ACCT 1063 (Intermediate Accounting 3) Week 7: SHAREHOLDERS! EQUITY |. RA 11232, Revised Corporation Code Accounting for share capita, classes of share capita, par and no par shares . Treasury shares, reacquitition, reissuance and retirement Delinguent Subscription Donated Capital Retained Earnings Topic: meaese Learning Outcomes: ‘At the end ef this module, you are expected tos a. Understand the components of shareholders’ equity b. Know the recognition and measurement of share capital Explain and prepare entries for treasury shares, reacquisition, reissuance and retirement of treasury shares ‘Account for stock rights, convertible preference shares and donated capital Explain retained earnings and to compute dividend payments LEARNING CONTE! Definition of a Corporation ‘A corporation Is 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. RA 11232 otherwise known as the Revised Corporation Code of the Philippines (RCC) wos eigned into low by Pres. Duterte on February 20, 2019 and took effect on February 23, 2019, updates the almost 39-year eld Corporation code of the Philippines to ‘e:se the burden of doing business in the Philipines. ‘Some of the salient features of the revised code that are applicable to the lesson at hand are as follows: ‘© Ramaval of the minimum of five indivduals in corporate formation Creation of a One Person Corporation (0?C} reducing the 5 minimum incorporators to 1 ‘Stork Corporations can be formed without minimum cepitalization requirement Removal of the 25-25 rule for paid up capital Perpetual existence of corporations ‘The Philippine Corporation Code defines a Corporation, creates a corporation and net in any way created by mere agreement Lnlike the contract of partnership. 2>>> a Carparation i ereatad by operation of lave ‘You may also want to visit this website for a better understanding of the Corporation Cede of the Philippines: 1s (Mlanphil nex/statates/eepacts/ta2019/ra_ 11722 2019 him! ACCT 1063: Intermediate Accounting 3. 2 Scanned with CamScannerBOOKS and records of a Corporation Minutes Book contains the minutes of the meetings of the directors and shareholders ‘Stocks and Transfer Book | is arecord of the names of shareholders, installments paid and unpaid by the, shareholders and dates of payment, transfer of share and dates thereof, by whom and to whom made. Books of Accounts represent the record of all business transactions, the journal and the ledger ‘Subscription Book is a book of printed blank subscriptions ‘Shareholders’ Ledger is a subsidiary for the share capital issued reporting the number of shares, issued to each shareholder Subscriber's ledger is a subsidiary for the subscriptions receivable account reporting the individual subscription of the subscribers Sharecertifieate book __| is a book of blank share certificates ‘Treatment of ORGANIZATION COSTS ‘Organization Costs represent costs Incurred in forming or organizing tre corperation that inclades the following: * Legal fees ‘+ Incorporation fees ‘+ share Issuance casts >>> printing of share ceruiicates, cost of stock transfer book, seal of the corparation, underwriting and promotional fees, accounting and legal fees related to share issuance PAS 38 provide: that startup cests such as legal and secretarial costs shall he recognized as expense immediately when incurred except for share Issuance costs. COMPOSITION OF THE SHAREHOLDERS’ EQUITY ‘Shareholders Equity ~is the residual | Composition of Shareholders’ Share capital may be: interest of the owners inthe net Equity «Par value share >> with value fixed in assets ofthe measuredbythe excess | Share capital the Articles of Incorporation and of assets over labiMties ASSETS © + Retained earnings appearing on the share certificate csv pammcmmmaimacaahe Other components of No par value share >> no amount Equity appearing on its face but it has always a Treasury Shares sated value or Issued value. Minimum consideration for no par value shares is. Ps Definition of LEGAL CAPITAL Legal Capital is that portion of paid-in capital which cannot be returned to the shareheldersin any form during the LUfetime of the cerporation €@) In case of par value share, legal capitalis computed as the | b) In case of no par value shares, legal capitals the total aggregate par value of shores issued and subscribed consideration received from the shareholders Including the excess over par or stated value ‘Trust Fund Doctrine >» sharo capita is considered as trust fund for the protection of sharcholders >> illegal to return legal capital >> illegal to declare dividends if there is a deficit ACCT 1063: Intermediate Accounting 3 3 Scanned with CamScannerL Ordinary Share Capital {Common Stock) ‘CLASSES OF SHARES 2. Preference Share Capital Preferred Stock) ACCOUNTING FOR SHARE CAPITAL ‘Memorandum Method a memorandum entry is prepared to recognize the capital authorization Exompie of memorandum entry: The outhorized copitalization of PXXX divided into shares of with por value of P Journal Entry Method ‘Pauthorized capitalization is recorded by journal entry: Debit: Unissued share capital Px Credit: Authorized Share Capital P xx ‘Note that the Memorandum Methods the preferred method and will be used for subsequent examples. Mlustrative Example 1: Computation of Legal Capital ‘Abacus Corporation provided the following Information at year end: Preference Share capital, P100 par Share Premium - preference share Ordinary share capital, P10 par Share premium ordinary share Retained Earnings Notes Payable Subseription Receivable- ordinary shore 2,300,000 805,000 Computation of Legal Capital: 5,250,000 2,750,000 Preference Share capital 2,300,000 1,900,000 Ordinary Share Capital 5,250,000 4,000,000 subscribed ordinary share capital _ 400,000.00, 400,000 Total Legal Capital 7,950,000 Note: In case of par value share, legal capital is the total amount of stated value issued and subscribed plus any excess over the stated value is accordance with the Comoration code of the Philippines. Mlustrative Example 2: Computation of Shareholders’ Equi ‘The following Information were derived from the books of ACE Corporation: Authorized share capital Unissued share capital Subscribed share capital Subscription receivable Share premium Retained Earnings Unappropriated Retained Earning Appropriated Revaluation Surplus ‘Treasury Shares, at cost Solutior Authorized share capital Unissued share capital 000,000) 5,000,000 Issued share capital 3,000,000 2,000,000 Subscribed share capital 1,000,000 1,000,000 Subscription receivable __(400.000)_ 600,000 490,000 Share premium 500,000 500,000 Retained Earnings: 600,000, Unappropriated 600,000 300,000 Appropriated 300,600. 900,000 200,000 Revaluation Surplus 200,000 100,000 Total 5,200,000 Troasury Shares (100,000), Sharcholdersti Equity 3,100,000 Notes on illustrative Example 2: ACCT 1063: Intermediate Accounting 3 4 Scanned with CamScanner“The subscription receivable was presented as a deduction from the related subscribed share capital. Subscription receivable collectible within a period of one year is presented as Current Asset. Mlustrative Example 3: Shares Issued at a discount If shares are issued at below par or below stated value, the shares are said to be issued at a discount. Take note that this is not allowed under the Corporation Code. It is not considered asa loss but an investment deficiency where the shareholder is held accountable forthe said deficiency, ‘Assume that 10,000 shares of P100 par value are issued for P800,000 cash. Journal Entry: Cash Discount on share capital Share capital ‘800,000 200,000 32,000,000 SHARE issuances for Noncash considerations in the order of priority, the share capital account is credited for noncash considerations like tangible property, Intangible property and services. 1. Fair value of the noncash consideration received 2. Fair value of the shares issued 3. Par value of the shares issued ‘Watered Share is the term used for share capital issued for Insufficient or inadequate consideration. ‘An example is 2 parcel of land with far value of P00, 000 was exchanged for 10,000 shares of P100 par value. To create a water in the share the transaction is recorded as: Debit: Land 1,000,000 Credit: Share Capital 1,000.00 To correct the ilegal entry, the discount should be properly recorded. ‘Secret Reserve arises when asset hs understated or lability i= overstated. Itis the reverse of Watered Share. = Excessive provision for depreciation, dealetion, amortization and doubtful accounts ‘© Exoassive write down of receivables, Inventories and Investments. Capital expenditures are recorded as outright expense ‘= Fictitious labilites are recorded Delinquent Subscription Highest bidder >> the person willing to pay for the amount of delinquent subscription for the smallest number of shares. Offer price consist of the following: © Outstanding balance of the subscription + Accrued interest Incidental expenses like advertising and cost ofsale Mlustrative Example 04: Delinquent Subscriptions Cyrus Cloud subscribed for 10,000 shares at par of P100 giving P600,000 as down payment. The balance of P400,000 became due but Mr. Cloud failed to pay his balance and the subscription was declared as delinquent. An auction was conducted to sell the shares. The offer price was P450,000 including the ‘outstanding balance of P400,000, Interest of P20,000, and Expenses on the delinquency sale of P30,000. There are three qualified bidders who are willing to pay the offer price: A__=4,500shares B = 5,000 shares C= 6,000 shares ACCT 1063: Intermediate Accounting 3 5 Scanned with CamScanner‘The bid was awarded to A, the highest bidder. The distribution of shares will be X (the original subscriber) will get 5,500 shares and the winning bidder A will get 4,500 shares. The related Journal entries are: 1 To record the subscription of X “The offer price consist of the following: Subscription Receivable 3,000,000 ‘Subscription 400,000 Subscribed Share Capital 41000000 interest 120,000 Expenses 30,000 2. To record the subscription of K ‘Total Offer Price 450,090, cash 600,000 To record the awarding ofthe ‘Subscription Receivable 600900 5 bidtoA: cash 450,000 ‘The subscription balance is called and X 3 defaults Subscription Receivable 400,000 0 journal entry Interest income 20,000 Advances on. Delinquency Sale 30,000 ‘To record the expenses related to the delinquent 4 subscription: Advanceson delinquency sale 30,000 6 Subscribed Share Capital 3,000,000 cath 20,000, Share Copital 41,000,000, Callable Preference Shares (equity) + Equity instrument * Nodefinite redemption date Dependent upon the eal of the bsver Callamount > original issue price Excess of call price vs Par value: Charged to Share Premiuin-original bbsvance of PS * Retained carnings is insutficent) Redeemable Preference sharesiliablity) ‘¢ mandatory redemation by the issuer for a fixed or determinable amount ata fature date night torequire issuer to redcem the instrument fora fixed amount at a future date classified as curent or noncurrent iabitty depending on the redemption date PAS 32 provides that the difference batweon the redemption price vsthe financial lability is accounted for as Gain or Losson Redemption Convertible Preference Share © right to exchanges shares for ‘other securities of the issuing corporation ‘© may convert PS to ordinary shares ‘+ may convert prolerence shares nto bonds Mlustrative Example 05: Convertible Preference Share Given Information Preference Share Capital, 10,000 shares, P00 par Ordinary Share capital, 200,000 41,000,000 Entry Preference Share Capital Share Premium: PS Case 1-PS converted to ordinary shares in the ration of 2:3 1,000,000 200,000 ACCT 1083: Intermediate Accounting? 6 Scanned with CamScannershares, authorized, 100,000 shares ‘Orcinary Share (20,000330) 900,000 Issued, P30 par 2,000,000 Share Premium - Ordnary 300,000 Share Premium PS 200,000 | case2-PS converted to Ordinary shares inthe ratio of 1:5, Share Premium -O 100,000 | entry Preference share Capital 2,000,000 Retained Earnings 2.000.000 Share Prernium-PS 200,000 Retained Earning 30,000 Ordinary Share {50,000%30) 1,506,000 DONATED CAPITAL Gifts received by the corporation from nonreciprocal transactions, May come from the following sources: Donations from shareholders in the form of Cash, Noncash Assets and the corporation's own shares Denatians from the government >> considered 2¢ government grants Donations from other sources >> recognized as income when: 1. The conditions attached to the donation are fulfilled or reasonably expected to be fulfilled 2. The donation becomes receivable 3. Theerterla forasset recognition are met Donations from Shareholders maybe in the following forms: a) Cash= recorded at the amount of cash received b)Noncash assets = recorded at the par value of the noncash assets ©) Entity’'s Own shares = initially recorded as a memo entry. Donated Capital is recorded only upon reissuance of the donated shares. Presentation of Donated Capital in the FS = Shareholders equity under Share Premium, "TREASURY SHARES >>> are the corporalion’s own shaves that are repurchased but notretiredi iv alowed only T ‘There Is sufftcient balance in the Unappropriated Retained Earnings account. ‘ACCOUNTING FOR TREASURY SHARES. Reacquisition Relssuance of treasury shares Retirement of treasury shares ¥ Cost method is used AC COSt Y Gain fi par value is more than ¥ Cash acquisition = cost Is amount of | ¥ At above cost = excess is treated | cost, credit Share Premium cash paid as Share Premium = 1S, Treasury Y Noncash considerations = cost is | ¥ At below cost = charged in the | ¥ Lass fi cost is more then the the carrying amount of the noneash | order of priori parvalue, asset surrendered. 1. Share Premium ~ 15 same in case of a loss on reti‘ement, dass charge the following by prlority order 2, Retained Earnings 2. Share premium original Issuance 2. Share premium —treasury shares 3._Retained Earnings Presentation of Treasury Shares Diselosure Requirement related to Treasury Shares PAS 32 provides that the cost af Treasury Shares shall be ~ umber of shares held in treasury deducted from Total Sharehoider’s Equity restriction on retained earnings should be equal to the cost of the Treasury Shares RIGHTS ISSUE Right of Preemption or preemptive right = right of exiting shareholder: to purchase newly baued shares before tls Fssued tothe general public, meant to protect existing shareholders from a dilution of control. Preemptive rights are set forth in the corporate ACCT 1063: Intermediate Accounting 3. 7 Scanned with CamScannerGane Stock Rignts ft Ise 10 exsting shareholders in relation to their preemptive rights Share warrants = or stock warrants are certificates or instruments evidencing ownership over the rights tse Rights Issue granted to cssting sharchalderstn enable ther to acquire new shares at speed prea during = Speeitied time. ‘Accounting for Stock Rights Issuance of Rights Expiration of Fights | Exercise of Rights ¥ memorandum entry 1s needed to | ¥ onlya ¥ anentry is made only when rights re indicate number of rights issued and | memorandum exercised or recalled number of shares that can be| entryisneeded | ¥_ if the stock rights arc recalled, the purchased thru the exercise of rights consideration paid is debited to Share Y warrants are issued without Premium. consideration Proferance Shares with Detachable Warrants ‘Warrants may be included in the Issuance of different types of secunties to improve market performance, When share warrants are issued together with preference shares, there is actually salesof two instruments, the preference shares and the warrants Accounting for the single price receive for the share and warrant will be allocated between their fair market value Ilustrative Example 06: Preference Share with detachable stock warrants ‘An entity issued 20,000 preference shares of P100 par value for P3,250,000 with 20,000 warrants to acquire 10,000, P50 par value ordinary shares at P60/share. Onihe aie oT ane, ho HaTT TT Touran record the uance ofthe Preven Freerence aren waian PitO Sanrandnarace Warae Fa ch 3,250,000 Sy aes Preference Share Capital (20,000 ‘value Fraction tesa peice | P2100) 2,000,000 prckerene: Shore (20,000 120) zapn900 74/20 3,0004 Shere Preriay FS 1.000.000 rams 00000410) _73 emasoatenei® aia. 226 298 o.nding 230,00 ‘Assume that the share warrants aa exercised requiring csuance of 10,000 ordinary shares, the Journal entry wi ‘Cash (10,000 x P60) 600,000 Shore Warrant: Outstanding 250,000 Ordinary Shares Capital /10,000« P50) 500,000 ‘Shave Promiven 350,000, Note: If the share warrants are not exercised, the share warrants outstanding account is closed and credited to Share Premium SHARE SPLITS of STOCK SPLITS ‘Share split may be in the form of: Scanned with CamScannerSplit up > Split up or share spit proper > Split down or reverse share split Wi Before and after the spit, share capital remains the same No formal entry is required to record a spit, Memorandum entry will suffice > Original shares are cancelled and replaced by larger number of shares with reduction Id par value or stated value Split down » Original sharesare cancelled and replaced by a smaller number of shares with increase in par value or stated value RETAINED EARNINGS Retained Earnings are cumulativebalances of the following: % Net Income of Loss for the period Dividend Distribution Prior Perlod Errors Changes in Accounting policy Reclassification of some components of CCI Other Capital adjustments vivre Unappropriated Retained Earnings>> free and available For dividends >> restricted | Appropriated Retained Eamings ‘Dividends Impertant dates: re ditibutions of earningsto the owners Date of dectaration Date of Record Date of Payment Dividends out of Earnings + Cashdividends Property Dwvidends ** Uabiiey anadends > bond and serip ‘Share dividend or borus issuo Cash di * Acertain amount of pesos per share + Acertain percent of the par or stated value Accounting issues regarding property dividends: 1. Measurement of the property dividends payable 2. Measurement of the noncash asset distributed idends are the most common type of dividend that can be expressed as follows: Property dividends or dividends in kind are considered as distribution of noncash assets to owners. Measurement of Property Dividends Payable ¥- Dividend payable is intially recognized at Far Value of the noncash asset at the date of declaration Adjusted at end of each reporting periog, and at date of settlement, Y The offsetting debitor credit is thru equity or directly to Retained Earnings Settlement of Property Dividends Payable % The differcnec between carrying amount of the rhoncash asset and carrying amount of dividends payable shall be recognized as profit or lost ‘Measurement of Noncash asset distributed > Lower of carrying amount and fair value less cost to distribute (PFRS 5 par 15A) It the fairvalue less cost to distribute fs lower than the carrying amount at the end of reporting period, the difference Is accounted for as Impairment loss END OF DISCUSSION References: 1. Intermediate Accounting 2 by Zeus Vernon B. Millan ACCT 1063: Intermediate Accounting 3 Scanned with CamScanner 9