Shareholders Equity With Discussion Exercises

SHAREHOLDER’S EQUITY
Prepared by: John Glenn Reoja, CPA

Definition & Components of SHE
Shareholder’s equity or
stockholder’s equity is the
RESIDUAL INTEREST of owners
in the net assets of a corporation
measured by the excess of assets
over liabilities.
Contributed
Capital
Components Accumulated
of SHE Comprehensive
Income
Deductions from
SHE (Contra-
Equity Accounts)
Contributed
Capital
Components Accumulated
of SHE Comprehensive
Income
Deductions from
SHE (Contra-
Equity Accounts)
Share Capital (Ordinary &
Preferred)
Contributed Subscribed Share Capital

Capital (Ordinary & Preferred)
Share Premium
Less: Subscriptions
Receivable
Accumulated Unappropriated
Profit or Loss R.E
(RE)
Accumulated Appropriated R.E
Comprehensive
Income Accumulated
Other
Comprehensive
Income and
Losses
Treasury Shares
Deductions from Discount on Share Capital

SHE (contra-
Equity Accounts)
Capital Liquidated
Share Capital (Ordinary &
Preferred)
Contributed Subscribed Share Capital

Capital (Ordinary & Preferred)
Share Premium
Less: Subscriptions
Receivable
Exercise #6
Ordinary Shares 18,000,000

Preference shares 3,000,000
Subscribed share capital 2,000,000
Total Contributed capital 23,000,000
Exercise #1
Authorized share capital 5,000,000
Unissued share capital (2,000,000)
Issued Share capital 3,000,000
Subscription receivable (400,000) 600,000
Share premium 500,000
RE :
Restricted 600,000
Unrestricted 300,000 900,000
Revelation Surplus 200,000
Total 5,200,000
Treasury shares (100,000)
Shareholder’s equity 5,100,000
Exercise #2
RE :
Restricted 600,000
Unrestricted 300,000 900,000
Revelation Surplus 200,000
Total 5,200,000
Treasury shares (100,000)
Shareholder’s equity 5,100,000
Exercise #2

Contributed Capital 4,100,000
1. Presentation of Subscription Receivable
General rule if silent as to maturity:
Subscription receivable is presented as a
deduction from contributed capital
(Specifically subscribed share capital).
Exception: If the maturity date of the
receivable is within 12 months, it is presented
as a current asset rather than deduction from
contributed capital.
2. Share Premium is not just the portion of the paid in
capital representing the excess over the par or stated
value.
Broadly, the common sources of share premium are:
• Excess over par value or stated value

• Capital gains (from treasury share transactions,
retirement, conversion and etc.)
• Distribution of stock dividend – market value of
share is more than par or stated value
2. Share Premium is not just the portion of the paid in
capital representing the excess over the par or stated
value.
Broadly, the common sources of share premium are:
• Ordinary share warrants outstanding and bond

conversion privilege and Ordinary share options
outstanding
• Donated capital
• Quasi-reorganization and recapitalization
• Forfeited subscription
3. Accumulated other comprehensive income and losses are
presented separately as a line item for each type of OCI or
OCL. They are as follow:
a. Unrealized gain or loss from a derivative instrument
designated as cash flow hedge.
b. Unrealized gain or loss from translation of foreign
currency financial statements.
c. Unrealized gain or loss from change in fair value of debt
and equity instrument measured at FVOCI
d. Revaluation surplus
e. Remeasurement of employee benefits
f. Unrealized gain or loss from change in fair value of
financial liability due to credit risk
4. Distinction between ordinary shares and preferred shares
Ordinary shares Preference Shares
Return on Investment Residual Fixed
(income)
Priority during liquidation Least priority High priority
Rights and privileges Same May vary
granted to shareholders of
corporation
Can be issued with no par Yes No
value?
With voting rights? Yes No
Other features None Convertible Redeemable
or with warrants
5. Par value and no par value shares
• A par value share is one with specific value fixed in
the articles of incorporation and appearing on the
share certificate. The purpose of the par value is to
fix the minimum issue price of the share.
• A no-par value share is one without any value
appearing on the face of the share certificate. But a
no-par share has always an “issued” or stated value
which may be fixed by the articles of incorporation or
board of directors. The minimum stated value of no-
par share is P5.
6. Share capital and subscribed share capital
Subscribed share capital is the portion of the
authorized share capital that has been
subscribed but not yet fully paid and
therefore still unissued while share capital is
the portion of the authorized share capital
already issues (i.e already fully paid)
7. Legal Capital
Legal capital is legal concept. It is that portion
of the paid in capital arising from the issuance
of share capital which cannot be returned to
the shareholders in any from during the
lifetime of the corporation. Note:
Subscription receivable is ignored in
computing legal capital. The amount of legal
capital is determined as follows:
The amount of legal capital is determined as
follows:
Share capital ordinary & preferred xx
Subscribed share capital (ordinary & preferred) xx
Share dividends payable xx
Share premium – in excess of par or state value
(only for no-par value shares) xx
Total Legal Capital xx
Exercise #3
Preference share capital 2,300,000

Ordinary share capital 5,250,000
Subscribed ordinary SC 50,000
Total Legal Capital 7,600,000
8. Reserves
Reserves is a grouping required by PAS 1 as a
minimum line item and computed as follows:
Total Share premium xx
Total other comprehensive income or losses xx
Appropriated retained earnings xx
Total reserves xx
9. Discount on share capital
This account exists if shares are issued for

consideration less than par or stated value.
The journal entry includes:
Cash xx
Discount on share capital xx
Share capital (@ par value) xx
Issuance, Subscription and Retirement
In journalizing issuance and subscription
transactions, two methods may be used
namely:
1. Memorandum entry method- The most
common method used. In this method, no
entry is made during authorization. During
issuance, one principal account will be used,
namely “Share Capital”.
In journalizing issuance and subscription
transactions, two methods may be used namely:
2. Journal Entry method- In this method, one
principal account and contract- account will be
used. The principal account is the “Authorized
Share Capital” which remains generally constant
all throughout while the contra-account is
“Unissued Share Capital” which decreases every
time there is an issuance of share.
Exercise #5
MEMO ENTRY METHOD JOURNAL ENTRY METHOD
a. The entity was authorized to issue a. Unissued Share capital 4M
share capital of P4 million, divided Authorized SC 4M
into 40,000 shares with par value
of P100
b. Subscription Receivable 1M b. SAME
Subscribed SC 1M
c. Cash 250k c. SAME
Subscription Receivable 250k
d. Cash 450k d. SAME
Subscription Receivable 450k
Exercise #5
e. Subscribed SC 600k e. Subscribed SC 600k
Share capital 600k Unissued Share capital 600k
f. Cash 500,000
f. Cash 500,000 Unissued Share capital 500,000
Share capital 500,000
Exercise #5
Authorized SC 4,000,000
Unissued-SC (2,900,000)
Share capital 1,100,000 Issued SC 1,100,000
Subscribed SC 400,000 Subscribed SC 400,000
Subscription Receiv. (300,000) Subscription Receiv. (300,000)
SHE 1,200,000 SHE 1,200,000
Basically, the main difference of the two
methods is the existence of share capital
account. Share capital account is maintained
account under the memorandum entry
method. On the other hand, share capital
account is a residual account under the
journal entry method (share capital =
authorized share capital – balance of unissued
share capital.)
Measurement of Consideration
TYPE OF MEASUREMENT
CONSIDERATION
Cash Face Value
Non-cash Asset Fair Value Fair value of shares
(if no fair value of
non-cash asset)
Services Fair Value Par value of shares
(if no fair value of
the services
rendered)
Shares to be issued
Shares to be issued by a corporation may be
one (1) class or two (2) classes of shares.
• For 1 class of shares, it could be ordinary
shares or preferred shares.
❖ Ordinary shares may be issued with par value
or no par value but with stated value not less
than P5.
❖ Preferred shares should strictly be issued
with par value only.
Shares to be issued
• For 2 classes of shares (ordinary shares &
preferred shares) issued at a lump-sump
consideration, the consideration should be
allocated to the two equity instruments (SPLIT
THE CONSIDERATION). It is allocated by using:
(1) Use Relative fair value approach – fair value
of all class of shares is available.
(2) Residual Approach – NOT ALL fair value of
shares is available. This is also used if the
preference shares is classified as redeemable
preference shares.
Shares to be issued
RELATED COST SHARE ISSUANCE COSTS LISTING COSTS (LC) JOINT COSTS (JC)
(SIC)
Nature of costs Direct costs to sell equity Cost of public offering of Transaction costs that
shares shares NOT directly relate jointly to the
attributable to the concurrent listing and
issuance of new shares issuance of new shares,
and listing of old existing
shares
Accounting treatment Contra equity account as Expense in the income Allocated between the
a deduction from the statement. newly issued and listed
following in the order of shares, and the newly
priority: listed old existing shares
(1) Share premium from pro rata on the basis of
previous share issuance outstanding newly issued
(2) Retained earnings and listed shares and
outstanding newly listed
old existing shares (on the
basis of no. of shares)
Shares to be issued
RELATED COST SHARE ISSUANCE LISTING COSTS JOINT COSTS (JC)
COSTS (SIC) (LC)
Examples • Underwriting • Road show • Audit and other
and commission presentation professional
• Accounting and • Public relations advice relating to
legal fees consultant fees prospectus
• Printing costs • Opinion of
• Documentary counsel
stamps • Tax opinion
• Filing fees with • Fairness opinion
SEC and valuation
• Cost of report
advertising or • Prospectus
promoting the design and
issue. printing
Deliquent Subscriptions
If a subscriber of shares does not pay on the date
fixed by board of directors, the subscriptions is
declared deliquent and the deliquent shares will
be sold at a public auction to a HIGHEST
BIDDER.
If for example, the number of delinquent shares

is 10,000 shares and the other offer of the
highest bidder at 6,000 shares and 4,000 shares,
accordingly.
Deliquent Subscriptions
If there is NO HIGHEST BIDDER, the Corporation may
purchase for itself the delinquent shares and will be
part of TREASURY Shares. The purchase must be
backed up by sufficient balance of unrestricted
retained earnings in accordance with trust fund
doctrine.
If such happens , the delinquent subscriber shall be

released from any liability with regard to his or her
subscription but will not share to any number of
deliquent shares unlike if there is a heist bidder.?
Retirement of Shares
Retirement of shares is known as
cancellation of issued shares. In accordance
with the trust fund doctrine, before you
retire shares, there should be an
unrestricted balance of retained earnings
since before you retire shares; you are
effectively reacquiring it first.
RETIREMENT PRICE < ORIGINAL PRICE = GAIN ON
RETIREMENT (Capital gain) (Share premium)
Share capital xx Original

Issue Price
Share premium – excess of par xx
Cash (retirement price) xx
Share premium – retirement xx
RETIREMENT PRICE > ORIGINAL PRICE = LOSS ON
RETIREMENT (Capital Loss)
The Capital loss is charged:
(1) First to related share premium (share premium-
retirement)
(2) Retained Earnings
Share premium – retirement xx
Retained Earnings (in excess) xx
Share premium- excess of par xx Issue Price
Cash (retirement price) xx
Exercise #7
Share capital (2,000 x 10) 20,000

Share premium (2,000 x 90) 180,000
RE (balancing figure) 100,000
Cash 300,000
Treasury Shares
Treasury shares are an entity’s own shares that
have been issued and then reacquired but not
cancelled. Based from the definition, we can
derive the characteristics of treasury shares and
as follows:
(a) The shares must be the entity’s own shares.
The acquisition of shares of another entity is not
treasury but an investment.
Treasury Shares
(b) The shares must have been issued

originally. This requisite distinguishes
treasury shares from unissued shares.
Treasury shares can be legally reissued at a
discount without any discount liability while
unissued shares must be issued at least at
par or stated value.
Treasury Shares
(C) The shares are reacquired but not
canceled.
Note: No corporation shall redeem,

repurchases or reacquire its own shares of
whatever class unless it has adequate
amount of unrestricted retained earnings to
support the cost of said shares. This is in
accordance with the Trust Fund doctrine.
Accounting for Treasury Shares
(1) On Reacquisition
The measurement of treasury shares is
COST, the value of consideration given up
to acquire the treasury shares. The cost is:
(a) Cash – face
(b) Non-cash – carrying amount
Journal Entry:
Treasury shares (@cost) xx
Cash/ Non-cash asset xx
(2) On reissuance
The main concern on reissuance would
be the gain or loss on reissuance of
treasury shares.
Selling price xx
Cost of treasury shares sold (xx)
Gain or (loss) from reissuance xx(xx)
(2) On reissuance
treasury shares.
Selling price xx
Selling Price depends on the
consideration received for the
reissuance of treasury shares. It could
be:
(a) Cash – face value

(b) Non-cash – fair value of non-cash
consideration
(2) On reissuance
treasury shares.
Selling price xx
Exercise #8
Treasury Shares (45 per share) 270,000
Cash 270,000
Cash (3,600 x 50) 180,000

Treasury shares(3,600 x 45) 162,000
Share premium-treasury 18,000
Cash (2,400 x 41) 98,400

Share premium-treasury 9,600
Treasury shares (2,400 x 45) 108,000
Exercise #8
Share premium- issuance Jan. 1 900,000

Share premium-treasury credit 18,000
Share premium-treasury debit (9,600)
Total Share premium 908,400
Cost to be assigned to treasury shares
depends on the method used in
accounting for the movement of
treasury shares. These methods are as
follows:
(1) Specific identification – the problem
stated from what reacquisition date the
treasury shares sold are attributable.
(2). First in, first out- if the problem is
silent as to method in assigning value,
FIFO shall be used. The treasury shares
sold will be coming from the earliest
acquisition.
(3) Weighted average – the value of all
treasury shares are equal on the point of
view that the cost to be used will be the
weighted average amount. The weighted
average cost is computed as (TOTAL
AMOUNT OF TREASURY SHARES
AVAILABLE FOR SALE IN PESOS AMOUNT
/ TREASURY SHARES AVAILABLE FOR
SALE)
Gain from reissuance (capital gain) =
credited to share premium-treasury shares
Loss from reissuance (capital loss) =

debited to
(1) first to share premium-treasury shares;

(2) retained earnings.
Gain from reissuance (capital gain) =
credited to share premium-treasury shares
Loss from reissuance (capital loss) =

debited to
(1) first to share premium-treasury shares;

(2) retained earnings.
(3.) Retirement of Treasury Shares
Cost of treasury shares < original issue
price = Gain on retirement (Capital gain)
(Share premium)
Share capital xx
Share premium –excess of par xx
Treasury shares @cost xx
Share premium – treasury shares xx
Cost of treasury shares > original issue
price = Loss on retirement (capital loss)
The capital loss is charged:
(1) First to related share premium (share
premium-treasury shares)
(2) Retained earnings
Cost of treasury shares > original issue price =
Loss on retirement (capital loss)
Share premium- treasury shares xx
Retained Earnings (in retirement excess) xx
Issue
Share premium- excess of par xx Price
Treasury shares @ cost xx

Exercise #9
Par value of treasury
shares retired (5,000 x25) (125,000)
Share Capital Outstanding 500,000
JOURNAL ENTRY:
Share premium (5,000 x5) 25,000
RE (balancing figure) 500,000
Treasury shares 650,000
Exercise #9
RE – beginning balance 900,000

RE (balancing figure) debit (500,000)
RE – ending balance 400,000
Other Equity Instruments
Redeemable PS Callable PS
(a) Reacquisition With the holder With the issuer
option (corporation)
(b) Redemption Mandatory Indefinite
date (maturity date)
(c) Classification Financial Liability Equity
instrument
(d) Effect of Retirement of Retirement of
redemption liability shares
Other Equity Instruments
Redeemable PS Callable PS
(e) Gain on redemption Profit or Loss Share premium-
retirement
(f) Loss on redemption Profit or Loss (1) Share premium-
retirement
(2) Retained earnings
in excess
(g) Dividends Interest Expense Dividends

Entry: Entry:
Interest expense xx Retained earnings xx

Liability xx Liability xx
Rights, Warrants & Options
These securities entitle holders to
acquire shares at an exercise rate
ordinarily LOWER THAN the prevailing
market rate.
(a) Rights – are issued to entitle the
general stockholders in relation to their
pre-emptive rights, to protect their
proportional interest whenever
corporations issue new shares.
(b) Warrants – normally issued
attached to a principal security
(bond or preference shares) as
an inducement to buyers of the
principal securities.
(c) Options – normally issued to key
executives and officers as
additional compensation for either
past or future services provided to
the company (share-based
payments)
Note: Warrants may came with (1)
bonds payable (2) preference
shares.
(1) Bonds with warrants – classified
as a compound financial
instrument. In allocating the
consideration, use RESIDUAL
APPROACH.
(2) Preference shares with
warrants – NOT a compound
financial instrument. In allocating
the consideration, use (1) FAIR
VALUE APPROACH; if not
applicable, use (2) RESIDUAL
APPROACH.
Exercise #4
FAIR VALUE ALLOCATION

Ordinary 10,000 x 36 = (360,000/900 320,000
Shares 360,000 ,000) x
800,000
Preference 20,000 x 27 = (540,000/900 480,000
Shares 540,000 ,00) x
800,000
Exercise #4
Cash 800,000
Ordinary Shares (@par) 200,000
SP – OS [ 320,000 – 200,000] 120,000
Preference Shares (@par) 400,000
SP – OS [480,000 – 400,000] 80,000
EQUITY ISSUANCE EXERCISE EXPIRATIO
INSTRUMENT N
Rights No Journal Normal Entry for issuance of No journal

Entry shares entry
(Memo (Memo
entry only) Cash (@exercise price) xx entry only)
Share capital(@par) xx
1 right for Share premium xx
every 1
stock
outstanding
EQUITY ISSUANCE
INSTRUMENT
Warrants Bonds with warrants
Cash (total consideration) xx
Discount on BP xx
Premium on BP xx
Bonds payable xx
OSWO xx
EXPIRATION EXERCISE
OSWO xx Cash (@exercise price) xx
SP xx Share capital (@par value) xx
Share premium xx
OSWO xx
EQUITY ISSUANCE
INSTRUMENT
Warrants PS with warrants
Cash (total consideration) xx
Preference share capital xx
Share premium xx
Ordinary Shares warrants outstanding xx
EXPIRATION EXERCISE
OSWO xx Cash (@exercise price) xx
SP xx Share capital (@par value) xx
Share premium xx
OSWO xx
Convertible Preference Shares
A convertible preference share is
one which gives the holder the
right to exchange the holding for
other securities of the issuing
corporation. A preference share
may be converted into ordinary
share or bond payable.
If the preference shares are
converted into ordinary shares, the
preference shares are retired. Thus,
the step-by-step procedure for
retirement will apply. Then the
ordinary shares will be issued, the
issuance rule will apply.
JOURNAL ENTRIES:
If conversion resulted to gain (capital
gain) it is credited to share premium-
ordinary.
Preference share premium xx
Ordinary share capital xx
Ordinary share premium xx
If conversion resulted to loss
(capital loss) it is debited to
retained earnings
Preference share premium xx
Retained earnings xx
Ordinary share capital xx
Cash received Exercise #10 11,000,000
Market value of bonds payable (4,000,000)
Residual amount allocated to OS 7,000,000
Par value of OS (10,000x50) ( 500,000)
Share premium 6,500,000
Journal entry:
Cash 11,000,000
Discount on bonds payable 2,000,000
Bonds payable 6,000,000
DONATION
FORM OF SOURCE MEASUREMENT
DONATION
Cash Third party or Face value
shareholders
Non-cash assets Third party or Fair value
shareholders
Entity’s own Shareholders N/A memo entry
shares only
DONATION
If the donation came from a third
party, the credit is other income,
while if the donation came from a
related or shareholder, the credit is
donated capital.
DONATION
Upon reissuance of the donated
shares (treasury shares) the entry is
Cash or non-cash asset xx

Donated capital xx
Exercise #11
a. Land 150,000
Donated Capital 150,000

Land 25,000
Cash 35,000
b. Building 20,000
Other income 20,000
Exercise #10
c. No Journal Entry
d. Cash 50,000
e. Cash 150,000
Government grant 150,000
f. Cash (5,000 x P30) 150,000

RETAINED EARNINGS
Retained Earnings represent the
cumulative profits and losses which
are retained and not yet
distributed as dividends to the
shareholders.
RETAINED EARNINGS
Total retained earnings may be:
(a) Unappropriated RE – represent that
portion which is free and can be
declared as dividends to stockholders.
(b) Appropriated RE- represent that
portion which is restricted and
therefore not available for any dividend
declaration unless the restriction is
subsequently reversed.
RETAINED EARNINGS
Total retained earnings may be:
(a) Unappropriated RE – represent that
portion which is free and can be
declared as dividends to stockholders.
(b) Appropriated RE- represent that
portion which is restricted and
therefore not available for any dividend
declaration unless the restriction is
subsequently reversed.
RETAINED EARNINGS
Types of Appropriation
1. Legal appropriation – these are
appropriations required by law as in
the case of treasury shares. Retained
earnings must be appropriated to the
extent of the cost of treasury shares.
RETAINED EARNINGS
2. Contractual appropriation- these
are appropriations required by
contract such as appropriation for
bond or preference share
redemption.
RETAINED EARNINGS
3. Voluntary appropriation is a
matter of discretion on the part of
management such as appropriations
for plant expansion or
appropriations for contingencies.
RETAINED EARNINGS
Note: Whether legal, contractual or
voluntary, the intent or purpose of the
appropriation of retained earnings is to
limit the declaration of dividend.
Funding is a different concept from
appropriation. The appropriation of RE
is recorded as follows:
RE – unappropriated xx
RE – appropriated xx
RETAINED EARNINGS
Please be minded that
appropriations of RE do not affect
shareholder’s equity as well as total
retained earnings since both types of
retained earnings comprise total
retained earnings.
RETAINED EARNINGS
Negative Balances in Equity
when the RE account has a debit
balance, it is called a “deficit”. This is
presented as a deduction from total
SHE.
When total SHE has a negative balance,
this is described as “capital deficiency”
RETAINED EARNINGS
Components of RE
The statement of RE shows the changes
directly affecting the RE of an entity
and relates the income statement to the
statement of financial position.
Unfortunately, this statement is NOT
REQUIRED to be a component of
financial statements as per PAS 1.
Exercise #1 - RE
RETAINED EARNINGS- Unappropriated
Dividends declared Beg. 450,000
(70k shs+ 30k shs-10k shs)
x P2.50 Net Income 280,000
225,000
Bond sinking fund
(P30k x 3 mos.) 90,000
Treasury shares
200,000
P 215,000
Dividends
Dividends are distributions of earnings or capital to
shareholders in proportion to their shareholdings. If the entry
has a deficit, it is illegal to pay dividends.
Relative dates in Accounting for Dividends
• Date of Declaration- The date when the board of directors

formally announces the distribution of dividends. This is
the date when the liability for dividend must be recognized
(under IFRIC 17)
Dividends
Under IFRIC 17 “distribution of noncash assets to
owners”, The liability to pay dividend shall be recognized
when the dividend is appropriately authorized and is no
longer at the discretion of the entity which is the date:
a. When the dividend is declared by management or the
BOD if the local jurisdiction does not require further
approval
b. When the declaration of dividend by management or

the board of directors is approved by relevant authority,
for example, the shareholders, if the local jurisdiction
requires such approval.
Dividends
• Date of record – The date on which the stock and
transfer book of the corporation is closed for
registration. Only those who are listed as of this date is
entitled to receive dividends.
• Date of payment or Distribution- The date when the
dividends declared are distributed to the shareholders
who are entitled to the dividends.
Note: Generally, only the date of declaration and date of

payment requires journal entries. There is no journal
entry involve on the date of record.
Dividends
ACCOUNTING FOR DIVIDENDS
Reminder: Only outstanding shares are entitled
to dividends. Outstanding share are issued
shares plus subscribed shares-treasury share.
Issued shares can be derived from share capital

while subscribed shares can be derived from
subscribed share capital.
Dividends
Types of Dividends
(a) Cash dividends- it is the most common form
of dividends. It can be declared as a certain
amount per share or a certain percentage of
the par value of shares
(b) Property dividends – A.K.A dividends in kind.
These are dividends in the form of non-cash
assets (e.g inventory, investment in shares of
another entity)
Dividends
The accounting for property dividend is covered
by IFRIC 17, promulgated by the International
Financial Reporting Interpretations Committee.
The accounting for this type of dividend has two

accounting issues, namely:
(1) Accounting for property dividends payable
(Liability)
(2) Accounting for noncash asset to be
distributed as property dividend (Asset)
Dividends
RELEVANT DATES PROPERTY DIVIDENDS Asset to Be Distributed
PAYABLE (PDP) (NCAHFS)
Date of Declaration RE XX NCAHFS XX
PDP XX PPE XX
Note: PDP is measured always at Note: NCAHFS is measured at
FV lower of CA or FV-CTS. If the
latter is lower than the former,
the difference is treated as
impairment loss
Year-end Remeasurement? Yes, ALWAYS Yes, if FV-CTS is lower than CA
The changes are adjustment to Note: If FV-CTS is higher than CA,
RE the difference is accounted for as
reversal of impairment loss.
Date of Settlement Yes, Always No
Remeasurement?
Entry on Settlement Date Loss on Distribution xx
PDP xx
Dividends
RELEVANT DATES PROPERTY DIVIDENDS Asset to Be Distributed
PAYABLE (PDP) (NCAHFS)
Date of Settlement Yes, Always No
Remeasurement?
Entry on Settlement Loss on Distribution xx
Date PDP xx
NCAHFS xx
Gain on Distribution xx
Dividends
Note: If there is a choice between cash and
property dividends, amount charged to RE must
be probability weighted.
Shared dividends – A.K.A bonus issue. Stock

dividend is distribution of the earnings of the
entity in the form the entity’s own shares. Thus,
declaration of this type of dividend in effect
results to capitalization of RE.
Dividends
NOTE: Dividend payable in
stock or stock dividend payable
is not a liability but an addition
to the share capital in the SHE.
Dividends
Share dividends are accounted for as:
a. Unissued shares- if the stock dividend is
20% or more or large stock dividend, the par
or stated value is capitalized or debited to
RE. If the stock dividend is less than 20% or
small stock dividend , the fair value of the
share on the date of declaration is
capitalized.
Dividends
However, if the fair value is lower than
the par or stated value, the par or stated
value is capitalized. If the fair value is
higher than par or stated value, the
difference is credited to share premium
from stock dividend.
Dividends
b. Treasury shares – the accounting for
small or large share dividends DO NOT
APPLY. The cost method is used by
debiting RE for the cost of treasury
shares declared. No share premium
arises.
Dividends
c. Fractional shares- sometimes, issuance of
full shares cannot be done due to fractional
shares. To address this, a corporation may
(1) issue fractional share rights and give the
shareholders enough time to accumulate
share warrants for a full share or
(2) pay cash in lieu of fractional share rights
but this is only allowed if dividends are
declared out of earnings.
Dividends
Scrip or Liability dividends - A.K.A
deferred cash dividends. This are
measured at face or present value of the
dividend. If scrip dividends bear interest,
the interest portion of the cash payment
should be debited to Interest expense
and should not be treated as dividends.
Dividends
Liquidating Dividends - a distribution or
return of capital to shareholders. This
type of dividend can legally be paid
under the following circumstances
(1) When the entity is undertaking a
complete dissolution and liquidation
(2) When the entity is engaged in the
exploitation of natural resources.
Exercise #2
Outstanding Shares= Issued + Subscribed – Treasury shares

= 20,000 + 5,000 – 3,000
= 22,000 shares
A. 10% (Small) 22,000 shares x 10% = 2,200 shares

x P 120 fair value
P 264,000
JOURNAL ENTRY:
Retained Earnings 264,000
Share dividends payable (2.2k xP100) 220,000
Share Premium 44,000
Exercise #2

= 20,000 + 5,000 – 3,000
= 22,000 shares
B. 5%. 22,000 shares x 5% = 1,100 shares

x P 80 fair value
P 88,000
JOURNAL ENTRY:
Treasury Shares 88,000
Exercise #2

= 20,000 + 5,000 – 3,000
= 22,000 shares
C. 30% (Large) 22,000 shares x 30% = 6,600 shares

x P 100 par value
P 660,000
JOURNAL ENTRY:
Share dividends payable 660,000
Exercise #2

= 20,000 + 5,000 – 3,000
= 22,000 shares
D. 15%, 22,000 shares x 15% = 3,300 shares

(3,000 shs x P80) –P240,000 treasury shares
(300 shs x P120) – P 36,000 unissued shares
JOURNAL ENTRY:
Share dividends payable(300shs x P100) 30,000
SP (300 shs x P20) 6,000
Treasury shares 240,000
Preference Shares
Preference shares can be:
• Preference over assets- preference shares are
settled first upon corporate liquidation and
after the creditor’s claims. 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 liability is shared proportionately by
preference and ordinary shareholders.
Preference Shares
• Preference over dividends- when dividends may be
➢ A non-cumulative preference share is one on
which the right to receive dividends is forfeited in
any one year in which dividends are not declared.
➢ A cumulative preference share is one on which
any undeclared dividends accumulate each year
until paid. Accordingly, the cumulative
preference share is entitled to dividends in
arrears.
Preference Shares
➢ A non-participating preference share is one
that is entitled to receive only the dividends
equal to the fixed preference rate
Preference Shares
➢ A participating preference share is one
which is entitled to received the dividends in
excess of the basic or fixed dividend rate.
Participating preference share may be fully
participating with ordinary share on a pro-
rata basis or participating only to a certain
amount or percentage.
Preference Shares
➢ However, before the preference share
can participate, the ordinary share
should receive first an amount equal to
the basic preference rate, meaning
preference rate times the par value of
the ordinary share outstanding.
Preference Shares
Notes:
(1) In the absence of specific designation,
preference share is assumed to be
noncumulative and non-participating.
(2) If there are 2 or more classes of
participating preference shares, use the
lowest participation rate to determine the
basic dividend the ordinary share should
receive first.
Exercise #3
A. PS are Non-Cumulative & Non-participating
Preference Ordinary Shares
Shares
Dividends in P 600,000
Arrears
(10% x P300 x
20,000 x1)
Balance P 1,800,000
Exercise #3
B. PS are Cumulative & Non-participating
Preference Ordinary Shares
Shares
Dividends in P 1,800,000
Arrears
(10% x P300 x
20,000 x3)
Balance P 600,000
Exercise #3
C. PS are Non-cumulative & fully-participating
Preference Shares Ordinary Shares
Dividends in Arrears P 600,000
(10% x P300 x 20,000
x1)
Basic Dividends –OS 300,000
(10% xP150 x 20,000)
Balance 1,000,000
(1.5M x 6/9)
(1.5M x 3/9) 500,000
1,600,000 800,000
Exercise #3
D. PS are cumulative & fully participating
Dividends in Arrears P 1,800,000
(10% x P300 x 20,000
x3)
(10% xP150 x 20,000)
Balance 200,000
(300k x 6/9)
(300k x 3/9) 100,000
2,000,000 400,000
Exercise #3
E. cumulative and participating only up to 15%
(10% x P300 x 20,000
x3)
(10% xP150 x 20,000)
Balance 300,000
(5% x 6,000,000)
2,100,000 300,000
Exercise #3 F. There are two types of preference shares and they are as follows
Preference Shares Preference Shares Ordinary Shares

(10%) (12%)

(10% x P300 x 20,000
x3)
(12% xP150 x 10k x 1) 180,000

(10% xP150 x 20,000)
Balance 68,571
(120k x 6/10.5 )
(120k x 1.5/10.5 ) 17,143

(120k x 3/10.5) 34,286
1,868,571 197,143 334,286
Exercise #1 - RE
a. Accumulated Depreciation 280,000

Retained Earnings-app (400k x 70%) 280,000
Exercise #1 - RE
4,500,000
280,000
Exercise #1 - RE

Retained Earnings-app (400k x 70%)
280,000
b. Retained Earnings-app (700k x 70%) 490,000

Cost of Goods sold 490,000
Exercise #1 - RE
490,000 4,500,000
280,000
Exercise #1 - RE

Retained Earnings-app (400k x 70%)
280,000
b. Retained Earnings-app (700k x 70%) 490,000
Cost of Goods sold 490,000
c. Income Summary 2,500,000
Retained Earnings-app. 2,500,000
Exercise #1 - RE
490,000 4,500,000
280,000
2,500,000
Exercise #1 - RE
d. Retained Earnings 1,900,000

Cash dividends payable 1,900,000
Exercise #1 - RE
490,000 4,500,000
1,900,000 280,000
2,500,000
Exercise #1 - RE

e. Retained earnings- unapp. 1,400,000

Retained earnings-app. 1,400,000
Exercise #1 - RE
490,000 4,500,000
1,900,000 280,000
2,500,000
1,400,000
Exercise #1 - RE

e. Retained earnings- unapp. 1,400,000

Retained earnings-app. 1,400,000
f. Retained earnings-unapp. 675,000

Share dividends payable 675,000
(90k shares x 10% x P75.00)
Exercise #1 - RE
490,000 4,500,000
1,900,000 280,000
2,500,000
1,400,000
675,000
Exercise #1 - RE
G. Retained earnings-unapp. 600,000

Retained earnings-app. 600,000
Exercise #1 - RE
490,000 4,500,000
1,900,000 280,000
1,400,000 2,500,000
675,000
600,000
Exercise #1 - RE
490,000 4,500,000
1,900,000 280,000
1,400,000 2,500,000
675,000
600,000
P 2,215,000
RECAPITALIZATION
Recapitalization refers to the change in the
capital structure of an entity brought about
by the cancellation of old shares and
issuance of new shares as replacement. After
recapitalization, TOTAL SHE remains the
same.
RECAPITALIZATION
Recapitalization is accomplished through
any of the following:
(1)Change from par to no par and vice-
versa
(2)Reduction of par or stated value
(3)Share splits or reverse splits
RECAPITALIZATION
Note: Journal entry is involved for (1) and (2) it is
accounted for as if retirement of old shares and
issuance of new shares. On the other hand, (3) is
accounted for by issuing a memorandum entry.
Split up increase the number of shares but
decreasing the shares’s par value while split down
decreases the number of shares but increasing
the par value of the shares.
RECAPITALIZATION
A. Share capital 3,000,000

Share capital 1,600,000
(20k shs x P80)
RECAPITALIZATION
B. Share capital 3,000,000

(20k shs x P200)
RECAPITALIZATION
C. Share capital 3,000,000

(20k shs x P100)
RECAPITALIZATION
D. Share capital 3,000,000

Retained earnings 800,000
(80k shs x P50)
RECAPITALIZATION
E. Split-up (20k shs x 2) = 40,000 shares
F. Split-down (reverse split) (20k shs / 2) = 10k shares

QUASI-REORGANIZATION
A quasi-reorganization is a permissive
but not a mandatory procedure under
which a financially troubled entity
restates its accounts and establishes a
“fresh start” in accounting sense. Thus,
the main goal of procedure is to eliminate
the deficit in retained earnings.
Quasi-reorganization is effected
through:
(1) Revaluation of property, plant and
equipment
(2) Recapitalization
The accounting steps and procedures for
quasi-reorganization are as follows:
(1) Assets and liabilities are revalued
upwards or downwards.
(2) Any resulting credit balance in
revaluation surplus is to be used to wipe
out the deficit.
The accounting steps and procedures for
quasi-reorganization are as follows:
(3) If recapitalization is made, any
resulting share premium shall also be
used to wipe out the deficit.
SEC REQUIREMENTS FOR QUASI-
REORGANIZATION
1. If the quasi-reorganization is the result
of revaluation of PPE, the revaluation
must be made by an independent expert
or specialist.
REORGANIZATION
2. The increase in the value of PPE is
credited to “revaluation surplus”
3. The adjustments concerning “other”
assets (inventory, investment,
intangibles etc.) shall be made through
RE
REORGANIZATION
4. The resulting deficit from the quasi-
reorganization is offset against the
revaluation surplus.
5. RE subsequent to quasi-reorganization
shall restricted to the extent of the deficit
wiped out during the reorganization and
cannot be declared as dividend.
REORGANIZATION
6. Losses subsequent to quasi-
reorganization cannot be charged to the
remaining revaluation surplus.
7. The quasi-reorganization shall be
disclosed for at least 3 years.
Exercise #6
a. Retained earnings 500,000
Inventory 500,000
Exercise #6
Inventory 500,000
b. Retained earnings 1,500,000
Accumulated Dep’n 1,500,000
Exercise #6
Inventory 500,000
c. Cash 1,500,000
Share Premium 1,500,000
Exercise #6
Inventory 500,000
c. Cash 1,500,000
d. Share capital (100k x 50) 5,000,000
Exercise #6
e. Share Premium 6,000,000
Retained Earnings 6,000,000
THE END

Shareholders Equity With Discussion Exercises

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SHAREHOLDER’S EQUITY

Prepared by: John Glenn Reoja, CPA

Contributed Subscribed Share Capital

Deductions from Discount on Share Capital

Contributed Subscribed Share Capital

Ordinary Shares 18,000,000

Authorized share capital 5,000,000

• Excess over par value or stated value

• Ordinary share warrants outstanding and bond

Preference share capital 2,300,000

This account exists if shares are issued for

If for example, the number of delinquent shares

If such happens , the delinquent subscriber shall be

Share capital xx Original

Share capital (2,000 x 10) 20,000

(b) The shares must have been issued

Note: No corporation shall redeem,

(a) Cash – face value

Cash (3,600 x 50) 180,000

Cash (2,400 x 41) 98,400

Share premium- issuance Jan. 1 900,000

Loss from reissuance (capital loss) =

(1) first to share premium-treasury shares;

Loss from reissuance (capital loss) =

(1) first to share premium-treasury shares;

Treasury shares @ cost xx

RE – beginning balance 900,000

(g) Dividends Interest Expense Dividends

Interest expense xx Retained earnings xx

FAIR VALUE ALLOCATION

Rights No Journal Normal Entry for issuance of No journal

Cash or non-cash asset xx

Donated Capital 10,000

f. Cash (5,000 x P30) 150,000

Relative dates in Accounting for Dividends

• Date of Declaration- The date when the board of directors

b. When the declaration of dividend by management or

Note: Generally, only the date of declaration and date of

Issued shares can be derived from share capital

The accounting for this type of dividend has two

Shared dividends – A.K.A bonus issue. Stock

Outstanding Shares= Issued + Subscribed – Treasury shares

A. 10% (Small) 22,000 shares x 10% = 2,200 shares

Outstanding Shares= Issued + Subscribed – Treasury shares

B. 5%. 22,000 shares x 5% = 1,100 shares

Outstanding Shares= Issued + Subscribed – Treasury shares

C. 30% (Large) 22,000 shares x 30% = 6,600 shares

Outstanding Shares= Issued + Subscribed – Treasury shares

D. 15%, 22,000 shares x 15% = 3,300 shares

Preference Shares Preference Shares Ordinary Shares

Dividends in Arrears P 1,800,000

(12% xP150 x 10k x 1) 180,000

(120k x 1.5/10.5 ) 17,143

a. Accumulated Depreciation 280,000

a. Accumulated Depreciation 280,000

b. Retained Earnings-app (700k x 70%) 490,000

a. Accumulated Depreciation 280,000

d. Retained Earnings 1,900,000

d. Retained Earnings 1,900,000

e. Retained earnings- unapp. 1,400,000

d. Retained Earnings 1,900,000

e. Retained earnings- unapp. 1,400,000

f. Retained earnings-unapp. 675,000

G. Retained earnings-unapp. 600,000