Share Capital

Mrs. Paz Castro

 Overview

Corporations separately report contributed capital

and accumulated profits in accordance with some
legal provisions.
The owners’ equity section of a corporation’s
statement of financial position is called shareholders’
equity.
Shareholders’ equity has two major components:
 Share capital (contributed or paid-in capital) reflects the
amount of resources received by a corporation as a result of
investment by shareholders, donations or other share capital
transactions.
  Retained earnings (accumulated profits or losses) is the
amount of capital accumulated and retained through the
profitable operations of the business.
Shareholders’ Equity
Share Capital
Preference Shares – P50 par, 1,000 shares P 50,000
authorized, issued and outstanding
Ordinary Shares – P5 par, 30,000 shares authorized, P100,000
20,000 shares issued and outstanding
Share Premium - Ordinary 50,000 150,000
Total Share Capital P200,000
Retained Earnings 80,000
Total Shareholders’ Equity P280,000
 Share Capital

It is the shares to be subscribed and paid in or

secured to be paid in by the shareholders, either in
money, property or services, at the time of
organization of the corporation or afterwards, and
upon which it is to conduct its operations.
Legal capital:
 Capital contributed by shareholders comes from the sale of
shares of stock.
 Portion of the contributed capital or the minimum amount of
paid-in capital, which must remain in the corporation for the
protection of corporate creditors.
The amount of legal capital is determined as follows:
 In case of par value shares, legal capital is the aggregate par
value of all issued and subscribed shares.
 In case of no-par shares, legal capital is the total consideration
received by the corporation for the issuance of its shares to the
shareholders including the excess of issue price over the stated
value (Section 6, par. 3, Corporation Code of the Philippines).
Share premium (or Additional Paid-in Capital):
 The portion of the paid-in capital representing amounts paid
by shareholders in excess of par.
 It may also result from transactions involving treasury stocks,
retirement of shares, donated capital, share dividends and any
other “gain” on the corporation’s own stock transactions.
 Two Basic Types of Shares

A share of stock represents the interest or right of a

shareholder in a corporation and is evidenced by a
certificate of stock.
Ordinary share:
 The basic ownership class of the corporation.
 Ordinary shares are the entity’s residual equity.
Preference share:
 These special benefits relate either to the receipt of dividends
when declared before the ordinary shareholders (preferred as
to dividends) or to priority claims on assets in the event of
corporate liquidation (preferred as to assets).
 Terms Related to Share Capital

Authorized share capital: the number of

authorized shares indicates the maximum number of
shares the corporation can issue as specified in the
article of incorporation. This maximum number of
shares when multiplied by the par value of the share
will yield the authorized share capital. Any increase
of decrease in the authorized share capital requires
prior approval of the SEC and formal amendment to
the articles of incorporation.
Issued share capital: these are shares which have
been sold and paid for in full. Issued shares may
include treasury shares. Share Capital, either
Ordinary Shares account or Preference Shares
account, is credited for the total par value of fully
collected subscriptions or in the case of no-par value
shares, for the total consideration received in
relation to the issue. Share Capital is debited only
when the issued shares are retired, redeemed or
canceled by the corporation.
Subscribed share capital: it is the portion of the
authorized share capital that has been subscribed but
not yet fully paid. This shareholders’ equity account
is credited for the total par value of the shares
subscribed and debited for the total par value of the
fully collected subscriptions.
Outstanding share capital: these are issued
shares, which are in the hands of the shareholders.
The number of outstanding shares will equal the
difference between the issued shares and the
treasury shares.
Treasury stock: these are issued shares acquired
by the corporation but not retired and are therefore,
awaiting to be reissued at a later date.
 Accounting for Issuance of Share Capital

When shares with par value are sold, the proceeds

should be credited to the share capital account to the
extent of the par value of the shares, with any excess
being reflected as share premium.
When shares without par value are sold, the
proceeds should be credited to the share capital
account. If the no-par stock has a stated value, the
excess proceeds over stated value may alternatively
be credited to share premium.
Section 65 of the Corporation Code prohibits the
original issue of share capital (or capital stock) for a
consideration less than the par or stated value (i.e.
issued at a discount).
Corporations set the par value of their ordinary
shares at nominal amounts such as P1 per share. The
par value is no indication of its market value; it
merely indicates the amount per share to be entered
in the share capital account.
 Considerations for Issuance of Shares

Share capital may be issued in exchange for any of

the following considerations:
 Actual cash paid to the corporation.
 Tangible or intangible properties actually received by the
corporation.
 Labor already performed for or services actually rendered to
the corporation.
 Previously incurred indebtedness by the corporation.
In issuing its share capital, a corporation may avail
of the services of an investment banker who is a
specialist in marketing shares to investors.
The investment banker may underwrite a share
issue which means that the banker agrees to buy the
shares of the corporation and sell them to investors.
The underwriter bears this risk in return for gains
from selling the shares at a price higher than that
paid to the corporation.
An investment banker who is not willing to
underwrite may handle a share issue on a best
effort basis. The banker undertakes to sell as many
shares as possible at a set price but the corporation
bears the risk on unsold shares.
 Share issue costs include costs associated with preparing,
printing and filing the relevant documentation and marketing
the share issue.
 Accounting for share issue costs is covered in paragraph 37
of International Accounting Standards (IAS) No. 32, Financial
Instruments: Presentation:
 An entity typically incurs various costs in issuing or acquiring its own equity
instruments. Those costs might include registration and other regulatory
fees, amount paid to legal, accounting and other professional advisers,
printing costs and stamp duties. The transaction costs of an equity
transaction are accounted for as a deduction from equity (net of any related
income tax benefit) to the extent they are incremental costs directly
attributable to the equity transaction that otherwise would have been
avoided. The costs of an equity transaction that is abandoned are recognized
as an expense.
 Share Issuance for Cash

Most share issues are for cash since the primary

reason for issuing shares is to raise capital for a
corporation’s operating activities.
With par value:
 Issuing share capital at par:
 Ex.: Narsan Holdings is authorized to issue P1,000,000 ordinary
shares divided into 10,000 shares, with a par value of P100 per
share. The diversified company issued on cash basis 2,000 shares
at par. The issuance entry will be:
Cash 200,000
Ordinary Shares 200,000
 The amount of P200,000 invested in the corporation is called
paid-in capital or contributed capital. The credit to Ordinary
Shares increases the share capital of the corporation.
 Issuing share capital above par:
 Ex.: Suppose the 2,000 shares were sold at P150 per share, the
entry follows:
Cash 300,000
Ordinary Shares 200,000
Share Premium 100,000
 This sale of shares increases the corporation’s contributed capital
by P300,000. When the shares with par value are sold, the
proceeds should be credited to the Ordinary Shares account to the
extent of the par value – in this case, P200,000; with any excess to
be reflected in the Share Premium account. The excess of
P100,000 is not a “gain”. The company can neither earn a profit
nor incur a loss when it issues shares to or acquires shares from its
shareholders.
Without par value:
 Issuing no-par share capital:
 Ex.: Morning Star Travel is a domestic corporation engaged in the
business of organizing tour packages for Asian and European
visitors to the Philippines. The company which is located at J.
Bocobo St., Manila, has two classes of shares – preference shares
and no-par ordinary shares. 5,000 ordinary shares were issued for
P85,000. The entry to record the issue of these no-par shares will
be:
Cash 85,000
Ordinary Shares 85,000
 When shares without par value are sold, the proceeds should be
credited to the Ordinary Shares account. Accounting for issuance
of preference shares is basically the same as that of ordinary
shares. Section 6 of the Corporation Code prohibits the issue of
no-par value preference shares.
 Issuing no-par share capital with stated value:
 Ex.: Suppose that Morning Star Travel’s no-par ordinary shares
have a stated value of P20. The company issued 5,000 shares at
P25 per share. The entry will be:
Cash 125,000
Ordinary Shares 125,000
 When shares without par value are sold, the proceeds should be
credited to the Ordinary Shares account. If the no-par stock has a
stated value, the excess proceeds over stated value – in this case,
P5 per share, may alternatively be credited to share premium.
Cash 125,000
Ordinary Shares 100,000
Share Premium 25,000
 Subscription of Shares

The subscription contract is a legally binding

contract which provides for the number of shares
subscribed, the subscription price, the terms of
payment and other conditions of the transaction.
A subscriber becomes a shareholder upon
subscription but the stock certificates evidencing
ownership over shares of stocks are not issued until
the full collection of the subscription.
 Ex.: Warranty Auto Shop, Inc. is a quality car care center
located at St. Paul St., San Antonio Village, Makati City.
Assume that 5,000 shares of P10 par value ordinary shares of
the company were sold on subscription at P12 per share on
Sept. 1, 2013 to Ashley Langga. Subscription installments of
P24,000 and P36,000 will be due on Sept. 16 and 30,
respectively.
Subscriptions Receivable 60,000
Subscribed Ordinary Shares 50,000
Share Premium 10,000
To record subscriptions above par.

Cash 24,000
Subscriptions Receivable 24,000
To record initial installment.

Cash 36,000
Subscriptions Receivable 36,000
To record final installment.

Subscribed Ordinary Shares 50,000

Ordinary Shares 50,000
To record issuance of stock certificates.
Subscriptions Receivable is a shareholders’ equity
account. It is presented in the statement of financial
position as a deduction from the related subscribed
ordinary shares; however, when it is collectible
within one year, this may be shown as a current
asset. It is debited for the total proceeds of the
subscriptions to the ordinary shares and credited for
the collections on the subscriptions.
There are instances 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
board of directors. In such case, the subscribed
shares are declared delinquent shares.
The usual remedy is to dispose of these shares in a
public auction for the account of the delinquent
subscribers. These shares will be sold to the person
who is willing to pay the “offer price” which includes
the full amount of the subscription balance plus
accrued interest, cost of advertisement and expenses
of auction sale in exchange for the smallest number
of shares. This person is referred to as the highest
bidder.
 Ex.: Assuming the same facts as above except that the
subscriber failed to settle part of his subscriptions in the
amount of P48,000. After complying with the legal procedures
pertaining to delinquency sale, a public auction was held. The
offer price is P56,000 including P3,000 accrued interest and
P5,000 expenses of sale. Three bidders are willing to pay the
offer price, namely:
Lenore Loqueloque 4,300 shares
Luz Un 4,500 shares
Felipe Niza Jr. 4,700 shares
 Loqueloque is the highest bidder. The 5,000 shares are
deemed fully paid. Ashley Langga, the original subscriber, gets
700 shares and Loqueloque received 4,300 shares.
Subscriptions Receivable 60,000
Subscribed Ordinary Shares 50,000
Share Premium 10,000
To record subscriptions above par.

Cash 12,000
Subscriptions Receivable 12,000
To record partial initial installment.

Receivable for Highest Bidder 3,000

Interest Revenue 3,000
To record accrued interest on delinquent shares.
Receivable from Highest Bidder 5,000
Cash 5,000
To record auction expenses.

Cash 56,000
Receivable from Highest Bidder 8,000
Subscriptions Receivable 48,000
To record sale at public auction.

Subscribed Ordinary Shares 50,000

Ordinary Shares 50,000
To record issuance of stock certificates.
 If there is no bidder, the corporation may bid for the
delinquent shares and the total amount due shall be credited as
paid in full in the books of the corporation. These shares shall
be considered as treasury shares.
 All the other entries will be the same except for the following:
Treasury Stock 56,000
Receivable from Highest Bidder 8,000
Subscriptions Receivable 48,000
To record purchase of own shares.
 A stockholder may be sued directly by creditors to the extent of
their unpaid subscriptions to the corporation (Keller vs. COB
Marketing, 141 SCRA 86).
 Share Issuances for Non-cash Considerations

International Financial Reporting Standards (IFRS)

No. 2, Share-Based Payment, Equity-Settled Share-
Based Payment Transactions, paragraph 10 to 13,
provides the following:
 Share-based payments to non-employees are measured at fair
value of the goods or services rendered. If the fair value
of the goods or services received cannot be reliably
determined, then the fair value of the equity instruments is
used. The measurement date is the date the entity obtains the
goods or the counterparty renders services.
 Share-based payments to employees including stock options,
the transaction should be measured at the fair value of the
equity instruments granted because the fair value of the service
provided by the employees generally is not reliably
measurable. The fair value of the stock options must be
determined at the date the options are granted.
 An equity settled share-based payment transaction is
one in which the entity receives goods or services as
consideration for equity instruments of the entity including
shares and share options.
 The term “fair value” is the amount for which an asset can be
exchanged, a liability settled, or an equity instrument granted
could be exchanged, between knowledgeable and willing
parties in arm’s length transactions. The fair value of the
shares is determined using the following three-tier
measurement hierarchy: observable market prices if available,
market data with reference to a recent transaction in the
entity’s shares, or a recent independent fair valuation of the
entity or its principal assets.
 Issuing shares for assets:
 Ex.: APL Construction and Development Corporation is a medium-sized
closely held company based in Quezon City. A group of Taiwanese investors
would like to acquire shares of the company because if its tremendous
earnings potential. After much thought on the part of its president, Az
Penaflorida, the investors were allowed to make investments. One on the
considerations given was a tract of land in Iloilo City with a fair value of
P1,000,000. The entry to record the issue of 900 shares of P1,000 par
ordinary shares in exchange for the land is as follows:
Land 1,000,000
Ordinary Shares 900,000
Share Premium 100,000
To record issuance of 900 shares of stock in exchange for land.
Issuing shares for services or outstanding
liabilities:
 A corporation may issue shares in exchange for legal,
accounting or other services.
 When shares are issued for services in connection with the
incorporation, the account Organization Expense may be
debited at an amount equal to the fair value of such services
(per IFRS 2, par. 10). Shares shall not be issued for future
services.
 Per IAS No. 38, Intangible Assets, start-up costs which consists
of establishment costs such as legal and secretarial costs
incurred in establishing a legal entity are recognized as an
expense when incurred. Organization cost should be expensed
immediately. Before IAS No. 38, costs of this nature are
considered intangible assets.
 Ex.: Dynasty BookSource Asia, Inc. engaged the services of a
promoter during its formation and organization. The
corporation issued 800 shares of P100 par value ordinary
shares for the services. The fair market value of such services is
P100,000. The entry will be:
Organization Expense 100,000
Ordinary Shares 80,000
Share Premium 20,000
To record issuance of 800 shares of stock in exchange for
services.
 If ordinary share is issued for an outstanding liability, the
amount of the liability set off should be the measure for
recording.
 Two Methods of Accounting for Share Capital

There are two methods of accounting for share

capital authorization and issuance, namely: the
journal entry method and the memorandum method.
Ex.: Lucky Draw Corporation was authorized to issue
P400,000 ordinary shares divided into 4,000 shares
with a par value of P100 per share. On Aug. 13, 2013,
the company received subscriptions for 1,000 shares
at par from various individuals. As at Sept. 20, 2013,
600 of the subscribed shares have been fully paid
and the stock certificates issued correspondingly.
Next day, the company issued 400 shares at par for
cash. The entries are as follows:
 JOURNAL ENTRY METHOD MEMORANDUM METHOD
Authorization:
Unissued Ordinary 400,000 Memo entry: The company was
Shares authorized to issue P400,000 ordinary
shares, divided into 4,000 shares, with
Authorized 400,000
P100 par.
Ordinary Shares
Shares subscription at par:
Subscriptions 100,000 Subscriptions 100,000
Receivable Receivable
Subscribed 100,000 Subscribed 100,000
Ordinary Shares Ordinary Shares
Subscriptions fully collected:
Cash 60,000 Cash 60,000
Subscriptions 60,000 Subscriptions 60,000
Receivable Receivable
 Issuance of stock certificates after full payment of subscriptions:
Subscribed 60,000 Subscribed 60,000
Ordinary Shares Ordinary Shares
Unissued 60,000 Ordinary Shares 60,000
Ordinary Shares
Cash subscriptions at par:
Cash 40,000 Cash 40,000
Unissued 40,000 Ordinary Shares 40,000
Ordinary Shares

If a statement of financial position is prepared on

Sept. 21, 2013, a portion of the shareholders’ equity
section will appear as follows:
 JOURNAL ENTRY METHOD
Shareholders’ Equity:
Authorized Ordinary Shares, P100 par, P400,ooo
4,000 shares
Less: Unissued Ordinary Shares, 3,000 300,000
shares
Issued Ordinary Shares P100,000
Subscribed Ordinary Shares P 40,000
Less: Subscriptions Receivable 40,000 - P100,000
MEMORANDUM METHOD
Shareholders’ Equity
Ordinary Shares, P1oo par, 4,000 shares P100,000
authorized, 1,000 share issued
Subscribed Ordinary Shares P40,000
Less: Subscriptions Receivable 40,000 - P100,000
 Treasury Stocks

Shares of stock which have been issued and fully

paid for, but subsequently reacquired by the issuing
corporation either by purchase, redemption,
donation or through other lawful means.
Such shares may again be disposed of for reasonable
price fixed by the board of directors.
Section 41 of Corporation Code provides that a stock
corporation has the power to purchase its own shares
for a legitimate purpose provided it has unrestricted
retained earnings.
 Some of the reasons for the purchase of treasury stock are as
follows: (1) to support employee stock compensation plans;
(2) to improve the stock market price by decreasing the supply
of shares; (3) to avoid takeover by an outside party.
 Paragraph 33 of IAS No. 32, Financial Instruments:
Presentation, states that, if an entity reacquires its own equity
instruments, these instruments (‘treasury shares’) shall be
deducted from equity. No gain or loss shall be recognized in
profit or loss on the purchase, sale, issue or cancellation of an
entity’s own equity instruments. Such treasury shares may be
reacquired and held by the entity or by other members of the
consolidated group. Consideration paid or received shall be
recognized directly in equity.
There are two methods of accounting for treasury
stock transactions, namely: (1) par or stated value
method and (2) cost method.
In the first method, treasury stock is debited for an
amount equal to the par or stated value of the stock
reacquired. The cost method is the preferred method
is the preferred method of accounting for treasury
stocks by the Accounting Standards Council as stated
in SFAS No. 18, par. 6.
Purchase of treasury stock:
 When the cost method is used, treasury stock is recorded at
cost regardless of whether the share is acquired below or above
par or stated value.
 The purchase of treasury shares does not decrease the number
of shares issued; only the outstanding shares decrease. The
effect of the purchase is to decrease both total assets and total
shareholders’ equity.
 Ex.: Plantation EcoResort is a world class destination in
Indang, Cavite. The operations have been successful. To
consolidate control over the enterprise and this avoid a
corporate takeover by outsiders, the board of directors decided
to minimize outstanding shares by purchasing 1,500 shares
with a par value of P1,000 for P2,000.
  The entry will be:
Treasury Stock 3,000,000
Cash 3,000,000
To record acquisition of treasury shares.
Reissuance of treasury stock:
 At cost: assume that the treasury shares are subsequently
reissued at cost.
Cash 3,000,000
Treasury Stock 3,000,000
To record reissue of treasury shares at cost.
 Above cost: assume that all treasury shares were reissued at P2,500 per
share.
Cash 3,750,000
Treasury Stock 3,000,000
Share Premium – Treasury 750,000
To record reissue of treasury shares above cost.
Treasury stock is always debited for the cost of the shares purchased or
credited for the cost of the shares reissued. There is no reference to par
value.
 Below cost: assume that the 1,500 treasury shares were reissued at P1,500
per share.
Cash 2,250,000
Retained Earnings 750,000
Treasury Stock 3,000,000
To record reissue of treasury shares below cost.
 The excess of the cost over reissue price of P750,000 should be
debited to share premium-treasury to the extent of its balance.
In the absence of any balance in this account, the “loss” is
debited to retained earnings.
Retirement of treasury stock:
 The shares purchased may be subsequently retired. The
Ordinary Shares account is reduced by its par value. The
number of shares issued is reduced by the stock retired. The
treasury stock account is credited at cost.
 With gain on retirement: assume that Plantation EcoResort
purchased the treasury shares for P750 per share. Observe that
there is a “gain” on retirement if the cost of treasury shares is
less than par value.
 Ordinary Shares 1,500,000
Share Premium 375,000
Treasury Stock 1,125,000
To record retirement of treasury shares.
 With loss on retirement: assume that a total of 10,000 shares have been
issued at P1,500 per share prior to the purchase of treasury shares.
Plantation EcoResort purchased 1,500 treasury shares for P2,000 per share;
these were not reissued and were ultimately retired.
Ordinary Shares 1,500,000
Share Premium 750,000
Retained Earnings 750,000
Treasury Stock 3,000,000
To record retirement of treasury shares.
 The “loss” on retirement of P1,500,000 should be debited to
the following accounts in the order given:
 Share premium to the extent of the credit when the share is issued;
 Share premium from treasury stock transactions of the same class
of share;
 Retained earnings.
 Donated Capital

Contributions, including shares of the corporation,

received from shareholders should be recorded at the
fair market value of the items received, with the
credit going to share premium. If significant, such
contributions may be designed as donated capital
(SFAS No. 18, par. 28).
If the donation is in the form of shares of the
corporation, the account share premium or donated
capital is credited at the time the shares are reissued.
 Ex.1: Jocker’s Food Industries received a new service van from
its major shareholder as a gift. The donated asset has a cash
price of P350,000. The entry will be as follows:
Service Vehicle 350,000
Donated Capital 350,000
To record receipt of the donated service van.
 The donated asset increases the total assets and total
shareholders’ equity by the fair market value of the assets
received. Donated capital is shown as part of share premium.
 Ex.2: assume that the Jocker’s Food Industries received 500 of
P100 par value ordinary shares from its major shareholder as a
gift. The receipt of the donated share is recorded by means of a
memorandum entry as follows: “Received 500 ordinary shares
as donation.”
 This transaction does not affect the assets, liabilities or
shareholders’ equity of the corporation. The number of shares
received as donation will reduce the outstanding shares.
 These donated shares are essentially treasury stocks which
may reissued at any price. The sale of these donated shares will
increase assets and shareholders’ equity. Assume that the 500
shares were issued at P80 per share. The entry will be:
Cash 40,000
Donated Capital 40,000
To record sale of donated shares.
 Homework 6

What is meant by “share capital”?

In delinquency sale, the delinquent shares are sold to
the highest bidder. Who is the highest bidder?
Treasury stocks may be reissued at cost, above cost
or below cost. State the accounting treatment for the
difference between the cost and reissue price of
treasury stocks.
On the balance sheet, a company must disclose all of
the following except the number of shares
a. Authorized
b. Issued
c. Unissued
d. Outstanding
If a company reissued at P200 per share 100 shares
of treasury stock that it had previously acquired for
P280 per share and there wasn’t any Share
Premium-Treasury, it would debit
a. Loss on Sale of Treasury Stock for P8,000
b. Share Premium-Ordinary for P8,000
c. Retained Earnings for P8,000
d. Treasury Stock for P8,000
Evans Corporation is authorized to issue 400,000
shares of P85 par value ordinary shares. Journalize
the following transactions:
Feb. 10 Sold 75,000 shares of ordinary shares at P86 per
share; received cash.
27 Issued 21,500 shares of ordinary shares in exchange
for land with a fair market value of P920,000 and a
building with a fair market value of P1,087,500.
Mar. 3 Sold 28,000 shares of ordinary shares at P86.50 per
share; received cash.
 Seatwork 6

What are the two components of shareholders’

equity? Discuss each briefly?
Distinguish share of stock and certificate of stock
What are treasury stocks? Cite some reasons for
their purchase.
Authorized share are the
a. Number of shares that have been distributed to shareholders
b. Total number of shares that can be issued by the company at
any time
c. Number of shares that are owned by shareholders at the
balance sheet date
d. Number of share the company has repurchased
Mizona Corp. issued 10,000 shares of its P1 par
value ordinary shares for a building. The building
has a fair value of P500,000. Mizona’s ordinary
shares is currently selling for P45 per share. Mizona
Corp. should record the building at
a. P10,000
b. P440,000
c. P450,000
d. P500,000
Cooper Corporation’s articles authorized the
issuance of 100,000 ordinary shares. Cooper sold the
following ordinary shares during 2011.
Feb. 12 Sold 1,000 shares for P100,000
July 10 Sold 5,000 shares for P630,000
Nov. 5 Sold 7,500 shares for P1,050,000
 Required: prepare journal entries to record each issuance,
assuming that
 The ordinary shares has a P100 par value.
 The ordinary shares has a P10 stated value.
 The ordinary shares has no-par or stated value.