TREASURY SHARES

As defined these are shares issued by an entity and then later reacquired but not retired. These shares are so
called because it is held in/by the treasury. The acquisition of treasury shares is recorded as a debit to treasury
shares and credit to cash or any appropriate account. This transaction is accounted for under the cost which
means that the treasury shares shall be recorded at an amount equal to the amount paid for the treasury shares.
These treasury shares as kept in the treasury may be later reissued at cost, above cost or below cost. When these
shares are reissued for cash at cost, the entry is simply debit cash and credit to treasury shares for the amount
received. When the shares will be reissued at above cost, the entry would be debit to cash for the amount
received, and credit to treasury shares at cost and share premium for the difference between cash
received/reissuance price and cost of treasury. Looking at it there’s a gain but it is not recognized as such
instead it is credited as share premium because treasury shares transactions is said to be an equity transaction so
no gain or loss shall be recognized. In an instance where the reissue price is below cost, the difference is a loss
but not recognized as such as earlier stated, instead it is charged against (1) share premium from treasury and
(2) retained earnings, in order of priority. In case, the entity will no longer reissue it, so the shares will instead
be retired. Any gain/excess shall be credited to share premium, and any loss/deficiency shall be charged against,
(1) share premium from original issuance, (2) share premium from treasury shares and (3) retained earnings, in
order of priority.

Treasury shares acquisition, reissuance and retirement. (Adapted)

Case 1
On May 5, an entity acquired 5,000 of its own shares with a par value of P100 at P120 per share. These shares
were originally issued for P110 per share. These shares were kept in treasury and on the following dates these
shares were reissued:
May 10 2,000 shares reissued for P130 per share.
May 20 1,500 shares were reissued for 115 per share.
May 30 1,500 shares were reissued at 108.

May 5 5,000*120 = 600,000

Treasury Shares 600,000
Cash 600,000

May 10 2,000@130
Cash 260,000
Treasury Shares (2,000*120) 240,000
Share Premium – T/S 20,000

May 20 1,500*115
Cash 172,500
Share Premium – TS 7,500
Treasury Shares (1500*120) 180,000

SP – TS = 20,000 – 7,500 = 12,500

May 30 1500*108
Cash 162,000
SP-TS 12,500
Retained Earnings 5,500
TS 180,000
Case 2 The same data as above except that on May 30, the 1,500 shares were not reissued at 108, instead it was
retired. The entry to retire the treasury shares is as follows:

Share Capital (1,500*100) 150,000

Share Premium 15,000
Share Premium – TS 12,500
Retained Earnings 2,500
Treasury Shares (1,500*120) 180,000
30,000 = 180,000 – 150,000
100 – 110 = 10*1500 = 15,000

Share Capital 180,000

Treasury Shares 150,000
Share Premium- retirement of treasury 30,000

In cases where the cost is higher, the difference shall be credited to share premium-retirement of treasury. The
entity can enter into treasury share transactions only if it has sufficient retained earnings balance because a
portion of retained earnings shall be appropriated for treasury shares so as not to violate the trust fund doctrine
which prohibits the entity to return any part of its capital to shareholders during the lifetime of the corporation.

Treasury shares transaction is indirectly return of capital to shareholders, thus in order not to violate the trust
fund doctrine, an amount of retained earnings equal to the cost of treasury shares shall be restricted. When the
treasury shares are reissued, the restricted retained must also be released. The entry to restrict retained earnings
is debit retained earnings and credit retained earnings appropriated for treasury shares. This is legal
appropriation of retained earnings.

The cost of the treasury shares, as it is an equity instrument, must be presented as a deduction in the
shareholders’ equity section of the statement of financial position. The number of shares held in treasury must
be disclosed and the restriction of retained earnings which is equal to the balance of the cost of treasury shares
which were not reissued.

RETAINED EARNINGS

Retained Earnings represent the cumulative balance of net income or loss for the period, dividend distributions,
prior period errors, changes in accounting policy, reclassifications of some components of other comprehensive
income and other capital adjustments.

The Retained earnings account normally has a normal credit balance. The IFRS term for retained earnings is
“accumulated profits”. When the retained earnings account has a debit balance, it is called a “deficit” which a
deduction from shareholders’ equity. The IFRS term for deficit is “accumulated losses”.

Kinds of Retained Earnings.

There are two kinds of retained earnings namely Unappropriated retained Earnings and the Appropriated
Retained earnings.

1.) Unappropriated retained earnings represent that portion of retained earnings which is free and can be
declared as dividends to shareholders while the Appropriated retained earnings represent the restricted portion
of retained earnings. Hence, it cannot be declared as dividends. In the absence of evidence to the contrary,
retained earnings is free and can be declared as dividends unless the entity transfer a portion of the retained
earnings to retained earnings appropriated.
2.) Appropriated Retained Earnings is that portion of retained earnings which has been restricted for a certain
purpose which may be legal, contractual or voluntary. This portion of retained earnings cannot be declared as
dividends to shareholders as this is restricted.

Legal Appropriation
This arises from the fact that the legal capital cannot be returned to the shareholders until the entity is dissolved
and liquidated. Thus, in treasury shares transaction, the entity must have sufficient retained earnings to
appropriate for the purchase of such shares. The amount to be appropriated is equal to the cost of the treasury
shares and when these treasury shares are later reissued, the restriction on retained earnings must be released.

The entry for this appropriation and subsequent release would be:

Retained Earnings xx
Retained Earnings Appropriated for Treasury Shares xx
To record appropriation of retained earnings for the acquisition of treasury shares.

Retained Earnings Appropriated for Treasury Shares xx

Retained Earnings xx
To record the release of appropriation as a result of reissuance of treasury shares.

Contractual Appropriation arises from the contract entered into by the entity like in the case of issuance of
bonds payable and preference shares by which the other parties impose restriction on the payment of dividends.
The reason for this restriction by other parties is to insure the eventual payment of bonds and redemption of
preference share. The entry to appropriate is:

Retained Earnings xx
Retained Earnings appropriated for sinking fund xx
To record appropriation of retained earnings.

Note: If the appropriation is for preference share redemption, then the account title to use would be “retained
earnings appropriated for redemption of preference share”.

Voluntary appropriation is a matter of management’s discretion. This may be done by the entity to preserve
funds for expansion purposes or for covering possible losses or contingencies. The account titles to be used for
this type of appropriation may be described as Retained Earnings appropriated for plant expansion, Retained
Earnings appropriated for increase in working capital, Retained Earnings appropriated for contingencies.

Whether the appropriation is legal, contractual or voluntary, the purpose of such is to limit the declaration of
dividend.

Dividends
This represent distributions of earnings or capital to the shareholders in proportion to their shareholdings.
Dividend declaration is reposed on the board of directors of the corporation. When the board of directors
formally declared the dividends, there are three important dates to consider:

Date of Declaration
This is the date on which the directors authorize the payment of dividends to shareholders. It is the date when
liability is recognized.

Date of Record
This is the date on which the stock and transfer book of the corporation will be closed for registration. Only
those shareholders registered as of this date are entitled to receive dividends.
Date of Payment
This is the date on which the dividend liability is to be paid.

Dividends are broadly classified into two namely Dividends out of earnings and Dividends out of capital.
Legally, dividends can be declared only from retained earnings and this is called the Dividends out of earnings
which may be settled in the form of cash, property, liability or shares. On the other hand, if the entity has a
deficit, it is illegal to pay dividends. In cases where the entity declares dividends when it has a deficit or it
declares a dividend in excess of retained earnings balance, it tantamount to return of capital which violates the
trust fund doctrine. This dividend is classified as Dividends out of capital.

Dividends out of earnings

This may be in the form of Cash Dividends, Property Dividends, Liability Dividends and Share Dividends.

Cash Dividends
The term dividend standing alone implies cash dividend because this is the most common type of dividend. This
may be expressed as a certain amount of pesos per share, say P5 per share, or may be expressed as a certain
percent of the par or stated value. For example, if the par value is P100 and the entity declared 10% dividend,
the shareholder will receive P10 per share.

When cash dividends are declared, a current liability is recognized. Presented below are the pro forma entries
on the three important dates.

Illustration 1
The board of directors at their meeting on November 30, 2018 declared a dividend of P10 per share, payable
April 30, 2019, to shareholders of record on December 31, 2018. The entity had 20,000 shares issued and
outstanding with par value of P100. The journal entries on specific dates would be:

November 30, 2018

Retained Earnings 200,000
Dividends Payable 200,000

December 31, 2019

No entry

April 30, 2019

Dividends Payable 200,000
Cash 200,000

Illustration 2 The board of directors at their meeting on November 30, 2018 declared cash dividend of 20% of
the par value, payable April 30, 2019, to shareholders of record on December 31, 2018. The entity had 20,000
shares issued and outstanding with par value of P100. The journal entries on specific dates would be:
100*20% = 20
November 30, 2018
Retained Earnings 400,000
Dividends Payables 400,000

December 31, 2018

No entry

April 30,2019
Dividends Payable 400,000
Cash 400,000

Property Dividends
This is distribution of earnings of the entity to the shareholders in the form of noncash assets. This is otherwise
known as dividends in kind.

Measurement of Property Dividend Payable

IFRIC 17, paragraph 11, provides that an entity shall initially measure a liability to distribute noncash asset as a
dividend to its owners at the fair value of the asset to be distributed. Thus, the entity shall review and adjust the
carrying amount of the dividend payable with any change recognized in equity (retained earnings account) as
adjustment to the amount of distribution.

Settlement of property of Dividend Payable

Upon settlement of dividend payable, any difference between the carrying amount of the dividend payable and
the carrying amount of the asset distributed shall be recognized in profit or loss. If the carrying amount of
dividend payable is greater than the carrying amount of asset distributed, a gain on distribution of property
dividend is recognized. If the carrying amount of dividend payable is lesser than the carrying amount of asset
distributed, a loss on distribution of property dividend is recognized.

Measurement of noncash asset distributed

The noncurrent asset classified for distribution to owners shall be measured at the lower of carrying amount and
fair value less cost to distribute. Accordingly, in case the fair value less cost to distribute is lower than the
carrying amount of the asset at the end of the reporting period, an impairment loss shall be recognized.

Illustration 1
An entity owned 100,000 unquoted shares of another entity accounted for under the cost method. The carrying
amount of the investment is P2,000,000. On December 31, 2018, the entity declared these shares as property
dividend to be distributed on January 31, 2019. The investment had the following fair value less cost to
distribute on the following dates, Dec. 1, 2018, P3,000,000; Dec. 31, 2018, P3,600,000 and Jan. 31, 2019,
P3,800,000. The journal entries would be as follows:

12/1/2018
Retained Earnings 3,000,000
Dividend Payable 3,000,000

12/31/2018
Retained Earnings 600,000
Dividends Payable 600,000

1/31/2019
Retained Earnings 200,000
Dividends Payables 200,000
Dividends Payable 3,800,000
Investment in equity securities 2,000,000
Gain on distribution of property dividends 1,800,000

Illustration 2 On Dec. 1, 2018, An entity declared a property dividend to be paid in the form of equipment
payable on Jan. 31, 2019. The carrying amount of equipment is P1,500,000 and the fair value is P1,250,000 on
Dec. 1, 2018. However, the fair value less cost to distribute the equipment is P1,100,000 on Dec. 31, 2018 and
P1,000,000 on Jan. 31, 2019.

12/1/2018
Retained Earnings 1,250,000
Dividends Payable 1,250,000

12/31/2018
Dividends Payable 150,000
Retained Earnings 150,000

Impairment Loss 400,000

Equipment 400,000

1/31/2019
Dividends Payable 100,000
Retained Earnings 100,000

Dividends Payable 1,000,000

Loss on the distribution of property dividends 100,000
Equipment 1,100,000

Liability Dividends
In this case, the entity declares dividend by issuing a scrip which is like a note representing a formal evidence of
indebtedness to pay a sum of money at some future time. The entity may also issue bonds.

Illustration on Scrip Dividend

Assume the entity declared scrip dividends in the amount of P500,000 payable in six months at 12% interest.
The journal entries upon declaration and settlement would be as follows:

Retained earnings 500,000

Scrip Dividend Payable 500,000

Scrip Dividend Payable 500,000

Interest Expense 30,000 (500,000*12%*6/12)
Cash 530,000

Illustration on Bond Dividend

Assume the entity declared bond dividend in the amount of P2,000,000 payable in entity’s own bonds, 12%,
P2,000,000 face value. The bonds mature in five years. The journal entries upon declaration and issuance would
be as follows:

Retained Earnings 2,000,000

Bond Dividends Payable 2,000,000

Bond Dividend Payable 2,000,000

 Bonds Payable 2,000,000

Share Dividend or Stock Dividend

This is a dividend settled through distribution of the entity’s own shares which is in effect retained earnings
being capitalized by means of transferring it to share capital. The amount of retained earnings to be capitalized
depends on whether the share dividend declared is small or large. A share dividend of “less than 20%” is
conceived as small share dividend and “20% or more” share dividend is deemed large share dividend. In a small
share dividend, the amount to be capitalized or to be charged to Retained earnings is equal to the fair value of
the shares to be distributed on the date of declaration. Typical entries on declaration date and distribution date
would be:

Retained Earnings XX
Share Dividends Payable XX
Share Premium XX
To record the declaration of share dividend.

Share Dividends Payable XX

Share Capital XX
To record the distribution of shares.

In case of large share dividend, the amount to be capitalized is equal to the par or stated value of the shares to be
distributed. The entries upon declaration and distribution would be:

Retained Earnings XX
Share Dividends Payable XX
To record the declaration of share dividend.

Share Dividends Payable XX

Share Capital XX
To record the distribution of shares.

Illustration on small and large share dividend

An entity’s shareholders’ equity section is presented below: (Adapted)
Share Capital, P100 par, 20,000 shares authorized,
10,000 shares issued and outstanding P1,000,000
Share Premium 500,000
Retained Earnings 750,000
Market value of the share is P150 per share

Small share dividend

If a 10% share dividend is declared, the journal entries upon declaration and issuance would be:

10,000*10% = 1,000*150 = 150,000

Retained Earnings 150,000

Share Dividends Payable 100,000 (1,000*100)
Share Premium 50,000

Share Dividends Payable 100,000

Share Capital 100,000

Large share dividend

If a 25% share dividend is declared, the journal entries upon declaration and issuance would be:
10,000*25% = 2,500*100 = 250,000

Retained Earnings 250,000

Share Dividends Payable 250,000

Share Dividends Payable 250,000

Share Capital 250,000

Fractional Share Dividends

Upon issuance of shares, it is impossible to issue full shares to all shareholders. Usually fractional shares is
created. For example, a shareholder owns 55 shares and a 10% share dividend was declared. The said
shareholder is entitled to receive five full shares and a fractional one-half share. There is no accounting problem
with regards to the full shares but with respect to the fractional shares, the entity may issue warrants to give the
holders enough time to accumulate sufficient warrants for a full share or the entity may pay cash in lieu of
fractional share.

Illustration on fractional share dividends

Assume the entity has the following shareholders’ equity account balances: (Adapted)
Share Capital, P100 par, 10,000 shares issued 1,000,000
Share dividends declared 50%
Full shares issued 4,000
Fractional shares issued 1,000
Of the 1,000 fractional shares, only 600 became full shares through the surrender of fractional warrants. The
remaining warrants expired.
The journal entries would be as follows:

10,000*50% = 5,000*100 = 500,000

Retained Earnings 500,000
Share Dividends Payable 500,000

Share Dividends Payable 500,000

Share Capital (4,000*100) 400,000
Fractional Warrants Outstanding 100,000 (1,000*100)

Fractional Warrants Outstanding 100,000

Share Capital (600*100) 60,000
Share Premium (400*100) 40,000

Treasury shares as share dividend

When treasury shares were declared as share dividend, the amount to be charged to retained earnings shall be
the cost of the treasury shares declared as share dividend. No accounting liability arises in this case because the
entity’s obligation is not to convey noncash asset but to reissue its own share capital.

Assume that an entity distributed as share dividend 2,000 treasury shares with cost of P200,000 and market
value of P240,000. The entry upon declaration and issuance would be:

Retained Earnings 200,000

Share Dividends Payable 200,000
To record declaration of Treasury shares as share dividend.
Share Dividends Payable 200,000
Treasury Shares 200,000
To record the issuance of treasury shares.

Dividends out of capital

This is capital being returned to shareholders. This is also known as liquidating dividend. As a rule this is done
when the entity is dissolved and liquidated. In conformance with the trust fund doctrine, the entity cannot return
capital to the shareholders during the lifetime of the entity because it is illegal to do so. However, wasting asset
corporations may declare dividends which are in part distribution of earnings and in part distribution of capital.
This is in conformity with wasting asset doctrine which holds that it can declare dividends not only to the extent
of the retained earnings balance but also to the extent of the accumulated depreciation balance.

Assume that the following accounts appear in the statement of financial position of a wasting asset entity at year
end: (Adapted)
Resource Property 5,000,000
Accumulated depletion 1,000,000
Retained Earnings 1,500,000

The maximum amount that can be declared as dividends for this entity is 2,500,000 and if such amount has been
declared, the entry would be:
Retained Earnings 1,500,000
Capital Liquidated 1,000,000
Dividends Payable 2,500,000

Note: Any amount declared in excess of the retained earnings balance is treated as liquidating dividends and
charged to the capital liquidated account which is a deduction from the total shareholders’ equity.