Accounting 1B

B. Share Capital, Retained Earnings - 9 hrs

a. Shareholder’s Equity
b. Share Capital
c. Types of Shares
d. Accounting for Issuance of Share Capital
e. Retained Earnings
f. Dividends

Shareholders’ Equity

Shareholders’ equity or Stockholders’ equity is the residual interest of owners in the net assets of a corporation
measured by the excess of assets over liabilities. Generally, the elements constituting shareholders’ equity
with their equivalent IAS term are:

Philippine term IAS term

Capital Stock Share Capital
Subscribed Capital Stock Subscribed share capital
Common Stock Ordinary share capital
Preferred Stock Preference share capital
Additional paid in capital Share premium
Retained Earnings (deficit) Accumulated profits (losses)
Retained Earnings appropriated Appropriation reserve
Revaluation Surplus Revaluation reserve
Treasury Stock Treasury Share

Definition of terms:

Share capital – portion of the paid in capital representing the total par or stated value of the shares issued.

Subscribed share capital – portion of the authorized share capital that has been subscribed but not yet fully paid and
therefore still unissued. This is reported or shown minus subscription receivable not currently collectible.

Share premium - portion of the paid in capital representing excess over the par or stated value.

Retained Earnings – represent the cumulative balance of periodic earnings, dividend distributions, prior period errors and
other capital adjustments.

Revaluation surplus – excess of the revalued amount over the carrying value of the revalued asset.

Treasury shares – are corporation’s own shares that have been issued and then reacquired but not cancelled.

Legal capital – portion of the paid in capital arising from issuance of share capital which cannot be returned to the
shareholders in any form during the lifetime of the corporation.

a. Par value shares – legal capital is the aggregate par value of the shares issued and subscribed.

b. No-par value shares - legal capital is the total consideration received from shareholders including the excess over
stated value.

Trust fund doctrine –

 share capital of a corporation is considered a trust fund for the protection of creditors.
 It is illegal to return the legal capital to the shareholders during the lifetime of the corporation.
 The corporation can pay dividend limited only to retained earnings balance. it is illegal to pay dividends if the
entity has a deficit.
Capital Stock
 Authorized capital stock/capital stock - the amount fixed in the articles of incorporation to be subscribed and paid in or
secured to be paid in by the shareholders of the corporation, either in money, property or services, at the organization of the
corporation or afterwards and upon which the corporation is to conduct its operations.

 Divided into shares evidence by a share certificate.

 Share certificate – is the instrument that evidences the ownership of a share and issued only when the subscription is fully
paid.

Issuance of share capital –

a. The RCCP provides :
 that a share shall not be issued for a consideration less than the par or stated value.
 No par value shares cannot be issued for less than P 5, thus no-par value share must have a stated value of P 5.

b. When par value shares are issued, the proceeds shall be credited to share capital to the extent of the par value and
the excess to Share premium.

c. When no-par value shares are issued, the proceeds shall be credited to share capital to the extent of the stated value
and the excess to Share premium.

d. When shares are sold or issued at a price below par or stated value, -- said to be issued at a discount (prohibited
under RCCP):

1. the discount is not considered a loss to the issuing corporation but the shareholder is held liable for the
discount or must pay for the discount – called discount liability of the shareholder and debited to Discount on
share capital account.
2. Discount of share capital is a deduction from total stockholders’ equity.

Issuance of share capital for noncash consideration –

 if share capital is issued for noncash consideration, such as tangible property, intangible property and services, the
share capital is to be recorded in the following order of priority:
a. Fair value of noncash consideration received
b. Fair value of the shares issued
c. Par value of the shares issued

Issuance of share capital for services-

 The shares shall be recorded at the fair value of services received or fair value of shares issued whichever is
reliably determinable.

Share issuance costs

 are direct costs attributable to the issuance of new share such as legal fees, CPA fees, underwriting commissions,
cost of printing certificates, documentary stamps, filing fees paid to SEC, cost of advertising and promotion or
newspaper publication fee , - shall be deducted from equity or debited to share premium arising from the share
issuance.

 if share premium from share issuance is insufficient to absorb the issuance costs, the PIC concluded that the excess
shall be debited to Share issuance costs to be reported as a contra equity account as a deduction from the following
in the order of priority:

a. share premium from previous issuances

b. retained earnings

Cost of public offering or Cost of listing shares –

 recorded as expense in the income statement
 not considered as cost of an equity transaction because no equity instruments has been issued.
 include the following:
a. road show presentation
b. public relations consultant’s fees
Accounting for share Capital:

1. Memorandum Entry Method –

 No journal entry is made to record authorized share capital. Only memorandum entry is made for the total
authorized share capital.

 When share capital is issued, it is credited to the share capital account.

2. Journal Entry Method

 Journal entry is made to record authorized share capital.
 When share capital is issued, it is credited to unissued capital.

Illustration 1:

Transaction Memorandum Entry Method Journal Entry Method

1. ABS Corp. was authorized to Memo Entry – The corporation was authorized Unissued share capital 4,000,000
issue share capital of P 4,000,000 to issue share capital of P4,000,000, 40,000 Authorized share capital 4,000,000
divided into 40,000 share with par shares , P 100 par. To record authorized share capital .
value P100.

2. Received subscription to 10,000 Subscription Receivable 1,000,000 Subscription Receivable 1,000,000

shares at par. Subscribed share capital 1,000,000 Subscribed share capital 1,000,000
10,000 shares subscribed at par. 10,000 shares subscribed at par.

3. Collected 25% on the above Cash 250,000 Cash 250,000

subscription Subscription Receivable 250,000 Subscription Receivable 250,000
25% Collection on the above subscription 25% Collection on the above subscription

4. Received full payment for 6,000 Cash 450,000 Cash 450,000

Shares originally subscribed Subscription Receivable 450,000 Subscription Receivable 450,000
Subscription (6,000 x 100) 600,000 Full collection – 6,000 shares Full collection – 6,000 shares
Partial payment ( 25% ) 150,000
Balance 450,000

5. Issued the share certificate for Subscribed share capital 600,000 Subscribed share capital 600,000
6,000 shares – fully paid. Share capital 600,000 Unissued share capital 600,000
Issuance of stock certificate. Issuance of stock certificate.

6. Received cash subscription for Cash 500,000 Cash 500,000

5,000 shares at par. Share capital 500,000 Unissued share capital 500,000
Stock certificate for 5,000 shares issued. Stock certificate for 5,000 shares issued.

7. A subscription for 1,000 shares at Cash 50,000 Cash 50,000

P 120 per share was received from Subscription Receivable 70,000 Subscription Receivable 70,000
Mr. B. Mr. B paid P 50 per share Subscribed share capital 100,000 Subscribed share capital 100,000
on his subscription. Share Premium 20,000 Share Premium 20,000
1,000 shares subscribed at 120. 1,000 shares subscribed at 120.

8. Mr. B paid his subscription in Cash 70,000 Cash 70,000

full Subscription Receivable 70,000 Subscription Receivable 70,000
Full collection from Mr. B Full collection from Mr. B

Subscribed share capital 100,000 Subscribed share capital 100,000

Share capital 100,000 Unissued Share capital 100,000
Issuance of stock certificate Issuance of stock certificate

Activity 1:
Problem 1:
A, B, C, D and E organized Bump Corporation on January 5, 2023 with an authorized share capital of P 5,000,000 consisting of 50,000
shares of p 100 par value. Other transactions during the month are as follows:
2022
Jan. 5- Subscriptions were taken from A for 12,000 shares, from B for 13,000 shares, from C for P 8,000 shares, from D
for 4,000 shares and from E for 3,000 shares, all at par.
6 - A transferred to the corporation in partial payment of his subscription the following assets and liabilities:
Accounts receivable P 350,000
Notes Receivable 70,000
Inventory 680,000
Accounts Payable 100,000

- B transferred the following assets to the corporation in partial payment of his subscription:
Land P 150,000
Building 850,000

- The remaining incorporators paid 25% of their subscriptions.

11 - 600 shares were issued in payment of legal fees of P P60,000 in connection with organizing the corporation.
15 - A subscription for 1,000 shares at P 120 per share was received from F . F paid P 40 per share on his subscription.
20 - A, B and C paid the remainder of their subscriptions.
25 - 10,000 shares were issued at P 125 cash
28 - F paid his subscription in full.
30 - 5,000 shares were subscribed at par,

REQUIRED: 1. Prepare the journal entries.

a. Memorandum Entry Method
b. Journal Entry Method

2. Balance sheet as of January 31, 2023

Problem 2:

HERALD Corporation. was organized On January 5, 2023, with authorized share capital divided into 300,000 shares Preference share
with a par value of P 100 per share and 1,000,000 shares Ordinary share, par, P 10 . On this date, the incorporators, Henry, Ranny,
Andy, Lance, and Don subscribed for a total of 25% of Preference share and 25% of Ordinary shares, each having subscribed for the
same number of shares. Also on this date, the incorporators paid for the required 25% of their subscriptions.

Other transactions during the month are as follows:

Jan. 5 - Received cash for 4,000 ordinary shares issued at P 40 per share and 2,000 preference shares issued at P 120 per share.
5- Received subscription from Tamy, 1,000 ordinary shares at P 35 and 1,000 preference shares at P 125.
7- 1,000 preference shares were issued in payment for fees amounting to P 105,000 in connection with organizing the
corporation.
8- Land which had a fair market value of P 1,300,000 for which 100,000 ordinary shares were issued.
9- Tammy paid ½ of his subscription.
10 - Henry, Ranny and Andy paid their subscriptions in full today and the preference sharee and ordinary shares certificates
were issued.
11 - The corporation received a bill on June 10 in the amount of P 50,000 from the legal counsel for organization services
rendered. The counsel accepted 5,000 ordinary shares in full payment.
19 - Lance transferred the following assets to the corporation in payment for his unpaid subscription and paid the balance in
cash:
Delivery Equipment (FMV) P 800,000
Furniture and Fixtures (FMV) 350,000

20 - A subscription for 1,000 ordinary shares at P 35 per share was received from Gerry for which cash of P25 per share
was received in partial payment.
21 - Tammy paid his subscription in full.
22 - Cash subscription, 2,000 preference shares at par and 1,000 ordinary shares at par value.
23 - Paid P 1,000 for other expenses incurred during incorporation.

REQUIRED: 1. Prepare the journal entries.

a) memorandum entry method
b) journal entry method
2. Balance sheet as of January 31, 2023
Delinquent Subscription
 RCCP provides that the board of directors may at any time declare due and payable unpaid subscriptions.
 Call - is the official declaration usually expressed in the form of board resolution stating the date fixed for payment
of the unpaid subscriptions.

 If the shareholder does not pay on the date fixed, he is declared delinquent and the delinquent shares will sold at
public auction to the highest bidder.

 The highest bidder is the person who is willing to pay the offer price of the delinquent shares for the smallest
number of shares.

 The offer price includes the following:

a. Balance of the subscription
b. Interest accrued on the subscription due.
c. Expenses of advertising and other costs of sale.

 If in case there are no bidder , the corporation may purchase for itself the delinquent shares.

 The delinquent subscriber is then released from liability with regard to the subscription which is deemed
fully paid.

To illustrate:

A. The following are information available pertaining to the subscription of Gina, a subscriber of ABC Corporation.
a) Gina subscribed 100,000 ordinary shares of ABC Corp. with P 10 par.
b) The total amount collected by ABC Corp. from Gina was P 400,000 and after that Gina defaulted.
c) To pursue the auction proceeding, total related expenses incurred chargeable against the highest bidder was
P 20,000.
d) The bidders are:
Allan Bene Aida Hellie
Shares willing to receive 45,000 55,000 60,000 65,000

e) The corresponding stock were issued to the highest bidder.

Solution:

a) Subscription receivable 1,000,000

Subscribed share capital 1,000,000
100,000 shares at par subscribed by Gina

b) Cash 400,000
Subscription receivable 400,000
Partial collection from Gina

c) Advances on delinquency sale 20,000

Cash 20,000
Expenses incurred on public auction

d) Cash 620,000
Subscription receivable 600,000
Advances on delinquency sale 20,000
Collection from the highest bidder - Allan

e) Subscribed share capital 1,000,000

Share Capital 1,000,000
Issuance of share certificates: Gina 55,000 shares;
Allan -45,000 shares

B. Using the same data in A, except that there are no bidders, the corporation purchased its own delinquent shares;
c) Advances on delinquency sale 20,000
Cash 20,000
Expenses incurred on public auction

d) Treasury shares 620,000

Subscription receivable 600,000
Advances on delinquency sale 20,000
Collection from the highest bidder - Allan

e) Subscribed share capital 1,000,000

Share Capital 1,000,000
Issuance of share certificates
Problem 3:
Journalize the following selected transactions:

1. S subscribes at par 5,000 shares with par value of P 100 per share.

2. S pays P 200,000 on his subscription.

3. S defaults on his payment and is declared delinquent by the board of directors.

4. Expenses paid in connection with the auction sale amount to P 30,000.

5. The highest bidder pays the subscription balance of P 300,000 plus interest of P 10,000 and expenses of
P 30,000. There are three bidders who are willing to pay the offer price, namely:

R 3,000 shares
T 3,500 shares
U 3,800 shares

6. The corresponding stock certificates are issued.

Required:
A. Answer the following:
1. Who is the highest bidder? ___________
2. How many shares shall be issued to the delinquent subscriber? ________

B. Journalize the above selected transactions:

C. Suppose there are no bidders to buy the delinquent shares, what would be the appropriate journal entry?