Share capital transactions subsequent to original issuance

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Lecture notes

Institute of Accounts, Business and Finance

Far Eastern University, Manila

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Corporation

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By

Merwin R. Portugal
2020
Share capital retirement
 Shares are reacquired and then retired by the issuing corporation.
 Cancellation of stock certificate, share capital account and related additional paid-in
capital from the original issuance.
 Retirement of share capital will reduce both the number of shares issued and the number
of shares outstanding.
 If retirement price < original issuance price, “Paid-in-capital from retirement” account is
credited for the difference.
 If retirement price > original issuance price, such difference is debited to the following
accounts in the order given:
i. Paid-in-capital from retirement (from previous retirement) or treasury share
transactions of the same class of stock.
ii. Retained earnings

Illustrative problem: The shareholder’s equity section of ABC Corp. contains the following:
Preference share capital, P100 par value, 10,000 shares P1,000,000

Preference share premium 250,000

Retained earnings 500,000
1,000 shares of preference share capital were reacquired and retired

Case 1: The retirement price is P110 per share (If retirement price < original issuance price)
Journal entry:
Preference share capital (1,000sh x P100) 100,000
Preference share premium (1,000sh x P25*) 25,000
Cash (1,000sh x P110) 110,000
**Paid-in-capital from retirement of preference share capital 15,000
*Preference share premium (250,000/10,000sh=P25 per share)
**This account is included in the Additional paid-in capital
Total shareholder’s equity after retirement:
Preference share capital (1,000,000-100,000) 900,000
Preference share premium (250,000-25,000) 225,000
PIC from retirement of preference shares 15,000
Retained earnings 500,000
Total 1,640,000
Case 2: The retirement price is P130 per share (If retirement price > original issuance price)
Journal entry:
Retained earnings (130,000-125,000) 5,000
Preference share capital (1,000sh x P100) 100,000
Preference share premium (1,000sh x P25) 25,000
Cash (1,000sh x P130) 130,000
Total shareholder’s equity after retirement:
Preference share capital (1,000,000-100,000) 900,000
Preference share premium (250,000-25,000) 225,000
Retained earnings (500,000-5,000) 495,000
Total 1,620,000
Treasury share transactions (Share capital reacquisition)
 Shares are reacquired but not retired by the issuing corporation.
 Reacquisition of share capital reduces the number of outstanding shares but does not affect
the number of issued shares.
 Purpose of reacquisition: Improve earnings per share, support the market price of the share
capital, obtain shares to acquire plant assets, invest excess cash and others.
 Treasury shares is a contra-equity account, not an asset.
 Reacquisition can be done by either purchase or donation.

a. Reacquisition by purchase
 Treasury share is recorded using cost method, irrespective of whether these are
acquired below or above par value.
 Corporation can reacquire treasury shares to the extent only of the unappropriated
retained earnings balance.
 An amount of retained earnings equal to the cost of treasury shares acquired shall be
appropriated for that purpose.
 Reissuance price > cost, gain is credited to Paid-in capital from sale of treasury shares
 Reissuance price < cost, loss is debited to the following accounts in the order given:
i. Paid-in capital from previous treasury share transactions of the same class of share
capital.
ii. Retained earnings

Illustrative problem: Shareholder's equity of a Corporation consists of the following:

Ordinary share capital, P20 par, 50,000 shares 1,000,000
Ordinary share premium 250,000
Retained earnings 500,000

On September 1, 1,000 shares were reacquired at P20 per share

Treasury share (1,000sh x P20) 20,000
Cash 20,000
Retained earnings 20,000
Retained earnings appropriated for treasury shares 20,000

On September 20, 500 shares were reissued at P25 per share

Cash (500sh x P25) 12,500

Treasury shares (500sh x P20) 10,000
*Paid-in capital from sale of treasury shares 2,500
Retained earnings appropriated for treasury shares 10,000
Retained earnings 10,000

On September 30, 400 shares were reissued at P10 per share

Cash (400sh x P10) 4,000
*Paid-in capital from sale of treasury shares 2,500
Retained earnings (10,000-5,000-2,500) 1,500

Treasury shares (400sh x P20) 8,000

*This account is included in the Additional paid-in capital

Total shareholder’s equity after the preceding transactions:

Ordinary share capital 1,000,000
Ordinary share premium 250,000
Paid-in capital from sale of treasury shares (2,500-2,500) 0
Retained earnings (500,000-20,000+10,000+8,000-1,500) 496,500
Retained earnings appropriated for treasury shares
(20,000-10,000-8,000) 2,000
Treasury shares (20,000-10,000-8,000) (2,000)
Total 1,746,500

b. Reacquisition by donation
 Treasury shares acquired through donation by shareholders.
 Since donated shares are acquired without any cost, the transaction does not affect
corporation’s assets, liabilities and shareholder’s equity upon acquisition.
 Receipt of donated shares is recorded by means of memorandum entry (if market
value of the share capital is unknown) or a journal entry (if market value is available)

Illustrative problem: Shareholders donated to the Corporation, a portion of their holdings totaling
1,000 shares of P100 par value ordinary shares on 01/01/20. Subsequently, all donated shares
were reissued at P130 per share on 01/15/20.

Case 1: There is no available market value for the shares at the time of donation
01/01/20 One thousand (1,000) shares of P100 par value ordinary shares were received as
donation from various shareholders.
01/15/20 Cash (1,000sh x P130) 130,000
Donated capital 130,000

Case 2: Market value for the donated share is known as P120 per share
01/01/20 Treasury shares (1,00sh x P120) 120,000
Donated Capital 120,000

01/15/20 Cash (1,000sh x P130) 130,000

Treasury shares 120,000
Donated Capital (130,000-120,000) 10,000
Conversion of preference shares into ordinary shares
 Convertible preference shares can be converted into ordinary shares at the option of the
holder.
 Convertible preference shares can be sold at a higher price but at a lower dividend rate
because of its conversion privilege.
 Accounting for conversion is similar to retirement of share capital.

Illustrative problem: A Corporation's shareholder's equity contains the following:

Ordinary share capital, P10 par, 50,000 shares 500,000
Ordinary share premium 100,000
Preference share capital, P100 par, 5,000 shares 500,000
Preference share premium 50,000
Retained earnings 750,000
1,000 preference shares were converted into ordinary shares

CASE 1 - 20 ordinary shares were issued for every preference share

Preference share capital (1,000 x P100) 100,000
Preference share premium (1,000 x P10) 10,000
Retained earnings (200,000-110,000) 90,000
Ordinary share capital (1,000sh x 20 x P10) 200,000

CASE 2 - 8 ordinary shares were issued for every preference share

Preference share capital (1,000 x P100) 100,000
Preference share premium (1,000 x P10) 10,000
Ordinary share capital (1,000sh x 8 x P10) 80,000
*Paid-in capital from conversion of PS to OS (110,000-80,000) 30,000
*This account is included in the Additional paid-in capital
Share split or stock split
 Defined as the issuance by an enterprise of its own ordinary shares to its ordinary
shareholders with a desire to increase the number of outstanding shares.
 Increases the number of shares outstanding with a corresponding decrease in the par
value but does not affect the total shareholder’s equity nor share capital.
 Purpose is to reduce the market price, thereby obtain a wider distribution and improved
marketability of shares.
 On the other hand, reverse share split decreases the number of shares outstanding with a
corresponding increase in the par value but does not affect the total shareholder’s equity
nor share capital.
 Share split and reverse share split are recorded in the books by a memorandum entry of
journal entry.

Illustrative problem: A Corporation's shareholder's equity contains the following:

Ordinary share capital, P100 par, 10,000 shares issued and outstanding 1,000,000
Share premium 120,000
Retained earnings 300,000

CASE 1 - 2-for-1 share split is effected (Share split)

Memorandum entry:
Effected a 2 for 1 share split, reducing par value to P50 and increasing the number of
outstanding shares issued to 20,000.

Journal entry:
Ordinary share capital, P100 par 1,000,000
Ordinary share capital, P50 1,000,000

CASE 2 - 1-for-2 share split is effected (Reverse-share split)

Memorandum entry:
Effected a 2 for 1 share split, increasing the par value to P200 and decreasing the number
of outstanding shares issued to 5,000.
Journal entry:
Ordinary share capital, P100 par 1,000,000
Ordinary share capital, P200 par 1,000,000