LESSON 13 RECAPITALIZATION

RECAPITALIZATION

Corporation recapitalization takes place when an entire issue of share capital is change by appropriate
action of the corporation. The typical types of recapitalization are as follows:

1. Change from par to no-par share capital and vice versa

2. Reduction in the par or stated value of share capital

Recapitalization is normally undertaken to establish an additional Paid-in Capital account that will be
used in capital restructuring. This type of transaction requires the setting up of capital accounts related
to the new issue and the cancellation of account balance related to the old issue. (Capital restructuring
will be discussed in a higher accounting subject.)

Illustrative Problem: The shareholders equity of TERIMA Co. Contains the following:

Ordinary Share Capital, P20 par, 50,000 shares P1,000,000

Ordinary share premium 250,000
Retained Earnings 500,000

Case-1 The original issue is replaced by a no-par share capital with a started value of P20

Ordinary share Capital, 1,000,000

P20 par
Ordinary Share 250,000
Premium
Ordinary Share Capital, 1,000,000
P20 stated value
Paid-in Capital from 250,000
exchange of Par for No-
Par share Capital

Case 2 - Each capital share is exchanged for a new share with a par value of P15

Ordinary Share Capital, P20 par 1,000,000

Ordinary Share Capital, P15 par 750,000
Paid-in Capital from Reduction 250,000
in Par Value of Ordinary Shares