Shareholders’ Equity

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 The Nature of Shareholders’ Equity
Assets – Liabilities = Shareholders’ Equity

Net Assets
Sources of
Shareholders’
Amounts invested Equity Amounts earned
by shareholders by corporation

Shareholders’ Equity
Other
Paid-in Capital gains and
Retained Earnings losses not
Accumulated Other included in
Comprehensive Income net income
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 Philippine Term vs. IFRS
Use of the Term Reserves and
Other Terminology Differences
Philippine
Term
• Capital stock: • Share capital:
➢ Subscribed capital stock ➢ Subscribed share capital
➢ Common stock. ➢ Ordinary shares.
➢ Preferred stock. ➢ Preference shares.
➢ Additional paid-in capital-APIC ➢ Share premium
➢ Retained earnings (deficit) ➢ Accumulated profits (losses)
➢ Retained earnings appropriated ➢ Appropriation reserve
➢ Revaluation surplus ➢ Revaluation reserve
➢ Treasury stock ➢ Treasury share

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 DEFINITION OF TERMS

 Share capital – the portion of the paid in capital representing the

total par or stated value of the shares issued.
 Subscribed share capital – the portion of the authorized share
capital that has been subscribed but not yet fully paid and
therefore still unissued.
 Subscribed share capital is reported minus subscription receivable
not collectible currently.
 Share premium – the portion of the paid in capital in excess of par
or stated value.
 Retained earnings – the cumulative balance of periodic earnings,
dividend distributions, prior period errors, and other capital
adjustments.

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 DEFINITION OF TERMS

 Revaluation surplus - the excess of revalued amount over the

carrying amount of the revalued asset.
 Treasury shares – the corporation’s own shares that have been
issued and then reacquired but not canceled.
 Deposits on subscriptions to a proposed increase in share capital
may be reported as part of SHE as a separate line item in the SHE.

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 Sources of Share Premium

 Excess over par or stated value

 Resale of treasury shares at more than cost
 Donated capital
 Issuance of share warrants
 Distribution of share dividends
 Quasi-reorganization and recapitalization

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 The Corporate Organization
Advantages of a corporation

Easy
Continuous Easy to Limited
ownership
Existence raise capital liability
transfer

Disadvantages of a corporation

Double Government
taxation regulation

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 The Model Business Corporation Act
• Nature and location of business activities.
• Number and classes of shares authorized.
• Number and classes of shares authorized.

Articles of incorporation
are filed with the state/SEC.
Board of directors
appoint officers.
SEC issues a
corporate charter.
Board of directors
Shares of elected by
stock issued. shareholders.
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 Fundamental Share Rights

Right Preemptive
to vote. right to maintain
percentage
ownership.

Right to share Right to share

in profits when in distribution of
dividends are assets if company
declared. is liquidated.
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 Books and Records

Minutes Subscription
Stock and
book book
transfer book

Books of Shareholders’ Subscribers’ Share certificate

Accounts- records of ledger book
all business transactions ledger

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 Authorized, Issued, and Outstanding Shares
Authorized shares are the maximum
number of shares of capital stock that
can be sold to the public.

Issued Unissued
shares are shares are
authorized authorized
shares of shares of
stock that stock that
have been never have
sold. been sold.

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 Authorized, Issued, and Outstanding Shares
Outstanding shares are
Authorized issued shares that are
Shares owned by stockholders.

Outstanding Unissued
Issued Shares Shares
Shares
Treasury Treasury shares are
Retired shares Shares issued shares that
have the same have been reacquired
status as Retired by the corporation.
authorized but Shares
unissued
shares.
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 Capital Stock
Par value share
 A specific amount is fixed in the
articles of incorporation and
appearing on the certificate of stock.
This amount is the minimum issue
price of the shares.
 Par value has no relationship
to market value.
No-par share
 Peso amount per share is not designated in
the AOI/corporate charter.
 Corporations can assign a stated value per
share (treated as if par value).
 However, the minimum stated value of a no-
par share is five pesos (P5.00) and is
deemed to be fully paid when issued.

Legal capital is . . .
▪ The portion of shareholders’ equity that must be
contributed to the firm when stock is issued.
▪ The amount of capital, required by law, that must
remain invested in the business.
▪ Refers to par value, stated value, or full amount paid
for no-par stock.
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 WATERED SHARE/WATERED STOCK

Watered share- share capital issued for

insufficient consideration.
 The consideration received is less than par
or stated value, but the share capital is
issued as fully paid.

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 NOT PERMITTED TO ISSUE NO-PAR
VALUE SHARES
(BPI-TB-PO)
1. Banks
2. Public utilities
3. Insurance companies
4. Trust Companies
5. Building and Loan Associations
6. Pre-need companies
7. Other corporations authorized to obtain or access funds from the
public, whether publicly listed or not

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 Capital Stock

Legal capital is . . .
• The portion of the paid in capital arising from issuance of share capital
w/c cannot be returned to the shareholders in any form during the lifetime
of the corp.

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

• In case of no-par shares, legal capital is the total consideration received by

the corporation for the issuance of its shares including the excess of issue
price over the stated value.

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 Trust Fund Doctrine

The share capital of a corporation is a trust fund for

the protection of the creditors.
Note: Trust Fund Doctrine mandates that the corporation must maintain its
Legal Capital for the protection of its creditors. It is not available for
distribution to shareholders until the claims of corporate creditors are
satisfied.

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 Capital Stock/Share Capital
Common stock/ordinary share is the basic voting
stock of the corporation. It ranks after preferred
stock/preference share for dividend and liquidation
distribution. Dividends are determined by the board of
directors.

Generally does not Usually has a

have voting rights. par or stated value.

Preferred
Stock
Dividend and liquidation May be convertible,
preference over callable, and/or
common stock/ordinary share. redeemable.
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 Problem 1.

The residual interest in a corporation belongs

to the
a. management.
b. creditors.
c. common stockholders.
D. preferred stockholders.

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 ACCOUNTING FOR SHARE CAPITAL (SC)

1. Memorandum Entry Method –

 No entry is made to record the authorized SC. Only a
memorandum is made for the total authorized SC.
 When SC is issued, it is credited to the share capital account.

2. Journal Entry Method-

 The authorization to issue SC is recorded by debiting Unissued SC
and crediting Authorized SC.
 When SC is issued, it is credited to the unissued share capital
account.

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 Accounting for Issuance of Shares

Measure of Capital When Issued:

a. With Par -credit share capital at par any
excess to Share Premium
b. Without Par but with a Stated Value -
Share Capital is credited at stated value
with the excess to Share Premium

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 Accounting for Issuance of Shares
Measure of the Consideration Received on the Issue of Share Capital

1. For Cash or Receivable - at Face value

2. For Non-Cash Consideration –

A. at Fair Market Value (FMV) of non-cash asset, or

B. FMV of the shares issued

C. Par value of shares issued, whichever is clearly determinable

3. For Services Rendered –

a. at FMV of the services rendered or

b. market value of the shares issued,

c. Par value of shares issued, whichever is clearly determinable

Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. (IFRS 13 par. 9)

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 Problem 1
 Ocean Company was organized at the beginning of the current year and was authorized to issue share
capital of 100,000 shares of P50 par value.

 The following transactions occurred during the year in connection with the share capital:

1. The incorporation subscribed for 25% of the authorized share capital at par value.
2. The incorporators paid 25% on their subscription.
3. Full payment was received on 15,000 shares originally subscribed.
4. Land with fair value of P600,000 was acquired upon issuance of 10,000 shares. The market value of
the share at this time P55.
5. Cash subscription to 5,000 shares at P60 per share was received.
6. Issued 2,000 shares to the legal counsel in payment for his P100,000 bill for organization services.

 Required:

a. Prepare journal entries to record the transactions using the memorandum method.
b. Present the shareholder’s equity in the statement of financial position.

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 Problem 1
 Ocean Company was organized at the beginning of the current year and was
authorized to issue share capital of 100,000 shares of P50 par value.
 The following transactions occurred during the year in connection with the share
capital:
1. The incorporation subscribed for 25% of the authorized share capital at par value

1. Memorandum entry
The corporation was authorized to issue share capital of P5,000,000, divided into
100,000 shares with par value of P50.
Subscription receivable 1,250,000
Subscribed share capital (100,000 x 25%=25,000 shares) 1,250,000

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 Problem 1
 Ocean Company was organized at the beginning of the current year and was authorized to issue share
capital of 100,000 shares of P50 par value.

 The following transactions occurred during the year in connection with the share capital:

2. The incorporators paid 25% on their subscription.

Cash (1,250,000 x 25%) 312,500

Subscription receivable 312,500

3. Full payment was received on 15,000 shares originally subscribed.

Cash (15,000 x 50 x 75%) 562,500
Subscription receivable 562,500
Subscribed share capital (15,000 x 50) 750,000
Share capital 750,000

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 Problem 1
 Ocean Company was organized at the beginning of the current year and was authorized to issue share
capital of 100,000 shares of P50 par value.

 The following transactions occurred during the year in connection with the share capital:

4. Land with fair value of P600,000 was acquired upon issuance of 10,000 shares. The market value of the share
at this time P55.
Land 600,000
Share capital (10,000 x 50) 500,000
Share premium 100,000
5. Cash subscription to 5,000 shares at P60 per share was received.
Cash (5,000 x 60) 300,000

Share capital (5,000 x50) 250,000

Share premium 50,000

6. Issued 2,000 shares to the legal counsel in payment for his P100,000 bill for organization services.
Legal expense (2,000 x 50) 100,000

Share capital 100,000

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 Problem 1
 Ocean Company was organized at the beginning of the current year and was authorized to issue share
capital of 100,000 shares of P50 par value.

 Required:

a. Present the shareholder’s equity in the statement of financial position.

Shareholder’s equity

Share capital, P50 par, 100,000 shares authorized,

32,000 shares issued P1,600,000
Subscribed share capital 500,000
Subscription receivable (375,000)
Share premium 150,000___
P1,875,000

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 Problem 2
 Lake Company was organized at the beginning of the current year and was authorized to issue
share capital of 50,000 shares with par value of P100. The following transactions occurred
during the year:
1. Received subscriptions at par value from incorporators equal to 40% of the authorized share
capital.
2. Received a 25% down payment on the subscriptions from the incorporators.
3. Received full payment on 10,000 shares originally subscribed.
4. A patent was acquired by issuing 5,000 shares. The patent has no fair value.
5. Received cash subscriptions to 15,000 shares at P120 per share.
Required:
A. Prepare journal entries to record the transactions following the journal entry method.
B. Present the shareholder’s equity in the statement of financial position.

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 Problem 2
 Lake Company was organized at the beginning of the current year and was authorized to issue
share capital of 50,000 shares with par value of P100. The following transactions occurred
during the year:
1. Received subscriptions at par value from incorporators equal to 40% of the authorized
share capital.
Unissued share capital 5,000,000
Authorized share capital 5,000,000
Subscription receivable (50,000 x 40%=20,000 shares) 2,000,000
Subscribed share capital 2,000,000

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 Problem 2
Lake Company was organized at the beginning of the current year and was authorized to issue
share capital of 50,000 shares with par value of P100. The following transactions occurred during
the year:
2. Received a 25% down payment on the subscriptions from the incorporators.
Cash (2,000,000 x 2%) 500,000
Subscription receivable 500,000
3. Received full payment on 10,000 shares originally subscribed.
Cash (10,000 x 100 x 75%) 750,000
Subscription receivable 750,000
Subscribed share capital (10,000 x 100) 1,000,000
Unissued share capital 1,000,000

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 Problem 2
 Lake Company was organized at the beginning of the current year and was authorized to issue
share capital of 50,000 shares with par value of P100. The following transactions occurred
during the year:
4. A patent was acquired by issuing 5,000 shares. The patent has no fair value.
Patent (5,000 x 100) 500,000
Unissued share capital 500,000
5. Received cash subscriptions to 15,000 shares at P120 per share.
Cash (15,000 x 120) 1,800,000
Unissued share capital (15,000 x 100) 1,500,000
Share premium 300,000

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 Problem 2
 Lake Company was organized at the beginning of the current year and was authorized to issue share
capital of 50,000 shares with par value of P100. The following transactions occurred during the
year:
Required:
A. Prepare journal entries to record the transactions following the journal entry method.
B. Present the shareholder’s equity in the statement of financial position.
Shareholder’s equity:
Authorized share capital, P100 par, 50,000 shares P 5,000,000
Unissued share capital (2,000,000)
Issued share capital, 30,000 shares 3,000,000
Subscribed share capital 1,000,000
Subscription receivable (750,000)
Share premium 300,000___
TOTAL SHE P 3,550,000

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 PROBLEMS
 Problem 3

 A, B, C, D, and E organized Charlie Company at the beginning of the current year with an
authorized share capital of P5,000,000 consisting of 50,000 shares of P100 par value.

1. On January 1, subscriptions were taken from A for 12,000 shares from B for 13,000
shares, from C for 8,000 shares, from D for 4,000 shares and from E for 3,000 shares, all
at par.
2. A transferred to the corporation in partial payment of the subscription the following
assets and liabilities:
 Accounts receivable 350,000
 Notes receivable 70,000
 Inventory 680,000
 Accounts payable 100,000

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 PROBLEMS
 Problem 3

3. B transferred the following assets to the corporation in partial payment of the

subscription:
 Land 150,000
 Building 850,000
4. The remaining incorporators paid 25% of their subscription.
5. The corporation received a bill on January 10 in the amount of P50,000 from the
legal counsel for organization services rendered. The counsel accepted 500 shares
of in full payment.
6. A subscription for 1,000 shares at P120 per share was received from F on
January 11. F paid P40 per share on his subscription.
7. On January 12, A, B, and C paid the remainder of their subscriptions.
 Required:

a. Prepare journal entries to record the transactions.

b. Present the shareholder’s equity.
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 PROBLEM 3
1. On January 1, subscriptions were taken from A for 12,000 shares from
B for 13,000 shares, from C for 8,000 shares, from D for 4,000 shares
and from E for 3,000 shares, all at par.

Subscription receivable (40,000 x 100) 4,000,000

Subscribed share capital 4,000,000

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 PROBLEM 3
2. A transferred to the corporation in partial payment of the
subscription the following assets and liabilities:
 Accounts receivable 350,000
 Notes receivable 70,000
 Inventory 680,000
 Accounts payable 100,000

Accounts receivable 350,000

Notes receivable 70,000
Inventory 680,000
Accounts payable 100,000
Subscription receivable 1,000,000

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 PROBLEM 3
3. B transferred the following assets to the corporation in partial
payment of the subscription:
 Land 150,000
 Building 850,000

Land 150,000
Building 850,000
Subscription receivable 1,000,000

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 PROBLEM 3

 4. The remaining incorporators paid 25% of their

subscription.

Cash (15,000 x 100 x 25%) 375,000

Subscription receivable 375,000

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 PROBLEM 3
5. The corporation received a bill on January 10 in the amount of
P50,000 from the legal counsel for organization services rendered.
The counsel accepted 500 shares of in full payment.

Legal expense 50,000

Share capital 50,000

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 PROBLEM 3

6. A subscription for 1,000 shares at P120 per share was

received from F on January 11. F paid P40 per share on his
subscription.
Subscription receivable (1,000 x 120) 120,000
Subscribed share capital 100,000
Share premium 20,000

Cash (1,000 x 40) 40,000

Subscription receivable 40,000

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 PROBLEM 3
7. On January 12, A, B, and C paid the remainder of their
subscriptions.
Cash 1,100,000
Subscription receivable 1,100,000

A 200,000
B 300,000
C (800,000 x 75%) 600,000_
Total 1,100,000

Subscribed share capital (33,000 x 100) 3,300,000

Share capital 3,300,000

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 PROBLEM 3
Shareholder’s equity:

Share capital, P100 par

Authorized – 50,000 shares
Issued and outstanding – 33,500 shares 3,350,000
Subscribed share capital – 8,000 shares 800,000
Subscription receivable (605,000)
Share premium 20,000___
3,565,000

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 END

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