Course Materials-IA3-Week 4-M. Manayao

DISCLAIMER: The information content provided in this course material is designed to provide helpful
information on the subjects discussed. Some information is compiled from different materials and
summarized from different books. Some information is based on contributors' perspective and
understanding. References are provided for informational purposes only and do not constitute
endorsement of websites or other sources. Readers should be aware that the websites/electronic
references listed in this course material may change. Hence, the contributors do not claim any
information presented in the materials and do not reflect their own work.
Subject Code: BAIACC3X

Subject Title: Intermediate Accounting 3
Subject Description: This course will introduce the concepts of shareholder’s equity, some
special topics and preparation of financial statements. It will specifically
discuss the application of accounting standards on shareholder’s equity,
special topics on employee benefits and the preparation of financial
statements.
No. of Units: 3
Class Schedule: ACT201: Tuesday 8:00 am – 12:00 pm
ACT202: Friday 8:00 am – 12:00 pm
Course Learning Outcomes:

At the end of this course, the student will be able to:
1. Recognize, measure, and present non-current liabilities and equity in accordance with applicable
PFRS
2. Describe the principles and standards underlying the recognition, measurement, presentation, and
disclosure requirements of the other liabilities and shareholders’ equity in statement of financial
position.
3. Prepare a complete set of financial statements in accordance with applicable PFRS.
4. Apply acquired knowledge and skills to pass professional licensure / certification examinations.
About the Instructor:

PROF. MICHAEL ANGELO M. MANAYAO, CPA, MBA
 Professional Lecturer, Baliwag Polytechnci College
 Master in Business Administration – Far Eastern University (2021)
 Graduated from Baliwag Polytechnic College (Cum Laude) – Batch 2018
 Member, PICPA Bulacan
SM Baliwag Complex, Dona Remedios Trinidad Highway, Brgy. Pagala, Baliwag, Bulacan
(+63) 927-533-0342 – (+63) 923-949-5265 admissions-nubaliwag@nu.edu.ph
MODULE 4 – SHAREHOLDERS’ EQUITY
I. Learning Outcomes
 To know the elements of shareholders' equity and the equivalent IFRS term.
 To distinguish ordinary share capital and preference share capital.
 To know the recognition and measurement of share capital
 To understand the accounting treatment of share issuance cost and cost of public offering of
shares.
 To know the recognition of a delinquent subscription.
II. Content
Concept 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.
 A corporation is a legal or juridical person with a personality separate and apart from the individual
members of shareholders.
 The corporation is not in fact and in reality a person but the law treats it as though it were a person
by process of fiction.
Organization of a Corporation
 A corporation is created by operation of law.
This means that a corporation cannot come into existence by mere agreement of parties as in the case
of a business partnership. A corporation requires the authority and grant from the state.
 In the Philippines, the general law which governs the creation of private corporations is Republic
Act 11232 otherwise known as Revised Corporation Code.
 Section 10 of the Revised Corporation Code provides that any person, partnership, association
or corporation, simply or jointly with others but not more than fifteen in number may organize
a corporation for any lawful purpose of purposes.
 Provided, that natural persons who are licensed to practice a profession and partnerships or
associations organized for the purpose of practicing a profession shall not be allowed to organize
as a corporation unless otherwise provided under special laws.
 A corporation with a single shareholder is considered a One Person Corporation.
 Section 3 provides that corporations formed or organized may be stock or nonstock
corporations. Stock corporations are those which have capital stock divided into shares. All
other corporations are nonstock corporations
Contents of Articles of Incorporation
All corporations shall file with the Securities and Exchange Commission the Articles of Incorporation
containing substantially the following matters:
a. The name of the corporation.
b. The purpose or purposes for which the corporation is formed.
c. The place where the principal office of the corporation is to be established or located which place
must be within the Philippines.
d. The term of existence if the corporation has not elected perpetual existence.
e. The names, nationalities and residence addresses of the incorporators.
f. The number of directors which shall not be more than fifteen or the number of trustees which may
be more than fifteen.
g. The names, nationalities and residence addresses of persons who shall act as directors until the first
regular directors are duly elected.
h. If it be a stock corporation, the amount of authorized capital stock, and the number of shares into
which it is divided, the par value of each share, names, nationalities and residence addresses of
original subscribers, amount subscribed and paid by each on the subscription.
If the share has no par value, the Articles need state only the number of shares but the fact that the
share is without par value shall be stated therein.
i. If it be a nonstock corporation, the amount of its capital, the names, nationalities and residence
addresses of the contributors and amount contributed by each.
j. Such other matters consistent with law and which the incorporators may deem necessary and
convenient.
Certificate of Incorporation
 The corporation commences to have juridical personality and legal existence only from the moment
the Securities and Exchange Commission issues to the incorporators a certificate of incorporation.
 Such certificate is a final determination of the corporation's right to do business.
 The issuance of the certificate of incorporation calls the corporation to being but it is not yet ready
to do business until it is organized
 Formal organization requires the adoption of bylaws which shall be filed with the Securities and
Exchange Commission
ByLaws
Bylaws may be defined as the rules of action adopted by the corporation for its internal government and
for the government of its officers, shareholders or members.
Among others, a private corporation may provide the following in its bylaws:
a. The time, place and manner of calling and conducting regular or special meeting of directors,
trustees, shareholders or members
b. The number, qualifications, duties, responsibilities, length of office and compensation of directors
or trustees
c. The appointment, duties, responsibilities, length of office and compensation of corporate officers,
other than directors or trustees
d. The manner of issuing stock certificates.
Minimum Capital Stock

Section 12 of the Revised Corporation Code provides that stock corporation shall not be required to have
a minimum capital stock, except as otherwise specifically provided by special law.
Components of Corporation
a. Corporators are those who compose the corporation whether shareholders or members or both.
b. Incorporators are those corporators mentioned in the articles of incorporation as originally forming
and composing the corporation.
c. Shareholders or stockholders are owners of shares in a stock corporation.
Under the Revised Corporation Code, shareholders and incorporators may be natural or artificial
persons.
d. Members are corporators of a nonstock corporation.
Books and Records of a Corporation

a. Minutes book contains the minutes of the meetings of the directors and shareholders.
b. Stock and transfer book is a record of the names of shareholders, installments paid and unpaid by
shareholders and dates of payment, any transfer of share and dates thereof, by whom and to whom
made.
c. Books of accounts represent the record of all business transactions. The books of accounts include
normally the journal and the ledger.
d. Subscription book is a book of printed blank subscription.
e. Shareholders' ledger is a subsidiary for the share capital issued reporting the number of shares issued
to each shareholder.
f. Subscribers' ledger is a subsidiary for the subscriptions receivable account reporting the individual
subscription of the subscribers.
g. Share certificate book is a book of printed blank share certificates.
Organization Cost
As the name suggests, the term “organization cost represents costs incurred in forming or organizing a
corporation.
Specifically, organization costs include:
a. Legal fees in connection with the incorporation, such as drafting of articles of incorporation and by-
laws and corporation registration
b. Incorporation fees
c. Share issuance costs, such as printing of share certificates, cost of stock and transfer book, seal of
corporation, underwriting and promotional fees, accounting and legal fees related to share issuance.
PAS 38, paragraph 69, provides that start-up costs which include legal and secretarial costs in
establishing a legal entity shall be recognized as expense when incurred.
Accordingly, it is now clear-cut that organization cost shall be expensed immediately with the exception
of share issuance costs which will be discussed later.
Shareholders’ Equity
Shareholders' equity or stockholders' equity is the residual interest of owners in the net assets of a
corporation measured by the excess of assets over liabilities.
Generally, the elements constituting shareholders' equity with their equivalent IFRS term are:
Philippine term IAS term

Capital stock Share capital
Subscribed capital stock Subscribed share capital
Common stock Ordinary share capital
Preferred stock Preference share capital
Additional paid in capital Share premium
Retained earnings (deficit) Accumulated profits (losses)
Retained earnings appropriated Appropriation reserve
Revaluation surplus Revaluation reserve
Treasury stock Treasury share
Definition of Terms
 Share capital is the portion of the paid in capital representing the total par or stated value of the
shares issued.
 Subscribed share capital is the portion of the authorized share capital that has been subscribed but
not yet fully paid and therefore still unissued. The subscribed share capital is reported minus
subscription receivable not collectible currently.
 Share premium is the portion of the paid in capital representing 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 cost
c. Donated capital
d. Issuance of share warrants
e. Distribution of share dividends
f. Quasi-reorganization and recapitalization
 Retained earnings represent the cumulative balance of periodic earnings, dividend distributions,
prior period errors and other capital adjustments.
 Revaluation surplus is the excess of revalued amount over the carrying amount of the revalued asset.
 Treasury shares are the corporation's own shares that have been issued and then reacquired but not
canceled.
Capital Stock
The term capital stock 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, either in money or property or services, at
the organization of the corporation, or afterwards and upon which the corporation is to conduct its
operations.
Actually, the amount fixed in the articles of incorporation is called the authorized share capital.
The share capital is divided into shares evidenced by a share certificate.
A share represents the interest or right of a shareholder in the corporation. The four rights of a shareholder
are:
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 preemption or share right.
d. To share in the net assets of the corporation upon liquidation
A share certificate is the instrument or document that evidences the ownership of a share.
As a general rule, a share certificate is issued only when the subscription is fully paid.
Par Value and No Par Value Shares

 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. The minimum stated value of no-par share is P5.
Ordinary Share Capital

If there is only one class of share capital, it necessarily is ordinary share.
Ordinary share is so called because the ordinary shareholders have the same rights and privileges.
The ordinary shareholders enjoy no preference over each other.
Generally, the ordinary share gives the owner the right to vote, to share in the income, and in the event
of liquidation, to share in all assets after satisfying creditors' and preference shareholders' claims.
The ordinary shareholders have no fixed or specific return on investment.
Their financial reward is dependent on the operations of the entity.
If the entity is exceptionally profitable, the holdings of ordinary shareholders will become more valuable.
Conversely, if an entity suffers losses, the value of the ordinary shareholders' equity will be reduced as
fewer assets are available to satisfy residual claims.
Preference Share Capital

Preference share is so called because of the preferences granted to the shareholders.
The preferences usually pertain to the preference shareholders' claims on dividends and net assets in the
event of liquidation.
The preference shareholders have only a limited or fixed return on investment.
For example, a holder of ₱100 par value, 12% preference share is entitled to an annual dividend, if
declared, of 12% of ₱100 or ₱12.
Legal Capital
Legal capital is that portion of the paid in capital arising from issuance of share capital which cannot be
returned to the shareholders in any form during the lifetime of the corporation
The amount of legal capital is determined as:

a. In the case of par value share, legal capital is the aggregate par value of the shares issued and
subscribed
b. In the case of no-par value share, legal capital is the total consideration received from shareholders
including the excess over the stated value.
Legal capital is legal concept. It is that portion of the paid in capital arising from the issuance of share
capital which cannot be returned to the shareholders in any form during the lifetime of the corporation.
NOTE: Subscription receivable is ignored in computing legal capital.
Trust Fund Doctrine
The trust fund doctrine holds that the share capital of a corporation is considered as trust fund for the
protection of creditors.
Consequently, it is illegal to return such legal capital to shareholders during the lifetime of the
corporation.
However, the corporation can pay dividends to shareholders but limited only to the retained earnings
balance.
Accordingly, it is illegal to pay dividends if the entity has a deficit.
Accounting for Share Capital

a. Memorandum method - No entry is made to record the authorized share capital. Only a memorandum
is made for the total authorized share capital.
When share capital is issued, it is credited to the share capital account.
b. Journal entry method - The authorization to issue share capital is recorded by debiting unissued
share capital and crediting authorized share capital.
When share capital is issued, it is credited to the unissued share capital account.
SUMMARY OF JOURNAL ENTRIES

TRANSACTIONS MEMORANDUM ENTRY METHOD JOURNAL ENTRY METHOD
Unissued share capital xx

Authorization Date NO ENTRY
Authorized share capital xx
Cash xx Cash xx
Issuance Date
Share Capital xx Unissued share capital xx
Subscription Receivable xx Subscription Receivable xx

Subscription Date
Subscribed Share Capital xx Subscribed Share Capital xx
Cash xx Cash xx
Collection Date (Partial)
Subscription Receivable xx Subscription Receivable xx
Issuance Date of Previous Cash xx Cash xx

Subscription (upon full
collection) Share Capital xx Unissued share capital xx
Basically, the main difference of the two methods is the existence of share capital account. Share capital
account is a maintained account under the memorandum entry method. On the other hand, share capital
account is a residual account under the journal entry method (share capital = authorized share capital –
balance of unissued share capital).
Illustration – Memorandum Entry

1. An entity was authorized to issue share capital of ₱4,000,000 divided into 40,000 shares with par
value of ₱100.
Memo entry - The entity was authorized to issue share capital of ₱4,000,000, divided into 40,000
shares with par value of ₱100.
2. Received subscription to 10,000 shares at par.

Subscription receivable 1,000,000
Subscribed share capital 1,000,000
3. Collected 25% on the above subscription.

Cash 250,000
Subscription receivable 250,000
4. Received full payment for 6,000 shares originally subscribed.

Cash 450,000
Subscription price (6,000 x 100) 600,000

Less: Partial payment (25% x 600,000) 150,000
Balance 450,000
5. Issued the share certificates for 6,000 shares which are fully paid.
Subscribed share capital 600,000
Share capital 600,000
The Revised Corporation Code provides that shares are issued only when subscriptions are fully
paid.
6. Received a cash subscription for 5,000 shares at par.

Cash 500,000
Share capital 500,000
A cash subscription is directly credited to the share capital account. It is not necessary to set up a
subscription receivable account.
Statement presentation
If a statement of financial position is prepared, the share capital would be shown under shareholders'
equity.
Share capital, ₱100 par, 40,000 shares authorized,
11,000 shares issued 1,100,000
Subscribed share capital, 4,000 shares 400,000
Subscription receivable (300,000)
Shareholders' equity 1,200,000
Illustration – Journal Entry Method

Assume the same information in the previous illustration
1. Unissued share capital 4,000,000
Authorized share capital 4,000,000
2. Subscription receivable 1,000,000

3. Cash 250,000
4. Cash 450,000
5. Subscribed share capital 600,000

Unissued share capital 600,000
Here lies the difference. The issuance of share capital is credited to the unissued share capital
account.
6. Cash 500,000
Unissued share capital 500,000
Statement presentation
Authorized share capital, ₱100 par, 40,000 shares 4,000,000
Unissued share capital, 29,000 shares (2,900,000)
Issued share capital 1,100,000
Subscribed share capital, 4,000 shares 400,000
Subscription receivable (300,000)
Shareholders' equity 1,200,000
Issuance of Share Capital
The Revised Corporation Code provides that a share shall not be issued for a consideration less than the
par or stated value.
The law further provides that shares without par value cannot be issued for less than ₱5.
Thus, in the Philippines, the no-par share must have a state value of at least ₱5.
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.
For example, if 10,000 ordinary shares of ₱100 par value are sold at ₱150 per share, the journal entry is:
Cash 1,500,000
Ordinary share capital (10,000 x ₱100) 1,000,000
Share premium 500,000
Observe that the excess over the par value is credited to share premium.
When shares without par value are sold, the proceeds shall be credited to the share capital account to the
extent of the stated value and any excess is credited to share premium.
For example, if 20,000 ordinary shares of ₱50 stated value are issued at ₱80 per share, the journal entry
is:
Cash 1,600,000
Ordinary share capital (20,000 x ₱50) 1,000,000
Shares Issued at Discount

When shares are sold at a price which is below par or stated value, they are said to be issued at a discount.
The Revised Corporation Code prohibits the issue of share at a discount.
Thus, when a share is sold at a discount, the discount is not considered a loss to the issuing corporation
but the shareholder is held liable therefor.
Note that the issue itself is not void but the agreement that the share shall be paid for less than par value
or stated value is illegal and cannot be enforced.
The issue of the share therefore is not canceled but the shareholder must pay for the discount. This is
called the discount liability of the shareholder.
Since a discount is an investment deficiency, it should be accounted for separately.
For example, if 10,000 shares of ₱100 par value are sold for ₱800,000 cash, the journal entry is:
Cash 800,000
Discount on share capital 200,000
Share capital 1,000,000
The account discount on share capital is a deduction from total shareholders' equity.
It should be pointed out that the prohibition to issue share at a discount refers to the original issue
of a share but not to a subsequent transfer of such share by the corporation.
Hence, treasury shares may be sold or reissued for less than the par value or stated value without violating
the provision of the law.
Treasury shares will be discussed in a later chapter.
Issuance of Share Capital for Non-cash Consideration

Accordingly, if share capital is issued for noncash consideration such as tangible property, intangible
property and services, the share capital is recorded 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 of the shares issued
Illustration
An entity issued 10,000 ordinary shares of ₱100 par value in exchange for land with a fair value of
₱1,500,000.
The fair value of the shares issued is ₱180 per share or a total of ₱1,800,000.
If the fair value of the land is used, the journal entry is:
Land 1,500,000
Ordinary share capital 1,000,000
If the fair value of the shares is used, the journal entry is:
Land 1,800,000
If the par value of the shares is used, the journal entry is:
Land 1,000,000
Issuance of Share Capital for Services

Shares may be issued for services as long as the services are already rendered
In conformity with the legal provision and PFRS 2, if shares are issued for services, the shares shall be
recorded at the fair value of such services or fair value of the shares issued, whichever is reliably
determinable.
Illustration
An entity issued 1,000 ordinary shares of ₱100 par value to lawyers for their legal services in getting the
corporation organized.
The fair value of such services is reliably determined to be ₱120,000.

Legal expenses 120,000
Ordinary share capital 100,000
Share Issuance Costs

Share issuance costs are direct costs to sell share capital which normally include legal fees, CPA fees,
underwriting fees, commissions, cost of printing certificates, documentary stamps, filing fees with SEC
and cost of advertising and promotion or newspaper publication fee.
PAS 32, paragraph 37, provides that transaction costs that are directly attributable to the issuance of new
shares shall be deducted from equity, net of any related income tax benefit.
In other words, share issuance costs shall be debited to 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" to be reported as a contra equity
account as a deduction from the following in the order of priority:
a. Share premium from previous share issuance
b. Retained earnings
Costs of Public Offering of Shares
The Philippine Interpretations Committee 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 as costs of an equity transaction since no equity instrument
has been issued. Therefore, such costs are recognized immediately as expense when incurred.
Costs of listing shares include the following:

a. Road show presentation
b. Public relations consultant's fees
Joint Costs
PAS 32, paragraph 38, requires that transaction costs that relate jointly to the concurrent listing and
issuance of new between the newly issued and listed shares, and the newly shares, and listing of old
existing shares shall be allocated listed old existing shares.
However, PAS 32 provides no further guidance as to what basis of allocation should be followed.
The Philippine Interpretations Committee concluded that the joint costs shall be allocated pro-
rata on the basis of outstanding newly issued and listed shares and outstanding newly listed old
existing shares.
Examples of joint costs include the following:

a. Audit and other professional advice relating to prospectus
b. Opinion of counsel
c. Tax opinion
d. Fairness opinion and valuation report
e. Prospectus design and printing
Illustration
An entity undertakes an initial public offering or IPO for the listing and issuance of 700,000 new shares
and listing of 300,000 old existing shares.
The entity incurred the following costs:

Listing fee 300,000
Documentary stamp tax 25,000
Newspaper publication 200,000
Fairness opinion and valuation report 125,000
Tax opinion 100,000
Other joint costs 275,000
Cost of public offering
Listing fee 300,000
Share issuance costs

Documentary stamp tax 25,000
Newspaper publication 200,000
Total 225,000
Joint costs
Fairness opinion and valuation report 125,000
Tax opinion 100,000
Other joint costs 275,000
Total joint costs 500,000
The cost of public offering is expensed immediately.

Share listing fee 300,000
Cash 300,000
The share issuance costs shall be recorded as follows:

a. If the new shares are issued at more than par:
Cash 225,000
b. If the new shares are issued at par:

Share issuance costs 225,000
Cash 225,000
Allocation of joint costs

Outstanding Fraction Allocated
Newly issued and listed shares 700,000 7/10 350,000
Newly listed old existing shares 300,000 3/10 150,000
1,000,000 500,000
Stock listing fee 150,000
Cash 500,000
Watered Share
Watered share is share capital issued for inadequate insufficient consideration.
The consideration received is less than par or stated value, but the share capital is issued as fully paid.
If the share capital is watered, asset is overstated and capital is correspondingly overstated.
For example, land with fair value of ₱800,000 is received for 10,000 shares of ₱100 par value.
To create a water in the share capital, the issuance of 10,000 shares is recorded as fully paid.
Land 1,000,000
Needless to say, the land is overvalued and the share capital is also overstated.
As mentioned earlier, it is illegal to issue a share for less than the par or stated value. Thus in the example,
the shareholder has a discount liability of ₱200,000. To correct the accounts, the journal entry is:
Discount on share capital 200,000
Land 200,000
Secret Reserve
The term secret reserve is the reverse of watered share. Secret reserve arises when asset is understated or
overstated with a consequent understatement of capital. Secret reserve usually arises from the following:
a. Excessive provision for depreciation, depletion, amortization and doubtful accounts.
b. Excessive write-down of receivables, inventories and investments.
c. Capital expenditures are recorded as outright expense.
d. Fictitious liabilities are recorded.
Delinquent Subscription
The Revised Corporation Code provides that the board of directors may at any time declare due and
payable unpaid subscriptions.
This official declaration is called a call usually expressed in the form of a board resolution stating the
date fixed for payment of the unpaid subscriptions.
If the shareholder does not pay on the date fixed, the shareholder is declared delinquent and the delinquent
share will be sold at public auction.
At the public auction, so may delinquent shares as may be necessary to cover the unpaid subscription,
interest accrued on the subscription, expenses of advertisement and other costs of sale will be sold to the
highest bidder.
Who is the highest bidder?

The highest bidder is the person who is willing to pay the offer price of the delinquent shares for the
smallest number of shares. The offer price normally includes the following:
a. Balance due on the subscription
b. Interest accrued on the subscription due
c. Expenses of advertising and other costs of sale
Illustration
X subscribed for 10,000 shares at par ₱100, paying ₱600,000 as initial payment. The balance of the
subscription was called and X failed to pay. Consequently, the subscription was declared delinquent.
The offer price is ₱450,000 including the balance due on the subscription, interest and costs of sale. There
are three bidders who are willing to pay the offer price, namely:
А 4,500 shares
B 5,000 shares
C 6,000 shares
Evidently, A is the highest bidder. Thus, all the 10,000 shares shall be deemed fully paid. Accordingly,
A gets 4,500 shares, and X, the original subscriber, gets 5,500 shares.
No bidders
In case where there are no bidders, the corporation may purchase for itself the delinquent shares. The
delinquent subscriber is then released from liability with regard to the subscription which is deemed fully
paid.
1. X subscribes for 10,000 shares at par ₱100.
Subscription receivable 1,000,000
2. X pays ₱600,000.
Cash 600,000
3. The subscription balance is called and X defaults.

No entry.
4. The corporation pays ₱30,000 for expenses incurred in connection with the auction of the delinquent
shares.
Advances on delinquency sale 30,000
Cash 30,000
5. The offer price comprises:

Interest 20,000
Expenses on delinquency sale 30,000
Total 450,000
6. There are no bidders. As stated earlier, the corporation may bid in the absence of a bidder or a highest
bidder.
Journal entries if no bidders

a. Treasury shares 450,000
Interest income 20,000
b. Subscribed share capital 1,000,000

Journal entries -highest bidders

a. Cash 450,000
Interest income 20,000
b. Subscribed share capital 1,000,000

Callable Preference Share

A callable preference share is one which can be called in for redemption at a specified price at the option
of the corporation.
As distinguished from a redeemable preference share, a callable preference share has no definite
redemption date as this is dependent on the "call" of the issuer.
A callable preference share is an "equity instrument".
Illustration
An entity issued 10,000 callable preference shares with par value of ₱100 at ₱120 per share. The journal
entry to record the issuance of the preference shares is as follows:
Cash (10,000 x 120) 1,200,000
Preference share capital (10,000 x 100) 1,000,000
Share premium – PS 200,000
Subsequently, the preference shares are called in at ₱150 per share. The journal entry to record the call
is:
Preference share capital 1,000,000
Retained earnings 300,000
Cash (10,000 x 150) 1,500,000
When preference shares are called in at more than the original issue price of the preference shares, the
excess is debited to retained earnings.
Accordingly, the excess of the call price over the par value of the preference shares is charged to the
following:
a. Share premium from original issuance of the preference share
b. Retained earnings
On the other hand, when preference shares are called in at less than original issue price, the difference is
simply credited to share premium related to ordinary shares.
Redeemable Preference Shares

PAS 32, paragraph 18, defines redeemable preference share as:
a. A preference share that provides for mandatory redemption by the issuer for a fixed or determinable
amount at a future date.
b. A preference share that gives the holder the right to require the issuer to redeem the instrument for
a fixed or determinable amount at a future date.
A redeemable preference share shall be classified as current or noncurrent financial liability depending
on the redemption date.
Illustration
An entity issued 10,000 preference shares at the par value of ₱100 per share. The preference shares have
a mandatory redemption by the issuer for ₱1,200,000.
The journal entry to record the issuance of the redeemable preference shares is:
Cash (10,000 x 100) 1,000,000
Redeemable preference shares 1,000,000
If a dividend of ₱100,000 is paid to the redeemable preference shareholders, the journal entry is
Interest expense 100,000
Cash 100,000
Subsequently, if the preference shares are redeemed by the issuer for ₱1,200,000, the journal entry is:
Loss on redemption 200,000
Cash 1,200,000
PAS 32, paragraph 36, provides that the difference between the redemption price and the financial
liability is accounted for as gain or loss on redemption.
Another Illustration
On January 1, 2020, an entity issued preference shares for cash equal to the par value of ₱6,000,000.
The preference shares are redeemable at the option of the preference shareholders.
No dividends are to be paid on these shares but the preference shareholders have the right to require the
issuer to redeem the shares on January 1, 2022 for ₱6,615,000.
The interest rate implicit in this agreement is 5% which is compounded annually.
Journal entries
2020
Jan. 1 Cash 6,000,000
Dec. 31 Interest expense 300,000

Accrued interest payable
(5% x 6,000,000) 300,000
2021
Dec. 31 Interest expense 315,000
Accrued interest payable
(5% x 6,300,000) 315,000
2022
Jan. 1 Redeemable preference shares 6,000,000
Accrued interest payable 615,000
Cash 6,615,000
Convertible Preference Share

A convertible preference share is one which gives the holder the right to exchange the holdings for other
securities of the issuing corporation.
A preference shareholder may convert the preference share into ordinary share because operations are
successful and earnings on the ordinary share are unlimited.
A preference shareholder may convert the preference share into bonds which is actually a change of
equity from that of an owner to that of a creditor. Normally, preference share is convertible into ordinary
share.
Illustration
Preference share capital, 10,000 shares, ₱100 par 1,000,000
Ordinary share capital, 200,000 shares authorized,
100,000 shares issued, ₱30 par 3,000,000
Share premium – ordinary 1,000,000
Retained earnings 2,000,000
Case 1
The preference share is converted into ordinary share in the ratio of one preference share for three
ordinary shares.
Ordinary share capital (30,000 x 30) 900,000
Share premium – ordinary 300,000
Case 2
The preference share is converted into ordinary share in the ratio of one preference share for five ordinary
shares.
Retained earnings 300,000
Ordinary share capital (50,000 x 30) 1,500,000
III. Activity – Supplementary
Problems 20-1 to 20-9
IV. Activity/Assessment – Visit the MS Teams
V. References
Intermediate Accounting 2, 2021 edition by Conrado Valix

Course Materials-IA3-Week 4-M. Manayao

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Course Materials-IA3-Week 4-M. Manayao

Uploaded by

Copyright:

Available Formats

DISCLAIMER: The information content provided in this course material is designed to provide helpful

Subject Code: BAIACC3X

ACT202: Friday 8:00 am – 12:00 pm

Course Learning Outcomes:

About the Instructor:

Minimum Capital Stock

Books and Records of a Corporation

Philippine term IAS term

Broadly, the common sources of share premium are:

The share capital is divided into shares evidenced by a share certificate.

Par Value and No Par Value Shares

Ordinary Share Capital

The ordinary shareholders enjoy no preference over each other.

The ordinary shareholders have no fixed or specific return on investment.

Their financial reward is dependent on the operations of the entity.

Preference Share Capital

The preference shareholders have only a limited or fixed return on investment.

The amount of legal capital is determined as:

Accordingly, it is illegal to pay dividends if the entity has a deficit.

Accounting for Share Capital

When share capital is issued, it is credited to the share capital account.

SUMMARY OF JOURNAL ENTRIES

Unissued share capital xx

Subscription Receivable xx Subscription Receivable xx

Issuance Date of Previous Cash xx Cash xx

Illustration – Memorandum Entry

2. Received subscription to 10,000 shares at par.

3. Collected 25% on the above subscription.

4. Received full payment for 6,000 shares originally subscribed.

Subscription price (6,000 x 100) 600,000

6. Received a cash subscription for 5,000 shares at par.

Illustration – Journal Entry Method

2. Subscription receivable 1,000,000

5. Subscribed share capital 600,000

Shares Issued at Discount

The Revised Corporation Code prohibits the issue of share at a discount.

Treasury shares will be discussed in a later chapter.

Issuance of Share Capital for Non-cash Consideration

Issuance of Share Capital for Services

The fair value of such services is reliably determined to be ₱120,000.

Share Issuance Costs

Costs of listing shares include the following:

Examples of joint costs include the following:

The entity incurred the following costs:

Share issuance costs

The cost of public offering is expensed immediately.

The share issuance costs shall be recorded as follows:

b. If the new shares are issued at par:

Allocation of joint costs

Who is the highest bidder?

3. The subscription balance is called and X defaults.

5. The offer price comprises:

Journal entries if no bidders

b. Subscribed share capital 1,000,000

Journal entries -highest bidders

b. Subscribed share capital 1,000,000

Callable Preference Share

A callable preference share is an "equity instrument".

Redeemable Preference Shares

The interest rate implicit in this agreement is 5% which is compounded annually.

Dec. 31 Interest expense 300,000

Convertible Preference Share

III. Activity – Supplementary

Problems 20-1 to 20-9