SHAREHOLDERS’

EQUITY
INTERMEDIATE ACCOUNTING II
 EQUITY
• the residual interest in the assets of the entity after deducting all of
its liabilities
• “net assets” or total assets minus liabilities
• Increased by profitable operations and contribution by owners.
• Decreased by unprofitable operations and distributions to owners.
• Owner’s equity in a proprietorship
• Partners’ equity in a partnership
• Shareholders’ equity in a corporation
• The term equity may simply be used for all business entities.
 Shareholders’ Equity
• residual interest of owners in the net assets of a corporation measured
by the excess of assets over liabilities.
Philippine termIAS term SFP – SHE section
Capital stockShare capital LINE ITEMS
Subscribed capital stock Subscribed share capital
Preferred stock Preference share capital (1) SHARE CAPITAL
Common stock Ordinary share capital
Retained earnings (deficit) Accumulated profits (losses) (2) RETAINED
Additional paid-in capital Share premium EARNINGS
Retained earnings appropriatedAppropriation reserve (3) RESERVES
Revaluation surplus Revaluation reserve
Treasury stock Treasury share Deduction from total SHE
 Shareholders' Equity
Share Capital
8% Preference Shares - P50 par, 1,000 shares
authorized, issued and outstanding ₱ 50,000
Share Premium - Preference 12,000 ₱ 62,000
Ordinary Shares - P5 par, 30,000 shares authorized
20,000 shares issued, and 18,000 shares outstanding ₱ 100,000
Share Premium - Ordinary 40,000 140,000
Total Share Capital ₱ 202,000
Retained Earnings 75,000
TOTAL ₱ 277,000
Less: Treasury Shares 2,000 shares, @ cost 12,000
Total Shareholders' Equity ₱ 265,000
 Shareholders' Equity
Share Capital (6) 2,750,000
Reserves (7) 1,450,000
Retained Earnings 2,450,000
Total Shareholders' Equity 6,650,000

Note 6 Share Capital Note 7 Reserves

Ordinary Share Capital - P20 par 2,000,000 Share Premium - PS 250,000
100,000 shares issued & outstanding Share Premium - OS 700,000
Preference Share Capital P100 par 750,000 Retained Earnings appropriated for 200,000
7,500 shares issued & outstanding contingencies
Total Share Capital 2,750,000 Cumulative Translation Adjustment - CR 300,000
Total Reserves 1,450,000
 Share Capital
• Share capital is the portion of the paid in capital representing the
total par or stated value of the shares issued.
• Ordinary Share Capital
• Preference 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.
• Subscriptions receivable shall preferably be reflected as deduction
from the related subscribed share capital.
• when collectible within one year shall be classified as current
asset.
 Share Premium
• Share premium is the capital contributed by the shareholders
excess of the par or stated value of the shares subscribed and
issued.
• Common Sources
CH 20 • Excess of par or stated value
• Resale of Treasury Shares at more than cost
CH 21
• Donated Capital
• Issuance of Share Warrants
CH 22 • Distribution of Share Dividends
CH 23 • Quasi-reorganization and Recapitalization
 Retained Earnings
• represent the cumulative balance of periodic net income or loss,
dividend distributions, prior period errors, changes in accounting
policy and other capital adjustments including reclassification
adjustments (components of OCI subsequently reclassified to RE)
• Unappropriated retained earnings represent that portion which is free
and can be declared as dividends to the shareholders.
• Appropriated retained earnings represent that portion which is restricted
and therefore not available for any dividend declaration.
• A deficit is a debit balance in retained earnings.
• not presented as an asset but as deduction from shareholders’ equity
 Treasury Shares
• an entity’s own shares that have been issued and then reacquired but
not canceled.
• When treasury shares are acquired, the retained earnings must be
appropriated to the extent of the cost of the treasury shares.
• The cost of treasury shares shall be shown as a deduction from the
shareholders’ equity.
• The amount of reduction to equity for treasury shares held shall be
disclosed separately either on the face of the statement of financial
position or in the notes.
• DEPOSITS ON SUSCRIPTIONS to a proposed increase in share capital may be
reported as part of shareholders’ equity as a separate item in the equity
section.
Reserves
• not officially defined in any accounting standard or in the
conceptual framework.
• form a substantial part of the equity of an entity
• Distributable equity is that portion that can be distributed to
shareholders as dividends without impairing the legal capital
of the entity. (unappropriated retained earnings)
• Nondistributable equity is that portion that cannot be
distributed to the shareholders in any form during the
lifetime of the entity. (reserves)
Example of Reserves
a. Share premium reserve is the excess over the par or stated value or
popularly called additional paid in capital.
b. Appropriation reserve is the earmarking of retained earnings for a
certain purpose which may be required by law, contract or the
result of a voluntary action of management.
c. Asset revaluation reserve arises from the revaluation of property,
plant, and equipment. Specifically, this reserve is called revaluation
surplus. IA1 – CH 33
d. Other Comprehensive Income reserve
 Components of OCI
Subsequently reclassified to PROFIT/LOSS
1. Unrealized gain or loss on debt investment measured at fair value through
other comprehensive income. IA1 – CH 15
2. Gain or loss from translating the financial statements of a foreign operation.
3. Unrealized gain or loss from derivative contracts designated as cash flow
hedge. IA1 – CH 23 & 24
Subsequently reclassified to RETAINED EARNINGS
4. Unrealized gain or loss on equity investment measured at fair value through
other comprehensive income. IA1 – CH 15
5. Revaluation surplus during the year IA1 – CH 33
6. Remeasurement gain or loss of defined benefit plan. IA2 – CH 18
7. Change in the fair value attributable to credit risk of a financial liability
designated at fair value through profit or loss. IA2 – CH 5 & 8
 Ordinary Share Capital
• If there is only one class of chare capital, it necessarily is ordinary
share.
• called because the ordinary shares have the same rights and privileges
• Four Basic Rights of a Shareholder
• To share in the earnings of a corporation (dividends)
• To vote in the election of directors and in the determination of
certain corporate policies
• To subscribe for additional share issues – right of pre-emption or
share rights
• To share in the net assets of the corporation upon liquidation
 Preference Share Capital
• So called because of preferences granted to the shareholders
• Preferred as to dividends
• Preferred as to net assets in the event of liquidation
• The preference shareholders have only a limited or fixed
return on investment
 Legal Capital
• Portion of the paid-in capital arising from the issuance of share
capital which cannot be returned to the shareholders in any form
during the lifetime of the corporation for the protection of the
creditors. TRUST FUND DOCTRINE Dividends to shareholders
limited only to the retained
earnings balance
• Par Value shares
• Aggregate par value of all issued and subscribed shares
• No-Par Shares
• Total consideration received for the issuance of shares including
the excess of issue price over stated value
TWO METHODS
Accounting for share capital
• Journal Entry Method
• Memorandum Method

• Difference lies in the entries pertaining to authorization and

issuance of share capital
ILLUSTRATION
• A company was authorized to issue P4,000,000 ordinary shares
divided into 40,000 shares with a par value of P100 per share.
• Journal Entry Method
Unissued Share Capital 4,000,000
Authorized Share Capital 4,000,000

• Memorandum Method
MEMO: The corporation was authorized to issue P4,000,000
ordinary shares divided into 40,000 shares with P100 par.
ILLUSTRATION
• Received subscriptions for 10,000 shares at par.
• Journal Entry Method
Subscriptions Receivable 1,000,000
Subscribed Share Capital 1,000,000

• Memorandum Method
Subscriptions Receivable 1,000,000
Subscribed Share Capital 1,000,000
ILLUSTRATION
• Collected 25% of the subscriptions.
• Journal Entry Method
Cash 250,000
Subscription Receivable 2500,000

• Memorandum Method
Cash 250,000
Subscriptions Receivable 250,000
ILLUSTRATION
• Received full payment for 6,000 shares originally subscribed.
• Journal Entry Method
Cash 450,000
Subscriptions Receivable 450,000

• Memorandum Method
Cash 450,000
Subscriptions Receivable 450,000
ILLUSTRATION
• Issued the share certificates for 6,000 shares which are fully paid.
• Journal Entry Method
Subscribed Share Capital 450,000
Unissued Share Capital 450,000

• Memorandum Method
Subscribed Share Capital 450,000
Share Capital 450,000
ILLUSTRATION
• Received a cash subscription for 5,000 shares at par.
• Journal Entry Method
Cash 500,000
Unissued Share Capital 50,000

• Memorandum Method
Cash 500,000
Share Capital 50,000
 STATEMENT PRESENTATION
MEMORANDUM METHOD
Share Capital, P100 par, 40,000 shares authorized 1,100,000
11,000 shares issued
Susbcribed Share Capital, 4,000 shares 400,000
Subscription Receivable (300,000)
Shareholders'Equity 1,200,000

JOURNAL ENTRY METHOD

Authorized Share Capital, P100 par, 40,000 shares 4,000,000
Unissued Share Capital, 29,000 shares (2,900,000)
Issued Share Capital 1,100,000
Susbcribed Share Capital, 4,000 shares 400,000
Subscription Receivable (300,000)
Shareholders'Equity 1,200,000
Issuance of Share Capital DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT

• When shares with par value are

sold, the proceeds shall be
credited to the extent of par value, CASH ( 10,000 * P150 ) 1,500,000
Ordinary Shares ( 10,000 * P100 ) 1,000,000
with any excess being reflected as Share Premium 500,000
share premium. To record issuance of shares for cash
• 10,000 ordinary shares of P100 par
value are sold at P150 per share.
• When shares without par value
are sold, the proceeds shall be
credited to the extent of the CASH ( 20,000 * P80 ) 1,600,000
stated value and any excess is Ordinary Shares ( 20,000 * P50 ) 1,000,000
credited to share premium. Share Premium 600,000
To record issuance of shares for cash
• 20,000 ordinary shares of P50
stated value are issued at P80 per
share
 Investor’s (shareholders) Point of View
• Investment - buying or acquiring shares (financial asset)
• Equity Security (financial asset) – any instrument representing ownership
shares and rights, warrants or options to acquire or dispose of ownership
shares at a fixed or determinable price.
• Accounting Treatment – depends on the purpose (accretion of wealth,
capital appreciation, ownership control
• Initial Measurement - FAIR VALUE (transaction price / consideration given)
• As a rule, transaction costs that are directly attributable to the acquisition
shall be capitalized as cost of the financial asset.
• If the financial asset is held for trading or if the financial asset is measured
at fair value through profit or loss, transaction costs are expensed
outright.
PFRS 9 Financial Instruments
 Investor’s (shareholders) Point of View
• MEASUREMENT (Accounting) OF EQUITY INVESTMENTS (Fin’l Assets)
• Fair Value through Profit or Loss (FVPL) IA1 – CH 15
• Held for trading, Not held for trading (as a RULE), all other investments in quoted
equity instruments
• Fair Value through Other Comprehensive Income (FVOCI) IA1 – CH 15
• Not held for trading – irrevocable election
• At COST IA1 – CH 16
• Investment in unquoted equity instruments
• EQUITY METHOD of accounting IA1 – CH 17
• Investments of 20% to 50% (associate - significant influence)
• CONSOLIDATION METHOD (advanced accounting)
• Investments of more than 50% (subsidiary)
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Issuance of Share Capital CASH ( 10,000 * P150 ) 1,500,000
• 10,000 ordinary shares of P100 Ordinary Shares ( 10,000 * P100 ) 1,000,000
par value are sold at P150 per Share Premium 500,000
To record issuance of shares for cash
share.
• INVESTOR (FV – Profit or Loss) INVESTOR
• TRADING SECURITIES (account) Financial Assets – FVPL 1,500,000
Cash 1,500,000
To record acquisition of 10,000 shares
• The investor paid P50,000 Commission Expense 50,000
commission to a broker. Cash 50,000
To record payment of transaction costs

• Received a dividend of P10,000. Cash 10,000

Dividend Income 10,000
To record receipt of dividend
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
INVESTOR’S Point of View DISCLOSURE – original cost
• INVESTOR (FV – Profit or Loss) Financial Asset – FVPL 1,500,000
• TRADING SECURITIES (account) Cash 1,500,000
To record acquisition of 10,000 shares
• 10,000 ordinary shares were Commission Expense 50,000
acquired for P150 per share Cash 50,000
To record payment of transaction costs
• The investor paid P50,000 Cash 30,000
commission to a broker. Dividend Income 30,000
To record payment of transaction costs
• Received a dividend of P30,000. Financial Asset - FVPL 10,000
• At the end of the year, the fair Unrealized Gain - FAFVPL 10,000
To record increase in market value
value of the financial asset is OTHER
Component of IS @ year end INCOME
P1,510,000. ( 1,510,000 – 1,500,000 )
CASH 1,490,000
Reported in the SFP @ year-end – Loss on Sale of Financial Asset 20,000
current assets (separate line item) Financial Asset - FVPL 1,510,000
• Early the following year, sold the To record sale
shares for P1,490,000 Component of IS @ following year end
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
INVESTOR’S Point of View DISCLOSURE – original cost
• INVESTOR (FV – OCI ) Financial Asset – FVOCI 1,550,000
Cash 1,550,000
• 10,000 ordinary shares were To record acquisition of 10,000 shares
acquired for P150 per share Dividend Receivable 30,000
( 10,000 shares * P150 ) + Dividend Income 30,000
• The investor paid P50,000 To record declared dividend
commission to a broker. CAPITALIZED Unrealized Loss - FAFVOCI 40,000
• Dividend of P30,000 were Financial Asset - FVOCI
To record decrease in market value
40,000
declared on the 10,000 shares. Component of (1) OCI and (2) SFP - Reserves @ year end
• At the end of the year, the fair CASH 1,520,000
value of the financial asset is Financial Asset - FVOCI 1,510,000
P1,510,000. ( 1,550,000 – 1,510,000 ) RETAINED EARNINGS 10,000
To record sale
Reported in the SFP @ year-end – noncurrent
NO GAIN/LOSS - @ FVOCI
assets (Long-Term Investment) 40,000
RETAINED EARNINGS
• Sold the shares for P1,520,000 Unrealized Loss - FAFVOCI 40,000
To record reclassification to retained earnings
ACTIVITY I Problem 15-6 (Ia1)
• Additional Info (changes)
• The entity paid P20,000 transaction costs for the acquisition of each type
of securities.
• Sale of Security One for P680,000
• Market Values End of Year 2
Security Two 1,000,000 Security Four 1,100,000
• Journal entries for 2019
• Purchase (2)
• Change in Market Values (2)
• Journal entries for 2020
• Sale (2)
• Change in Market Values (2)
• Presentation – end of 2019 & 2020
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
INVESTOR’S Point of View
• INVESTOR ( @ COST ) Investment in Shares 1,550,000
• Unquoted Equity Instruments Cash 1,550,000
To record acquisition of 10,000 shares
• 10,000 ordinary shares were
acquired for P150 per share Cash 30,000
Dividend Income 30,000
• The investor paid P50,000 To record receipt of dividend
commission to a broker.
• Received a dividend of P30,000.
CASH 1,600,000
• At the end of the year, the fair Investment in Shares 1,550,000
value of the financial asset is Gain on Disposal of Investment 50,000
P1,510,000. IGNORED To record sale of investment

• Early the following year, sold the

shares for P1,600,000
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
INVESTOR’S Point of View
Investment in Associate 1,550,000
• INVESTOR ( Equity Method ) Cash 1,550,000
• Significant Influence To record acquisition of 10,000 shares
• 10,000 ordinary shares were acquired ( 100,000 * 25% )
for P150 per share which represent Receivable from Associate 25,000
25% equity interest and having a Investment in Associate 25,000
significant influence over the investee. To record dividend declaration
( 150,000 * 25% )
• The investor paid P50,000 commission
Investment in Associate 37,500
to a broker.
Investment Income 37,500
• The investee declared a dividend of To record share in profit of associate
P100,000. RETURN OF INVESTMENT
Investment in Associate @ year-end 1,562,500
• At the end of the year, the fair value of Presented in the SFP-NCA as separate line item
the financial assetIGNORED
is P1,510,000. ( 1,550,000 – 25,000 + 37,500 )

• The investee reported a profit of OR Loss on Investment 30,000

P150,000. Investment in Associate 30,000
To record share in loss of associate ( 120,000 * 25% )
• OR. The investee reported a loss of
P120,000.
ACTIVITY II Problem – Investment in Associate
• On January 1, 2017, Anne Company purchased Acquisition cost 5,000,000
25% of the outstanding ordinary shares of Dune Carrying amount of net assets
Company for P4,000,000. Dune Company’s acquired (20% x 20,000,000) 4,000,000
shareholders’ equity on January 1, 2017 was Excess of cost over carrying amount 1,000,000
P15,000,000. Undervaluation of building
(20% x 2,000,000) 400,000
• Anne Company also paid P500,000 to a business
GOODWILL 600,000
broker who helped find a suitable business and
negotiated the purchase.
• At the time of acquisition, the fair values of Dune • Initial Computation
Company’s identifiable assets and liabilities were • Entry for acquisition
equal to their carrying amounts excepts for an • Computation of Net Investment
office building which had a fair value in excess of Income
carrying amount of P2,000,000 and an estimated • Entries at the end of the year
life of 10 years. • Presentation - SFP
• During 2017, Dune Company reported net income
of P5,000,000 and paid cash dividend of
P2,000,000.
ACTIVITY III Problem – Investment in Associate
Acquisition cost 5,000,000
• At the beginning of current year, Occidental
Carrying amount of net assets
Company purchased 40% of the outstanding
acquired (20% x 20,000,000) 4,100,000
ordinary shares of Mana Company for P3,500,000
Excess of cost over carrying amount 900,000
when the net assets of Mana amounted to
Undervaluation of equipment
P7,000,000.
(20% x 4,000,000) ( 800,000)
• At acquisition date, the carrying amounts of the Undervaluation of inventory
identifiable assets and liabilities of Mana were (20% x 500,000) ( 200,000)
equal to their fair value, except for equipment for EXCESS of Net FV over Cost ( 100,000)
which the fair value was P1,500,000 greater than
carrying amount and inventory whose fair value • Initial Computation
was P500,000 greater than cost. • Entry for acquisition
• The equipment has a remaining life of 4 years and • Computation of Net Investment
the inventory was all sold during the current year. Income
• Mana Company reported net income of • Entries at the end of the year
P4,000,000 and paid P1,000,000 cash dividend • Presentation - SFP
during the current year.
Shares Issued at a
Discount
• When shares are sold at prices below par
or stated value
• Corporation Code prohibits the issue of
share at a discount
• When share is sold at a discount, the
discount is not considered a loss to the
issuing corporation but the shareholder is
liable therefor.
• The issue of the share is not cancelled but
the shareholder must pay for the discount.
(Discount Liability of the shareholder)
• Since a discount is an investment
deficiency, it should be accounted for
separately.
• If 10,000 shares of P100 par value are sold for
P800,00 cash
CASH 800,000
DISCOUNT on SHARE CAPITAL 200,000
SHARE CAPITAL 1,000,000
• Discount on Share Capital is a deduction
from total shareholders’ equity.
• The prohibition to issue shares at a discount
refers to original issue of share but not to a
subsequent transfer of such share by the
corporation.
• Treasury shares may be sold or reissued for
less than par value without violating the
provision of the law.
Issuance of Share Capital for ACQUISITION of PPE thru issuance
of Share Capital (IA1 CH25 p634)

Noncash Considerations
• If share capital is issued for noncash consideration such as tangible property,
intangible property and services, the share capital is recorded at an amount
equal to the following order of priority:
1. Fair value of the noncash considerations received
2. Fair value of the shares issued
3. Par value of the shares issued
• ACQUISITION by EXCHANGE (investor’s view) (IA1 CH16)
• If the equity securities are acquired in an exchange, the acquisition
cost is determined to the following order of priority:
1. Fair value of the asset given
2. Fair value of the asset received
3. Carrying amount of the asset given
 Issuance of Share Capital for Noncash DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Considerations
(1) FAIR VALUE OF LAND
• ILLUSTRATION LAND 1,500,000
Ordinary Shares ( 10,000*100 ) 1,000,000
• An entity issued 10,000 ordinary Share Premium - OS 260,000
shares of P100 par value and 2,500 Preference Shares ( 5,000*50 ) 125,000
preference shares of P50 par value in Share Premium - PS 115,000
exchange for land with a fair value of To record issuance of shares for land
P1,500,000. To be allocated
• The fair value at the date of exchange INVESTOR – exchange LAND (PPE) for
of the ordinary share is P105 and Shares (Equity Securities)
preference share is P80.
10,000 2,500
INVESTMENT IN ORDINARY SHARES 1,260,000
shares shares ( 10,000 shares @ P126 )
Fair Value Allocation Par Value Share Premium
INVESTMENT IN PREFERENCE SHARES 240,000
OS 1,050,000 1,260,000 1,000,000 260,000 ( 2,500 shares @ P96 )

PS 200,000 240,000 125,000 LAND 1,500,000

115,000 To record exchange
1,250,000 1,500,000 1,125,000 375,000
 Issuance of Share Capital for Noncash DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Considerations
(1) FAIR VALUE OF LAND
• ILLUSTRATION LAND 1,500,000
• An entity issued 10,000 ordinary Ordinary Shares ( 10,000*100 ) 1,000,000
shares of P100 par value and 2,500 Share Premium - OS 260,000
Preference Shares ( 5,000*50 ) 125,000
preference shares of P50 par value in
exchange for land with a fair value of Share Premium - PS 115,000
To record issuance of shares for land
P1,500,000.
• The fair value at the date of exchange (2) FAIR VALUE OF SHARES
of the ordinary share is P105 and LAND 1,250,000
preference share is P80. Ordinary Shares ( 10,000*100 ) 1,000,000
Share Premium - OS ( 10,000*5 ) 50,000
Fair Value Allocation Par Value Share Premium Preference Shares ( 2,500*50 ) 125,000
Share Premium - PS ( 2,500*30 ) 75,000
OS 1,050,000 1,260,000 1,000,000 260,000 (3) PAR VALUE OF SHARES
PS 200,000 240,000 125,000 115,000 LAND 1,125,000
Ordinary Shares 1,000,000
1,250,000 1,500,000 1,125,000 375,000 Preference Shares 125,000
 Equity Swap IA2 – CH 9

• An equity swap is a transaction whereby a debtor and creditor may

renegotiate the terms of a financial liability with the result that the
liability is fully or partially extinguished by the debtor issuing equity
instruments to the creditor.
• An equity swap is the issuance of share capital by the debtor to the
creditor in full or partial payment of an obligation.
 IFRIC 19
• “extinguishment of a financial liability by issuing equity instruments”
• IFRIC 19 provides that when equity instruments issued to extinguish all or part of a
financial liability are recognized initially, an entity shall measure the equity instruments at
the fair value of the equity instruments issued, unless the fair value cannot be reliably
measured.
• The equity instruments issued to extinguish a financial liability shall be measured at the
following amounts in the order of priority:
1. Fair value of the equity instruments issued
2. Fair value of the liability extinguished
3. Carrying amount of the liability extinguished
• The difference between the carrying amount of financial liability and the initial
measurement of the equity instruments shall be recognized in profit or loss.
• The gain or loss on extinguishment shall be reported as a separate line item in the
income statement.
 ILLUSTRATION – Fair Value of the DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Shares issued is used Dec 31 Bonds Payable 5,000,000
Accrued Interest Payable 500,000
• An entity provided the following Share Capital 2,000,000
Share Premium 2,500,000
balances at year-end:. Gain on Extinguishment of Debt 1,000,000
Bonds Payable 5,000,000 To record extinguishment of debt

Accrued Interest Payable 500,000 COMPUTATION

Fair Value of Shares issued 4,500,000
• The entity issued share capital Par Value of shares 2,000,000
with a total par value of Share Premium 2,500,000
P2,000,000 and fair value of
Bonds PAYABLE 5,000,000
P4,500,000 in full settlement of Accrued Interest Payable 500,000
the bonds payable and accrued Carrying Amount of Bonds 5,500,000
interest. Less: Fair Value of Shares issued 4,500,000
Gain on Extinguishment of Debt 1,000,000
 ILLUSTRATION – Fair Value of the DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Bonds Payable is used Dec 31 Bonds Payable 5,000,000
Accrued Interest Payable 500,000
• An entity provided the following Share Capital 2,000,000
balances at year-end:. Share Premium 2,700,000
Gain on Extinguishment of Debt 800,000
Note Payable 5,000,000 To record extinguishment of debt

Accrued Interest Payable 500,000 COMPUTATION

Fair Value of Bonds Payable 4,700,000
• The entity issued share capital Par Value of Shares 2,000,000
with a total par value of Share Premium 2,700,000
P2,000,000 and fair value of
P4,500,000 in full settlement of Bonds PAYABLE 5,000,000
Accrued Interest Payable 500,000
the bonds payable and accrued Carrying Amount 5,500,000
interest. Less: Fair Value of Bonds 4,700,000
• The fair value of bonds payable is Gain on Extinguishment of Debt 800,000
P4,700,000.
ILLUSTRATION – Carrying Amount DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
of the Bonds Payable is used Dec 31 Bonds Payable 5,000,000
Accrued Interest Payable 500,000
• An entity provided the following Share Capital 2,000,000
Share Premium 3,500,000
balances at year-end:. To record extinguishment of debt
Note Payable 5,000,000
Accrued Interest Payable 500,000 COMPUTATION
Carrying Amount of Bonds 5,500,000
• The entity issued share capital Par Value of Shares 2,000,000
with a total par value of Share Premium 3,500,000
P2,000,000 and fair value of
P4,500,000 in full settlement of
the bonds payable and accrued
interest.
ACTIVITY IV Problem 20-17
• JOURNAL ENTRY (show computations) to RECORD the ISSUANCE for
1. Cash of P8,000,000
2. Land with Fair Value of P8,500,000 and carrying amount of
P7,500,000.
3. 10,000 12% Bonds with face amount of P1,000 each issued exactly 2
years ago @ 90. Market rate of interest is 15%. Interest for 2nd Year
was not yet paid. 2 Decimal places for PV Factors. (Equity Swap)
 Issuance of Share Capital for Services
• Shares may be issued for services as long as the services are already rendered.
• In conformity with the legal provision and PFRS 2 (Share-Based Payment), if
shares are issued for services, the shares shall be recorded at the fair value of
such services or fair value of the shares issued, whichever is reliably
determinable.
ILLUSTRATION ORGANIZATION COSTS – outright expense
• An entity issued 1,000 ordinary shares of P100 par value to lawyers for their
legal services in getting the corporation organized. The fair value of such
services is reliably determined to be P120,000.
Legal Expenses 120,000
Ordinary Shares 100,000
Share Premium – OS 20,000
 Organization Cost (IA1 CH37 p922)

• represents cost incurred in forming or organizing a corporation. 

a. Legal fees in connection with the incorporation, such as drafting of
articles of incorporation and by-laws and corporate registration.
b. Incorporation registration.
c. Share issuance cost, such as printing of stock certificates, cost of stock
and transfer book, seal of the corporation, underwriting and
promotional fees, and accounting and legal fees in issuance.
• PAS 38, par 69, provides that “start up costs which include legal and
secretarial costs in establishing a legal entity shall be recognized as expense
when incurred.”
• Accordingly, organization cost shall be expensed immediately with the
exception of share issuance costs.
 Share Issuance Cost
• Are direct costs to sell share capital which normally include legal fees, CPA fees,
underwriting fees, commissions, cost of printing certificates, documentary stamps,
filing fees with SEC and cost of advertising and promotion or newspaper publication
fee.
• PAS 32, par 37, provides that transaction costs that are directly attributable to the
issuance of new shares shall be deducted from equity, net of any related income
tax benefit.
• In other words, share issuance cost shall be debited to the share premium arising
from the share issuance.
• If the share premium is not sufficient to absorb such costs, the excess shall be
debited to “share issuance costs” account to be presented as “contra equity” or as
a deduction from share premium from previous share issuance first and retained
earnings second.
 Cost of Public Offering
• The Philippine Interpretations Committee (PIC) concluded that “costs
that relate to stock market listing”, or otherwise are not incremental
costs directly attributable to the issuance of new shares, shall be
recorded as expense in the income statement.
• The cost listing of shares are not considered as costs of an equity
transaction since no equity instrument has been issued. Such costs are
recognized immediately as expense when incurred.
• Cost of listing shares include the following
1. Road show presentation
2. Public relations consultant’s fees
 Joint Costs
• PAS 32, par 38, requires that transaction costs that relate jointly to the
concurrent listing and issuance of new shares, and listing of old existing
shares shall be allocated between the newly issued and listed shares, and
the newly listed old existing shares.
• The PIC concluded that the joint costs shall be allocated prorate on the
outstanding newly issued and listed shares and outstanding newly listed old
shares.
• Examples of joint costs
a. Audit and other professional advice relating to prospectus
b. Opinion of Counsel
c. Tax opinion
d. Fairness opinion and valuation report
e. Prospectus design and printing
• ILLUSTRATION. DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
1 Share Listing Fee 300,000
• An entity undertakes an 300,000
Cash
initial public offering or IPO To record cost of public offering
for the listing and issuance If new shares are issued at more than par
of P700,000 new shares and 2 Share Premium 225,000
listing of 300,000 old Cash 225,000
To record share issuance costs
existing shares. If new shares are issued at par
• The entity incurred the
Expense immediately 2 Share Issuance Costs 225,000
following
Listing costs:
Fee COST OF PUBLIC OFFERING 300,000 Cash 225,000
To record share issuance costs
Documentary Stamp Tax SHARE 25,000
ISSUANCE
Newspaper Publication COSTS 200,000 3 Share Premium ( 500,000*70% ) 350,000
Fairness Opinion and Valuation Report 125,000 Stock Listing Fee (500,000*100 ) 150,000
Tax Opinion JOINT 100,000 Cash 500,000
COSTS
Other Joint Costs 275,000 To record issuance of callable pref. shares
500,000
 Watered Share
• Share capital issued for inadequate or insufficient consideration
• The consideration received is less than par or stated value, but the share capital is
issued and fully paid.
• If the share capital is watered, asset is overstated and capital is correspondingly
overstated.
• Land with fair value of P800,000 is received for 10,000 shares of P100 par value.
The issuance of shares is recorded as fully paid.
LAND 1,000,000
SHARE CAPITAL 1,000,000
• It is illegal to issue share for less than par or stated value. To correct the accounts:
DISCOUNT ON SHARE CAPITAL 200,000
LAND 200,000
Secret Reserve
• Reverse of watered share
• Arises when asset is understated or liability is overstated with a
consequent understatement of capital
• Usually arises from the following:
a. Excessive provision for depreciation, depletion, amortization and
doubtful accounts
b. Excessive writedown of receivables, inventories and investments
c. Capital expenditures are recorded as expense
d. Fictitious liabilities are recorded.
 Callable Preference Shares
• One which can be called in for redemption at a specified price at the
option of the corporation
• No definite redemption date but dependent on the call of the issuer
• An equity instrument rather than a financial liability because the option
of the issuer to redeem the share for cash does not satisfy the
definition of a financial liability (PAS 32 Financial Instruments)
• When preference shares are called in at more than the original price of
the preference shares, the excess is debited to retained earnings.
• When preference shares are called in at less than the original issue
price, the difference is simply credited to share premium related to
ordinary shares.
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
CALLABLE PREFERENCE SHARES
Cash ( 10,000*120 ) 1,200,000
• ILLUSTRATION 1,000,000
Preference Shares ( 10,000*100 )
• An entity issued 10,000 callable Share Premium - PS 200,000
preference shares of P100 par To record issuance of callable pref. shares

value at P120 per share.

(1) Preference Shares 1,000,000
• (1) Subsequently the shares are Share Premium - PS 200,000
called in at P150 per share. Retained Earnings 300,000
Cash ( 10,000*150 ) 1,500,000
To record recalled of pref. shares @ P150
• (2) Subsequently the shares are
(2) Preference Shares 1,000,000
called in at P110 per share.
Share Premium - PS 200,000
Cash ( 10,000*110 ) 1,100,000
Share Premium - OS 100,000
To record recalled of pref. shares @ P110
 Redeemable Preference Shares
• PAS 32, par 18, defines redeemable preference share as:
a. A preference share that provides for mandatory redemption by the
issuer for a fixed or determinable amount at a future date.
b. A preference share that gives the holder the right to require the
issuer to redeem the instrument for a fixed or determinable amount
at a future date.
• A redeemable preference share shall be reclassified as current or
noncurrent financial liability depending on the redemption date.
• PAS 32, par 36, provides that the difference between the redemption
price and the financial liability is accounted for as gain or loss on
redemption.
REDEEMABLE PREFERENCE SHARES DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT

Cash ( 10,000*100 ) 1,000,000

• ILLUSTRATION Redeemable Preference Shares 1,000,000
To record issuance of redeemable pref. shares
• An entity issued 10,000
preference shares of P100 par Interest Expense 100,000
value. The preference shares Cash 100,000
have a mandatory redemption To record payment of dividend for the
redeemable pref. shares
by the issuer for P1,200,000.
• A dividend of P100,000 is paid to Redeemable Preference Shares 1,000,000
the redeemable preference Loss on Redemption 200,000
shares Cash 1,200,000
To record redemption
• Subsequently the preference
shares are redeemed.
REDEEMABLE PREFERENCE SHARES DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
2020
Jan 1 Cash 6,000,000
• ILLUSTRATION Redeemable Preference Shares 6,000,000
• On January 1, 2020, an entity issued To record issuance of redeemable pref. shares
preference shares for cash equal to the 6,000,000 * 5%
par value of P6,000,000. Dec 31 Interest Expense 300,000
• The preference shares are redeemable Accrued Interest Payable 300,000
To record accrued interest
at the option of the preference
shareholders. 2021 6,300,000 * 5%
Dec 31 Interest Expense 315,000
• No dividends are to be paid on these Accrued Interest Payable 315,000
shares but the preference shareholders To record accrued interest
have the right to require the issuer to 2022
redeem the shares on January 1, 2022 Jan 1 Redeemable Preference Shares 6,000,000
for P6,615,000. Accrued Interest Payable 615,000
• The interest rate implicit in this Cash 6,615,000
agreement is 5% which is compounded To record redemption
annually.
 Convertible Preference Share
• A convertible preference share is one which gives the holder the right to
exchange the holdings for other securities of the issuing corporation.
• A preference shareholder may convert the preference share into
ordinary share because operations are successful and earnings on the
ordinary shares are unlimited.
• A preference shareholder may convert the preference share into bonds
which is actually a change of equity from that of an owner to that of a
creditor. Normally preference share is convertible into ordinary share.
• A convertible preference share is an equity instrument while a
convertible bond is a compound financial instrument (IA2 CH7).
 Preference Share Capital, 10,000 shares P100 par 1,000,000
CONVERTIBLE PREFERENCE SHARES
Ordinary Share Capital, 200,000 shares authorized
100,000 shares issued, P30 par 3,000,000
• ILLUSTRATION Share Premium - PS 200,000
Share Premium - OS 1,000,000
• CASE I Retained Earnings 2,000,000
• The preference share is
converted into ordinary shares in DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT

the ratio of one preference share Preference Share Capital 1,000,000

for three ordinary shares Share Premium - PS 200,000
Ordinary Share Capital ( 30,000*30 ) 900,000
Share Premium - OS 300,000
• CASE II To record conversion

• The preference share is Preference Share Capital 1,000,000

converted into ordinary shares in Share Premium - PS 200,000
the ratio of one preference share Retained Earnings 300,000
for five ordinary shares Ordinary Share Capital ( 50,000*30 ) 1,500,000
To record conversion
ASSIGNMENT
• For February 13, 2021
• PROBLEMS 20 – 1, 3, 5, 7, 8, 9
• Ready Multiple Choice Problems (10-20)
• For February 20, 2021 (IA3)
• PROBLEMS 2 – 1, 2, 3, 4, 5
• PROBLEMS 6 – 1, 2, 3, 4, 5, 6, 7
• QUIZ 1, Thursday February 18, 2021
• Depletion, Revaluation, Impairment, Intangible Asset
• Accounting for Income Tax
END…