Financial Accounting and

Reporting 3
Shareholder’s Equity
- Nature of shareholders’ Capital
- Issuance of Share Capital
 Sec. 2. Corporation defined. - A corporation is an artificial being created by operation of
law, having the right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.
Nature of Shareholders’ Equity

 Residual interest of owners in the net assets of a corporate enterprise, measured as the
excess of assets over liabilities.

A = L + C  Basic Accounting Equation

A – L = C  Shareholders’ Equity
 Presentation in the Statement of Financial
Position
 Contributed (Paid-in) Capital
 Retained Earnings
 Other Comprehensive Income
 Other contra-shareholders’ equity
 Share Capital Subscription Receivable
 Treasury shares
 Contributed (Paid-in) Capital

 Represents the amount invested or contributed by owners.

1. Share capital
- Represents the contribution equal to the total par or stated value of the shares issued.
a. Ordinary Shares (common stock)
b. Preference Shares  can only be issued after ordinary shares

2. Subscribed share capital

- Portion of the authorized share capital that has been subscribed but not yet fully paid.
 Contributed (Paid-in) Capital

3. Share Premium
 Portion of paid-in capital representing the contribution in excess of the par or stated value.
Sources:
 Excess over par or stated
 Reissuance of treasury shares at more than cost
 Donated capital
 Issuance of share warrants
 Declaration and issuance of small share dividends
 Quasi-reorganization and recapitalization
 Ordinary Share (Common Stock) and
Preference Share (Preferred Stock)
A. Ordinary Share
- Residual ownership interest in the corporation.
Basic rights of ordinary shareholders,
 The right to share proportionately in profit and loss;
 The right to share proportionately in management (voting right);
 The right to share proportionately in corporate assets upon liquidation; and
 The right to share proportionately in any new issues of share capital of the same class (pre-emptive
right)
A. Preferred Share
 Special class of shares that possesses certain preferential rights that are not found in an ordinary
shares
 Does not have a voting right
 Legal Capital
 Portion of the paid-in capital which cannot be returned to the shareholders during the lifetime of the
corporation
 Represents:
a. Par Value Share Capital
- Share Capital
- Subscribed Share Capital

b. No-par Value Share Capital - total peso amount of consideration received or receivable on shares
issued and subscribed.
- Share Capital
- Subscribed Share Capital
- Paid in Capital in excess of stated value (Share Premium)
 Illustrative Problem: Legal Capital
The shareholders’ equity of May Company revealed the following on June 30, 20xx:

Preference Share, P100 par value P230,000

Share Premium – Preference 80,500
Ordinary Share, P15 par value 525,000
Share premium - Ordinary 275,000
Subscribed Ordinary Share 5,000
Retained Earnings 190,000

1. How much is the legal capital of the Company?

2. Assume the same information except that the common stock has a P15 stated value, what is the
amount of the legal capital?
 Illustrative Problem: Legal Capital
The shareholders’ equity of May Company revealed the following on June 30, 20xx:

1. How much is the legal capital of the Company?

2. Assume the same information except that the common stock has a P15 stated value, what is the
amount of the legal capital?
 Accounting for Issuance of Shares

Cash Face amount

Consideration
1. FMV of non-cash
received
consideration

2. FV of share
Noncash
capital issued

3. Par (or stated)

value of shares
issued
 Illustrative Example
Acquisition of the land with equivalent cash price of P12,000,000 by
issuing 100,000 shares of P100 par ordinary share is recorded as
A. What would be the value of the land received?
Answer: P12,000,000
B. If there was no equivalent cash price for the land and the land had no
ready market but the shares were actively traded at P130 per share, the
land would have been recorded at P13,000,000.
Answer: P13,000,000
C. Assuming both the fair value of the land and shares are not
determinable
Answer: P10,000,000
Shares issued with other securities
 When two or more classes of equity securities are issued for a single payment,
the lump-sum price is allocated among the classes of securities issued based on
their relative market values (proportional method).

 To illustrate, assume that JK Corporation issued for a lump sum price of P178,000,
1,000 ordinary shares with par value of P100 and 500 preference shares with par value
of P50. On the date of issuance, JK’s ordinary shares were selling at P135, while its
preference shares were selling at P90. Total market value are as follows:
Shares issued with other securities
 In instances where not all of the fair market values of classes of securities are
determinable, the residual method may be used.

 To illustrate, assume that JK Corporation issued for a lump sum price of

P178,000, 1,000 ordinary shares with par value of P100 and 500 preference
shares with par value of P50. On the date of issuance, JK’s ordinary shares were
selling at P135. Total market value are as follows:
 Organizational Costs – start-up costs
 expensed when incurred
 Share issuance costs – transactions directly attributable to issuance of new shares.
 charged to Share Premium arising from the related issuance.
Examples:
- professional fees
- commissions
- printing cost
- SEC filing fees
 If share premium is insufficient, contra-SHE account as a deduction from the following
in the order of priority:
1. Share premium from a previous issuance
2. Retained earnings
 Cost of public offerings of shares
 Costs related to stock market listing
 expensed when incurred
 Joint costs
 transaction costs that relate jointly to listing and issuance of new shares and listing old
existing shares.
 Allocated pro-rata between the newly-issued and listed shares and the newly-listed old
existing shares on the basis of outstanding newly-issued, listed and outstanding newly-
issued old existing shares.
Examples:
- Audit and other professional advise relating to prospectus
- Opinion of counsel and tax opinion
- Fairness opinion and valuation report
- Prospectus design and printing
Share Capital sold on Subscription

 A subscription is a legally binding contract between the corporation and the

subscriber (investor) which provides that the subscriber will buy a certain number
of shares at an agreed price with the payment spread over a specified time period.
 Issuance of shares is recorded upon full collection.
Share Capital sold on Subscription
At the date of subscription:

a. Subscription price exceeds par value

b. Subscription price exceeds stated value of no-par share capital

c. Subscription of no par, no stated value share capital

Delinquent Subscription

 When the subscriber defaults in payment of subscription due

 Delinquent shares declared are offered for sale at public auction.
 Usually offered to the highest bidder.
 The person who is willing to pay the offer price of the delinquent shares for the
smallest number of shares.
 Balance due
 Accrued interest
 Auction-related expenses
Illustrative Problem:
Delinquent Subscription
V subscribed to 1,000 shares of P100 par value ordinary share at par. A 25% down payment
was given by V, the balance being payable in two equal installments. V paid the first
installment but defaulted in the second. The unpaid subscription was offered for sale at a
public auction. Advertising costs amounted to P5,000. Rap made a bid for 800 shares, Jin for
700 shares and Suga for 600 shares.
Illustrative Problem:
Delinquent Subscription
V subscribed to 1,000 shares of P100 par value ordinary share at par. A 25% down payment
was given by V, the balance being payable in two equal installments. V paid the first
installment but defaulted in the second. The unpaid subscription was offered for sale at a
public auction. Advertising costs amounted to P5,000. Rap made a bid for 800 shares, Jin for
700 shares and Suga for 600 shares.

Offer price: P42,500 (37,500 + 5,000)

Highest bidder: Suga
Delinquent Subscription: No Bidder

 Subscribed shares will be issued in the name of the corporation as Treasury

Shares.
 The cost assigned to the Treasury shares is the cancelled balance (offer price)
Multiple Choice Questions

 The par value of ordinary share capital represents

a. The liquidation value of the share capital

b. The book value of the share capital
c. The legal nominal value assigned to the share capital
d. The amount received by the corporation when the share was originally issued.
 Multiple Choice Questions

 Then entry to record the issuance of ordinary shares for fully paid subscription
is

a. A memorandum entry
b. Ordinary Share Subscribed
Ordinary Share Capital
Share Premium – Ordinary Share
c. Ordinary Share Subscribed
Subscription Receivable
d. Ordinary Share Subscribed
Ordinary Share Capital
 Multiple Choice Questions

 Ownership of shares of share capital entitles the holders to all of the following
rights except:

a. To elect the board of directors of the corporation.

b. To share in the profits of the corporation.
c. To purchase new shares of share capital when they are offered for sale.
d. To participate in the daily operations of the corporation.
 Multiple Choice Questions

 JK Corporation was incorporated on January 2, 2013. The following information

pertains to JK’s ordinary share transactions during the year.

January 1 Number of shares authorized 80,000

February 1 Number of shares issued 60,000
December 1 Number shares reacquired but not canceled 5,000

a. 55,000
b. 75,000
c. 60,000
d. 65,000
 Problems
 The following are independent transactions relating to share capital:
a. Issued 10,000 ordinary shares of P150 par value at P200 per share. The
company incurred and paid documentary stamp tax and other percentage
tax, and underwriting costs of P60,000.

b. Issued 3,500 ordinary shares of P200 par in exchange for a parcel of land
to be used as plant site. The ordinary share capital is actively traded on
the Philippine Stock Exchange at an average price of P560 per share.
 Problems
 The following are independent transactions relating to share
capital:

c. Issued 10,000 P100 par ordinary shares for P18,000,000. One

share of P500 par preference was issued with every 20 ordinary
shares. The market price per ordinary share was P120 and per
preference share was P800
 Problems
The following are independent transactions relating to share capital:

d. Subscriptions to 5,000 ordinary shares with P100 par value are

received from various subscribers along with checks amounting to
25% of the subscription price as down payment. The share capital
was subscribed at P120 per share. The balance of the subscription
price is to be paid in three equal monthly installments.