Shareholder's Equity-Share Capital - 0

SHAREHOLDERS’ EQUITY
by: MCL | CPA | MSA

Definition & Components of SHE
Shareholder’s equity or stockholder’s equity
is the RESIDUAL INTEREST of owners in the
net assets of a corporation measured by the
excess of assets over liabilities.
Contributed
Capital
Components Accumulated
of SHE Comprehensive
Income
Deductions from
SHE (Contra-
Equity Accounts)
Share Capital (Ordinary &
Preferred)
Contributed Subscribed Share Capital

Capital (Ordinary & Preferred)
Share Premium
Less: Subscriptions
Receivable
Accumulated Unappropriated
Profit or Loss R.E
(RE)
Accumulated Appropriated R.E
Comprehensive
Income Accumulated
Other
Comprehensive
Income and
Losses
Treasury Shares
Deductions from Discount on Share Capital

SHE (contra-
Equity Accounts)
Capital Liquidated
Capital Stock/Share Capital
-the amount fixed in the articles of incorporation
to be subscribed and paid in or secured to be paid
in by shareholders (authorized share capital)
-divided into SHARES evidenced by a SHARE

CERTIFICATE.
Capital Stock / Share Capital
-Can be PAR VALUE or NO PAR VALUE
-PAR VALUE – with specific value fixed in the

articles of incorporation and appearing on the
share certificate.
-NO PAR VALUE – without any value appearing

on the face of the share certificate but has an
issued value or stated value which is not less P5.
Ordinary Share Capital
- gives the owner the right to vote, to share in the
income, and in the event of liquidation, to share in
all assets after satisfying creditor and preference
shareholders’ claims.
Preference Share Capital
- so called because of the preferences granted to
the shareholders.
4. Distinction between ordinary shares and preferred shares
Ordinary shares Preference Shares
Return on Investment Residual Fixed
(income)
Priority during liquidation Least priority High priority
Rights and privileges Same May vary
granted to shareholders of
corporation
Can be issued with no par Yes No
value?
With voting rights? Yes No
Other features None Convertible Redeemable
or with warrants
Legal Capital
- portion of the paid in capital arising from the issuance
of share capital which cannot be returned to the
shareholders in any form during the lifetime of the
corporation.
- if par value share = aggregate par value of the shares

issued and subscribed
-if no par value share = total amount of consideration

received from the shareholders
Trust Fund Doctrine
- holds that share capital of a corporation is considered
as a trust fund for the protection of creditors.
- Hence, return of legal capital during the lifetime of the

corporation is illegal.
-Dividend payments are limited to the balance of the

retained earnings.
Trust Fund Doctrine
- holds that share capital of a corporation is considered
as a trust fund for the protection of creditors.
- Hence, return of legal capital during the lifetime of the

corporation is illegal.
-Dividend payments are limited to the balance of the

retained earnings.
Accounting for Share Capital
- Memorandum method – no journal entry is made to
record the authorized share capital, only memo entry.
- Journal entry method – authorization to issue share

capital is recorded.
Accounting for Share Capital
Accounting for Share Capital - Illustration
Accounting for Share Capital - Illustration
Issuance of share capital
-share shall not be issued for a consideration less than its par or
stated value.
- when shares with par value are sold, proceeds shall be
credited to share capital at par and any excess to share
premium.
Example: If 20,000 ordinary shares of P50 stated value are
issued at P80 per share, the journal entry is:
Cash (20k x P80) 1.6M

Ordinary share capital (20k xP50) 1M
Share premium 600k
Share Issued at a Discount
-share issued below its par or stated value,
-prohibited by the Revised Corporation Code
-when shares are sold at a Discount, it shall be recognized as Discount
Liability of the shareholder. Hence, the concerned shareholder is held
liable and must pay for it.
-Example: If 10,000 shares of P100 par value are sold for P800,000
cash, the journal entry is:
Cash 800,000
Discount on share capital* 200,000
Ordinary share capital 1M
*Deduction from SHE

Issuance of Share Capital for Noncash Consideration
-share capital is recorded at the following amount in order of priority:
1. Fair value of the noncash consideration received
2. Fair value of the shares issued
3. Par value of the shares issued
Example:
An entity issued 10,000 shares of P100 par value in exchange for land
with a fair value of P1,500,000. The fair value of the shares issued is
P180 per share or a total of P1,800,000.
Issuance of Share Capital for Services
-services should already rendered
-share capital is recorded at the fair value of the services or fair value of
the shares whichever is reliably determinable.
Example:
An entity issued 1,000 shares of P100 par value to lawyers for their
legal services in getting the corporation organized. The fair value of such
services is reliably determined to be P120,000.
Share Issuance Costs
-direct costs to sell share capital
-examples: legal fees, CPA fees, underwriting fees, commission, cost of
printing certificates, documentary stamps , filing with SEC, cost of
advertising and promotion, newspaper publication fee
- shall be deducted from equity, debited to Share Premium arising from

share issuance.
- if Share premium is not sufficient, the excess shall be debited to “Share

Issuance Costs” to be reported as Contra equity accounts as a deduction
from the following in order of priority:
1. Share premium from previous share issuance
2. Retained earnings
Costs of public offering of shares
-cost that relates to stock market listing are not costs directly
attributable to the issuance of new shares
- examples: road show presentation, public relations consultant’s fee
-to be recorded as an expense in the income statement.

Joint Costs
-costs that relate jointly to concurrent listing and issuance of new shares
and listing of old existing shares
- shall be allocated between newly issued and listed shares and newly
listed old shares.
- allocation can be based on the outstanding newly issued and listed

shares and outstanding newly listed old existing shares.
Illustration
An entity undertakes an initial public offering or IPO for the listing and
issuance of 700,000 new shares and listing of 300,000 old existing
shares.
The entity incurred the following costs:
Documentary stamp 25,000 Share issuance cost
Fairness opinion and valuation report 125,000 Joint Costs
Tax opinion 100,000 Joint Costs
Newspaper publication 200,000 Share issuance cost
Listing fee 300,000 Cost of listing
Other joint costs 275,000 Joint Costs
Illustration
The cost of the public offering shall be expensed The joint costs shall be allocated as follows:
immediately:
Share listing fee 300,000
Cash 300,000
The share issuance cost shall be recorded as follows:
a. If new shares are issued at more than par:
Share Premium 225,000
The journal entry is:
Cash 225,000
b. If new shares are issued at par:
Share premium 350,000
Share issuance costs 225,000
Stock listing fee 150,000
Cash 225,000
Cash 500,000
Watered Share
-share capital issued for inadequate or insufficient consideration
-the consideration received is less than the par value or stated value but the share
capital is issued as fully paid
Example: land with fair value of P800,000 is received for 10,000 shares at P100 par
value.
To create a water in the share capital, it is recorded as fully paid:
Land 1M
Share Capital 1M
But, this needs to be corrected:
Discount on Share Capital 200,000

Land 200,000
Secret Reserve
-the reversed of watered share
-asset is understated or liability is overstated with a consequent understatement of
capital.
Delinquent Subscription
-if subscribed shares are called in and the subscriber cannot pay on the fixed date,
the shareholder is declared to be delinquent, and his shares can be sold to a public
auction.
-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 usually includes the following:

-balance due on the subscription
-interest accrued on the subscription due
-expenses on advertising and other costs of sale
Callable Preference Share
-shares that can be called in for redemption at a specified price at the option of the corporation.
-has no definite redemption date unlike a redeemable preference share
Illustration:
An entity issued 10,000 callable preference shares with par value of P100 at P120 per share. The
journal entry on issuance is:
Cash 1.2M
Preference share capital 1M
Share premium 200K
Subsequently, the preference shares are called in at P150 per share. The journal entry is:
Preference share capital 1M
Share premium – PS 200K
Retained Earnings 300K
Cash 1.5M
Redeemable Preference Share
-shares that provide a mandatory redemption by the issuer for a fixed or determinable amount at a future
date.
-gives the holder the right to require the issuer to redeem the instrument
-considered as a financial liability
Illustration:
An entity issued 10,000 preference shares with par value of P100. The preference shares have a
mandatory redemption by issuer for P1.2M. The journal entry on issuance is:
Cash 1M
Redeemable Preference shares capital 1M
If a dividend of P100,000 is paid to the redeemable preference shareholders, the journal entry is:
Interest expense 100k
Cash 100k
If the preference shares are redeemed by the issuer for P1.2M. The journal entry is:
Redeemable preference shares 1M
Loss on redemption 200k
Cash 1.2M
Convertible Preference Share
-shares that give the holder the right to exchange the holdings for other securities of the issuing corporation.
Illustration:
Preference share capital, 10,000 shares, P100 par P1,000,000
Ordinary share capital, 200,000 shares authorized,
100,000 shares issued, P30 par 3,000,000
Share premium – PS 200,000
Share premium – Ordinary 1,000,000
Retained Earnings 2,000,000
Case 1: Preference shares are converted into ordinary share in the ratio of one preference share for three
ordinary shares.
Preference share capital 1,000,000
Share premium-PS 200,000
Ordinary share capital (10kx3=30k x P30) 900,000
Share premium – ordinary 300,000
Convertible Preference Share
Illustration:
Preference share capital, 10,000 shares, P100 par P1,000,000
Ordinary share capital, 200,000 shares authorized,
100,000 shares issued, P30 par 3,000,000
Share premium – PS 200,000
Share premium – Ordinary 1,000,000
Retained Earnings 2,000,000
Case 2: Preference shares are converted into ordinary share in the ratio of one preference share for five ordinary
shares.
Preference share capital 1,000,000
Share premium-PS 200,000
Retained earnings 300,000
Ordinary share capital (10kx5=50k x P30) 1,500,000
THE END

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SHAREHOLDERS’ EQUITY

by: MCL | CPA | MSA

Contributed Subscribed Share Capital

Deductions from Discount on Share Capital

-divided into SHARES evidenced by a SHARE

-PAR VALUE – with specific value fixed in the

-NO PAR VALUE – without any value appearing

- if par value share = aggregate par value of the shares

-if no par value share = total amount of consideration

- Hence, return of legal capital during the lifetime of the

-Dividend payments are limited to the balance of the

- Hence, return of legal capital during the lifetime of the

-Dividend payments are limited to the balance of the

- Journal entry method – authorization to issue share

Cash (20k x P80) 1.6M

*Deduction from SHE

- shall be deducted from equity, debited to Share Premium arising from

- if Share premium is not sufficient, the excess shall be debited to “Share

- examples: road show presentation, public relations consultant’s fee

-to be recorded as an expense in the income statement.

- allocation can be based on the outstanding newly issued and listed

Discount on Share Capital 200,000

The offer price usually includes the following:

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