SHAREHOLDERS’ EQUITY

1. Explain share capital, subscribed share capital and share premium

 The term “capital stock” or “share capital” is the amount fixed in the articles of incorporation to be
subscribed and paid in or secured to be paid in by the shareholders of the corporation
 Actually, the amount fixed in the articles of incorporation is called the authorized share capital
 Subscribed share capital is reported in the shareholders’ equity minus related subscription receivable not
collectible currently
 Specifically, share premium is the portion of the paid in capital representing the excess over the par or
stated value
 Broadly, the common sources of share premium are:
a. Excess over par value or stated value
b. Resale of treasury shares at more than acquisition cost
c. Distribution of share dividend – market value of share is more than par or stated value
d. Issuance of share warrants
e. Donated capital
f. Quasi- reorganization and recapitalization
2. What are the four basic rights of a shareholder?
a. To share in the earnings of the corporation
b. To vote in the election of directors and in the determination of certain corporate policies
c. To subscribe for additional share issues – this is the right of pre-emption or stock right
d. To share in the net assets of the corporation upon liquidation
3. Distinguish par value share from no-par value share
a. A par value share is one with specific value fixed in the articles of incorporation and appearing on the share
certificate. The purpose of the par value is to fix the minimum issue price of the share.
A no-par value share is one without any value appearing on the face of the share certificate. But a no-par
share has always an “issued value” or “stated value” which may be fixed by the articles of incorporation or
board of directors
b. The minimum stated value of no-par share is 5. The par value of a share can be as low as one centavo.
4. Explain the accounting for the issuance of share capital
 When shares with par value are sold, the proceeds shall be credited to the share capital account to the
extent of the par value, with any excess being reflected as share premium
 When shares without par value are sold, the proceeds shall be credited to the share capital account
 If the no-par share has a stated value, the excess proceeds over stated value shall be credited to share
premium
5. Explain the measurement of share capital
 If share capital is issued for noncash consideration such as property, plant and equipment, and intangible
asset, the share capital is measured at an amount equal to the following in the order of priority:
a. Fair value of the noncash consideration received
b. Fair value of the shares issued
c. Par value or stated value of the shares issued
 If share capital is issued for services already rendered, the share capital is measured at an amount equal to
the following in the order of priority:
a. Fair value of services rendered
b. Fair value of shares issued
c. Par value or stated value of shares issued
  IFRIC 19 provides that the equity instruments issued to extinguish a financial liability shall be measured
initially at the following in the order of priority:
a. Fair value of equity instruments issued
b. Fair value of liability extinguished
c. Carrying amount of liability extinguished
6. What is the treatment of share issuance costs?
 Share issuance costs are direct costs to sell equity shares, such as underwriting and commission, accounting
and legal fees, printing costs, documentary stamps, filing fees with SEC and cost of advertising or promoting
the issue
 PAS 32, paragraph 37, provides that share issuance costs shall be deducted from share premium arising from
the share issuance
 If the share premium is insufficient to absorb such expenses, the Philippine Interpretations Committee or PIC
concluded that the excess shall be debited to “share issuance costs”
 The share issuance costs shall be reported as a contra equity account as a deduction from share premium
from original issuance and retained earnings, respectively.
7. What is the treatment of “costs of public offering of shares’?
 The PIC concluded that “costs that relate to stock market listing, or otherwise are not incremental costs
directly attributable to the issuance of new shares, shall be recorded as expense in the income statement.
 The costs of listing shares are not considered costs of an equity transaction since no equity instrument has
been issued
 Therefore, such costs of listing shares are recognized immediately as an expense when incurred.
 Costs of listing shares include road show presentation and public relations consultant fees
 PAS 32, paragraph 38, requires that joint costs or transaction costs that relate jointly to the concurrent listing
and issuance of new shares, and listing of old existing shares shall be allocated between the newly issued
and listed shares, and the newly listed old existing shares
8. What is recapitalization?
 Recapitalization occurs when there is a change in the capital structure of the entity. The old shares are cancelled
and new shares are issued.
a. Change from par to no-par
 The old par value share is called in and replaced by new no-par share
b. Change from no-par to par
 The old no-par share is cancelled and replaced by new par value share
c. Reduction of par value
 The old share is cancelled and replaced by a new par value share but with a reduced par value
d. Reduction of stated value
 The old share is cancelled and replaced by a new no-par share but with a reduced stated value
 The reduction in the stated value is credited to share premium
e. Share split
 Split up or share split is a transaction whereby the original shares are called in for cancellation and
replaced by a larger number accompanied by a reduction in the par or stated value
 Split down or reverse share split is a transaction whereby the original shares are cancelled and
replaced by a smaller number accompanied by an increase in the par or stated value.

When shares with par value are sold, the proceeds shall be credited to the
a. Share capital account
b. Share premium
c. Retained earnings
d. Share capital account to the extent of the par value of the shares issued with any excess being reflected in
share premium
1. When shares without par value are sold, the excess proceeds over stated value shall be credited to
a. Income
b. Retained earnings
c. Share premium
d. Share capital
2. If shares are issued for a noncash consideration, the shares issued shall be measured by
a. Fair value of the shares issued
b. Par value of the shares issued
c. Fair value of the noncash consideration received
d. Carrying amount of the noncash consideration received

3. The cost of treasury shares acquired for noncash consideration is usually measured by
a. Fair value of the noncash consideration
b. Carrying amount of the noncash asset surrendered
c. Par value of the shares
d. Book value of the shares
4. Gain and loss on retirement of treasury shares shall not be included in profit or loss. If the retirement results in a
gain such gain shall be credited to
a. Share premium
b. Retained earnings
c. Share capital
d. income