POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

College of Accountancy and Finance

Week 5 – 6: Primary Market

Discussion: There will be five (5) parts of the discussion that we need to tackle:

1. Recognize the importance of primary market

The Primary Market

The primary market is the financial market where new securities are issued and
become available for trading by individuals and institutions. The trading activities of the capital
markets are separated into the primary market and secondary market.

The primary market is where companies issue a new security, not previously traded
on any exchange. A company offers securities to the general public to raise funds to finance
its long-term goals. The primary market may also be called the New Issue Market (NIM). In
the primary market, securities are directly issued by companies to investors. Securities are
issued either by an Initial Public Offer (IPO) or a Further Public Offer (FPO).

An IPO is the process through which a company offers equity to investors and
becomes a publicly-traded company. Through an IPO, the company is able to raise funds and
investors are able to invest in a company for the first time. Similarly, an FPO is a process by
which already listed companies offer fresh equity in the company. Companies use FPOs to
raise additional funds from the general public.

Raising Funds from the Primary Market

Public Issue

This is the most common way to issue securities to the general public. Through an
IPO, the company is able to raise funds. The securities are listed on a stock exchange for
trading purposes.

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 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
College of Accountancy and Finance
Department of Financial Management
Sta. Mesa, Manila

Rights Issue

When a company wants to raise more capital from existing shareholders, it may offer
the shareholders more shares at a price discounted from the prevailing market price. The
number of shares offered is on a pro-rata basis. This process is known as a Rights Issue.

Preferential Allotment

When a listed company issues shares to a few individuals at a price that may or may
not be related to the market price, it is termed a preferential allotment. The company decides
the basis of allotment and it is not dependent on any mechanism such as pro-rata or anything
else.

Key Differences Between Primary Market vs Secondary Market

Both Primary Market vs Secondary Market are popular choices in the market; let us discuss
some of the major differences:

 The securities are initially issued in a market known as Primary Market, which is then
listed on a recognized stock exchange for trading, which is known as a Secondary
Market.
 The prices in the primary market are fixed whereas the prices vary in the secondary
market depending upon the demand and supply of the traded securities.

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 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
College of Accountancy and Finance
Department of Financial Management
Sta. Mesa, Manila

 In the primary market, the investor can purchase shares directly from the company. In
the Secondary Market, investors buy and sell the stocks and bonds among
themselves.
 In the primary market, security can be sold only once, whereas in the secondary market
it can be done an infinite number of times.
 In the Primary Market, the amount received from the securities is the income of the
company, but in the Secondary Market, it is the income of investors.
 The primary market is rooted in a specific place and has no geographical presence as
it has no organizational set up. Conversely, the Secondary market is present
physically, as a stock exchange, which is situated in a particular geographical area.
 Investment bankers do securities trading in the case of the Primary Market.
Conversely, brokers act as intermediaries while trading in the secondary market.

Activity:

Theories: Review of Accounting for Partnership and Corporation – Issuance of Stocks

Let us test how much you have learned from the field of accounting and finance over
the last three years.

We all know that primary markets deal in new issues of finance, such as issues of new
shares or debentures. When a public limited company issues shares for the first time to be
sold on the stock exchange, it is called Initial Public Offering (IPO). When the company later
seeks to increase its share capital it can do so through a secondary public offering.

a. The issuance of the shares cause what on the liquidity position of the company the
initial public offering.
b. What are the components of the journal entries upon the issuance of common shares
at a specified par value? If in any case that the company received an amount greater
than the total value of shares at par, what should be the account added on the journal
entry?
c. If in any case that the stocks issued are at no-par value, otherwise at an assigned
stated value. How will you treat the value of the investment? How should we present
and record the contributed capital in excess of the stated value in the equity section of
the balance sheet?
d. Is it possible for the stock to be issued in exchange of non-cash assets? Justify your
answer based solely on the knowledge that you’ve acquired from accounting for
partnership and corporation.

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 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
College of Accountancy and Finance
Department of Financial Management
Sta. Mesa, Manila

Problems: Review of Accounting for Partnership and Corporation – Issuance of Stocks

Cruz, Diabordo and Gozum Corporation is a Filipino media company based in Quezon
City, Metro Manila, Philippines. It is the Philippines' largest entertainment and media
conglomerate in terms of revenue, operating income, net income, assets, equity, market
capitalization, and number of employees.

a. Assume that Cruz, Diabordo and Gozum corporation issues 12,746 shares with the
par value of P11.50 per share for P146,579 on January 01, 2020. What value must be
reported on the common stock account given the assumption?
b. Assume that the cash received would be P13.75 per share for the common stock of
P11.50 par value. What value must be reported on the common stock account? What
would should be the effect on the equity account upon the receipt of contributed capital
in excess of par?
c. Assume that the cash received would be P9.25 per share for the common stock of
P146,579 par value. What value must be reported on the cash account? What would
be the contra-asset account that must be added on the entries and at which value?
d. Assume that Cruz, Diabordo and Gozum Corporation issues 12,746 common shares
at P11.50 par value per share in exchange for real property with a market value of
P250,931 at the date of issuance. If the real property has been debited for P250,931,
what must be reported amount for the common shares? Will there be an account added
on the journal entry? If so, what account and at what value?

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