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Corporation-Part 2

Treasury shares (2,000 shares x P150) 300,000 Share premium (2,000 shares x P50) 100,000 Retirement of TS: Treasury shares 300,000 Capital stock (2,000 shares x P100) 200,000 Additional paid-in capital 100,000 The number of issued shares is reduced by 2,000 shares.

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0% found this document useful (0 votes)
310 views51 pages

Corporation-Part 2

Treasury shares (2,000 shares x P150) 300,000 Share premium (2,000 shares x P50) 100,000 Retirement of TS: Treasury shares 300,000 Capital stock (2,000 shares x P100) 200,000 Additional paid-in capital 100,000 The number of issued shares is reduced by 2,000 shares.

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SUBSEQUENT SHARE

TRANSACTIONS
Delinquent Subscription
Subscription received

Subscription unpaid

Board declares subscription due and payable (call) in the form of a board
resolution

Shareholder does not pay-shareholder is declared delinquent and the delinquent


shares will be sold at public auction

At the public auction, so many delinquent shares as may be necessary to cover


the unpaid subscription, interest accrued on the subscription, advertising
expenses and other costs of sale will be sold to the highest bidder.
Delinquent Subscription

 HIGHEST BIDDER- is the person who is willing to pay the


“offer price” of the delinquent shares for the smallest
number of shares.

 The “offer price” includes:


1. Balance due on the subscription
2. Interest accrued on the subscription due
3. Exepenses of advertising and other costs of sale
Delinquent Subscription
Example:
S subscribed for 10,000 shares at par of P100,, paying P600,000 as initial payment. The
balance of the subscription was called and S failed to pay. The BoD declared the
subscription delinquent.

The offer price is P450,000 including the balance due on the subscription, interest and
costs of sale. There are three bidders who are willing to pay the offer price:
A====4,500 shares
B====5,000 shares
C====6,000 shares

Who is the highest bidder?


A is the highest bidder and all the 10,000 shares shall be deemed fully paid.
A gets 4,500 shares and S, the original subscriber, gets 5,500 shares.
Delinquent Subscription
Journal entries:
1. S subscribes for 10,000 shares at par P100.

S/R 1,000,000
Subscribed share capital 1,000,000

2. S pays P600,000

Cash 600,000
S/R 600,000
Delinquent Subscription
Journal entries:
3. The subscription balance is called and S defaults.
No entry

4. The corporation pays P30,000 for expenses incurred in connection with


the auction of the delinquent shares.

Advance on delinquency sale or


Receivable from highest bidder 30,000
Cash 30,000
Delinquent Subscription
Journal entries:
5. A is the highest bidder A pays the subscription balance of P400,000 plus
interest of P20,000 and the delinquency expenses of P30,000, for a bid of
4,500 shares.

Cash 450,000
S/R 400,000
Interest income 20,000
Advances on delinquency sale
or Receivable from highest bidder 30,000
Delinquent Subscription
Journal entries:
6. The corporation issues the shares to A, 4,500 shares and to S, 5,500
shares.

Subscribed share capital 1,000,000


Share capital 1,000,000
Delinquent Subscription
Journal entries:
If there are no bidders, the corporation may bid in the absence of a bidder
or a highest bidder.

Treasury shares 450,000


S/R 400,000
Interest income 20,000
Advances on delinquency sale
or Rec’l. from highest bidder 30,000
Shares Issued with Other Securities

Two methods of allocating proceeds:

◆ Proportional method.

◆ Incremental method.
TWO CLASSES OF SHARES FOR A SINGLE
CONSIDERATION
Alpha Corporation issued 300 shares of P10 par value ordinary shares and
100 shares of P50 par value preference shares for a lump sum of P13,500.
The ordinary shares have a market value of P20 per share, and the
preference shares have a market value of P90 per share.

Number Amount Total Percent


Ordinary shares 300 x ₱ 20.00 = ₱ 6,000 40%
Preference shares 100 x 90.00 9,000 60%
Fair Market Value ₱ 15,000 100%

Allocation: Ordinary Preference


Issue price ₱ 13,500 ₱ 13,500
Allocation % 40% 60% Proportional
Total ₱ 5,400 ₱ 8,100 Method
JOURNAL ENTRIES FOR TWO CLASSES OF SHARES
FOR A SINGLE CONSIDERATION
Journal entry (Proportional):

Cash 13,500

Preference shares (100 x P50) 5,000

Share premium - preference 3,100

Ordinary shares (300 x P10) 3,000

Share premium - ordinary 2,400


JOURNAL ENTRIES FOR TWO CLASSES OF SHARES
FOR A SINGLE CONSIDERATION
 Bravo Corporation issued 300 shares of P10 par value ordinary shares and 100
shares of P50 par value preference shares for a lump sum of P13,500. The
ordinary shares have a market value of P20 per share, and the value of
preference shares are unknown.

Number Amount Total


Ordinary shares 300 x ₱ 20 = ₱ 6,000
Preference shares 100 x -
Fair Market Value ₱ 6,000

Allocation: Ordinary Preference Incremental


Issue price ₱ 13,500 Method
Ordinary (6,000)
Total ₱ 6,000 ₱ 7,500
JOURNAL ENTRIES FOR TWO CLASSES OF SHARES
FOR A SINGLE CONSIDERATION
Journal entry (Incremental):

Cash 13,500

Preference shares (100 x P50) 5,000


Share premium - preference 2,500
Ordinary shares (300 x P10) 3,000

Share premium - ordinary 3,000


ACCOUNTING FOR TREASURY SHARES

Reacquisition of Shares
Corporations purchase their outstanding shares to:
◆ Provide tax-efficient distributions of excess cash to
shareholders.
◆ Increase earnings per share and return on equity.
◆ Provide shares for employee compensation contracts or to
meet potential merger needs.
◆ Thwart takeover attempts or to reduce the number of
shareholders.
◆ Make a market in the shares.
ACCOUNTING FOR TREASURY SHARES (TS)
 COST METHOD –used in accounting for treasury shares.
 Treasury shares shall be recorded at cost, regardless of whether the
shares are acquired below or above par value or stated value.

 If the treasury shares are acquired for cash, the cost is equal to the
cash payment.
 No gain or loss shall be recognized on the purchase, sale issue or
cancelation of an entity’s equity instrument. (PAS 32)
 Accordingly, if TS are acquired for noncash consideration, the cost is
usually measured by the carrying amount of the noncash asset
surrendered.
ACCOUNTING FOR TREASURY SHARES
Illustration: Charlie Company issued 100,000 shares of $1 par
value ordinary shares at a price of $10 per share. In addition, it has
retained earnings of $300,000.
ACCOUNTING FOR TREASURY SHARES
Illustration: Charlie Company issued 100,000 shares of $1 par value
ordinary shares at a price of $10 per share. In addition, it has
retained earnings of $300,000.

On January 20, 2021, Charlie acquires 10,000 of its shares at $11


per share. Charlie records the reacquisition as follows.

Treasury Shares 110,000


Cash (10,000 shares x $11) 110,000
ACCOUNTING FOR TREASURY SHARES
Illustration: The equity section for Charlie after purchase of the
treasury shares.
ACCOUNTING FOR TREASURY SHARES

Sale of Treasury Shares

◆ Above Cost

◆ Below Cost

Both increase total assets and equity.

LO 4 Describe the accounting for treasury shares.


ACCOUNTING FOR TREASURY SHARES
Sale of Treasury Shares above Cost. Pacific acquired 10,000
treasury shares at $11 per share. It now sells 1,000 shares at
$15 per share on March 10. Pacific records the entry as follows.

Cash 15,000
Treasury Shares 11,000
Share Premium—Treasury 4,000

LO 4 Describe the accounting for treasury shares.


ACCOUNTING FOR TREASURY SHARES
Sale of Treasury Shares below Cost. Pacific sells an additional
1,000 treasury shares on March 21 at $8 per share, it records
the sale as follows.

Cash 8,000
Share Premium—Treasury 3,000
Treasury Shares 11,000
ACCOUNTING FOR TREASURY SHARES

Illustration: Assume that Pacific sells an additional 1,000


shares at $8 per share on April 10.

Cash 8,000
Share Premium—Treasury 1,000
Retained Earnings 2,000
Treasury Shares 11,000
ACCOUNTING FOR TREASURY SHARES
Retiring Treasury Shares

Decision results in
◆ cancellation of the treasury shares and
◆ a reduction in the number of shares of issued
shares.
ACCOUNTING FOR TREASURY SHARES
Illustrative Problem:
Delta Corp. acquired 2,000 shares with par value of P100 at P150 per share.
Journal entry:

Treasury shares 300,000


Cash 300,000

Reissuance at cost:
Cash 300,000
Treasury shares 300,000
ACCOUNTING FOR TREASURY SHARES
Illustrative Problem:
Delta Corp. acquired 2,000 shares with par value of P100 at P150 per share.
Journal entry:
Treasury shares 300,000
Cash 300,000

Reissuance at more than cost:


The TS are subsequently reissued at P200 per share. The excess of the reissue price over the cost is
treated as share premium.
Cash (2,000 shares x P200) 400,000
Treasury shares 300,000
Share premium- TS 100,000
Note: No gain or loss shall be recognized on the purchase, sale, issue or cancelation of an entity’s
equity instrument. The gain from sale of TS shall not be credited to income but recognized directly in
equity as share premium.
ACCOUNTING FOR TREASURY SHARES
Reissuance at below cost:
If the TS are subsequently reissued at below cost, the excess of the cost over the reissue price
is charged to the following in the order mentioned”
1. Share premium from TS of the same class.
2. Retained earnings

The “loss” on the sale of TS is debited to share premium from TS of the same class, if any, and
when this balance is exhausted, it is charged to RE.
ACCOUNTING FOR TREASURY SHARES
Illustrative Problem:
Delta Corp. acquired 2,000 shares with par value of P100 at P150 per share.
Journal entry:
Treasury shares 300,000
Cash 300,000

Reissuance at below cost:


The TS are subsequently reissued at P100 per share. If there are no previous transactions
involving TS,
Cash (2,000 shares x P100) 200,000
Retained earnings 100,000
Treasury shares 300,000
ACCOUNTING FOR TREASURY SHARES
Illustrative Problem 2:
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

The TS are reissued at P100 per share.

Cash ( 2,000x P100) 200,000


Share premium-TS 20,000
Retained earnings 80,000
Treasury shares 300,000
NOTE: THE SHARE PREMIUM FROM ORIGINAL ISSUANCE IS NOT TOUCHED.
RETIREMENT OF TREASURY SHARES

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

If the retirement results in a gain, meaning the par value exceeds the cost of the TS, such gain
is credited to share premium from TS.
Example:
1,000 ordinary shares with par value of P100 are held as treasury at a cost of P80,000 and
subsequently retired:
Ordinary share capital 100,000
TS 80,000
Share premium-TS 20,000
RETIREMENT OF TREASURY SHARES

If the retirement results in a loss (the cost of the TS exceeds the par value, such loss is debited
to the ff in the order given:

1. Share premium from original issuance


2. Share premium from TS
3. Retained earnings
RETIREMENT OF TREASURY SHARES
Example:
Ordinary share capital, 50,000 shares, P100 par 5,000,000
Share premium-OS (original issuance) 500,000
Share premium-TS 100,000
RE 1,000,000
TS, 5,000 shares at cost 750,000

The TS are retired.


Ordinary share capital (5,000 x P100) 500,000
Share premium – OS (original issuance) 50,000 (500,000/50,000 sh x 5,000)
Share premium-TS 100,000
RE 100,000
Treasury shares 750,000
DISCLOSURE OF TREASURY SHARES
THE disclosure relating to TS shall include the ff:
1. The number of shares held in treasury.
2. The restriction on the availability of RE for distribution of dividends.

The cost of TS shall be deducted from total SHE.


PRESENTATION OF TREASURY SHARES

Ordinary share capital, 50,000 shares. P100 par 5,000,000


Share premium-original issuance 500,000
RE (of which P600,000 is appropriated for the cost of TS) 2,000,000
TS, 5,000 shares at cost (600,000)
Total SHE 6,900,000
DONATED SHARES

Donated shares- shares received by the corporation from its shareholders by way of
donation.
They are actually shares and may be reissued at any price without any discount
liability.

Donated shares are secured w/o cost and therefore assets, liabilities and SHE are not
affected, but the number of shares outstanding is reduced.

The reissue or resale of donated shares increases assets and share premium on
donated capital.
DONATED SHARES (DS)
Example:
Shareholders donated to the entity an aggregate of 10,000 OS with par value of P100.
the receipt of the DS by the entity is simply recorded by means of a memorandum
entry. (no journal entry)

“Received from shareholders as donation 10,000 OS with P100 par value.”

If the 10,000 DS are subsequently sold for P150 per share, the JE is
Cash (10,000 shares x P150) 1,500,000
Share premium-DC 1,500,000
If the DS are retired or canceled prior to reissuance:
OSC (10,000 xP100par) 1,000,000
Share premium-DC 1,000,000
SHARE SPLIT
Share split may be in the form of:
1. Split up or share split proper
2. Split down or reverse share split
Share split up - a transaction whereby the original shares are called in for
cancelation and replaced by a larger number accompanied by a reduction in the
par or stated value. (to increase the number of shares outstanding for the
purpose of effecting a reduction in unit market price.)
Example:
The corporation has 10,000 shares issued and outstanding with P100 par. If the
shares are split 5 to 1, the new capitalization would be 50,000 shares with P20
par value.
10,000 x 5 = 50,000 shares
P100 par / 5 = P20 par
SHARE SPLIT
Note:
Before and after the share split, the share capital remains the same. No JE is
required, only a memorandum entry is necessary.

“Issued 50,000 new shares with par value of P20, as a result of 5-for-1 split of
10,000 old shares with par value of P100.
SHARE SPLIT
Split down – the reverse of split up. It is a transaction whereby the original
shares are canceled and replaced by a smaller number accompanied by an
increase in the par or stated value.
Example:
The corporation has 10,000 shares issued and outstanding, with P100 par value.
The shares are split down 5 to 1.
The new capitalization would be 2,000 shares with par value of P500.
10,000 shares/5 = 2,000 shares
P100 par x 5 = P500 par
CONVERSION Of PREFERENCE SHARES (PS)
 Convertible PS- one w/c gives the holder the right to exchange the holdings
for other securities of the issuing corporation.
 A preference shareholder may also convert the PS into bonds w/c is a change
of equity from owner to creditor.

Example:
Preference share capital, 10,000 shares, P100 par 1,000,000
Ordinary share capital, 200,000 shares authorized,
100,000 shares issued, P30 par 3,000,000
Share premium- PS 200,000
Share premium- OS 1,000,000
Retained Earnings 2,000,000
CONVERSION Of PREFERENCE SHARES
(PS)
Case 1-The PS is converted into OS in the ratio of 1 PS for 3 OS.
Example:
Preference share capital, 10,000 shares, P100 par 1,000,000 JE:
Ordinary share capital, 200,000 shares authorized,
100,000 shares issued, P30 par 3,000,000 PS capital 1,000,000
Share premium- PS 200,000
Share premium-PS 200,000
Share premium- OS 1,000,000
OS capital (30,000 x P30) 900,000
Retained Earnings 2,000,000
Share premium-OS 300,000
CONVERSION Of PREFERENCE SHARES
(PS) Case 1-The PS is converted into OS in the ratio of 1 PS for 5 OS.

JE:
Example:
Preference share capital, 10,000 shares, P100 par --1,000,000
PS capital 1,000,000
Ordinary share capital, 200,000 shares authorized,
Share premium 200,000
100,000 shares issued, P30 par 3,000,000
RE 300,000
Share premium- PS 200,000
OS capital (50,000 x P30) 1,500,000
Share premium- OS 1,000,000
Retained Earnings 2,000,000
PROBLEMS AND EXERCISES
Aroma Company reported the following shareholders’ equity.
Ordinary share capital, 50,000 shares, P100 par 5,000,000
Share premium 200,000
Retained earnings 2,000,000
Subsequently, the following transactions, among others occurred:
a) Treasury shares of 5,000 were acquired at P160 per share.
b) Assuming the treasury shares were reissued for P1,000,000.
c) Assuming the treasury shares were reissued for P700,000.
Required:
1. Prepare journal entries to record the transactions.
2. Prepare journal entry to record the retirement of the treasury shares,
assuming the treasury shares are not reissued. The original issue price of
treasury shares was P104 per share.
PROBLEMS AND EXERCISES
1.)
a. Treasury shares of P5,000 were acquired at P160 per share.
Treasury shares (5,000 x 160) 800,000
Cash 800,000
b. Assuming the treasury shares were reissued for P1,000,000
Cash 1,000,000
Treasury shares 800,000
Share premium-TS 200,000
c. Assuming the treasury shares were reissued for P700,000.
Cash 700,000
Retained earnings 100,000
Treasury shares 800,000
PROBLEMS AND EXERCISES
2. Prepare journal entry to record the retirement of the treasury
shares, assuming the treasury shares are not reissued. The original issue
price of treasury shares was P104 per share.

Ordinary share capital (5,000 x P100) 500,000


Share premium (5,000 x 4) 20,000
Retained earnings 280,000
Treasury shares 800,000
PROBLEMS AND EXERCISES

Omega Company provided the following data during the first year of operations:
a. Sold 30,000 preference shares, 12%, P100 par, at P140.
b. Sold 100,000 ordinary shares of P50 par at P55.
c. Purchased and retired 10,000 preference shares at P120.
d. Purchased 15,000 ordinary shares at P52 to be held as treasury.
e. Sold 10,000 treasury ordinary shares at P60.
f. Shareholders donated to the entity 20,000 ordinary shares when shares had a market price of
P60. One half of these shares were sold for P65.
g. Net income for the year was P3,000,000.
h. Appropriated retained earnings equal to the remaining cost of treasury shares.
Required:
1. Prepare journal entries to record the transactions.
2. Present the shareholders’ equity.
PROBLEMS AND EXERCISES

a. Sold 30,000 preference shares, 12%, P100 par, at P140.


Cash (30,000 x P140) 4,200,000
Preference share capital (30,000x P100) 3,000,000
Share premium – PS (30,000 shares x P40) 1,200,000
b. Sold 100,000 ordinary shares of P50 par at P55.
Cash 5,500,000
Ordinary share capital 5,000,000
Share premium – ordinary share 500,000

c. Purchased and retired 10,000 preference shares at P120.


Preference share (10,000 x 100) 1,000,000
Share premium – PS (10,000 X 40) 400,000
Cash (10,000 x 120) 1,200,000
Share premium – retirement 200,000
PROBLEMS AND EXERCISES
d. Purchased 15,000 ordinary shares at P52 to be held as treasury.
Treasury shares (15,000 x 52) 780,000
Cash 780,000

e. Sold 10,000 treasury ordinary shares at P60.


Cash (10,000 x 60) 600,000
Treasury shares (10,000 x 52) 520,000
Share premium – treasury share 80,000

f. Shareholders donated to the entity 20,000 ordinary shares when shares had a
market price of P60. One half of these shares were sold for P65.
“Received 20,000 ordinary shares as donation from shareholders.”
To record the sale of 1/2 donated shares:
Cash (10,000 x 65) 650,000
Donated capital 650,000
PROBLEMS AND EXERCISES

g. Net income for the year was P3,000,000.


Profit and loss 3,000,000
Retained Earnings 3,000,000

h. Appropriated retained earnings equal to the remaining cost of treasury


shares. ????? (15,000-10,000)x52

Retained earnings 260,000


Retained Earnings appropriated for treasury shares 260,000
PROBLEMS AND EXERCISES
2. Present the shareholders’ equity.
Shareholders’ Equity
Preference share capital, 12% P100 par P2,000,000
Ordinary share capital, P50, 100,000 shares issued, of which
5,000 shares are in treasury and 10,000 shares are donated 5,000,000
Share premium
Preference share 800,000
Retirement of preference share 200,000
Ordinary share 500,000
Treasury share 80,000
Donated capital 650,000 2,230,000
Retained earnings:
Unappropriated 2,740,000
Appropriated for treasury shares 260,000 3,000,000
Treasury shares, at cost (260,000)
Shareholders’ equity P11,970,000
PLEASE ANSWER THE EXERCISES AT
THE END OF CHAPTER 10.

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