Prepared by Gabriela H. Schneider, CMA; Grant MacEwan College INTERMEDIATE ACCOUNTING INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK

C H A P T E R 16 Shareholders’ Equity: Contributed Capital

Appendix 16A Accounting for Par Value and Treasury Shares

Study Objectives 1.Explain accounting for par value shares 2.Explain accounting for treasury shares

Par Value Shares Issuance of par value shares is no longer permitted by CBCA Practice is allowed in some provincial jurisdictions (and in the US) Par Value has no relation to the market price Is a price set by the Board on the original issue

Par Value Shares Share capital account is credited with the par value when share is initially sold Any amount received in excess of par value is credited to Contributed Surplus If shares are repurchased and retired, follow same procedures as explained in Chapter 16

Par Value Shares - Example Given: Colonial Corporation issues 100 shares; par value $5 Total issue price received - $1,100 Cash1,100 Common Shares (100 * $5)500 Contributed Surplus600

Reacquisition of Par Value Shares - Example Given: Of the 100 ($5 par value) shares issued by Colonial, 25 are reacquired at a cost of $12.00 per share Common Shares (25 * $5)125 Contributed Surplus175 Cash (25 * $12)300 Note: Contributed Surplus is debited only because there is an available balance to do so.

Treasury Shares not permitted under the CBCA Are permitted in some provinces (and in the US) Shares are reacquired, but rather than being retired or cancelled are held by the corporation for reissue Voting rights and dividends are not attached to Treasury Shares, since they are not outstanding in the hands of shareholders The single transaction method is used to account for Treasury Shares Treasury Shares - Concepts

Treasury Shares Some reasons why corporations buy back their outstanding stock: to increase earnings per share and return on equity to provide tax efficient distributions of excess cash to shareholders to provide stock for employee stock compensation contracts to thwart takeover attempts to create or improve the market for the stock

Treasury stock represents reacquired (outstanding) common stock Steps in treasury stock transactions: On acquisition Treasury Shares account is debited with the full amount of proceeds received When subsequently sold, Treasury Shares is credited with the original acquisition cost Any difference is charged to Contributed Surplus (if available) and then Retained Earnings Treasury Shares

If Treasury Shares are retired: The original share capital account is debited, with the original issue or stated value of the share Treasury Shares is credited with the original acquisition cost of the Treasury Shares Any difference is then allocated to Contributed Surplus and Retained Earnings

In 1997, Glider Co. issued 100,000 of its 500,000 authorized no-par value common shares at $35 per share. In January 1998, Glider repurchased and placed into Treasury Shares 1,600 shares at $30 per share. Assume these are the only share transactions the company has ever had. Treasury Shares (1,600 x $30) 48,000 Cash (1,600 x $30) 48,000 Treasury Shares - Example

Assume now that 500 of the Treasury Shares are sold at $31.50 per share. Cash (500 x $31.50) 15,750 Treasury Shares (500 x $30)15,000 Contributed Surplus (500 x $1.50) 750 Treasury Shares - Example

Now assume that 750 of the Treasury Shares are sold at $28.50 per share. Cash (750 x $28.50) 21,375 Contributed Surplus 750 Retained Earnings 375 Treasury Shares (750 x $30)22,500 Note that Contributed Surplus is debited with only $750 – the available balance in that account.

Treasury Shares - Presentation Shareholders’ Equity Common shares$XXX,XXX Retained Earnings XX,XXX XXX,XXX Less: Cost of Treasury Shares X,XXX Total Shareholders’ Equity$XXX,XXX

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