Share Capital

Transactions
 Key Concepts and
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Definitions

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 Authorized share capital
the maximum aggregate par value or stated value of shares that may be
issued by the corporation as stated in its articles of incorporation (i.e.
maximum number of shares x par value or stated value). For shares
without par and without stated value, this simply pertains to the maximum
number of shares that may be issued.

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 Share capital
this pertains to the capital issued and/or outstanding. Share capital may
be ordinary or preferred/preference.

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 Ordinary share capital
share capital that gives the shareholders the same rights and privileges. The
basic rights of a shareholder are:
◉ Right to the share of the income of the corporation
◉ Right to vote
◉ Right to subscribe for additional share issuance (i.e. preemptive right)
◉ Right to the share in the net assets of the corporation upon liquidation

However, ordinary shares have no fixed return on investment since their return
is entirely dependent on how well the corporation performs.

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 Preference share capital
share capital that gives the shareholders the right to a fixed amount of
dividends and/or a specified claim on the net assets of the corporation
upon liquidation.

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Cumulative preference share
entitles the shareholder to dividends in arrears

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 Participating preference share
entitles the shareholder to participate in any excess dividends

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 Callable preference share
shares that may be redeemed at a specified price at the option of the
issuing corporation

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 Redeemable preference share
shares that may be redeemed at a specified price at the option of the
shareholder or that has a mandatory redemption date on the part of the
issuing corporation.

Because of its nature, redeemable preference shares are classified as a

liability and any dividends paid to shareholders are accounted for as
interest expense.

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 Convertible preference share
shares that may be converted, at the option of the shareholder, to other
securities (e.g. bonds, ordinary shares) of the issuing corporation.

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 Share premium
the portion of paid-up capital representing the excess over the par or
stated value of the shares.
This can come from:
◉ Any excess over par or stated value
◉ Resale of treasury shares at more than acquisition cost
◉ Distribution of stock dividends (i.e. bonus issue)
◉ Issuance of share warrants
◉ Donated capital
◉ Quasi-reorganization and recapitalization

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 Subscribed share capital
the portion of the authorized share capital that has been subscribed but
not yet paid in full.
Subscribed share capital is considered unissued until they are fully paid.
Subscribed share capital is presented net of any subscription receivable
not currently due (i.e. due more than 12 months from the balance sheet
date).

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 Par value
the specific value fixed in the articles of incorporation and imprinted
on the stock certificates. There is no minimum amount for par value.

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 Stated value
the value of a share that may be fixed in the articles of incorporation or
the board of directors but is not imprinted on the stock certificates.
Stated value should not be lower than P5.00.

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 No-par, no-stated value shares
shares that have no par value or stated value either on the stock
certificate or in the articles of incorporation. Likewise, this type of shares
should not be issued at lower than P5.00 per share.

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 Legal capital
pertains to the sum of the:
a. par value of all issued and subscribed shares with par value, and
b. the total value of all issued and subscribed shares without par value.

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 Treasury shares
shares of the corporation that are issued originally to shareholders but are
reacquired (but not retired or cancelled) shares of the corporation that are
issued originally to shareholders but are reacquired (but not retired or
cancelled) by the corporation. Treasury shares are considered to be issued but
not outstanding.by the corporation. Treasury shares are considered to be
issued but not outstanding.

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 Recapitalization
an event that changes the capital structure of the entity, such as a stock
split or a change in the par value of the share.

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2 Issuance of Shares

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Pro-forma journal entry

Fair value of considerationxx

Share capital (@par/stated value) xx
Share premium (excess over par/stated) xx

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No-par no stated value shares

◉ the entire fair value of the consideration is credited to the

appropriate share capital account
◉ no share premium is recognized

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Issuance of non-cash assets

◉ the shares are measured using the following hierarchy:

a. Fair value of the noncash asset/s received
b. Fair value of the shares issued on the date of issuance (or
on the closest date)
c. Par value or stated value of the shares issued

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Issuance for services

◉ the expense account is debited, and the appropriate equity

accounts are credited.
◉ the shares are measured using the following hierarchy:
a. Fair value of the services rendered to the corporation
b. Fair value of the shares issued on the date of issuance (or
on the closest date)
c. Par value or stated value of the shares issued

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Issuance to extinguish liability

◉ the shares are measured initially using the following

hierarchy:
a. Fair value of shares issued
b. Fair value of liability extinguished
c. Carrying amount of liability extinguished

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Issuance at below par or stated

◉ For their original issuance, shares may not be issued for a

consideration lower than their par value or stated value.
◉ For subsequent issuance, a consideration at below par value
or stated value is allowed, such as in the case of the
reissuance of treasury shares.

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Share issuance costs

◉ Share issuance costs are costs directly attributable to the

issuance of shares. Examples are underwriting costs,
commission to broker, accounting and legal fees, printing
costs of stock certificates, and SEC filing fees. These costs
are treated in the following hierarchy:
○ Deduction to share premium from the specific share issuance
○ Deduction to share premium from previous share issuance
○ Deduction to retained earnings
◉ Cost of listing shares in the stock market are recognized
immediately as expense when incurred.
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Stock rights and share warrants

◉ Stock rights (i.e. preemptive right) is given to existing

shareholders in the instance that the corporation increases its
authorized share capital and new shares are initially issued to
the public.
◉ Stock rights give the existing shareholders the right to be
offered first with the new shares in proportion to their
interest before such shares are issued to or subscribed by
others. This is for the purpose of protecting their ownership
interest. The instrument evidencing such right is called a
share warrant.
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Stock rights and share warrants

◉ No entry is made when share warrants are issued for the

reason that no consideration was received for their issuance.
Only a memorandum entry is made to indicate the number of
shares the existing shareholders can purchase through the
exercise of the warrants.

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3 Share Subscriptions

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Pro-forma journal entry

Subscription receivable xx
Subscribed share capital (@par/stated value) xx
Share premium (excess over par/stated) xx

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No-par, no-stated value shares

◉ The entire receivable balance is credited to the appropriate

share capital account.
◉ No share premium is recognized.

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Presentation in the FS

◉ Subscribed share capital is presented in the equity section

net of any subscription receivable not currently due. It is
possible that a down payment is made on the day the share
capital is subscribed.
◉ Subscription receivable that are currently due are presented
in the current assets section.

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Subsequent payments

◉ Journal entry:
Cash xx
Subscription receivable xx

◉ Issuance of stock certificates may only be made upon full

payment.
Subscribed share capital xx
Share capital xx

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Delinquent subscriptions

◉ When subscriptions are determined to be delinquent (i.e. the

subscriber can no longer pay his or her balance), the initial
entry to record the delinquency is:
Receivable from highest bidder xx
Subscription receivable xx

◉ The highest bidder pertains to the bidder who is willing to

pay the entire receivable balance (including the expenses
related to the delinquency sale) for the least number of
shares.
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Delinquent subscriptions

◉ Upon receipt of payment from the highest bidder, the entry to

record the issuance of the shares is:
Subscribed share capital xx
Share capital xx

◉ In the instance that there is no bidder for the delinquent

shares, the corporation may bid for its own shares. The
entries to record such scenario are:
Treasury shares xx
Receivable from highest bidder xx
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PRACTICE! PRACTICE!
PRACTICE!

The following transactions occurred during the first quarter of operations of No-
to-Retake Corporation:
Jan. 1 Authorized by the SEC to issue 500,000 Ordinary Shares (P10
par); 100,000 Preference Shares (P50 par); 50,000 Ordinary Shares
(no par, no stated value); and 25,000 Preference Shares (P100 stated
value).

Memo entry only.

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PRACTICE! PRACTICE!
PRACTICE!

Jan. 5 Received subscriptions for 100,000 ordinary shares (P10 par) at P15
per share and for 10,000 preference shares (P100 stated value) at
P120 per share. A down-payment of 40% was received from the
ordinary share subscribers and 60% from the preference share
subscribers.

Subscription receivable (1.5M + 1.2M – 1.32M) 1,380,000

Cash (1.5M x 40%) + (1.2M x 60%) 1,320,000
Subscribed share capital – ordinary (100,000 x 10) 1,000,000
Subscribed share capital – preference (10,000 x 100) 1,000,000
Share Premium – ordinary (1.5M – 1M) 500,000
Share Premium – preference (1.2M – 1M) 200,000

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PRACTICE! PRACTICE!
PRACTICE!

Jan. 6 Issued 5,000 ordinary shares (no par, no stated value) in exchange for
the services of the lawyer and 1,000 preference shares (P50 par) in
exchange for supplies valued at P53,000. The fair value of the
ordinary shares and preference shares on this date is P12 and P55,
respectively.

Professional fee expense (5,000 x 12) 60,000

Supplies 53,000
Ordinary share capital (no-par, no-stated) 60,000
Preference share capital (1,000 x 50) 50,000
Share premium – preference 3,000

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PRACTICE! PRACTICE!
PRACTICE!

Feb. 5 Issued 12,000 ordinary shares (P10 par) for the following: Inventory
valued at P150,000; Equipment with no known fair value; and office
supplies valued at P53,000. On this date, the shares were valued at
P20 per share.

Inventory 150,000
Office supplies 53,000
Equipment (12,000 x 20 – 150k – 53k) 37,000
Ordinary share capital (12,000 x 10) 120,000
Share premium – ordinary (240k – 120k) 120,000

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PRACTICE! PRACTICE!
PRACTICE!

Feb. 10 Received 30% of the balance from ordinary share subscribers on the
January 5 subscriptions. Also, received the balance due from the
preference share subscribers of 4,000 shares on the January 5
subscriptions. Shares of stock were issued to the fully paid
subscribers.

For ordinary shares:

Cash (1.5M x 60% x 30%) 270,000
Subscriptions receivable 270,000

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PRACTICE! PRACTICE!
PRACTICE!

Feb. 10 Received 30% of the balance from ordinary share subscribers on the
January 5 subscriptions. Also, received the balance due from the
preference share subscribers of 4,000 shares on the January 5
subscriptions. Shares of stock were issued to the fully paid
subscribers.

For preference shares:

Cash (1.2M x 40% x 4/10) 192,000
Subscriptions receivable 192,000

Subscribed share capital (4000 shares x 100) 400,000

Preference share capital 400,000
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4 Treasury shares

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Pro-forma journal entry

Under the cost method, the entry to record the acquisition of

treasury shares is:
Treasury shares (at cost) xx
Cash (or CA of noncash asset given) xx

Retained earnings – unappropriated xx

Retained earnings – appropriated xx

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Presentation in the FS

◉ Treasury shares are deducted from the total equity

balance.
◉ The number of shares held in the treasury and the restriction
on the retained earnings pertaining to the treasury shares
should be disclosed.

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Reissuance of treasury shares

◉ The entry to record the reissuance of treasury shares,

assuming no difference between the cost of treasury shares
and the reissuance price, is:
Cash xx
Treasury shares xx

Retained earnings – appropriated xx

Retained earnings – unappropriated xx
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Reissuance of treasury shares

◉ When the reissuance price exceeds the cost of the treasury

shares, the excess is credited to share premium.
◉ When the reissuance price is lower than the cost of the
treasury shares, the excess is debited using the following
hierarchy:
a. Share premium from treasury shares of the class of shares
b. Retained earnings

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PRACTICE! PRACTICE!
PRACTICE!

The following transactions occurred during the first quarter of operations of No-
to-Retake Corporation:
Mar. 22 Reacquired 5,000 of its own par-value ordinary shares (P10 par) at
P20 per share.

Treasury shares (5,000 shares x P20) 100,000

Cash 100,000

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PRACTICE! PRACTICE!
PRACTICE!

Mar. 24 Reissued 2,000 of the treasury shares at P25 per share.

Reissuance price (P25) > Cost of TS (P20), credit to share premium

Cash (2,000 x 25) 50,000

Treasury shares (2,000 x 20) 40,000
Share premium – treasury shares 10,000

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PRACTICE! PRACTICE!
PRACTICE!

Mar. 26 Reissued 2,500 of the treasury shares at P15 per share.

Reissuance price (P15) < Cost of TS (P20),

debit to (1) share premium; or (2) retained earnings

Cash (2,500 x 15) 37,500

Share premium – treasury shares 10,000
Retained earnings 2,500
Treasury shares (2,500 x 20) 50,000

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PRACTICE! PRACTICE!
PRACTICE!

Mar. 27 Retired the remaining treasury shares.

Ordinary share capital (500 shares x 10) 5,000

Share premium – ordinary (10,000 – 5,000) 5,000
Treasury shares (500 shares x 20) 10,000

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TEST YOUR KNOWLEDGE!

When the shares with par value are sold, the proceeds shall be credited to
the:
A. Share capital account.
B. Share premium.
C. Retained earnings.
D. Share capital account to the extent of the par of the shares issued with any
excess being reflected in share premium.

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 TEST YOUR KNOWLEDGE!

On December 31, 2019, Candid Company's board of directors canceled 5,000 shares of
P50 par value held in treasury at an average cost of P120 per share. Before recording
the cancelation of the treasury shares, the entity had the following balances in its
shareholders' equity:
Share capital (50,000 shares at P50) P2,500,000
Share premium 1,250,000
Retained earnings 1,000,000
Treasury shares, at cost 600,000
On December 31, 2019, what amount should be reported as share capital outstanding?
A. P2,500,000
B. P1,900,000
C. P2,250,000
D. P2,125,000
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Thanks!
Any questions ?
AJ Cresmundo
@ajcresmundo
Sir AJ Cresmundo

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