MODULE 5 PART 3

ACCOUNTING FOR
TREASURY STOCKS

U N D E R S TA N D I N G T H E N AT U R E O F T R E A S U RY
SHARES, TRADING AND RETIREMENT
 WHAT ARE TREASURY SHARES?
TREASURY SHARES are shares also known as “RE-ACQUIRED SHARES” refers to previously
issued outstanding shares that has been re-purchased and is being held by the issuing company in
its treasury.
➢ A company’s own shares , issued and fully paid, that was bought back from shareholders. It
is contra-equity account thus reduces the Shareholder’s Equity by the amount paid for the
stock .
➢ Total number of outstanding shares in the open market decrease by buying back its own
stock.
➢ If the Co. performs a buyback, these shares are issued shares but NO longer
OUTSTANDING and are not included in the distribution of dividends likewise in the
calculation of earnings per share (EPS).
➢ Such shares while in the hands of the corporation cannot vote or be entitled to vote nor
to a representation at any shareholder’s meeting.
*EPS = NI /OS
 WHY DO CORPORATIONS REPURCHASE OWN
SHARES (TS)
Treasury shares are acquired normally by corporations using their surplus
profits for the following reasons:
1. In support of the executives’/ employees’ stock option and
compensation plan known as ESOs.*
2. Improve earnings per share (EPS) by reducing the no. of shares
outstanding or improve the company’s price-earnings ratio.
3. Improve market price of shares by decreasing supply of shares.
4. Protect the company against takeover** threat.
* ESOs-company offered plan that gives the employees the right to buy shares of the
company at a pre-determined price.
**takeover-to buyout or acquire ownership of a company.
ILLUSTRATION:
• BSA Co. has the following data in its books:
Outstanding Shares 10M shares
Trading at P10.00/share
Market capitalization P100M
Net Income P 5M
EPS (P5M/10M shares) P .50 cents
P/E ratio ( P10/P.50 cents) 20x
• Assume BSA Co. repurchased 1M shares at P10 per share. The outstanding shares in the
market will be 9M shares=(10M-1M worth of treasury shares) . Suppose earnings for this year
is also P5M so EPS = P5M/9Mshares = P.56cents.
• IF it continue to trade at P/E ratio of 20x multiple, the value of share will now be P11.20 that is
P10 per share plus P1.20( representing an increase of 12% after reacquisition).
➢ EPS before P.50 – EPS after P.56 = P.06/ P.50 = 12% x P10=P1.20.
*EPS –indicates how much money a company makes for each share of stock.
• PRICE-EARNING RATIO (P/E ) is the ratio for valuing a company that measures
its current share price relative to its earnings per share (EPS). It is sometimes
known as earnings multiple computed as:

P/E Ratio = Share Price / EPS =P10/P.50 = 20x

If BSA Co. is trading at P/E ratio of 20x, it means that an investor is willing to pay
P20 for P1 of current earnings.

Our example clearly shows how treasury shares affect the EPS and P/E ratio of BSA
Co wherein the value of a share increases.
 WHY TREASURY SHARES MATTER?
Treasury shares is often a form of reserved shares set aside to raise funds or pay for future
investments.
These shares can also be re-issued to existing shareholders to reduce dilution from incentive
compensation plans.
Ex. Ms. A is a shareholder of BSA Inc. and owns 500 ordinary shares giving her a 5% ownership
interest. Shares issued as incentive will increase the O/S shares therefore the value of A shares will
be diluted say to 3% ownership interest.
• To prevent share dilution, companies can get the needed shares from its reacquired shares (treasury shares).
• Purchase of Treasury Shares use cash and in some States limit the amount of treasury shares a
corporation can own at a given time.
Why? To ensure that shareholders do not jeopardize the interests of debtholders.
• Increase in TS can be a good thing because it indicates that the Company thinks the shares are
UNDERVALUED.
NOTE: Treasury shares transactions may affect cash flows but they have no effect on the profit of the
corporation.
PRESENTATION
BASED ON ASSUMED AMOUNT

SHAREHOLDERS’ EQUITY
Share Capital, P100 par, 1000 shs authorized,500 shs issued P50,000
Subscribed Capital Share 60,000
Less: Subscription Receivable 60,000 0
Retained Earnings 20,000
Total Shareholders’ Equity P 70,000
Less: Treasury Share 56,000
Shareholders’ Equity P 14,000
HOW TO ACCOUNT FOR TREASURY SHARES
Two methods are used in accounting for treasury shares namely:
1) COST METHOD –treasury shares are recorded at cost regardless of whether the
shares are acquired below or above par or stated value. If purchased in cash the
cost is equal to the cash payment.

2) PAR VALUE METHOD-shares are debited for the amount equal to the par value or
stated value of the shares reacquired.

NOTE:
The ASC as stated in the Statement of Financial Accounting Standards (SFAS) No. 18
states that the preferred method for recording treasury shares is the COST METHOD.
 COST METHOD
Under this method, the purchase of treasury stock is recorded by debiting the treasury shares account. The
two aspects of accounting for treasury shares are:
A. REPURCHASE
Ex. On Jan. 3 , 2019, assume the Shareholder’s Equity (SHE) accounts of BSA Inc. revealed the following:
Share Capital , P10 par , 10,000 shares authorized
5,000 shares issued and outstanding P 50,000
Share premium-Ordinary (P1 per share) 5,000
Share Premium-Treasury shares 250
Retained Earnings 15,000

IF 100 shares, P10 par value are reacquired for cash at P12.50 on January 5, the journal entry will be
January 5 Treasury Share P1,250
Cash P1,250
COST METHOD...
B. REISSUANCE OR RESALE
ILLUSTRATIVE PROBLEM
Suppose BSA Co. reacquired 2,500 shares of its own ordinary shares, par value of P10,
at P80 per share. The entry would be
Treasury share P200,000
Cash P200,000
To record repurchase of own shares.

Accounting regarding the reissue or resale may be done based on the following cases:
CASE 1 : Treasury shares are reissued at cost
Cash P200,000
Treasury share 200,000
To record reissue of treasury shares at cost.