Shareholders Equity:

1. Certificate of incorporation- right to do business. Juridical personality and legal existence

commences.
2. Organization cost shall be expensed immediately. However, share issuance cost shall be
debited to share premium arising from the issuance of share capital. The excess is charged to
expense.
3. Ordinary shareholders have no fixed or specific return on investment. Their financial reward is
dependent on the operations of the entity.
4. In case of par value share, legal capital is the aggregate par value of the shares issued and
subscribed.
5. Articles of incorporation- corporation’s right to do business, juridical personality and legal
existence commences.
6. Corporation must formally organize and commence operations within 2 years from the date of
incorporation
7. Formal organization -adoption of by laws and election of officers by the board of directors.
8. By-laws-rules of action adopted by the corporation for its internal government and for the
government of its officers, shareholders, or members.
9. Place of shareholders meeting must be the principal place of business.
10. 25 percent of authorized shall be subscribed and at least 25% of the subscription has been
paid.
11. Artificial person- corporation
12. Natural- incorporators/corporators
13. Share issuance cost- shall be debited to share premium arising from issuance of share capital.
If SP is not sufficient to absorb the issuance cost, excess is charged to expense.
14. Contributed capital includes SP, aggregate par value of issued and subscribed
15. Par value- minimum issue price; no indication of market price.
16. Ordinary shareholders have no fixed or specific return on investment. Financial reward is
dependent on the operation of the entity
17. No par shares contributed capital is the total consideration received
18. Corporation can pay dividends to shareholders limited only to the retained earnings balance.
But in wasting asset entity, it is up to the accumulated depletion balance
19. It is illegal to pay dividends if the entity has a deficit.
20. Normal balance of unissued share capital is debit.
21. Authorized share capital 4,000,000-beg
Unissued share capital (2,900,000)-end
Issued 1,100,000
22. Corporation code prohibits the issue of share at a discount.
Cash 800T
Disc.in SC 200T
Share capital 1M
23. Discount is a deduction from total SHE
24. Watered Share: land’s FV is 800T

Land 1M
SC 1M no discount is recorded. Debited all to land
account
25. Secret reserve-opposite of watered share. Asset is understated or liability is overstated
26. Call-official declaration of due and payable unpaid subscription
27. Mae failed to pay the remaining balance of 400,000. Delinquency sale followed with an offer
price of 450,000, including interest and other costs
A- 4,500 shares
B- 5,000 shares
C- 6,000 shares
* the 10,000 are deemed fully paid, A gets 4,500 while Mae gets 5,500
Advances on delinquency sale 30,000
Cash 30,000

Cash 450,000
Subscription receivable 400,000
Interest Income 20,000
Advances 30,000

28. Callable preference- can be called in for redemption at a specified price at the option of the
corporation.
29. Redeemable- at the option of the holder. Mandatory. Classified as a financial liability
30. Right of preemption- legal right of stockholders
31. Rights issue-accounting term for preemptive right (stock right)
32. No entry is required when share warrants are issued to existing shareholders because these
warrants are issued usually without consideration. Just indicate the no. of rights issued to
shareholders and the number of shares that can be purchased through the exercise of rights
33. If rights are exercised, memorandum is made for the decrease in the no. of shares claimable
through the exercise of rights
34. If bonds payable is issued with warrants, the value of the warrants is the residual after
deducting the market price of the bonds.
Reissuance of TS below cost:
a. SP-TS
b. RE
Retirement:
a. SP- original issuance
b. SP-treasury
c. RE
35.Donated shares are treasury shares.
“Received from shareholders as donation 10,000 OS with par value of 100”
Reissuance:
Cash xx
Donated capital xx
Canceled:
OS xx
Donated capital xx
Subterfuge
Land’s value is 800T
Land xx
OSC xx

Correcting entry upon reissuance:

Cash xx
Land xx
Donated capital xx
* the should-have-been payment has been recovered upon reissuance of donated shares

Share split: Issued 50,000 new shares with par value of 20, as a result of 5-for-1 split of 10,000
old shares with par value of 100.

Share-based compensation
1. Equity settled—share option
2. Cash settled—incurs liability and the liability is based on the entity’s equity
instruments(share appreciation rights)
3. Share option- at the option of a shareholder, therefore not a liability
4. 2 methods for measuring compensation:
a. Fair value—compensation is equal to the fair value of SO on the date of grant.
Mandated by PFRS 2
b. Intrinsic—excess of market price over option price

Rules:
1. If SO vest immediately, employee is not required to complete a specified period of
service before unconditionally entitled to SO. On grant date, entity shall recognize the
compensation expense in full with corresponding increase in equity
2. If it doesn’t vest immediately, compensation is recognized as expense over the
service period (matching)
Salaries—SO (100Tx20fair value) 2,000,000
SOO 2,000,000

Exercise:
Cash 6,000,000
SOO 2,000,000
OSC 5,000,000
SP 3,000,000
*In effect, it is capitalization of RE. From RE (salaries) to SWO or SP. It is like the
entity pays cash and the same was subsequently invested.

3. With vesting period:

Total fair value/compensation(100Tx15) 1,500,000/2=750,000

Dec.31,2010:
 Salaries—SO 750,000
SWO 750,000
2011:
Salaries—SO 750,000
SWO 750,000
2012:
Cash 6,000,000
SWO 1,500,000
OS 5,000,000
SP 2,500,000

*So outstanding account is reported as component of share premium. IF not subsequently

exercised, SO shall be adjusted and credited to SP

2010:
No of employees 500
Employees who left 2010 (30)
Expected (30)
Employees entitled to SO 440
SO X100
Total SO 4,000
Fair value 30
Total compensation 1,320,000/3=440,000

2011:
No of employees 500
2010 (30)
2011 (28)
Expected (25)
417x100=41,700x30=1,251,000/3x2=834,000-
440,000=394,000
2012:
No of employees 500
2010 (30)
2011 (28)
2012 (22)
420x100=42,000x30=1,260,000-834,000=426,000

4. Intrinsic value:
MV(OS). dec.31,2010 150
Option price (125)
25x10,000=250,000/2=125,000

2011 180
(125)
55x10,000=550,000-125,000=425,000(end of vesting period)
Dec 31,2012(exercise date) 200
2011 (180)
Increase in intrinsic 20x10,000=200,000(additional compensation)
2010 salaries-SO 125,000
SO 125,000
2011 Salaries-SO 425,000
SOO 425,000
2012 Salaries 200,000
SOO 200,000

Execise:
Cash 1,250,000
SOO 750,000
OS 1,000,000
SP 1,000,000

5. If SO are canceled or settled during the vesting period, it is as if the vesting date had been
brought forward and the balance of the fair value not yet expensed is recognized
immediately
Total compensation 4,000,000
Cumulative 2010 and 2011 2,050,000
Compensation expense 2012 1,950,000

Exercise in 2012
Cash 3,000,000
SOO 4,000,000
SC 2,500,000
SP 4,500,000

6. If it is settled in cash:
SOO 2,050,000
Salaries (expense) 450,000
Cash 2,500,000
7. Share appreciation creates liability.
8. During the vesting period from the date of grant to the exercise date, if there are increases
or decreases in the market value of share over a predetermined price for a given number of
shares, the liability for the compensation shall be adjusted. The predetermined price is the
beginning of the earliest period.
9. Market value of shares at the end of the period less the predetermined price times the no.
of shares equals the total compensation to be distributed equally over the service period. If
there is no increase at the end of the service period, the entry is:
Accrued salaries payable
Gain on reversal of SAR
10. If the entity has the choice of settlement, entity shall account for the instrument either as
a liability or equity. If the employee has the right to choose the settlement, entity is deemed
to have issued a compound financial instrument. It shall be accounted for as partly liability
(cash alternative) and partly equity (share alternative)
11. Fair value of share alternative(12,000x48) 576,000
Fair value of liability on grant date,jan1(10,000x51) 510,000
Equity component 66,000
12. Cash alternative:
Accrued salaries payable 650,000(65x10,000)
Share options outstanding 66,000
Cash 650,000
Share premium 66,000

Share alternative:
13. Accrued salaries payable 650,000
Share options outstanding 66,000
Share capital 300,000
Share premium 416,000

14. Fair value of the equipment purchased 5,000,000

Fair value of the liability(40Tx110) 4,400,000
Equity component 600,000

Equipment 5,000,000
Accounts payable 4,400,000
Share options outstanding 600,000

Cash alternative(market price is 130,dec.31)

Accounts payable 4,400,000
Share options outstanding 600,000
Interest expense 800,000
Cash 5,200,000
Share premium 600,000

Share alternative:
Accounts payable 4,400,000
Share options outstanding 600,000
SC 2,500,000
Share premium 2,500,000