GENSANTOS FOUNDATION COLLEGE, INC.

Bulaong Extension, General Santos City 9500
BSA/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
AUDIT OF SHAREHOLDER’S EQUITY DISCUSSIONS
Shareholder’s equity – this is the excess of corporation’s assets over liabilities or the residual interest of the
shareholders in the net assets of the corporation.

Basic rights of shareholders

Vote
Receive share of the profits
Right to Inspect corporate books and records
Request financial statements and reports
Participate in the distribution of corporate assets (in case of dissolution)

Component of Shareholder’s equity

Contributed equity/Paid-in capital
Share capital/Capital stock The amount fixed in the articles of incorporation to be subscribed and paid in or
secured to be paid in by shareholders, either in money or services. It could be either
ordinary or preferred.
Subscribed share capital Amount of shares which have been subscribed but not yet fully paid. As a rule, shares
of stock shall be issued only for fully-paid subscriptions.

Legal requirement  At least 25% of the authorized share capital should be subscribed and 25% of
the subscribed shares should be paid.

Entry upon subscription  Debit – subscription receivable/cash/other consideration

 Credit – subscribed share capital (or share capital if fully paid)

Excess of subscription price  Recorded immediately upon subscription and not upon issuance of shares.
over par
Subscription receivable Portion of subscriptions not yet paid

Presentation of 
Current assets – if currently collectible
Subscription receivable 
Equity – deduction from shareholder’s equity
(if problem is silent, the receivable is presented as deduction from equity)
Share premium/Additional The portion of the paid-in capital representing the amount paid by the shareholders in
paid-in capital excess of par or stated value.

Other sources of share  Resale and reissuance of treasury shares

premium  Retirement of shares
 Receipt of donations from a shareholder
 Issuance of share warrants and share options
 Fractional shares
Treasury shares Entity’s own shares that have been issued, and reacquired, but were not canceled.
Treasury shares are not outstanding shares.

Presented as a deduction to the shareholder’s equity.

Earned equity/Accumulated profits and losses/Retained earnings
Unappropriated RE Portion of earned capital which is free and available for distribution as dividends to the
shareholders
Appropriation reserve Restricted RE – not available for any distribution

 LEGAL – ex. Treasury share acquisition

Reasons for appropriation  CONTRACTUAL – ex. Appropriations for bond payment

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         GENSANTOS FOUNDATION COLLEGE, INC.
Bulaong Extension, General Santos City 9500
BSA/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
 DISCRETIONARY – ex. For plant expansion, working capital requirement,
contingencies.
Deficit A debit balance in the Retained earnings (Accumulated losses)

Doctrines on Corporate Dividend Distribution

Trust Fund Doctrine Legal principle prohibiting a private corporation (other than wasting asset corporations like
mining companies) to distribute its legal capital to the shareholders for the protection of
corporate creditors.
Legal capital Portion of paid-in capital which cannot be returned to the shareholders in any form during
the lifetime of the corporation.

Composition  For shares with par value: total par value of shares issued and subscribed
 For shares without par value: total consideration received (including the excess over
stated value)

Accounting for Share capital

Memorandum method Authorized share capital is not journalized, only a memo is made. This is
used if problem is silent.
Journal entry method Authorized share capital is journalized, debiting unissued share capital and
crediting authorized share capital.

Issuance of Par value shares: Measurement of consideration received

Consideration: Measurement
1. Cash or Receivable Face value
2. Goods, Properties, or 1. Fair value of noncash consideration received
Services /Non-cash 2. Fair value of share capital issued
consideration 3. Par/Stated value of share capital issued
3. Liability 1. Fair value of share capital issued
2. Fair value of liability extinguished
3. Carrying amount/Book value of liability extinguished

Issuance of No-Par value shares: Measurement of consideration received

Rule Issuance of shares without par value shall be deemed fully paid and non-
assessable.
Minimum price Above shares, however, may not be issued for a consideration less than the
value of five pesos (P5.00) per share

Premium or Discount on Share Issuances

Share premium (issuance above par) Consideration received exceeds total par value of shares issued

Regardless of the value of the consideration received, the account share

capital (subscribed share capital if yet unissued) is always credited at par.
Share discount (issuance below par) Consideration received is below total par value of shares issued

Since it is prohibited by the Corporation Code, such discount creates a

liability on the part of shareholder and a receivable (like a subscription
receivable) on the part of the issuing corporation. (Such prohibition applies
only to original issuance of shares).

Presented as a deduction from total shareholder’s equity

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         GENSANTOS FOUNDATION COLLEGE, INC.
Bulaong Extension, General Santos City 9500
BSA/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA

Share Issuance Costs

Items included in SIC Legal fees, CPA fees, underwriting fees, commissions, cost of printing share
certificates, documentary stamp taxes, filing fees with the SEC, advertising and
promotion costs
If incurred during incorporation Charged first against Share premium; if not sufficient, excess shall be charged to
or organizational stage organization cost.
If incurred during operational Charged first against Share premium from issuance; if not sufficient, excess shall
stage be charged to Retained earnings.
If incurred as recurring or Charged directly to profit or loss (e.g. cost of maintaining shareholder’s records,
indirect in nature registrar and agents fees, administration costs)

Lump Sum Issuance of Ordinary and Preference Shares (Sale for a basket price)
Both securities are equity instruments:

Both have known market values Price is allocated based on the relative fair values of the securities (ratio)
Only one security has known market Assign the fair value to the security and the excess of the price over such
value assignment will be allocated to the other security.
Both securities have no known market Price is allocated based on the relative par values of the securities (ratio)
value

Preference shares that are effectively liability instruments:

Residual method The fair value of preference shares shall be assigned to such shares and
deducted from the total price to arrive at the residual allocation to the
ordinary shares.

Note: unlike preference shares, ordinary shares cannot become liability

instruments)

Redeemable preference shares – provides for a mandatory redemption

date or give the shareholder the right to require the issuer to redeem
the instrument for a fixed or determined amount at a future date.

Dividends on redeemable preference shares are classified as expense.

Treasury share transactions

Definition Entity’s own shares that have been issued, reacquired, but were not canceled
Measurement At cost (cash or fair value of the non-cash consideration given up in reacquiring
the shares)
Legal requirement (Appropriation) There must be enough Unrestricted Retained earnings to support the above
repurchase cost; thus an appropriation is required equal to the cost of the
treasury shares; such appropriation restricts accumulated profits from
distribution as dividends.
Re-issuance:

At cost Credited to TS

Above cost Credited to TS and Share premium – TS (excess of consideration over cost)

Below cost Debited to the ff. accounts in the order of balance sufficiency:
 Share premium – TS
 Retained earnings
Retirement/Cancellation:

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         GENSANTOS FOUNDATION COLLEGE, INC.
Bulaong Extension, General Santos City 9500
BSA/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
If gain Cost of treasury shares is lower than par value of retired shares plus the share
premium from original issuance (TS < Par + SP)
 Credited to share premium on retirement of TS

If loss Cost of treasury shares is higher than par value of retired shares plus the share
premium from original issuance (TS > Par + SP);

Credited to the ff. accounts in the order of balance sufficiency:

 Share premium from TS
 Retained earnings

Note: In retirement of treasury shares, it is given that Share premium from

original issuance is debited together with the related Share capital account.
Release of appropriation Restricted RE is reverted or credited back to being Unrestricted upon re-
issuance or retirement of the treasury shares; the amount of reversal equals
the original acquisition cost of the treasury shares.
Presentation Deducted from shareholder’s equity
Disclosure a) Number of shares held in the treasury
b) Restriction on the availability of retained earnings for distribution of
dividends

Donations
Donor Donation Debit Entry Credit Entry
Services, goods, or property Fair value of the services or Income from Donation
(including shares of another property received (Profit or loss)
Non-shareholder entity)
Income from donation (for Cash (for transaction
transaction costs) costs)
Services, goods, or property Fair value of the services or Share premium – donated
(including shares of another property received capital (Equity)
entity)

Share Premium – donated Cash (for transaction

capital (for transaction costs)
costs)
Shares of the entity (in substance, Memo entry (no Memo entry (no
Shareholder it becomes a treasury share) consideration received) consideration received)

Cash (upon subsequent Share premium – donated

reissuance) capital (upon subsequent
reissuance)

Share premium – donated Cash (for transaction

capital (for transaction costs)
costs)

Share Splits
Split up The original shares are called in, canceled, and replaced by a larger number of shares followed
by a reduction in the par value.

Purpose: increase the number of outstanding shares, reduce the unit market price.
Split down The original shares are called in, canceled, and replaced by a smaller number of shares followed
(reverse share by an increase in the par value.
split)
Purpose: decrease the number of outstanding shares, increase the unit market price.
Accounting entry For share split transactions, only a memorandum entry is necessary; hence, it has no effect on

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         GENSANTOS FOUNDATION COLLEGE, INC.
Bulaong Extension, General Santos City 9500
BSA/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
the elements of financial statements.

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