Accounting 3 & 4

Module 9 – ACCOUNTING FOR TREASURY SHARES

Prepared by: Prof. Amelia M. Arganda

Definition of Treasury Shares

Treasury Shares refer to shares owned by the corporation which are fully paid up and have been issued,
and later reacquired by the same corporation but not for cancellation. This kind of share is not entitled
to receive dividend, has no voting right, and has no right to share in the assets of the corporation in case
of liquidation.

The corporation may acquire treasury shares only up to the extent of the Retained Earnings balance so
that the Capital Share remains the same. This is in conformity with the Trust Fund Doctrine where the
legal capital of the corporation is held intact for the protection of the creditors. Acquisition of treasury
shares at an amount above the balance of the retained earnings would be the same as returning its legal
capital to the shareholders.

Assume that the shareholders’ equity of the Lambat Corporation is as follows:

Ordinary Shares Php150,000

Retained Earnings 50,000
Total Shareholders’ Equity Php200,000

In this example, the corporation can purchase its own shares up to the extent of the Retained Earnings
balance of Php50,000. If treasury shares were acquired at a cost of Php50,000, the shareholders’ equity
of Lambat Corporation will appear as follows:

Ordinary Shares Php150,000

Retained Earnings 50,000
Total Php200,000
Less: Treasury Shares 50,000
Shareholders’ Equity Php150,000

After the acquisition of treasury shares, the Retained Earnings of Php50,000 is no longer available for
dividend declaration; otherwise, the legal capital of Php150,000 will be reduced to Php100,000 which is
a violation of the trust fund concept.

Accounting for Treasury Shares

There are two methods of accounting for treasury shares, namely:

1. Retirement Method
2. Cost Method

Retirement Method. Under this approach, the purchase or acquisition of treasury shares is tantamount
to withdrawal or retirement of certain group of shareholders and the sale of these shares would mean
admission of new group of shareholders to invest in the corporation.

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If the retirement method is adopted, upon the purchase of treasury shares, the account Treasury Shares
is charged:

(a) at an amount equal to the par value, in case of par value share
(b) at stated value, in case of no-par value share
(c) at original issue price
(d) at weighted average price in case of no-par value share and without stated value

When treasury share is purchased at a price that exceeds the par or stated value, the following accounts
may be charged for the difference in the following order of priority:

1. paid-in capital from sale of treasury shares

2. premium on ordinary shares or capital in excess of stated value
3. retained earnings

An alternative way of recording acquisition of treasury share at an amount over the par or stated value is
to charge the entire difference to the Retained Earnings account.

It should be noted that the Paid-in Capital from Sale of Treasury Shares should be exhausted first before
the account Premium on Ordinary Share or Capital Excess over Stated Value is charged. If after these
two accounts have been exhausted, and there is still a difference, then the same must be charged to
Retained Earnings.

Illustration:

The shareholders’ equity of Rose Corporation is given below:

Ordinary Shares, Php50 par, 2,000 shares Php100,000

Premium on Ordinary Share 2,000
Retained Earnings 40,000

Acquisition at Par

If the corporation acquired 250 of its own shares at Php50 par value, the entry would appear as follows:

Treasury Shares Php12,500

Cash Php12,500
To record acquisition of 250 shares at Php50 par value.

Acquisition at Above Par

If 250 treasury shares are acquired at Php65 per share, the entry is:

Treasury Shares Php12,500

Premium on Ordinary Shares 250
Retained Earnings 3,500
Cash Php16,250
To record acquisition of 250 shares Php65 per share.

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The alternative way of recording the said purchase is as follows:

Treasury Shares Php12,500

Retained Earnings 3,750
Cash Php16,250

Acquisition at Below Par

If 250 shares are acquired at Php40 per share, the entry would be:

Treasury Shares Php12,500

Cash Php10,000
Paid-in capital from reacquisition of Treasury Shares 2,500

Reissuance of Treasury Shares

Treasury shares may be reissued: (1) at par; (2) at above par; or (3) at less than par value. Reissuance of
these shares would be tantamount to admission of new group of shareholders to join the corporation.

Illustration:

Assume the following:

Ordinary Shares Php100,000
Retained Earnings 40,000
Treasury Shares, at par 50 shares 2,500

Reissuance at Par

If 250 shares are reissued at Php50 par value, the entry would be:

Cash Php12,500
Treasury Shares Php12,500
To record reissuance of 250 shares Php50 par value.

Reissuance at Above Par

If 250 shares are reissued at Php70 per share, the entry would be:

Cash Php17,500
Treasury Shares Php12,500
Paid-in Capital from Sale of Treasury Shares 5,000

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Reissuance at Less than Par

If 250 shares are reissued at Php45 per share, the entry would be:

Cash Php11,250
Retained Earnings 1,250
Treasury Shares Php12,500

Note: In the reissuance of treasury shares, whether it is at par, at more than par, or at below par value,
Treasury Share account is always credited at par value.

Cost Method. Under this method, treasury share is recorded at cost, regardless of whether the shares
are par value or no par value shares and regardless of whether the cost is more or less than the price
paid at which the shares were originally issued.
According to the cost principle, cost is the amount of cash paid. In non-cash asset transactions,
however, cost is fair market value of the asset given up, fair market value of the shares received; and
in the absence of the fair market value, cost is represented by the book value of the property given
up.

Illustration:

1. Purchased 100 shares of Php50 par value treasury shares at Php75 per share.

Journal entry: Treasury Shares Php7,500

Cash Php7,500
To record acquisition of 100 shares at
Php75 per share.
2. The 100 shares acquired were subsequently reissued:
(a) at cost
(b) at more than cost, at Php80 per share
(c) at below cost, at Php70 per share

Reissuance at Cost
Journal entry: Cash Php7,500
Treasury Shares Php7,500

Reissuance at More than Cost

When treasury shares are reissued at more than cost, a credit is made to Paid in Capital from Sale of
Treasury Shares for the difference between the cost and re-issue price of the shares.

If the 100 treasury shares were reissued at Php80 per share, the journal entry is:

Cash Php80,000
Treasury Shares Php75,000
Paid-in capital from sale of Treasury Shares 5,000

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Reissuance at Below Cost

Reissuance of shares below its cost would result to a difference between the cost and the reissue price.
In the previous example, if the 100 shares were reissued at Php70 per share which is below its cost of
Php75, the difference of Php500 (Php75 – Php70 = Php5 x 100 shares) may be charged to the following
accounts in the order enumerated:
(a) paid-in capital from sale of treasury shares
(b) premium on ordinary shares or premium on preference shares
(c) retained earnings

Using the same example, assume that the account Paid-in Capital from Sale of Treasury Shares has an
adequate balance, then the journal entry in the books would be:
Cash Php7,000
Paid-in Capital from Sale of Treasury Shares 500
Treasury Shares Php75,000

Balance Sheet (Statement of Financial Condition) Presentation of Treasury Shares

When treasury share is presented in the balance sheet, the number of shares held in the treasury should
be disclosed as well as the changes in this account brought about by various treasury share transactions
during the fiscal period.

Treasury shares may be shown in the balance sheet as a deduction from the total of the accounts in the
shareholders’ equity such as: paid-in capital, retained earnings, and appraisal capital, if there is any.
Another way of presenting treasury share in the balance sheet is as a deduction from issued share
capital.

This means that if the shares reacquired by the corporation is preference or ordinary, then this should
be deducted from the pertinent account. In the shareholders’ equity, whether the first or the second
method is adopted, the appropriations of retained earnings such as that portion reserved for treasury
shares, for contingencies, or for plant expansion should be disclosed since this would mean restriction of
this portion of retained earnings as to dividends.

Illustration:

The following accounts are found In the shareholders’ equity of Macopa Corporation:

Preference Share, 8%, par value Php100, authorized 1,000 shares

of which 800 shares are issued and outstanding Php 80,000
Ordinary Share, par value Php125, authorized and issued 2,000 shares 250,000
Additional Paid-in Capital:
Premium on Ordinary Share 5,000
Paid-in Capital from Sale of Treasury Shares 1,500
Retained Earnings 165,000
Appropriated for Treasury Shares 45,000
Appropriated for Plant Expansion 70,000
Treasury Shares 200 Preference shares at cost 39,000
Appraisal Capital 21,000

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Required: Prepare the Shareholders’ Equity using the two methods of presenting Treasury Shares.

1. Shareholders’ equity section of Macopa Corporation using the first method of presenting
Treasury Shares

Share Capital
8% Preference Share, par value Php100, authorized 1,000 shares
800 shares issued and outstanding Php 80,000
Ordinary Share, par value Php125, authorized 2,000 shares
Issued and outstanding 250,000
Additional Paid-in Capital:
Premium on Ordinary Shares Php5,000
Paid-in Capital from Sale of Treasury Shares 1,500 6,500
Retained Earnings:
Unappropriated Php50,000
Appropriated for Treasury Shares 45,000
Appropriated for Plant Expansion 70,000 165,000
Appraisal Capital 21,000
Total Php522,500
Less: Treasury Shares 39,000
Total Shareholders’ Equity Php483,500

2. Shareholders’ equity section of Macopa Corporation using the second method of presenting
Treasury Shares

Share Capital
8% Preference Share, par value Php100, authorized 1,000 shares
800 shares issued and outstanding Php80,000
Less: Treasury Shares at cost 39,000 Php 41,000
Ordinary Shares, par value Php125, authorized 2,000
shares issued and outstanding 250,000
Additional Paid-in Capital:
Premium on Ordinary Shares Php 5,000
Paid-in Capital from Sale of Treasury Shares 1,500 6,500
Retained Earnings:
Unappropriated Php50,000
Appropriated for Treasury Shares 45,000
Appropriated for Plant Expansion 70,000 165,000
Appraisal Capital 21,000
Total Shareholders’ Equity Php483,500

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Exercises:

1. The Hillside Corporation has an authorized shares of 250,000 with a par value of Php70.
100,000 shares were originally issued at par and 50,000 shares were subscribed at Php2
above par. During the year, the following transactions occurred:

Jan. 5 An additional 30,000 shares were issued at Php75 per share.

Feb. 11 2,500 of its own shares were reacquired by the company for Php150,000.
Sept. 30 A 10% share dividend was declared by the Board of Directors.
Dec. 31 The company realized a profit od Php470,000.

Required: Record the foregoing transactions.

2. The shareholders’ equity section of Banana Co. revealed the following:

Ordinary Shares, Php50 par value, 10,000 shares Php500,000

Premium on Ordinary Shares 20,000
Retained Earnings 100,000

Required: Record the acquisition and reissuance of treasury shares based on the following:
(a) The corporation acquired 2,000 of its own shares at Php50. Reissued 1,000 of these
shares.
(b) The corporation acquired 2,000 of its own shares at Php55. Reissued 1,000 of these
shares at Php60.olders’ equity of
(c) The corporation acquired 2,000 of its own shares at Php48. Reissued 1,000 of these
shares at Php50 and 1,000 at Php55.

3. The following accounts are found in the shareholders’ equity of Dahlia Corporation:

Preference Shares, 8%, par value Php100, authorized 10,000 shares

8,000 shares issued and outstanding Php 800,000
Ordinary Shares, par value Php125, authorized and issued
20,000 shares 2,500,000
Additional Paid-in Capital:
Premium on Ordinary Shares 50,000
Paid-in Capital from Sale of Treasury Shares 15,000
Retained Earnings 700,000
Appropriated for Treasury Shares 450,000
Appropriated for Plant Expansion 150,000
Treasury Shares 2,000 shares at cost (Ordinary Shares) 150,000
Appraisal Capital 210,000

Required: Prepare the shareholders’ equity section of the corporation using two methods of
presenting treasury shares.

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