Professional Documents
Culture Documents
Corporation
Retirement of shares
Donated capital
Ordinary shares represent the residual corporate interest that bears the
ultimate risk of loss and receives the benefits of success.
Generally control the management of the corporation and tend to profit the
most if the corporation is successful.
Basic rights of ordinary shareholders
Preference shares are shares that give the holders thereof certain preference
over other shareholders. Such preferences may include:
Share premium (additional paid-in capital) arises from various sources which
include the following:
A par value share is one with a peso value fixed in the articles of incorporation.
The purpose of which is to fix the amount of issuance price. A par value share
cannot be issued below its par value. The par value appears on each share
certificate issued.
No-par value shares
A no-par value share is one without a peso value fixed in the articles of
incorporation. However, a no-par share has a stated value (issued value) which
is also indicated in the AOI but not on the share certificate issued.
The excess of subscription price over the stated value is credited to share
premium.
Par value and No-par value shares
Corporation Code:
No-par value shares should not be issued for a consideration less than P5 per
share
The subscription contract is a legally binding contract which provides for the
number of shares subscribed, the subscription price, the terms of payment and
other conditions of the transaction.
● Regulatory fees
● Legal fees
● Accounting fees
● Commissions
● Underwriter’s fees
● Printing costs of certificates
● Documentary stamp tax
● Other transaction taxes
How to account for share issuance costs?
Deducted from any resulting share premium from the issuance. If share
premium is insufficient, the excess is charged to retained earnings.
Jan-1-2022 Cash 600,000
Share capital 500,000
Illustration Share premium 100,000
This is based on the concept, trust fund doctrine, which states that the share
capital of a corporation is a trust fund held for the protection of its creditors.
How to compute legal capital?
a. Par value shares: aggregate par value of shares issued and subscribed
b. No-par value shares: total consideration received or receivable from shares
issued or subscribed. Total consideration refers to the subscription price
inclusive of any amount in excess of stated value.
Illustration Par No-par
Retained earnings represent the cumulative profits that are retained in the
business and not yet distributed to the shareholders.
Treasury shares are an entity’s own shares that were previously issued but are
subsequently reacquired but not retired.
NOTE: An entity may reaquire its previously issued shares only if it has
sufficient unrestricted retained earnings.
Accounting for treasury shares
Illustration
1-Jul-22 Treasury shares 90,000
Share capital (P100 par value) 800,000 Retained earnings - appropriated 90,000
Share premium 160,000 Retained earnings - unrestricted 90,000
Retained earnings 540,000
Treasury shares (90,000)
Total shareholders' equity 1,410,000
Excess of cost over reissuance price is debited (in order of
priority):
a. Share premium - treasury shares
b. Retained earnings
Retirement of shares
Shares are considered retired if they have been reacquired and cancelled in
accordance with SEC regulations.
The total par value and the related share premium of the retired shares are removed
from the books. Any difference between the total amount removed and the retirement
cost is accounted for as follows:
1. par value + related share premium of the retired shares > retirement cost
- credit to “share premium - retirement”
1. par value + related share premium of the retired shares < retirement cost
- debited to the following (order of priority):
a. Share premium - treasury shares
b. Retained earnings
Illustration
On January 1, 2022 the statement of
financial position of ABC Co. shows
the following information:
Cash 80,000
Forms:
Retained earnings represent the cumulative profits that are retained in the
business and not yet distributed to the shareholders.
a. Date of declaration - the date when the board of directors formally announce the
distribution of dividends
b. Date of record - the date on which the stock and transfer books of the corporation is
closed for registration. Only those who are listed as of this date are entitled to
receive dividends
c. Date of distribution - the date when the dividends declared are distributed to the
shareholders
Cash dividends
● Small or < 20% of the outstanding shares = use fair value (date of declaration)
Preference shares are have one or both of the following preference over
ordinary shares:
Preference shares that are preferred as to assets are settled first and any remaining
amount is paid to the ordinary shareholders.
***If the preference shares are not preferred as to assets, the remaining amount after
settlement of liabilities is shared proportionately by the preference and ordinary shareholders.
Preference over assets
In case where the net assets of the corporation after settlement of creditors’ claims are
insufficient to pay the liquidation value, the preference shares will be entitled only to the
remaining net assets.
NONE will be paid to the ordinary shareholders BUT they will not be obliged to provide any
additional capital. (limited liability concept = personal assets of the owners are not
subject to corporate claims)
Preference over dividends
When dividends are declared, preference shares that are “preferred as to dividends” are
paid first before ordinary shareholders.
Preference over dividends
The amount of participation is computed after both the preference and ordinary shares
are allocated their basic dividends.
Preference shares may have more than one dividend preference. For example, preference
shares may be both cumulative and participating.
Retained earnings 5,000,000 *Only the current year dividend is paid because the preference
shares are noncumulative.
Total shareholders' equity 15,000,000
Illustration Case 2: Preference shares are cumulative and
ABC Co. declared P1,800,000 cash
nonparticipating
dividends to its preference and ordinary
shareholders in 2021. No dividends have
been declared since 2018. ABC’s Total dividends declared 1,800,000
shareholders’ equity immediately before Allocation:
the dividend declaration is as follows:
1. Preference shares 600,000
2. Ordinary shares 1,200,000
10% Preference share capital,
As allocated -
P200 par 2,000,000
Retained earnings 5,000,000 *All the unpaid dividends from 2018 to 2020 are paid because
the preference shares are cumulative.
Total shareholders' equity 15,000,000
Illustration Steps for fully participating preference shares:
ABC Co. declared P1,800,000 cash
1. Provide the dividends of the preference shares first.
dividends to its preference and ordinary
shareholders in 2021. No dividends have a. If the preference shares are noncumulative,
been declared since 2018. ABC’s provide one-year dividends only
shareholders’ equity immediately before b. If the preference shares are cumulative, provide all
the dividend declaration is as follows:
dividends in arrears
2. Provide the basic dividends of the ordinary shares using
10% Preference share capital,
the preference share rate.
P200 par 2,000,000 3. Allocate the excess dividends after deducting amounts
in 1&2 pro rata based on the aggregate par values of the
Ordinary share capital, P100 par 8,000,000 outstanding shares
1. Split up or share split - occurs when old shares are cancelled and replaced by a larger
number of new shares but with a reduced par value (stated value) per share.
Effect: increases the no. of shares available for issuance while decreasing the fair
value per share
2. Split down or reverse share split - occurs when old share are cancelled and replaced by a
smaller number of new shares but with an increased par value (stated value) per share.
Do not affect A, L or E or the aggregate par value of issued shares. Memo entry only.
Effect: no. of share outstanding and par value per share
Share split
Case 1: Split up
ABC Co. declares a 2-for-1 share split.
Memo entry:
“Issued 20,000 shares with par value of P50 as a result of a 2-for-1 split of 10,000 old
shares with par value of P100.
Share split
Memo entry:
“Issued 5,000 shares with par value of P200 as a result of a 1-for-2 reverse share split of
10,000 old shares with par value of P100.
Share split