MODULE 21: Shareholders’ Equity

RELATED STANDARDS: IAS 1 – Presentation of Financial Statements; IAS 32 –

Financial Instruments: Presentation; Batas Pambansa Bilang 68 – The
Corporation Code of the Philippines

INTRODUCTION
This module focuses on the accounting and reporting of shareholders
equity. Shareholder equity (SE), also referred to as shareholders' equity and
stockholders' equity, it a corporation's owners' residual claim after debts have
been paid. Equity is equal to a firm's total assets minus its total
liabilities. Equity is found on a company's balance sheet, it is one of the most
common financial metrics employed by analysts to assess the financial health
of a company. Shareholder equity can also represent the net or book value of a
company.

Learning Objectives:
1. Enumerate and describe each component of shareholders’ equity.
2. Identify what items are included in contributed and legal capital.
3. Appropriately account for different share capital transaction (including
treasury share) and share issuance cost.

 Definition of Terms (B.P. Blg. 68, IFRS, and various textbooks)

 Authorized capital – The total amount of shares which a corporation is
allowed to issue if shares have a par value.
 Capital stock – Amount specified in the articles of incorporation paid in, or
procured to be paid in for carrying on of the business of the corporation.
 Callable preference shares – Preference shares which can be called in for
redemption at a specified price at the option of the corporation.
 Convertible preference share – Preference shares which gives the holder
the right to exchange the holdings for other securities of the issuing
corporation.
 Legal capital – The portion of the contributed capital or the minimum
amount of the paid-in capital which must remain in the corporation for the
protection of corporate creditors.
 Ordinary share – Basic stock class ownership of a corporation without any
advantage or preference over any other class of shares.
 Outstanding shares – Issued shares in the hands of the shareholders.
 Paid in capital – The section of stockholders' equity that reports the
amount a corporation received when it issued its shares of stock. Also
called contributed capital.
 Preferred shares – Stock issued by a corporation which give preference in
the distribution of the assets of the corporation in case of liquidation and in
the distribution of dividends, or such other preferences as may be stated
in the articles of incorporation.
 Redeemable shares – Shares that provide for mandatory redemption by
the issuer for a fixed or determinable amount at a fixed or determinable
future date, or gives the holder the right to require the issuer to redeem
the instrument at or after a particular date for a fixed or determinable
amount.
 Retained earnings – Cumulative balance of periodic earnings, dividend
distributions, prior period adjustments and other capital adjustments.

Module 21 Page 1 of 12
Shareholders’ Equity
 Rights issue - Issue of rights to existing shareholders that entitles them to
buy additional shares at specified price in proportion to their
existing holdings, within a fixed time period.
Share premium – The portion of the paid-in capital representing the
amount in excess of par. Also called additional paid in capital.
 Share warrants – A financial instrument that gives the holder the right to
purchase ordinary shares.
 Shareholders’ equity – The residual of assets minus liabilities.
 Subscribed capital – The portion of the authorized capital which has been
subscribed but not yet fully paid.
 Treasury shares – Shares of stock which have been issued and fully paid
for, but subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. An entity’s
own equity instruments, held by the entity or other members of the
consolidated group.

 Elements of shareholders’ equity

1. Share capital
 Classes of shares
a. Ordinary shares
b. Preference shares
2. Subscribed share capital
3. Subscriptions receivable – Deducted from subscribed shares capital if
collectible for a period of more than 12 months (contra equity account).
Otherwise, subscription receivable is presented as a current asset.
4. Share premium (Additional paid in capital)
a. Excess over par
b. Reissuance of treasury shares at more than cost
c. Donated capital
d. Share warrants (compound financial instruments - i.e. securities
issued with warrants; fractional warrants)
e. Conversion privilege (compound financial instruments - i.e.
convertible bonds)
f. Quasi-reorganization and recapitalization
5. Stock dividend payable/share dividends distributable
6. Retained earnings
7. Revaluation surplus
8. Treasury shares – Contra equity account
9. Other comprehensive income

 Accounting methods for share capital

1. Memorandum method – No journal entry for authorized share capital.
Shares issuance is credited to the particular share capital account.
2. Journal entry method – Authorization to issue shares is recorded. Shares
issuance is credited to the unissued share capital account.

 Issuance of shares
 At least 25% of the authorized shares must be subscribed at the time of
incorporation, and at least 25% of the total subscription must be paid upon
subscription.
 Shares without par value may not be issued for a consideration less than
the value of P5 per share.
 Consideration received in excess of par value is credited to share
premium.
 Stocks shall not be issued for a consideration less than the par or issued
price thereof.

Module 21 Page 2 of 12
Shareholders’ Equity
 Discount on share premium for original issuance is prohibited by the
Corporation Code. Thus, shareholder must pay for the discount liability.
 Treasury shares may be sold or reissued for consideration less than par
value.
 Watered share is share capital issued for inadequate consideration.
Watered shares overstate both equity and asset. Discount liability must be
recognized for watered shares.
 Issuance of both ordinary and preference shares for a basket price (single
price for both securities)
 Consideration is allocated prorate based on the fair values of both
shares
 When only one security has fair value, residual value of the
consideration is assigned to the other security.

 Issuance of shares for noncash consideration

 Consideration for shares issuance may be other than cash, such as,
tangible or intangible property and service.
 Order of priority for measurement of equity issued:
a. Fair value of noncash consideration
b. Fair valued of shares issued
c. Par value of shares issued

 Share issue costs

 An entity typically incurs various costs in issuing or acquiring its own
equity instruments. Those costs might include registration and other
regulatory fees, amounts paid to legal, accounting and other professional
advisers, printing costs and stamp duties.
 Order of priority for charging stock issuance costs
a. share premium from previous issuance
b. retained earnings
 The costs of an equity transaction that is abandoned are recognized as an
expense.
 Joint costs shall be allocated between
a. Newly issued and listed shares (share premium)
b. Newly listed old existing shares (expense)

 Delinquent subscription
 Subscribed capital not paid by shareholders shall be considered
delinquent and will be sold at public auction.
 Highest bidder is the person willing to pay the offer price of the delinquent
shares for the smallest number of shares.
 If there is no winning bidder, delinquent shares will be reacquired by the
entity as treasury shares.

 Callable preference shares

 No definite redemption date and callable at the option of the
issuer/corporation.
 Classified as equity instrument, part of shareholders’ equity account.
 Accounting for callable preference shares:
 Call price is more than the par value of preference shares, excess is
debited to (order of priority):
a. Share premium from original issuance
b. Retained earnings
 Call price is less than the par value of preference shares, excess is
credited to share premium.

Module 21 Page 3 of 12
Shareholders’ Equity
 Redeemable preference shares
 Has mandatory redemption date or redeemable at the option of the
shareholder.
 Classified as financial liability.
 Dividends paid shall be accounted as interest expense.
 The difference between the redemption price and the amount of the
financial liability is accounted for as gain or loss on redemption (part of
profit or loss).

 Convertible preference shares

 Preference shares are normally convertible into ordinary shares.
Preference shares may also be convertible to bonds (debt securities).
 Issuance of convertible preference shares is accounted as normal
issuance of shares.
 Accounting for conversion of preference shares into ordinary shares:
 Par value of ordinary shares is more than the par value of preference
shares; excess is debited to (order of priority):
a. Share premium from original issuance
b. Retained earnings
 Par value of ordinary shares is less than original issue price of
convertible preference shares (par plus share premium), excess is
accounted as share premium on ordinary shares.

 Rights issue and warrants

 Rights issued in connection with right of pre-emption
 No journal entry for issuance of rights, memorandum entry only.
 Exercise of rights is accounted as regular issuance of shares.
 No journal entry for expiration of rights, memorandum entry only.
 Preference shares issued with warrants (Compound financial instruments)
o The consideration is allocated between the preference shares issued
and share warrants on the basis of their fair values.
o If there is no known fair value of the warrants, warrants is equal to the
consideration minus the fair value of thee preference shares.
 Bonds payable issued warrants requires measurement and classification
of financial liability and the equity component (warrant) using residual
approach.

 Treasury shares
 Cost method is used in accounting for treasury shares.
 Treasury shares account is a contra equity account.
 Reissuance of treasury shares:
 Reissue price is equals to cost, treasury shares account is simply
debited.
 Reissue price is more than cost, excess is accounted as share
premium - treasury shares.
 Reissuance below cost, excess is charged to the following accounts
(order of priority):
a. Share Premium – Treasury Shares (same class of shares)
b. Retained earnings
 Retirement of treasury shares:
 Cost is less than par value of retired share capital, excess is credited
to share premium
 Cost is more than par value of retired share capital, excess is charged
to the following accounts (order of priority):
a. Share premium (original issuance)
b. Share premium – Treasury shares

Module 21 Page 4 of 12
Shareholders’ Equity
c. Retained earnings

 Donated capital
 Donation from shareholders
o Donated assets – accounted as donated capital (share premium)
o Donated shares – entity’s own shares donated by shareholders
 No journal entry when received. Memorandum entry only
 Recorded only when sold. Donated capital account is credited.

 Donation from non-shareholders

 No restriction, accounted as income
 With restriction, accounted as liability, then transferred to income when
restrictions are met.

 Recapitalization
 Types of recapitalization:
a. Change from par to no-par and vice versa
 Decrease in new share capital, charged to share premium –
recapitalization
 Increase in new share capital, charged to retained earnings
b. Reduction of par value
 Decrease in new share capital, charged to share premium –
recapitalization
c. Share split
 Split up – increases the number of outstanding shares, no effect on
the amount of share capital
 Split down/reverse share split – decreases the number of
outstanding shares, no effect on the amount of share capital

Module 21 Page 5 of 12
Shareholders’ Equity
********************************************************
Illustrative Problems

1. Defined as an entity’s own equity instruments held by the entity or other

members of the consolidated group.
A. Ordinary shares C. Callable shares
B. Redeemable shares D. Treasury shares

2. Defined as shares that provide for mandatory redemption by the issuer for
a fixed or determinable amount at a fixed or determinable future date, or
gives the holder the right to require the issuer to redeem the instrument at
or after a particular date for a fixed or determinable amount.
A. Ordinary shares C. Callable shares
B. Redeemable shares D. Treasury shares

3. Defined as basic stock class ownership of a corporation without any

advantage or preference over any other class of shares.
A. Ordinary shares C. Preference shares
B. Redeemable shares D. Treasury shares

4. Defined as The total amount of shares which a corporation is allowed to

issue
A. Authorized capital C. Paid in capital
B. Legal capital D. Subscribed capital
5. Defined as the portion of the contributed capital or the minimum amount of
the paid-in capital which must remain in the corporation for the protection
of corporate creditors.
A. Authorized capital C. Paid in capital
B. Legal capital D. Subscribed capital

6. The following equity transactions are considered illegal under Philippine

laws, except
A. Returning legal capital to shareholders during the lifetime of the
corporation.
B. Issuance of shares at a discount.
C. Reissuance of treasury shares at less than cost.
D. Paying dividends if the entity has a deficit.

7. When shares are issued for noncash consideration, the equity component
shall be recorded at
A. Fair value of the shares issued
B. Book value of the noncash consideration
C. Fair value of the noncash consideration
D. Par value of the shares issued

8. Share issuance cost shall be accounted as

A. Operating expense
B. Deduction from share premium
C. Deduction from retained earnings
D. Loss – part of other comprehensive income

9. Watered share capital will

A. Understate asset and overstate capital
B. Understate asset and capital
C. Overstate asset and understate capital
D. Overstate asset and capital

Module 21 Page 6 of 12
Shareholders’ Equity

10. Which of the following shall be classified as liability instead of equity?

A. Callable preference shares at the option of the issuer.
B. Redeemable preference shares at the option of the holder
C. Both A and B
D. Neither A nor B

11. Which statement about treasury share is incorrect?

A. Treasury shares are shares reacquired but not cancelled.
B. Treasury shares must be the entity’s own shares.
C. Treasury shares cannot be legally reissued at a discount (below par
value).
D. Retained earnings must be appropriated to the extent of the cost of the
treasury shares.

12. For reissuance of treasury shares at more than cost, the excess shall be
credited to
A. Share premium
B. Gain – other comprehensive income
C. Gain – profit or loss
D. Retained earnings

13. For reissuance of treasury shares at less than cost, the excess shall be
debited to
A. Retained earnings
B. Share premium - treasury
C. Share premium – share capital
D. Loss - other comprehensive income

14. Which statement about donated capital is false?

A. Donated capital is credited when contribution is received from
shareholders.
B. Donated capital is part of the share premium.
C. No journal entry is need for receipt of an entity’s own shares as
donation.
D. Donated capital account is closed to retained earnings at year-end.

15. The following equity transactions do not necessitate a journal entry.

Choose the exception.
A. Reduction of par value per ordinary share
B. Receipt of entity’s own shares as donation
C. Share split up
D. Issuance of rights issue by way of pre-emptive right

16. Kazakhstan Company is authorized to issue 600,000 ordinary shares, P10

par. The company had the following transactions in year 1:
 Issued 20,000 shares at P30, received in cash
 Issued 2,800 shares for legal services costing P100,000.
 Issued 125,000 shares in exchange for a building valued at
P2,950,000 and land valued at P800,000. The building has original
cost of P2,500,000 and P1,000,000 accumulated depreciation. The
land was originally acquired for P300,000
Share capital would be
A. 1,485,000 C. 1,478,000
B. 3,978,000 D. 1,543,000

Module 21 Page 7 of 12
Shareholders’ Equity
17. Refer to the preceding problem. Share premium would be
A. 2,965,000 C. 2,907,000
B. 2,972,000 D. 2,722,000

18. Pakistan shareholders’ equity accounts prior to treasury shares

transactions:
Ordinary shares, P10 par P1,200,000
Share premium - issuance 140,000
Retained earnings 720,000
Treasury shares transactions are as follows:
 Acquired 2,000 shares for P30,000 cost
 Sold 1,200 shares at P18 per share
 Retired the remaining treasury shares
Share premium after treasury shares transactions
A. 136,000 C. 143,600
B. 140,400 D. 139,600

19. The accounts shown below appear in the December 31, year 1 trial of
Afghanistan Corporation:
Preference share capital, authorized P100 par P10,000,000
Unissued Preference share capital 3,600,000
Ordinary share capital, authorized P20 par 4,000,000
Unissued Ordinary share capital 2,000,000
Subscription receivable, Preference 380,000
Subscription receivable, Ordinary 360,000
Subscribed Preference share capital 600,000
Subscribed Ordinary share capital 440,000
Treasury share capital, preferred, at cost 1,360,000
Share premium 1,700,000
Retained earnings 2,000,000
All subscription receivables are due in year 2. How much is the total
stockholder’s equity of Afghanistan Corporation?
A. 11,040,000 C. 12,400,000
B. 11,780,000 D. 13,760,000

20. Turkmenistan Company issued 6,000 shares of its P10 par common stock
to Max as compensation for 1,000 hours of legal services performed. Max
billed Turkmenistan for P500 per hour of legal services. On this date of
issuance, the stock was selling at a public trading at P150 per share. By
what amount should the share premium of Turkmenistan Company
increase as a result of the issuance of those shares?
A. 60,000 C. 900,000
B. 440,000 D. 3,000,000

21. The shareholders’ equity section of Uzbekistan Inc. statement of financial

position shows the following:
Preference share capital, P100 par 2,300,000
Ordinary share capital, P10 par 5,500,000
Treasury shares – ordinary, P12 cost/share 132,000
Share premium – ordinary 1,140,000
Share premium – preference 620,000
Subscribed ordinary shares 250,000
Subscription receivable (2 years collectability) 100,000
Donated capital 125,000
Share warrants outstanding 110,000
Retained earnings 6,540,000

Module 21 Page 8 of 12
Shareholders’ Equity
How much is the legal capital
A. 7,800,000 C. 7,950,000
B. 8,050,000 D. 9,560,000

22. Refer to the preceding problem. How much is the total share premium?
A. 1,995,000 C. 1,760,000
B. 1,885,000 D. 1,870,000

23. Refer to the preceding problem. How many are the outstanding ordinary
shares?
A. 550,000 C. 564,000
B. 525,000 D. 539,000

24. Refer to the preceding problem. How much is the total shareholders’
equity?
A. 16,792,000 C. 16,917,000
B. 16,817,000 D. 16,353,000

25. Tajikistan Company issued 100,000 ordinary shares. Of these, 5,000

shares were held in treasury as of January 1, Year 1. During Year 1,
equity transactions are as follows:
May 1 1,000 shares of treasury were sold
Aug 1 10,000 shares were issued
Nov 25 2-for-1 share split took effect
As of December 31, Year 1, how many shares were issued and
outstanding?
Issued Outstanding
A. 220,000 212,000
B. 220,000 216,000
C. 222,000 214,000
D. 222,000 218,000

26. During the current year, Kyrgyzstan Co. issued 10,000 ordinary shares
with P200 par value and 20,000 convertible preference shares with P200
par value for a total of P8,000,000. On the date of issuance, the ordinary
share selling at P360 and the preference share is selling at P270. What
amount of the proceeds should be allocated to the convertible preference
shares?
A. 6,000,000 C. 4,800,000
B. 5,400,000 D. 4,400,000

27. Bhutan Corporation reported the following information on December 31,

Year 3:
Ordinary share capital, P3 par 600,000
Share premium 800,000
Treasury shares, at cost 50,000
Net unrealized loss on available for sale securities 20,000
Retained earnings appropriated
for uninsured earthquake loss 150,000
Retained earnings unappropriated 200,000
What amount should be reported as total shareholders’ equity on
December 31, Year 3?
A. 1,680,000 C. 1,780,000
B. 1,720,000 D. 1,820,000

Module 21 Page 9 of 12
Shareholders’ Equity
28. Albania Inc. had 700,000 ordinary shares authorized and 300,000 shares
outstanding on December 31, Year 1. The following events occurred
during Year 2:
January 31 Declared 10% stock dividend
June 30 Purchased 100,000 shares
August 1 Reissued 50,000 shares
November 30 Declared 2 for 1 stock split
On December 31, Year 2, how many ordinary shares are outstanding?
A. 560,000 C. 630,000
B. 600,000 D. 660,000

29. During the current year, Algeria Co. issued 6% bonds with a maturity
value of P6,000,000, together with 10,000 ordinary shares with P50 par
value for a combined cash amount of P11,000,000. The market value of
the ordinary share cannot be determined. If the bonds were issued
separately, the bonds would have sold for P4,000,000 on an 8% yield to
maturity basis. What amount should be reported for share premium on the
issuance of the ordinary shares?
A. 7,500,000 C. 5,500,000
B. 6,500,000 D. 4,500,000

30. During the current year, Bulgaria Mfg. issued 50,000 convertible
preference shares with P100 par value for P110 per share. One
preference share can be converted into three ordinary shares with P25 par
value at the option of the preference shareholder. At year-end, when the
market value of the ordinary share was P40 per share, all of the
preference shares were converted. What amount should be credited
respectively to ordinary share capital and share premium as a result of the
conversion?
A. 3,750,000 and 1,750,000 C. 5,000,000 and 500,000
B. 3,750,000 and 2,250,000 D. 6,000,000 and 0

31. Croatia Company acquired 60,000 shares with P10 par value at P30 per
share. During the current year, the entity issued 30,000 of these shares at
P50 per share. The cost method is used in accounting for treasury shares.
What accounts and amounts should be credited to record the issuance of
the 30,000 shares?
A. Share capital P300,000, share premium P600,000, and retained
earnings P600,000
B. Share capital P300,000 and share premium P1,200,000
C. Treasury shares P900,000 and share premium P600,000
D. Treasury shares P900,000 and retained earnings P600,000

32. Estonia Co. was organized on January 1, Year 1 with 100,000 shares
authorized with P100 par value. On same date, the entity issued 75,000
shares at P140 per share and on December 31, Year 1, it purchased
5,000 shares at P110 per share to be held as treasury. The entity used the
par value method of recording treasury shares. What is the balance in the
share premium account arising from treasury share transaction on
December 31, Year 1?
A. 200,000 C. 50,000
B. 150,000 D. 0

33. On January 1, Year 2, Lithuania Inc. had 125,000 shares issued, 25,000
shares of which were held as treasury. During the current year,
transactions were as follows:

Module 21 Page 10 of 12
Shareholders’ Equity
January 1 through October 31 – 13,000 treasury shares were distributed
to officers as part of share compensation plan.
November 1 – A 3 for 1 share split took effect.
December 1 – The entity purchased 5,000 of its own shares to discourage
an unfriendly takeover. These shares were not retired.
On December 31 Year 2, how many shares were outstanding?
A. 375,000 C. 334,000
B. 360,000 D. 324,000

34. Latvia Corporation reported the following shareholders’ equity on January

1, Year 4:
Share capital, P10 par, outstanding 225,000 shares2,250,000
Share premium 900,000
Retained earnings 2,190,000
During the current year, the entity had the following share transactions:
 Acquired 6,000 treasury shares for P270,000.
 Sold 3,600 treasury shares at P50 a share.
 Sold the remaining treasury shares at P41 per share.
What is the total amount of share premium on December 31, Year 4?
A. 891,600 C. 908,400
B. 870,000 D. 927,600

35. On December 31, Year 2, Mongolia Co. cancelled 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 share, the entity had the
following shareholder’s equity:
Share capital (50,000 shares originally 2,500,000
issued at P75)
Share premium 1,250,000
Retained earnings 1,000,000
Treasury shares, at cost 600,000
On December 31, Year 2, what amount should be reported as share
capital outstanding?
A. 2,500,000 C. 2,250,000
B. 1,900,000 D. 2,125,000

36. Nigeria Co. was organized on January 1, Year 1. On that date, the entity
issued 200,000 shares with P10 par value at P15 per share. During the
period January 1, Year 1 through December 31, Year 2, the entity
reported net income of P2,000,000 and paid cash dividends of P500,000.
On January 5, Year 2, the entity purchased 10,000 shares at P20 per
share to be held as treasury. On December 31, Year 2, 5,000 treasury
shares were sold at P30 per share and the remaining treasury shares
were retired. What is the total shareholders’ equity on December 31, Year
2?
A. 4,450,000 C. 4,400,000
B. 4,350,000 D. 4,950,000

- End of discussion

“He who would learn to fly one day must first learn to stand and walk and run and
climb and dance; one cannot fly into flying.” – Friedrich Nietzsche

Module 21 Page 11 of 12
Shareholders’ Equity
Answer Key:
1. D 13. B 25. A
2. B 14. D 26. C
3. A 15. A 27. A
4. A 16. C 28. A
5. B 17. B 29. B
6. C 18. D 30. A
7. C 19. B 31. C
8. B 20. B 32. B
9. D 21. B 33. C
10. B 22. A 34. C
11. C 23. D 35. C
12. A 24. A 36. A

Module 21 Page 12 of 12