Delinquent Subscription

Definition
Corporation 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)
 Delinquent Subscription

Delinquency sale
Corporation 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.
 Delinquent Subscription

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.
 Delinquent Subscription

Lafferty Corp. declared Dean Winchester’s share subscription delinquent. The records of
the corporation pertinent to Winchester’s 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 price
corresponding to the shares, as follows:
Bidder No. of shares
Mia Michaels 20 000
Nigel Lythgoe 25 000
Mary Murphy 30 000

Suppose there are no bidders in the sale, how would the journal entries in the books of
Lafferty differ?
 Delinquent Subscription
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 balance
and share certificates were issued.
 Delinquent Subscription

Questions:
1. How much is the total contributed capital after all the foregoing transactions?
2. How many shares were issued and how many were outstanding?
3. How many shares did the highest bidder receive?
4. Suppose there was no highest bidder, what will be the total cost of the treasury shares
at the end of the reporting period?
 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 not
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 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
 Treasury Shares

Limitation on Reacquisition of Shares

Sec. 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

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

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)

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.
 Treasury Shares

Disclosure of Treasury Shares

1. Number of shares
2. Restriction on retained earnings