delinquent subscription and treasury shares

7/27/2019 Delinquent Subscription and Treasury Shares

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Delinquent Subscription

DefinitionCorporation Code of the Philippines, Sec. 67

Subscription that has not been paid in full within 30 days on the date fixed by

the board of directors.

Conditions related to a delinquent subscription

1. Sold at a public auction (Sec. 41)

2. Has no right to vote or be voted (Sec. 24)

3. Receives insufficient or no cash dividends (Sec. 43)


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Delinquency saleCorporation Code of the Philippines, Sec. 68

1. BOD orders the sale of the delinquent subscription 30 to 60 days from the day it

becomes delinquent.

2. Delinquent subscriber shall be informed either personally or through mail.3. Notice of the sale shall be published once a week for two weeks.

4. Offer price includes the balance of the subscription, accrued interest, costs of

advertisement and expenses of sale.

5. Corporation may bid for the delinquent subscription provided that no one bids at the

public auction.


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Delinquency sale

Corporation Code of the Philippines, Sec. 68

6. The highest bidder shall be the one who shall offer to pay the full amount of the

balance on the subscription together with accrued interest, costs of advertisement,

and expenses of sale, for the smallest number of shares.7. Should there be no bidders, the corporation may bid for the delinquent subscriptions,

but title to all of the shares shall be vested to the corporation as treasury shares.


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Lafferty Corp. Declared Dean Winchesters share subscription delinquent. The records of

the corporation pertinent to Winchesters subscription show that he subscribed for 50

000, P20 par ordinary shares at P30 per share, and he still has a remaining balance of

P750 000. The delinquent shares are subsequently offered for public auction incurring a

cost of P100 000. The offer price is P850 000.

There are three bidders during the auction who are willing to pay the offer pricecorresponding to the shares, as follows:

Suppose there are no bidders in the sale, how would the journal entries in the books of

Lafferty differ?

Bidder No. of shares

Mia Michaels 20 000

Nigel Lythgoe 25 000Mary Murphy 30 000


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Thomas Corp. was incorporated at the beginning of 2012. It was authorized to issue 1M,

P20 par ordinary shares. The incorporators subscribed to 30% of the authorized shares at

150% of the par per share and paid 40% of the balance as down payment. The following

transactions occurred during the year.

1. Thomas received a subscription for 50 000 of the shares at P50 per share. 20% of the

balance was immediately paid and the rest was contracted to be paid a month after.

2. The incorporators paid the remaining balance of their subscription. Share certificates

were subsequently issued to them.3. After paying half of the balance of the subscription in #1, the subscriber defaulted

and the subscription was declared delinquent. Expenses amounting to P100 000 was

incurred in relation to the delinquency sale.

4. Lawson, Goodwin and Tidwell bid for the delinquent subscription for 25 000, 22 000

and 23 000, respectively. The highest bidder subsequently paid the remaining balanceand share certificates were issued.

5. 60 000 shares were reacquired at P40 per share.

6. 20 000 of the reacquired shares were subsequently reissued at P48/share. 20 000 were

reissued at par.

7. A part of the accumulated profits was appropriated for the cost of the treasury shares.


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Questions:

1. How much is the total contributed capital after all the foregoing transactions?

2. What is the total cost of the remaining treasury shares?

3. What is the amount debited to retained earnings due to the reissuance of the treasury

shares?

4. How many shares were issued and how many were outstanding?

5. How many shares did the highest bidder receive?6. Suppose there was no highest bidder, what will be the total cost of the treasury shares

at the end of the reporting period? Assume that the reissued shares were part of the 60

000 that were previously reacquired.


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Treasury Shares

DefinitionSkousen, 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 entitys own shares that have been issued and then reacquired but not

cancelled


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Treasury Shares

Kieso, Weygandt, Warfield; Intermediate Accounting IFRS Edition,

Volume 2

Corporations 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


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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 earnings 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


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Treasury Shares

Limitation on Reacquisition of Shares

Sec. 41, Corporation Code of the PhilippinesA 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.


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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 entitys 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.


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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




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


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Treasury Shares

Retirement of Treasury Shares

1. Cancellation of certificates2. 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


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Treasury Shares

The following accounts were taken from Chehon Companys statement of financial

position

Chehon decided to retire the treasury shares. They were originally issued at an

average price of P15/share. Prepare the journal 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 2,000,000.00Treasury shares, 10 000 shares at cost (120,000.00)


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Treasury Shares

Disclosure of Treasury Shares

1. Number of shares2. Restriction on retained earnings

delinquent subscription and treasury shares

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