CORPORATION ACCOUNTING

Share Capital Transactions

Basic Share Capital Transactions

There are 5 basic share capital transactions:

1. Authorization –records the maximum number of shares a

corporation is authorized to issue.

2. Sale – a shareholder buys stocks and pays immediately in full.

Stock certificate is issued to the shareholder.

3. Subscription –a subscriber enters into a contract to buy shares.

4. Collection – a subscriber pays his subscription.

5. Issuance of certificate – if a subscription is fully paid, a stock

certificate is issued to the subscriber.

Share Capital

Share capital may be paid by the shareholder or subscriber in the form

of

1. cash

2. property – record the value of the property using the following

amounts:
a. fair value of the property received
b. fair value of the shares, whichever is clearly determinable;
c. par value of the shares

3. labor or services – record the cost of the labor or services using

the fair value of the services rendered.

Share capital may be issued

1. at par
2. at a premium – at an amount more than the par value

Share capital cannot be issued at a discount or an amount less

than par.

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 When the value assigned to the asset received is overstated, the share
issued is called watered shares. The overstatement is done to
comply with the requirement of the law that the share should not be
issued at less than its par value.

International Accounting Standards (IAS) Terms

Below is a table showing the elements of a shareholders’ equity with

their equivalent IAS terms:

Old Terms New IAS Terms

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
Stock dividends Bonus issue

Accounting Methods to Record Share Capital

Transactions

1. Memo entry method

2. Journal entry method

Pro-forma Entries – Par Value Share Subscribed or

Sold at Par

Transaction Memo Entry Method Journal Entry Method

Authorization Authorized to issue _____ shares with Unissued share capital xxx
a par value of P___. Authorized share capital xxx

Sale Cash xxx Cash xxx

Share capital xxx Unissued share capital
xxx

Subscription Subscriptions receivable xxx Subscriptions receivable xxx

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 Subscribed share capital xxx Subscribed share capital xxx

Collection Cash xxx Cash xxx

Subscriptions receivable xxx Subscriptions receivable xxx

Issuance of certificate Subscribed share capital xxx Subscribed share capital xxx
Share capital xxx Unissued share capital
xxx

Classroom Exercise

Journalize the following transactions under the memo entry method and the
journal entry method.

1. ABC Corporation is authorized to issue 4,000 shares with a par

value of P100.
2. Received subscription for 1,000 shares at par.
3. Collected the subscription in full.
4. Issued stock certificate for 1,000 shares.
5. Received subscription for 2,000 shares at par.
6. Received partial payment on the above subscription, P150,000.
7. Sold 500 shares at par.

Pro-forma Entries – Par Value Share Subscribed or

Sold at a Premium

Transaction Memo Entry Method Journal Entry Method

Authorization Authorized to issue _____ shares with Unissued share capital xxx
a par value of P___. Authorized share capital xxx

Sale Cash xxx Cash xxx

Share capital xxx Unissued share capital xxx
Share premium xxx Share premium xxx

Subscription Subscriptions receivable xxx Subscriptions receivable xxx

Subscribed share capital xxx Subscribed share capital xxx
Share premium xxx Share premium xxx

Collection Cash xxx Cash xxx

Subscriptions receivable xxx Subscriptions receivable xxx

Issuance of certificate Subscribed share capital xxx Subscribed share capital xxx
Share capital xxx Unissued share capital
xxx

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Special Notes

1. Under sale and subscription, the debit to subscriptions receivable

and cash is computed as follows:

Subscriptions receivable = subscribed shares x

subscription price
Cash = sold shares x selling price.

2. Subscribed Share Capital is always credited at par.

3. Share Capital is always credited at par.

Classroom Exercise

Journalize the following transactions under the memo entry method and the
journal entry method.

1. ABC Corporation is authorized to issue 100,000 shares with a par

value of P10 per share.
2. Received subscriptions for 1,000 shares at P12 per share.
3. Received partial payment on the subscription, P5,000.
4. Sold 2,000 shares at P 11 per share.
5. Collected the subscription in full.

Accounting for Two Classes of Shares

1. The two classes of shares are common or ordinary shares and

preferred or preference shares.

2. Ordinary shares entitle the holder to the four basic rights of a

shareholder.

3. Preference share is generally issued with par value and with a

dividend rate.

4. Voting right is frequently given exclusively to ordinary shareholders.

5. The pro-forma entries to record share capital transactions for two

classes of shares are the same. However, the account titles must
be labeled as to whether it is ordinary or preference.

6. The following account titles may be used.

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 Ordinary Preference
Subscriptions receivable - ordinary Subscriptions receivable –
preference
Subscribed share capital - ordinary Subscribed share capital –
preference
Share premium- ordinary Share premium- preference
Share capital - ordinary Share capital - preference

Accounting for No Par Shares

1. No par shares do not have a definite or fixed value.

2. No par shares are recorded using the memo entry method only.

3. The entire consideration received by the corporation for its no

par value shares shall be treated as capital and shall not be
liable for distribution as dividends.

4. Preference shares which are preferred as to assets can be issued

only with par value.

5. Banks, trust companies, public utilities, buildings and loan

associations, insurance companies cannot issue no-par shares.

6. No par value shares may not be issued at an amount less than

P5 per share.

7. While no par value shares do not carry a nominal value in the

certificate, a selling price may be assigned. This value is called
stated value. Stated value should not be less than P5 per
share.

Pro-forma Entries: No Par Value Shares (Memo Entry

Method only)

Transaction No Stated Value With Stated Value

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Authorization Authorized to issue _____ shares, no Authorized to issue _____ shares,
par. no par with a stated value of P___.

Sale Cash xxx Cash xxx

Share capital, no par xxx Share capital , no par
xxx
Share premium-stated value
xxx

Subscription Subscriptions receivable xxx Subscriptions receivable xxx

Subscribed share capital xxx Subscribed share capital
xxx
Share premium – stated value
xxx

Collection Cash xxx Cash xxx

Subscriptions receivable xxx Subscriptions receivable
xxx

Issuance of certificate Subscribed share capital xxx Subscribed share capital xxx
Share capital, no par xxx Share capital, no par
xxx

Classroom Exercise

Journalize the following transactions assuming (a) there is no stated

value; (b) there is a stated value of P10.

1. ABC Corporation was authorized to issue 100,000 shares, no par.

2. Received subscriptions for 70,000 shares at P12 per share.
3. Received full collection on the above subscription.
4. Issued stock certificates.
5. Sold for cash 10,000 shares at P11 per share.

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 follows:

 In the case of par value shares, legal capital is the aggregate par
value of the shares issued and subscribed.

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  In the case of no par value shares, legal capital is the total
consideration received from shareholders including the excess
over the stated value.

Contributed Capital
Contributed capital represents the amount invested or contributed by
owners. It is also known as paid in capital. This amount is composed
of

 Share capital
 Represents the contribution equal to the par value or
stated value of the shares purchased by the shareholders
or
 The total contribution by the shareholders in case of no par
share, no stated value share capital
 Share premium
 Represents contribution in excess of the par or stated value
of the share capital
 Arises also from various share capital transactions and
other transactions with shareholders
 Treasury shares
 Stock dividends
 Donated shares

July 2014