FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

FINANCIAL ACCOUNTING AND REPORTING PART 2

HANDOUNT NO. 5

Shareholders’ Equity – Contributed Capital

LECTURE

1. Corporation

An artificial being created by operation of law, having the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.

2. Articles of Incorporation and By-Laws

The Articles of Incorporation contains the charter of the corporation. It states the corporation’s authorized share
capital, which is the maximum number of shares that the corporation can issue. By-Laws contain the agreement
among the shareholders.

3. Shareholders’ Equity

Shareholders’ equity is the residual interest in the assets of a corporation after deducting its liabilities. Usual
components of shareholders’ equity include the following:

• Ordinary share capital

• Preference share capital
• Subscribed share capital less subscription receivable
• Share premium
• Retained earnings
• Other reserves
• Treasury shares

4. Accounting for Share Capital

a) Memorandum method – only a memorandum entry is made upon authorization of a corporation’s shares.
Subsequent issuances are credited to share capital account.

b) Journal entry method – the authorized capitalization is recorded by debiting “unissued share capital” and
crediting “authorized share capital.” Subsequently, issuance of share capital is credited to unissued share capital.

5. Subscription – a contract between the purchaser of shares (i.e. the subscriber) and the corporation (the issuer) in
which the subscriber promises to acquire shares of the corporation.

6. Subscribed share capital – represents the portion of the authorized share capital that is subscribed but not yet issued.

7. Subscription receivable – represents the unpaid portion of the subscription price. If the collection is indefinite,
subscription receivable is presented as a deduction from the related subscribed share capital (contra equity). If
subscription is collectible currently, it is not considered in computation of shareholders’ equity but presented as other
receivables under current asset section of the statement of financial position.

8. Share Capital – represents the portion of the authorized share capital that is already issued evidenced by a share
certificate.

9. Par value of shares – nominal or arbitrary amount assigned to each share of stock fixed in the corporation’s articles
of incorporation. A par value share cannot be issued below its par value. A share issued below its par is considered
watered share/stock which creates an obligation on the part of the subscriber to pay to the corporation for the
difference between the issue price of the share and its par value.

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10. No-par value shares – A share without a peso value fixed in the articles of incorporation. However, it shall be assigned
a stated value instead which can be fixed by the board of directors. No-par value shares can not be issued for a
consideration less than five (P5) pesos per share. Ordinary shares may be issued with or without par value but
preference shares should only be issued with par value.

11. Ordinary shares (Common Stock) – represent the residual corporate interest that bears the ultimate risk of loss and
receives the benefits of the company’s success. Ordinary shareholders’ receipt of returns, in the form of dividends,
are not guaranteed because dividends are distributed only if declared by the board of directors. However, ordinary
shareholders benefit the most if the company proved to be successful.

12. Rights of Ordinary Shareholders

a. Right to attend and vote in shareholders’ meetings

b. Right to purchase additional shares (preemptive right or stock right)
c. Right to share in corporate profits (right to dividends)
d. Right to share in the net assets of the corporation upon liquidation

13. Preference Shares (Preferred Stock) – shares that give the holders certain preferences over other share holders such
us preference as to dividend distribution and/or preference as to distribution of net assets. Although preference
shareholders enjoy certain preferences, their participation in corporate affairs is limited because preference shares
are non-voting in nature.

14. Share Premium (Additional Paid-In Capital) – consideration received in excess of par or stated value of shares issued
or subscribed. Sources of share premium may include

a. Excess of consideration over par value or stated value of shares subscribed or issued.
b. Excess of reissue price of treasury shares over its cost.
c. Distribution of small share dividends.
d. Donated capital
e. Issuance of share warrants and options

15. Legal Capital – Based on “Trust Fund Doctrine,” it is the portion of contributed capital that cannot be distributed back
to owners during the existence of the corporation for the protection of the corporation’s creditors.

a. For par value shares, legal capital is the aggregate par values of the shares issued and subscribed.
b. For no-par value shares, legal capital is equal to aggregate stated value of the shares issued and subscribed
including the share premium.

16. Share Issuance Costs – regulatory fees, legal, accounting, and other professional fees, commissions and underwriter’s
fees, printing and engraving costs, and documentary stamp tax and other transaction taxes. These costs are deducted
from the any resulting share premium from issuance. If the share premium is insufficient, the excess is charged to
retained earnings account.

17. Treasury Shares – are entity’s own shares that were previously issued but are subsequently reacquired by the
corporation but are not retired. Treasury shares are accounted for at cost. Reissuance above its acquisition cost give
rise to share premium. Reissuance below its cost shall be charged to share premium from previous reissuance of
treasury shares, and in excess or if there is no share premium from previous reissuance of treasury shares, such is
charged against retained earnings.

18. Retained Earnings – represent the cumulative profits and losses of the corporation, distributions to owners,
adjustments, and other share-related transactions.

a. Unrestricted/Unappropriated Retained Earnings – portion of retained earnings that is available for future
distribution to the shareholders.

b. Appropriated/Restricted Retained Earnings – portion of retained earnings not available for distribution.

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19. Retirement of Shares

• shares are considered retired if they have been reacquired and cancelled by the corporation. When shares are
retired, the total par value and the related share premium from original issuance are removed from the books of
accounts.

• If the par value and the related share premium of the retired shares exceed the retirement price (the amount paid
by the corporation to reacquire the share for retirement), the difference is credited to “share premium –
retirement”.

• If the par value and the related share premium of the retired shares are less than the retirement price, the
difference is debited to “share premium – treasury shares” if the shares being retired are related to treasury
shares, and any remaining amount to “retained earnings”.

DISCUSSION PROBLEMS

Problem No. 1
Ellen Corporation was a newly established company engaged in trading services. The following transactions occurred
during 2018.
a. Authorized to issue 1,000,000 ordinary shares with par value of P100 per share.
b. Received subscription to 10,000 shares at par.
c. Collected 30% of the subscription described in letter b.
d. Received full payment for the 10,000 shares originally subscribed in letter b and issued the related share
certificates.
e. Issued shares for cash, 1,000 shares at P110 per share.
f. Received subscription for 5,000 shares at P120 per share receiving 50% down payment.

Requirements:
1. Journal entries to record the transactions under Memorandum Entry approach of accounting for share capital.
2. Journal entries to record the transactions under Journal Entry approach of accounting for share capital.
3. Statement presentation under nos. 1 and 2.

Problem No. 2
Arci Company issued 10,000 of its P10 par ordinary shares to Ramona Corp. in exchange for land having tax declared value
of P150,000, cost of P120,000, and fair value of P140,000. The shares have fair value of P115 per share at the date of
issuance.

Requirements:
1. Journal entry to record the issuance of shares.
2. Journal entry to record the issuance of shares assuming the fair value of land is not determinable.
3. Journal entry to record the issuance of shares assuming the fair value of the land and shares are not determinable.
4. Journal entry to record the issuance of shares assuming the shares have publicly quoted price in the market of
P125 per share.

Problem No. 3
Nadine Co. Ltd. Issued 10,000 ordinary shares of P10 par value to Atty. Pia for her legal services in getting the corporation
organized. The shares have fair value of P12 per share at the date of issuance.

Answer the following questions:

1. Assuming Atty. Pia usually bills her clients at P15,000 per hour and she incurred 10 hours in working with Nadine
Co. Ltd., what is the journal entry to record the issuance of shares?
2. Assuming the fair value of the services of Atty. Pia is reliably determined to be P130,000, what is the journal entry
to record the issuance of shares?

Problem No. 4
Kisses Company issued 60,000, P50 par value, ordinary shares and 20,000, P100 par value, preference shares for a total
consideration of P7,500,000. At this date, the ordinary share was selling for P100 per share and the preference share was
selling for P150 per share. Journalize the issuance of ordinary and preference shares.

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Problem No. 5
Pressman Corp. issued 6% bonds with a maturity value of P6,000,000, together with 100,000 shares of its P5 par value
ordinary shares, for a combined cash amount of P11,000,000. The market value of Pressman's shares is P80 per share. If
the bonds were issued separately, they would have sold for P4,000,000 on an 8% yield to maturity basis. Journalize the
issuance of bonds and shares of stocks?

Problem No. 6
Solenn Company undertakes an IPO for the listing and issuance of 700,000 new shares and 300,000 existing shares. In
relation to this, the company incurred the following costs:

Documentary stamp tax P 25,000

Other percentage tax 15,000
Fairness opinion and valuation report 125,000
Tax opinion 75,000
Newspaper publication 200,000
Listing fee 300,000
Roadshow presentation 150,000
Public relation consultant’s fees 100,000
Audit and other professional fees relating to prospectus 275,000
Opinion of counsel 50,000
Prospectus design and printing 75,000

Requirements:
1. How much of the foregoing costs are considered as share issuance cost to be recognized directly in equity?
2. How much of the foregoing costs are considered as listing cost to be recognized in profit or loss?
3. How much of the foregoing costs are considered joint cost to be allocated between equity and profit or loss?

Problem No. 7
The following data were compiled prior to preparing the statement of financial position of the Bea Corporation.
Authorized share capital, P100 par value P4,000,000
Unissued share capital 800,000
Subscribed share capital 480,000
Subscriptions receivable 120,000
Premium on share capital 320,000
Premium on bonds payable 240,000
Gain on sale of treasury shares 80,000
Donated capital 800,000
Share warrants outstanding 200,000
Reserve for bond sinking fund 400,000
Reserve for treasury shares 144,000
Reserve for depreciation 600,000
Reserve for plant expansion 200,000
Treasury shares, at cost 144,000
Retained earnings, unappropriated 576,000
Cash dividends payable 160,000
Revaluation increment on property 800,000
Net unrealized loss on FA@FVTOCI 96,000

Compute for the following:

1. Total share premium
2. Contributed capital
3. Appropriated retained earnings
4. Total shareholders’ equity
5. Legal capital

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Problem No. 8
Angel Corporation was organized on January 1, with an authorization of 1,000,000 ordinary shares with a par value of P5
per share.
During the year, the corporation had the following equity transactions:
Jan. 4 - Issued 200,000 shares @ P5 per share.
April 8 - Issued 100,000 shares @ P7 per share.
June 9 - Issued 30,000 shares @ P10 per share
July 29 - Purchased 50,000 shares @ P4 per share.
Dec. 31 - Sold 50,000 shares held in treasury @ P8 per share.

Journalize the transactions.

Problem No. 9
Angelica Company has the following shareholders’ equity account as of January 1, 2018.

Ordinary share capital (1,000,000 shares at P1 par value) P1,000,000

Share premium – ordinary 250,000
Retained earnings 450,000

During 2018, Angelica issued 10,000 callable preference shares with par value of P100 at P120 per share. Subsequently,
the preference shares are called in and retired them.

Requirements:
1. Journal entry to record the original issuance of the callable preference shares.
2. Journal entry to record the retirement of the callable preference shares assuming the call price is at P110 per
share.
3. Journal entry to record the retirement of the callable preference shares assuming the call price is at P150 per
share.

Problem No. 10
Liza Company issued 20,000 redeemable preference shares at P10 par value. The preference shares are mandatorily
redeemable by the issuer for P230,000. During the year, the Liza paid P10,000 dividend to the redeemable preference
shareholders. Subsequently the preference shares were redeemed by the issuer for P230,000.

Requirements:
1. Journal entry to issue redeemable preference shares.
2. Journal entry to record payment of dividends.
3. Journal entry to record redemption.

Problem No. 11
Julia Company has the following details as of December 31, 2018.

Convertible preference share capital, 20,000 shares, P100 par P2,000,000

Ordinary share capital, 500,000 shares authorized,
200,000 shares issued, P20 par 4,000,000
Share premium – preference 500,000
Share premium – ordinary 2,000,000
Retained earnings 2,500,000

Requirements:
1. The preference shares are converted into ordinary shares in the ratio of one (1) preference share for five (5)
ordinary shares. Record the issuance of ordinary shares.
2. The preference shares are converted into ordinary shares in the ratio of one (1) preference share for eight (8)
ordinary shares. Record the issuance of ordinary shares.

Problem No. 12
Jessy Corporation is authorized to issue 100,000 ordinary shares, P17 par value. At the beginning of the year, 18,000
ordinary shares were issued and outstanding. These shares had been issued at P24. During the year, the company entered
into the following transactions:

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Jan. 16 - Issued 1,300 ordinary shares at P25 per share.

Mar. 21 - Exchanged 12,000 ordinary shares for a building. The ordinary shares were selling at P27 per share.
May 7 - Reacquired 500 ordinary shares at P26 per share to be held in treasury.
July 1 - Accepted subscriptions to 1,000 ordinary shares at P28 per share. The contract called for 10% down payment
with the balance due on June 30 next year.
Sept. 20 - Sold 500 treasury shares at P29 per share.
1. Journalize the transactions.
2. Compute the contributed capital.

Problem No. 13
The following balances are shown in the shareholders' equity of Bea Company on December 31, 2017:

Preference share capital, P10 par, 100,000 shares P1,000,000

Ordinary share capital, P10 par, 500,000 shares, 5,000,000
Share premium - preference 50,000
Share premium – ordinary 200,000
Retained earnings 100,000
Total P6,350,000

During 2018, the following transactions pertaining to the shareholders' equity were completed:
• Retirement of 5,000 preference shares at P11 per share.
• Purchase of 5,000 ordinary shares at P12 per share to be held as treasury shares.
• Share split, ordinary, 2 for 1.
• Reissue of 2,000 treasury shares at P8 per share.
• Profit for 2018, P300,000.

The total shareholders' equity on December 31, 2018 is

End of Material

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