SHAREHOLDERS’ EQUITY ✓ Subscriptions Receivable

➢ claims on subscribed share capital;

• Equity of a Corporation / Net Assets
unpaid balance of the subscribers
• The residual balance of the assets after
➢ If expected to be received within 1
deducting all the liabilities of a
year or less:
corporation.
• not part of SHE
Components of SHE (CORT) • part of receivables (Assets)
1. Contributed Capital
✓ If expected to be received beyond 1
2. Other Comprehensive Income
year (also if the prob is silent):
3. Retained Earnings
• Contra-equity account
4. Treasury Shares
• Deduction from SHE

I. Contributed Capital
✓ Share Capital
➢ Always at Par/Stated Value
➢ Ordinary Share Capital (w/
voting rights)
➢ Preference Share Capital (non-
voting; preferred over ordinary
shareholders in terms of dividends
and assets during liquidation;
fixed dividends)
✓ Share Premium
➢ Excess of FV over Par
➢ Resale of Treasury Shares at more
than cost
➢ Donated Capital
➢ Issuance of Share Warrants
➢ Issuance of Share Options
➢ Issuance of Convertible Bonds
Payable (share premium
conversion privilege)
➢ Distribution of Small Stock
Dividend
➢ Quasi Reorganization/
Recapitalization
✓ Subscribed Share Capital
➢ not yet fully paid (according to the
Corporation Code of the
Philippines, a corporation cannot
issue shares unless it is fully paid)
➢ not included in share capital, but
part of the total SHE
II. Other Comprehensive Income (OCI)
✓ Change in Revaluation Surplus
✓ Unrealized Gain/Loss on Investments in
FA @ FVOCI
✓ Actuarial Gains/Loss (Remeasurements)
✓ Gain/Loss on Translations
✓ Unrealized Gain/Loss on Forward
Contracts Classified as Cash Flow Hedge
III. Retained Earnings
Also known as Accumulated Earnings/
Accumulated Profits
RE, beg xx
Net Income xx
Dividends (xx)
RE, end xx
Appropriated RE
✓ not available for dividend distribution.
✓ set aside for a certain purpose
Unappropriated RE
✓ available for dividend distribution
✓ maximum amount of dividend that a
corporation can declare (except for
wasting asset corporation)
Note: A debit/negative balance in RE indicates
that there is a deficit.
IV. Treasury Shares C. Issuance of 2 or more Equity Instruments @
a Lump Sum Price
✓ shares previously issued and reacquired
by the corporation but not cancelled • Relative FV Approach
✓ a contra-equity account (deduction from ➢ used if the FVs are given in the
total SHE) problem
➢ allocate the basket/lump sum
price based on the FV
Accounting for SHE
Example:
Issuance of Share Capital (Pref. & Ordinary)
issued 10k O/S; par 10; FV 12
- First time issuance (from authorized SC &
15k P/S; par 7; FV 9
unissued SC)
- Rule: it is illegal to issue shares at below @ a basket price of 240,000
par or stated value. (Hence, par or stated
Solution:
value is the minimum issue price of
shares) O/S 240kx120k/255k=112,941

P/S 240kx135k/255k=127,059
A. Issuance at a Discount (at below par)
Example: Issued 10,000 shares @ 8; par @10 Journal Entry:
Cash 8,000 Cash 240,000
Discount on Share Capital 2,000 Ordinary Share Capt 100,000
Share Capital 10,000 Share Prem-Ord 12,941
Pref Share Capt 105,000
Share Prem-Pred 22,059
Note: Discount on share capital is:

✓ a liability of the shareholder

• Residual Approach
✓ a contra equity account
➢ used if not all FVs are available
✓ not a loss of the corporation
➢ allocate first the basket price to the
✓ not a receivable of the corporation
instrument with known FV; the
residual is allocated to the
instrument with no known FV
B. Issuance in Exchange for Non-Cash
Consideration Example:

Measurement in order of priority: issued 10k O/S; par 10; FV?

1. FV of non-cash consideration received 15k P/S; par 7; FV 9

2. FV of shares
@ a basket price of 240,000
3. Par/Stated Value of shares
Solution:
Issue Price 240,000
P/S -135,000
0/S 105,000
 Journal Entry:

Cash 240,000
Ordinary Share Capt 100,000
Share Prem-Ord 5,000
Pref Share Capt 105,000
Share Prem-Pred 30,000

Organizational Cost Trust Fund Doctrine

➢ expensed ➢ Protection given to creditors.
➢ Legal capital is illegal to distribute to
owners (shareholders).
Cost of Initial Public Offering
➢ expensed
For par value shares,
Legal Capital = Issued SC + Subscribed SC
Share Issuance Cost
➢ Contra-Equity Account
➢ Deducted from (in order of For no par value shares,
priority):
Legal Capital = Issued SC + Subscribed SC +
1. Share Premium
2. Retained Earnings Share Premium
 Accounting for Subscription Bidder A 90k/6k = 15
Bidder B 90k/8k=11.25
• Subscription of 10k shares; par 10; Bidder C 90k/7k=12.86
subscribed @ 15; down payment 40%
Bidder A is the Highest Bidder.
Cash 60,000
Subscriptions Receivable 90,000 Note: If there is no bidder,
Subscribed Share Capital 100,000
Share Premium 50,000 ✓ The corporation will become the bidder;
the corporation will shoulder the offer
price.
• Payment of the 60%
✓ The delinquent shares will be Treated as
Cash 90,000 Treasury Shares.
Subscriptions Rec 90,000

Accounting for Treasury Shares

Subscribed Share Capital 100,000
Share Capital 100,000 • Cost method

Example: Acquired 10,000 TS @ 15.

• If no payment of the 60% of the total
Treasury Shares 150,000
subscription is received, the subscription
Cash 150,000
is classified as delinquent subscription.
As a result, the delinquent shares are RE 150,000
being offered at a public auction. RE-Unappropriated 150,000

Legal Limit: The maximum amount of TS is

Highest Bidder – bidder who is willing to
equal to the balance of Unappropriated RE.
accept the minimum number of shares in
exchange for the offer price.

Reissuance of Treasury Shares

Offer price shall be composed of the ff: • legal to issue at below par
• Reissue Price VS. Cost
1. Balance of Subscriptions Receivable
2. Interest
3. Advertising Exp and Other Costs
If Reissue Price > Cost, Cr. to SP-TS
incurred in relation to the auction.
Cash (reissue price) xx
Example: The Offer Price is 90,000
Treasury Shares (cost) xx
Bidder A is willing to accept 6,000 shares. Share Premium-TS xx

Bidder B is willing to accept 8,000 shares.

Bidder C is willing to accept 7,000 shares. If Reissue Price < Cost, Dr to:
1. Share Premium-TS
2. Retained Earnings
 Cash (reissue price) xx Retirement or Cancellation of Donated Shares
Share Premium-TS xx
Retained Earnings xx Share Capital xx
Treasury Shares (cost) xx Share Premium-TS xx

Retirement or Cancellation of Treasury Shares

• Par Value VS. Cost
If Par Value > Cost, Cr. to SP-TS
Share Capital (par)
Treasury Shares (Cost)
Share Premium-TS
If Par Value < Cost, Dr. to:
1. Share Premium- Original Issuance
2. Share Premium-TS
3. Retained Earnings
Share Capital
Share Prem-Orig Issuance
Share Prem-TS
Retained Earnings
Treasury Shares
Donation from Shareholders Other than Shares
• Debit to Asset, Credit to Donated Capital
• Asset it debited at FV of the property
received. (If services, debit to Expenses at
the FV of the Service)
xx • Donated Capital is part of Share
xx
Premium.
xx
Note: Any cost incurred in relation to the
donation is not expensed, not capitalized, but is
charged to donated capital account.
Preference Shares
xx 1. Callable Preference Shares
xx 2. Redeemable Preference Shares
xx
3. Convertible Preference Shares
xx
4. Cumulative Preference Shares
xx
5. Participating Preference Shares.

Note: Whether reissuance or retirement, reverse Callable Preference Shares

the entry to appropriate RE. • Corporation has the right to set the
RE-Appropriated xx redemption date.
RE xx • Part of SHE
• Dividends: Deduction from RE
• At Redemption date, compare the:
Donated Shares
Issue Price vs. Redemption Price
• When shareholders donate their shares (Issue Price is composed of the Share
back to the corporation. Capital and Share Premium)
• Acquisition of TS at no cost.
If the Issue Price > Redemption Price, Cr. to SP
• At point of receipt, there is no journal
entry. Preference Share Capital xx
Share Premium-PS xx
Reissuance of Donated Shares Cash xx
Share Premium xx
Cash xx
Share Premium-TS xx
If the Issue Price < Redemption Price, Dr. to RE
Redeemable Preference Shares Right of Pre-emption (Pre-emptive Right)

• Shareholder has the right to set the • Provide existing shareholders the right to
redemption date. subscribe for any additional shares issued
• Part of Liabilities by the company, giving them the chance
• Dividends: Interest Expense to ensure their percentage ownership in
• At Redemption date, compare the the corporation is not diluted.
Issue Price VS. Redemption Price • Stock right
➢ Right to buy shares
If Issue Price > Redemption Price, Credit to
➢ On the issuance of stock right, no
Gain on Redemption
journal entry is made (memo entry
If Issue Price < Redemption Price, Debit to only).
Loss on Redemption
Exercise of Pre-emptive right @ par
Cash xx
Convertible Preference Shares Share Capital xx

• Can be converted into ordinary shares

• At Conversion, Compare Exercise of Pre-emptive right @ more than par
Issue Price VS. Par of OS Cash xx
Share Capital xx
Share Premium xx
If Issue Price > Par of OS, Cr. to SP-O
Preference Share Capital xx Expiration of Stock Right
Share Premium-PS xx
Ordinary Share Capt xx ✓ No journal entry; memo entry only.
Share Prem-Ordinary xx

If Issue Price < Par of OS, Dr. to RE

Recapitalization
Preference Share Capital xx
Share Premium-PS xx • Occurs when there is a change in the
Retained Earnings xx capital structure of the entity.
Ordinary Share Capital xx • Old shares will be retired or cancelled,
and new shares will be issues.
Cumulative Preference Shares

• During dividend declaration, holders of Kinds:

CPS are entitled not only for the current
year dividend, but also for the dividend 1. Change from no par to par
in arrears. 2. Change from par to no par
3. Reduction in par value
Participating Preference Shares 4. Reduction in stated value
• After the basic dividends for PS and OS, 5. Share Split
the remaining dividends may be shared 6. Reverse Share Split
to holders of PPS.
Change: Par to No Par or No Par to Par Quasi-Reorganization

• Issue Price vs. New Par/Stated Value • a.k.a. Corporate Adjustment

• Purpose: to eliminate Deficit (or the
negative balance of RE)
If IP>New Par/Stated Value, Cr. to SP-Recapt. • Fresh start of the corporation in
Share Capital xx
accounting sense (as if RE is zero)
Share Premium xx Procedures in Quasi-Reorganization
Share Capital-New xx
SP-Recapitalization xx 1. Adjust the assets and liabilities to their
FV.
2. Reflect adjustments to RE.
If IP<New Par/Stated Value, Dr. to RE
3. If there is still a deficit, reclassify the
Share Capital xx Share Premium to RE.
Share Premium xx
Retained Earnings xx Share Premium xx
Share Capital-New xx Retained Earnings xx

Note: Quasi-Reorganization must be approved

Reduction of Par or Stated Value by the SEC.
Share Capital xx
SP-Recapitalization xx
Dividends
Share Split (Split Up) • Distribution of Earnings to Owners
• Reduction to Retained Earnings
• old shares will be retired, new shares will
• Maximum amount of dividend is equal to
be issued
unappropriated RE (except for wasting
• if the problem is silent, split up
asset corporation)
• no. of shares increase, par value decrease
• Only outstanding shares are entitled for
• before and after share split, total SHE will
dividends.
be the same
• no journal entry; memo entry only (Outstanding Shares = issued shares +
subscribed shares – treasury shares)
3 Important Dates
Reverse Share Split (Split Down)
1. Date of Declaration – Reduce RE
• assumed only if stated in the problem
2. Date of Record – Cutoff date
• no. of shares decrease, par value increase
3. Date of Payment
• before and after split down, the total SHE
will be the same
• no journal entry; memo entry only
Kinds: Steps in the Allocation of Cash Dividends for
Both Class of Shares
1. Cash Dividends
2. Property Dividends/Dividend in Kind 1. Allocate the basic dividends of PS and OS
3. Stock Dividend
Basic Dividends of PS
4. Scrip Dividend
= Outstanding Shares x Fixed Dividends x
5. Liquidating Dividends
Dividends in Arrears

Fixed Dividends = Par x Dividend Rate

Scrip Dividends
Note: For cumulative PS multiply to Dividend in
• also known as liabilities dividends, are arrears. For non-cumulative PS, multiply by 1
issued by the company to its shareholders
in the form of certificates instead of the
cash dividend that provides a choice to its Basic Dividends of OS
shareholders to get dividends at a later =Outstanding Shares x Fixed Dividends x 1
time, or they can take shares in place of
Fixed Dividends= Par x Dividend rate of PS
dividends. Companies issue this kind of
dividend when they have insufficient Note: If there are 2 PS and one is participating,
cash to pay as dividends. choose the rate of the participating PS. If 2 or
more are participating PS, choose the lower rate.
Retained Earnings xx
Bonds/Notes Payable xx

2. Allocate the remaining dividends.

Liquidating Dividends
Notes:
• given only during liquidation
1. If the PS is non participating, allocate
• For a wasting asset corporation, it is legal
remaining dividends to ordinary
to distribute liquidating dividends even
shareholders only.
before its liquidation.
2. If the PS is participating, allocate the
remaining dividends to both OS and PS.
(Basis for allocation is Outstanding shares
Cash Dividend
x par)
• stated either as a percentage of par or
stated value or as amount per share
Journal Entries: (Cash Dividends)
At date of Declaration,
Cash dividend per class of share
Retained Earnings xx
- no problem
Cash Dividend Payable xx

Cash dividend of both class of shares At date of Record,

- allocate the dividend to ordinary and No journal entry

preference shareholders
-
At date of Payment,
Cash Dividend Payable xx Large Stock Dividend
Cash xx
➢ More than 20% of the outstanding
stock.
Property Dividends ➢ Measured at Par Value
• Noncash assets are distributed as Retained Earning xx
dividends Stock Dividend Payable xx
Property Dividends Payable (PDP)
➢ Measured at FV less cost to sell
➢ Remeasured at B/S date and Date Note: Cash Dividend Payable and Property
of settlement Dividend Payable are Liabilities. Stock Dividend
Payable is part of SHE.

Noncash Asset Held for Distribution

(NCAHFD)
➢ Measured at the lower of CA and
FV less cost to sell.
➢ If FVLCTS < CA, recognize
impairment loss
➢ Remeasured at balance sheet date
only

At Date of Settlement
➢ PDP > NCAHFD = Gain
➢ PDP < NCAHFD = Loss

Stock Dividend

• Either small stock dividend or large stock

dividend

Small Stock Dividend

➢ Less than 20% of outstanding stock.
➢ Measured at the higher between FV of
Shares of Par Value.

Retained Earning xx
Stock Dividend Payable xx
Share Premium xx