fixed rate. However, before the preference share can
participate, the ordinary share should receive first an amount equal to the basic
preference rate, meaning preference rate times the par value of the ordinary
share outstanding
*In case where there are two classes of PS with different rates and both are
participating, the lower rate shall be the basis for allocation to the ordinary share

*In the absence of specific designation, preference share is assumed to be noncumulative


and nonparticipating.

ILLUSTRATION
The shareholders equity in the statement of financial position on December 31,
2014 showed the following:
Share capital, P100 par, 50,000 shares 5,000,000
Share premium 1,000,000
Retained earnings 2,000,000
Revaluation surplus 1,500,000
The book value per share is computed as follows:

Another illustration
The shareholders equity in the statement of financial position on December 31,
2014 showed the following:
Preference share capital, 12% P100 par, 25,000 shares P2,500,000
Ordinary share capital, P100 par, 50,000 shares 5,000,000
Share premium 600,000
Retained earnings 3,000,000
Dividends have been paid on preference share up to December 31, 2012.
What is the book value per PS and OS, assuming:
Preference share is noncumulative and nonparticipating
Preference share is cumulative and nonparticipating
Preference share is cumulative and participating
Preference share is cumulative and participating up to 16%
Preference share is cumulative, nonparticipating and with liquidation value
of P106 per share