SHAREHOLDER’S EQUITY
deduction)
Corporation- an artificial being created
by operation of law, having the right of
succession and the powers, attributes
and properties expressly authorized by
law or incident to its existence.
- separate legal entity
distinguished from its owner
Organization of a Corporation
 A corporation is formed by “any
person, partnership, association or
corporation, singly or jointly with
others but not more than 15 in
numbers
 The entity’s articles of incorporation
must be authorized by the SEC
 To amend the articles of
incorporation, a majority vote of
the board plus a vote by
shareholders representing at least
2/3 of the outstanding share capital
 There is no minimum capital stock
required for a stock corporation,
except when a special law provides
otherwise
 A corporation has perpetual
existence unless a fixed term is
stated in the articles of
incorporation
Shareholder’s Equity- residual interest in
the asset of a corporation after
deducting all its liabilities.
Component of Shareholder’s Equity
 Share Capital (Capital Stock)
 Preference Share Capital
 Ordinary Share Capital
 Subscribed Share Capital
 Subscription Receivable (as a
deduction)
 Share Dividends distributable
 Discount on Share Capital ( as a
deduction)
 Capital liquidated (as a
 Share Premium (additional
paid-in capital)
 Retained Earnings (appropriated
and unappropriated)
 Other Components
 Revaluation surplus
 Cumulative unrealized fair
value gains/losses on FVOCI
securities
 Translation differences of
foreign operations
 Effective portion of cash flow
hedge
 Treasury Shares
Accounting for Share Capital
1. Memorandum Method- only a
memorandum is made for the
authorized capitalization.
Subsequent issuances of shares are
credited to Share Capital Account
2. Journal Entry Method- the
authorized capitalization is
recorded by crediting “authorized
share capital” and debiting
“unissued share capital” .
Subsequent issuance of share are
credited to “unissued share capital”
. The difference between the two
represent the issued share capital.
Subscription- a contract between the
purchaser and the issuer in which the
purchaser promises to buy shares of the
issuing company’s stock
Subscription Receivable- represent the
unpaid portion of the subscription price.
Represent as a deduction from the
related subscribed share capital

Subscribed Share Capital- represent the
portion of the authorized share capital
that is subscribed but nit yet issued
Share Capital- represent the portion of
the authorized share capital that is
already issued
Share Certificate- a document that
evidences the ownership of a share
Classes of Share Capital
1. Ordinary Share Capital (Common
Stock)
 Represent the residual
corporate interest that bears
the ultimate risk of loss and
receives the benefits of success
Rights:
 Right to attend and vote in
shareholder’s meetings
 Right to purchase additional shares
 Right to share in the corporate
profits
 Right to share in the net asset of
the corporation upon liquidation
2. Preference Shares (Preferred Stock)
 Shares that give the holders
thereof certain preferences
over other shareholders. Such
preferences may include
priority claims over (a)
dividends and/or (b) net assets
of a corporation in the event of
liquidation. In exchange for
such preference(s), preference
shareholders sacrifice certain
inherent rights of ordinary
shareholders (e.g., voting rights
over election of directors and
officers). One purpose of
issuing prefernce share is to
broaden investor appeal,
thereby increasing the
corporation’s opportunity to
generate equity financing
Share Premium
a. Excess of subcription price over par
value or stated value
b. Excess of reissuance price over cost
of treasury shares issued.
c. Distribution of “small” stock
dividends
Share Capital xx
Subscribed Share Capital xx
Subscription Receivable (xx)
Share Premium xx
Total Contributed Capital xx
Par value share
 one with peso value fixed in the
articles of incorporation
 the purpose of which is to fix the
amount of issuance price
 cannot be issued below its par
value
No-par value share
 One without peso value fixed in the
article of incorporation but not on
the share certificate issued
 Should not be issued for a
consideration less than five (5)
pesos per share
 The excess of subscription price
over the stated value is credited to
Share Premium
*Under the Corporation Code, ordinary
shares may be issued as either par or
no-par value shares. However,
preference shares should only be issued
as par value shares
Legal Capital
 portion of contributed capital that
cannot be distributed to owners
during the lifetime of the
corporation unless the corporation
is dissolved and all of its liabilities
are settled first.
 Based on the concept of trust fund
doctrine which states that the
share capital of a corporation is a
trust fund held for the protection of
its creditor
Computed as:
a. For par value shares, legal capital is
aggregate par value of shares
issued and subscribed.
b. For no-par value shares, legal
capital is the 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
Par No
Par
% Preference Share Capital xx xx
Ordinary Share Capital xx xx
Share Premium- OS - xx
Subscribed Share Capital- OS xx xx
Legal Capital xx xx
Share Issuance Cost
 Entails expenditures, such as
regulatory fees, legal accounting,
and other professional fees,
commissions and underwriter’s
fees, printing cost of certificates,
and documentary stamp tax and
other transaction taxes.
 Deducted from any resulting share
premium from the issuance. If
share premium is insufficient, the
excess is charged to retained
earnings.
Watered Stock
 shares issued for noncash
consideration with fair value that is
below par or stated value.
 The “water” (discount) is the
difference between the fair value of
the non-cash consideration
received and the par or stated
value of the shares issued
 If discount is not recorded, asset
and equity will be overstated
Secret Reserve
 Arises when shares are issued for
noncash consideration with fair
value that is above par or stated
value but the consideration
received is recorded at par or
stated value
 It understates the asset and equity
 May also arise from transactions
other than issuances of share
capital, such as when provision for
losses are made excessively or
when income earned is not
recognized.
Treasury Shares
 Entity’s own share that were
previously issued but are
subsequently reacquired but not
retired.
 An entity may reacquire its
previously issued shares only if it
has sufficient unrestricted retained
earnings.
 Are accounted for using the cost
method.
 The reacquisition and subsequent
reissuance of treasury shares are
recorded at cost.
Retirement of Shares
 When shares are retired, the total
par value and the related share
premium of the retired shares are
derecognized. Any difference
between the total amount
derecognized and the retirement
cost is accounted for as follows:
a. If the par value and the related
share premium of the retired
shares exceed the retirement
cost, the difference is credited
to “Share Premium-retirement”
b. If the par valueand the related
share premium of the retired
shares are less than the Delinquent Subscription
retirement cost, the difference CaseA 2: Retirement
subscriber Cost > Original
is declared Issuance
delinquent
is debited to the following in Price
if his/her share subscription
the order of priority: remains unpaid at due date.
ABCThereacquires 1,000
delinquent shares
Shares areatsold
P140atand
a
- Share Premium- Treasury immediately retires
public auction tothem
the highest bidder
Shares .
- Retained Earnings Share Capital
Highest (1,000 the
Bidder- x 100)
person100,000
who is
Share Premium
willing to pay- the
OG Issuance 20,000
“offer price” for
(a) SP- Treasury Shares
the smallest number of shares 5,000
(b) Retained Earnings
Offer Price- includes the unpaid15,000
Case 1: Retirement cost < Original Issuance Cashon the subscription,
balance 140,000
Cost interest accrued on the
subscription, and expenses in the
ABC reacquires 1,000 shares at P80 per share public auction
and retires them. (par value = P100)

Reacquisition:
Treasury Shares (1,000 x 80) 80,000
Cash 80,000

Retirement:
Share Capital (1,000 x 100) 100,000
SP- original issuance (@20) 20,000
Treasury Shares (1,000 x 80) 80,000
Share Premium- Retirement 40,000
Redeemable Callable
Prefence Share Preference Share
 Preferred  Preferred
stock which stock which
the holder has the issuer has
the right to the right to
redeem at a call at a set
set date date
 Classified as  Classified as
financial equity
liability instrument
because when because the
the holder right to call is
exercises its at the
right to discretion of
redeem, the the issuer and
issuer is therefore has
mandatorily no obligation
obligated to to pay unless
pay for the it chooses too
redemption call on the
price shares
 The related  The related
dividends are dividend are
recognized as recognized as
interest direct
expense in deduction
profit or loss from retained
earnings

Callable preference share are accounted

for similar to regular preference shares.
On redemption, the accounting is
similar to the retirement of shares.

Redeemable preference shares are

accounted for as financial liabilities.