CORPORATION

ACCOUNTING
(PART 3)

ACCTBA2

TREASURY SHARES
****

(Unit 7)

What are treasury shares?

Treasury shares
refers to the
equity shares
owned by the
issuing
corporation that
have been issued
and then
reacquired but
not cancelled.

These are
generally
stated at their
cost of
acquisition and
as a reduction
of shareholders
equity.

What are treasury

shares?

When a company
reacquired its
own shares and
these shares are
not cancelled, the
accumulated
profits must be
appropriated
equivalent to the
cost of the said
shares.

The law provides that treasury shares

shall have no voting rights as long as
such equity shares remain in the
Treasury. For this reason, treasury
shares are not entitled to receive
dividend.

What are treasury

shares?

Treasury shares do not affect the

number of issued shares, but
they reduce the number of
outstanding shares. They are
deducted from the total amount
of share capital contribution.

What are the reasons why a

corporation re-acquire its own
shares?

1. To obtain stock to be used in acquisition of

plant assets.
2. To improve earnings per share by reducing
the number of shares outstanding.
3. To invest excess cash temporarily.
4. To support the market price of the stock.
5. To increase the ratio of liabilities to
stockholders equity.
6. To obtain shares for conversion of other
securities such as preferred stock.

Treasury shares, contd..

Treasury shares may be acquired either:

By purchase
By donation
The two accounting methods of recording
treasury share are:
The cost method prescribed under
Philippine accounting standards.
The par value method

ACCOUNTING FOR TREASURY SHARES

1. ACQUISITION

2. REISSUANCE, and

3. RETIREMENT.

SHARE CAPITAL DONATION

When a
corporation
acquired its own
shares from its
shareholders by
mode of donation,
such transaction
is called Share
Capital Donation
or Stock Donation

The stock donation is in

substance a treasury share
provided that the related shares
reacquired are not retired.

Accordingly, the corporation can

sell the donated shares to
increase its share premium

SHARE CAPITAL DONATION

Date of donation
there is no entry,
but the receipt of
donated share is to
be recorded in a
memorandum entry
in the ledger.
Treasury Share

Received from
stockholders 1,000 shares
at par value of P50.

Date of sale the journal entry would

be:

CASH

XX

Donated Capital

XX

ACCUMULATED PROFITS,
APPROPRIATIONS &
DIVIDENDS
UNIT 8

The other components of shareholders

equity are:

A. Accumulated profits (losses)

B. Other Reserves:
1. Appropriation reserve
2. Additional paid-in capital (APIC)
a. Share premium (APIC excess over par or stated value;
APIC treasury shares)
b. Donated capital
c. Equity share options issued
3. Revaluation reserve (Revaluation surplus or increment)
4. Unrealized gains or losses on available sale securities
5. Foreign currency translation differences

ACCUMULATED PROFITS

Accumulated profits account is a real account

representing the accumulated profits and losses of
the corporation since its inception.

This account is reduced by dividends declaration and

adjusted for any prior period adjustments,
fundamental errors and accounting policies.

Other terms to describe accumulated profits are:

accumulated income, accumulated earnings, retained
profits, undistributed earnings, and earnings retained.

CLASSIFICATION OF
ACCUMULATED PROFITS
UNAPPROPRIATED
ACCUMULATED
PROFITS

APPROPRIATION
RESERVE

The portion of accumulated

profits that is set aside for
special purposes, and therefore,
restricted to dividend
declaration.

Means free or unrestricted for

dividend purposes.

APPROPRIATION RESERVE

Accumulated profits may be restricted

for the following reasons:

1. Legal requirement e.g. treasury

shares
2. Contractual obligation e.g. bonds
redemption
3. Optional appropriation e.g. plant
expansion
possible loss
contingencies

ACCOUNTING FOR
ACCUMULATED PROFITS

ACCUMULATED PROFITS (LOSSES)

DEBIT
CREDIT
1) Overstatement (prior period
5) Understatement (prior perio
adjustments or effect of change
adjustments
in
or effect of chang
accounting policy).
in accounting policy).
2) Closing of income summary
6) with
Closing of income summary
debit balance.
with credit balance.
3) Declaration of dividends.
4) Appropriation for specific purpose.
7) Reversal of appropriations.
DECREASES

INCREASES

ACCOUNTING FOR
DIVIDENDS
***

WHAT ARE DIVIDENDS?

Dividends are distributions

to shareholders as a return
on capital or return on
capital in the form of cash,
noncash assets or share
capital.

Legally, dividends are

declared only from the

WHAT ARE DIVIDENDS?

Dividends could be grouped into two
categories in accordance with its
source, namely:
1. Dividends out of earnings (return
on capital)
Paid out of accumulated earnings.
2. Dividend out of capital (return of
capital)
Liquidating dividends of a wasting
asset company, and

Rules for declaring

dividends

1. There must be available unrestricted

accumulated profits credit balance and the
BOD must declare the dividend.

2. dividends are declared to outstanding

shareholders of records at a particular date.

Outstanding shares include the share capital

issued to and in the hands of the investors and
the unpaid subscribed shares as long as there is
binding subscription agreement. This does not
include treasury shares.

Rules for declaring

dividends

3. Unpaid subscriptions are also part of

outstanding shares entitled to the
dividend if these are par value shares.

4. Delinquent shares are also legally

entitled to dividends. The amount of
cash dividends should be applied first to
the unpaid balance of the subscription
plus expenses.

DIVIDENDS DATES & FORMS

There are 3 dates

relevant to the
distribution of
dividends out of
earnings:
1. DATE OF
DECLARATION
2. DATE OF RECORD
3. DATE OF PAYMENT

FORMS OF
DIVIDENDS

1. CASH DIVIDEND

2. PROPERTY
DIVIDEND

3. SHARE CAPITAL
DIVIDEND

ACCOUNTING METHODS TO
RECORD SHARE DIVIDENDS
SMALL less than 20%

LARGE 20% or more

ACCOUNTING SHARE DIVIDENDS

Share capital distributable is stock

dividend payable or share dividend
distributable. It is treated as an
adjunct account of the share capital
(added to the shareholders equity).

CASH DIVIDENDS
***

DIVIDENDS ON ORDINARY AND

PREFERENCE SHARES

When there are two classes of share capital, it is

necessary to apportion the cash dividend
declared between the ordinary and preference
shares.

Preference shareholders are generally given

priority over the corporate earnings and assets.
This privilege is commonly called preferred as
to dividends and preferred as to assets.

Preference shares are quasi-liabilities that earn

fixed interest.

DIVIDENDS ON ORDINARY AND

PREFERENCE SHARES

PREFERENCE AS TO ASSETS will entitle the holder

of preference share not only to liquidating value
but also to the amount of dividends in arrears.

PREFERENCE AS TO DIVIDENDS simply entitles

the holder of preference share to receive
dividends first before the ordinary shareholders
are paid dividends.

Preference share standing alone means it is

preferred as to dividends, noncumulative and
nonparticipating.

DIVIDENDS RIGHTS OF
PREFERENCE SHARE
The apportionment of any cash dividend
declared between the ordinary and
preference shareholders will depend on
the dividend right of the preference share.
The preference may have the following
dividend rights:
1. Cumulative preference share
2. Participating preference share

PREFERENCE SHARES

Based on the basic dividend right of the

preference share, the dividend right
could be expanded to the following
combination features:

1.
2.
3.
4.

Noncumulative and nonparticipating

Noncumulative and participating
Cumulative and nonparticipating
Cumulative and participating