Issis Co. issued 50 000, P20 par convertible preference shares at

P50/share. Each preference share is convertible into 3 P5 par ordinary

shares. Prepare the journal entries for the issuance and conversion of

30 000 shares.

Kazmierczak Corp. issued P10M,12% bonds at 102. Each P1 000 bond

can be converted into 20 ordinary shares having a par value of P30.

Without the conversion option, Kazmierczak’s bonds would only sell at

98. At maturity, only 80% of the bonds were converted into ordinary

shares.

Theoretical Value of a Right

Market value of share right-on/Number of rights to purchase one share plus 1

Lind Co. had 100 000 ordinary shares outstanding, P25 par, when she issued rights

to the existing shareholders. 4 rights entitles the holder to acquire one share at P40.

All of the rights were exercised one month after. Prior to the exercise of the rights,

the shares were trading at P70. Find the theoretical value of the rights and the value

of each share ex-right.

Share Split

Definition A corporate action in which a company’s existing shares are divided into multiple shares Results in an increase or decrease in the number of shares outstanding with a corresponding decrease or increase in the par or stated value per share No journal entry needed

Split upThe number of outstanding shares increases by a specific multiple, but

the total par value of the shares remains the same compared with the pre-split amount.

Split downAlso called reverse share splitThe number of outstanding shares decreased by a specific multiply, but

the total par value of the shares remains the same compared with the pre-split amount

*No real value is added as a result of any kind of share split.

Share Split

Effect of Share Split (Split Up)

Par value per share proportionately decreases by the number of shares issued

Total par value doesn’t change

Retained earnings doesn’t change

Share premium doesn’t change

Number of shares issued proportionately increases

Share Split

Kujawa Corp. issued 80 000 new shares as a result of a 4-for-1 split of

20 000 old shares with par value of P20. Compute the par value of each

new share.

Suppose Kujawa implemented a 5-for-2 share split on its 20 000 old

shares. Find:

1. Total par of the new shares

2. Number of new shares issued

3. Par value of each new share

Treasury Shares

Definition – Skousen, Stice, Stice; Intermediate Accounting,16th Edition

Shares issued by a corporation but were subsequently reacquired and

held for possible future reissuance or retirement

Reported as a contra-equity account, not as an asset

Does not create a gain or loss on reacquisition, reissuance or

retirement

Valix, Peralta, Valix; Financial Accounting 2, 2012 Edition

An entity’s own shares that have been issued and then reacquired but nor

cancelled

Treasury Shares

Kieso, Weygandt, Warfield; Intermediate Accounting IFRS Edition,

Volume 2

Corporation’s own shares that were outstanding, have been reacquired by the

corporation, and are not retired

Not an asset and should be shown in the statement of financial position as a

reduction of equity

Treasury Shares

Reasons for Reacquisition of Shares

1. To boost underpriced shares/To create market

2. To distribute surplus without paying dividends

3. To boost earning per share

4. To offset issuance of shares under share-based compensation plans

5. To invest excess cash temporarily

6. To thwart takeover attempts or to reduce the number of shareholders

Treasury Shares

Limitation on Reacquisition of SharesSec. 41, Corporation Code of the Philippines

A stock corporation shall have the power to purchase or acquire its own

shares for a legitimate corporate purpose or purposes… Provided, that the

corporation has unrestricted retained earnings in its books to cover the shares to be

purchased or acquired

Other Notes on Treasury Shares Treasury shares may decrease retained earnings but not increase it. Although issued, treasury shares do not have the status of outstanding shares. Treasury shares are not an asset of the company. Treasury shares are affected by share splits.

Treasury Shares

Accounting for Treasury Shares

IAS 32, par. 33

If an entity reacquires its own equity instruments, those instruments

(‘treasury shares’) shall be deducted from equity. No gain or loss shall be

recognized in profit or loss on the purchase, sale, issue or cancellation of an

entity’s own equity instruments. Such treasury shares may be acquired and held by

the entity or by other members of the consolidated group. Consideration paid or

received shall be recognized directly in equity.

Treasury Shares

2 Methods

1. Par value – records all transactions in treasury shares at their par

value and reports the treasury shares as a deduction from the share

capital only

2. Cost – treasury shares are recorded in the accounts at acquisition

cost, regardless whether the shares are acquired below or above the

par or stated value

*Cost method is the preferred method in accounting for treasury share

transactions

Treasury Shares

Par Value Method

Eliana Corp. acquired 10 000 of its own P2-par ordinary shares, which it originally

issued at an average of P5/share, at P7/share. Prepare the entry to record the

transaction.

Cost Method

To prevent an unfriendly takeover, Gottlieb Co. reacquired 20 000 of its own

shares at P10/share. These shares have a par value of P5/share and were originally

issued at an average price of P8/share.

Treasury Shares

Reissuance

IAS 32, par. 33

… No gain or loss shall be recognized in profit or loss on the purchase, sale, issue

or cancellation of an entity’s own equity instruments… Consideration paid or

received shall be recognized directly in equity.

*Reissuance of treasury shares, regardless whether at, below or above cost,

increases total assets and equity.

Treasury Shares

Cole Co. reacquired 50 000 of its ordinary shares previously issued at

P8/share. The following transactions show how the treasury shares

were subsequently reissued.

1. 10 000 shares at P8/share

2. 10 000 shares at P7/share

3. 10 000 shares at P9/share

4. 10 000 shares at P6/share

*Treasury shares may decrease retained earnings but not increase it.

Treasury Shares

Retirement of Treasury Shares

1. Cancellation of certificates

2. Reduction in the number of issued shares

3. Historical cost is used in recording

If the retirement results in gain, it is credited to share premium

from treasury shares. If the retirement results in a loss, it is debited to the following

accounts in order:

1. Share premium from treasury shares

2. Retained earnings

Treasury Shares

The following accounts were taken from Chehon Company’s statement

of financial position

Chehon decided to retire the treasury shares. They were originally

issued at an average price of P15/share. Prepare the jornal entry to

record the transaction.

Suppose the treasury shares have a total cost of P300 000. Prepare the

journal entry to record the transaction.

Ordinary shares, 100 000 shares, P10 par 1,000,000.00 Share premium - ordinary 500,000.00 Share premium - treasury shares 100,000.00 Retained earnings 2,000,000.00 Treasury shares, 10 000 shares at cost (120,000.00)

Treasury Shares

Disclosure of Treasury Shares1. Number of shares

2. Restriction on retained earnings