MAJOR COMPONENTS OF

SHAREHOLDERS’ EQUITY SECTION

 Two major components:
A. SHARE CAPITAL reflects the amount of resources
received by the corporation as a result of investment by
stockholders, donation and or other capital stock
transactions.
B. RETAINED EARNINGS is the amount of capital
accumulated and retained through the profitable
operations of the business.**

**NET WORTH =TOTAL ASSETS – TOTAL DEBTS

 SHAREHOLDERS’ EQUITY
Share Capital
Preference share-P50 par, 1000shares
authorized, issued and outstanding P50,000
Ordinary Shares-P5 par, 30,000shares
authorized, 20,000 shares issued and
outstanding P100,000
Share Premium – Ordinary 50,000 150,000
Total 200,000
Retained Earnings 80,000
Total Shareholders’ Equity P 280,000
 SHARE CAPITAL
SHARE CAPITAL OR CAPITAL STOCK– is the portion of a corporation’s
equity that has been obtained by the issue of shares of the company to a
shareholder and paid by them in money, property or services.
The share capital or contributed capital or paid-in capital is
divided into:
LEGAL CAPITAL -refers to the amount equal to the aggregate number of
all issued and subscribed par value shares multiplied by par value.
 that portion of owners’ equity and assets that cannot be distributed , and is
therefore permanent in nature.
 it cannot be allowed to leave the business and distributed through a
DIVIDEND or any other means.
SHARE CAPITAL...
WHY IS LEGAL CAPITAL IMPORTANT?
States require companies to maintain legal capital in order to
protect creditors’ claims to assets.

SHARE PREMIUM or ADDITIONAL PAID-IN CAPITAL

the credited difference in price between the par value , face
value of shares and the total price a company received for
recently issued shares.
a statutory reserve account and therefore non-distributable ,
unless such move is stated in the company’s by-laws.
For example,
 if a company issues a share of common stock at a par value
of P1 per share ,this means that only P1 of the amount for
which the share is sold must be reserved as legal capital,
while all other receipts are credited to the additional paid-in
capital (APIC).

 Thus, an issuance of 1 million shares would only yield legal

capital of $1,000,000, assuming a par value per share of P1.

 The company issuing the 1 million shares could issue a

dividend to its investors in the amount of the additional
paid-in capital associated with the sale, but could not issue a
dividend for the $1,000,000 designated as the par value of
the stock.
 TERMS RELATED TO SHARE CAPITAL
AUTHORIZED SHARE CAPITAL
• It is the maximum amount of shares than can lawfully sell
to investors.
• Fixed in the Articles of Incorporation to be subscribed and
paid or secured to be paid-in by the stockholders.
• It is divided into transferable shares of stock multiplied by
par value.
A share/stock represents the interest or right of a holder in a
corporation and is evidenced by certificate of stock,
whether it be a common share or a preferred share.
Increase /decrease is subject to the approval of SEC.
CONTINUED...
ISSUED SHARE CAPITAL - shares which have been
sold and paid for in full. It includes treasury shares.
SUBSCRIBED SHARE CAPITAL -is the portion of the
authorized capital stock that has been subscribed but not
fully paid.
OUTSTANDING SHARE CAPITAL -these are issued
shares which are in the hands of the stockholders.
TREASURY SHARES- shares bought back by the issuing
company, thus reducing the number of shares outstanding
on the open market
OS = Issued shares- Treasury shares
CONSIDERATIONS FOR ISSUANCE OF A
SHARE OF STOCK

Share capital may be issued in exchange for any of the

following considerations:

1. Actual cash paid to the corporation

2. Tangible or intangible properties
3. Labor already performed for services actually rendered
4. Previously incurred indebtedness by the corporation
 STOCK ISSUANCES FOR NON-CASH
CONSIDERATIONS
If a stock is issued for non-cash considerations such as
properties or intangibles, the valuation basis would be:
 fair market value of property
 fair market value of stocks issued
 par or stated value of capital stock
in order of priority.
FAIR MARKET VALUE -the estimated amount that a
willing seller would receive from a financially capable
buyer for the sale or exchange of the asset in a free market.
 Example:

FM Construction Co. is a closely-held corporation. A group of foreign

investors wanted to acquire stocks of the company because of its
tremendous earning potential equivalent to 900 ordinary shares. After
meeting with the management and the board, the investors were allowed to
make an investment. The consideration given was a tract of land located in
Mindanao with a fair market value of P1,000,000. FM corporation’s stocks
has a par value of P1000. per share.

 Land 1,000,000
Ordinary Shares 900,000
Share Premium-Ordinary 100,000
To record issuance of shares for non cash consideration.
 TWO METHODS OF ACCOUNTING
FOR CAPITAL STOCK
JOURNAL ENTRY METHOD
Upon Authorization
Dr. Unissued Ordinary Shares xx
Cr. Authorized Ordinary Shares xx
Upon full payment & stock certificate
issuance
Dr. Subscribed ordinary shares xx
Cr. Unissued ordinary shares xx
**all other entries are the same
MEMORANDUM METHOD
Upon Authorization
The corporation was authorized
to issue P400,000 ordinary shares
divided into 4,000 shares, P100 par.
Upon full payment & stock
certificate issuance
Dr. Subscribed Share Capital xx
Cr. Share Capital-Ordinary xx
 ACCOUNTING FOR SHARE CAPITAL
WITH PAR VALUE & AT PAR
BSA, Inc . Is authorized to issue P5,000,000 capital stock, 50,000 shares
with par value of P100 per share. The company issued 2,000 shares at
par for cash. The stock issuance entry is:
Cash 200,000
Ordinary Shares 200,000
To record issuance of ordinary share at par
WITH PAR VALUE ABOVE PAR
Assuming the 2,000 issued shares was for P150 per share
Cash 300,000
Ordinary shares 200,000
Share Premium-Ordinary 100,000
To record issuance or ordinary shares above par.
ACCOUNTING...
WITHOUT PAR VALUE
The proceeds for the sale of no- par value shares is credited to ordinary
shares account.

NO-PAR SHARE WITH STATED VALUE

The entity issued a P5,000 no-par shares with stated value of P20 per
share for P125,000.
Cash P125,000
Ordinary shares P100,000
Share Premium-ordinary 25,000
 STOCK/ SHARE SUBSCRIPTIONS
There are times that a corporation sells its stocks directly
to investors on a subscription basis.

The transaction is a binding subscription contract as to:1.

No. of shares subscribed
2. Subscription price
3. Terms of payment
and other conditions of the transaction.
 ILLUSTRATION
BSA Car Shop, Inc. is a prestigious car dealer in Quezon City.
Assume that 5,000 shares of P10 par value capital stock of
the company were sold on subscription at P12 per share on
August 15, 2019 to Medina Co. Subscription installments of
P24,000 and P36,000 will be due on Sept 16 and 30
respectively.
Entries upon subscription:
1). Aug 15 Subscription Receivable 60,000
Subscribed Ordinary Shares 50,000
Share Premium 10,000
To record subscription above par
CONTINUED…
2). Sept 16 Cash 24,000
Subscription Receivable 24,000
To record initial installment

3) . Sept 30 Cash 36,000

Subscription Receivable 36,000
To record final installment
4). Sept 30 Subscribed Ordinary Shares 50,000
Ordinary Shares 50,000
To record issuance of stock certificates
ABOUT STOCK
SUBSCRIPTIONS
 Subscription Receivable is a Stockholder’s Equity
account.
 It is represented in the equity section of the Balance Sheet
as a deduction from related Subscribed Capital Stock.

 If it is collectible within a year, this may be shown in the

statement of financial position as current asset.
DELINQUENT SUBSCRIPTION
 When a subscriber fails to settle the subscriptions in full on the date
specified in the subscription contract or in the call made by the BOD,
then the shares shall be declared delinquent shares.
 In this case , the delinquent shares shall be sold in public auction for the
account of the delinquent shares to the highest bidder.

HIGHEST BIDDER
 is a person who is willing to pay the full amount of the “offer price”
plus accrued interest, cost of ads and other expenses related to
auction sale in exchange for the smallest number of shares.
 ILLUSTRATION
Assuming Medina Co., a subscriber, failed to settle part of his
subscriptions in the amount of P48,000. After complying with legal
procedures pertaining to delinquency sale, a public auction was held.
The offer price is P59,000 including accrued interest of 3,000 and
P8,000 expenses of sale.
The bidders for the shares were the following:

Pedraja , Inc 4,300 shares

Contreras Co. 4,500 “
Arcega Co. 4,700 “
Quinio Corp. 4,750 “
WHO IS THE HIGHEST
BIDDER?
Pedraja, Inc. is the highest bidder. The 5,000 shares are deemed fully paid.
Medina , the original subscriber gets 700 shares, and Pedraja, Inc. gets
4,300 shares.

Entries to record the transactions are:

1) Subscription Receivable 60,000
Subscribed ordinary shares 50,000
Share premium-ordinary 10,000
To record transaction above par.
ENTRIES…
2) Cash 12,000
Subscription Receivable 12,000
To record initial installment
(P60,000-P12,000 =P48,000)

3) Receivable from highest Bidder 3,000

Interest revenues 3,000
To record interest income earned

4) Receivable from Highest Bidder 8,000

Cash 8,000
To record auction expenses incurred
ENTRIES…
5) Cash 59,000
Receivable from Highest Bidder 11,000
Subscription Receivable 48,000
To record payment of Pedraja, the highest bidder

6) Subscribed Ordinary Shares 50,000

Ordinary Shares 50,000
To record issuance of stock certificate.
 WHAT HAPPENS IF THERE IS ONLY
ONE OR NO BIDDER?
ONLY ONE or SOLE BIDDER
 The BOD may or may not accept the bid offered.
NO BIDDER
 If there is NO BIDDER, then the corporation may bid for the delinquent
shares . Shares acquired under this circumstances are considered
Treasury Shares.

All other entries are the same except for the TS :

Treasury Stock P59,000
Receivable from Highest Bidder 11,000
Subscription Receivable 48,000
To record purchase of own shares
Thank You Very
Much!