Watered share

Is share capital issued for inadequate or insufficient consideration.

The consideration received is less than par or stated value, but the share capital is issued as fully.

If the share capital is watered, asset is overstated and capital is corresponding overstated

The land with fair value of 800,000 is received for 10,000 shares of P100 par value.

Land 1,000,000

Share capital 1,000,000

Issue a share for less than the par or stated value. Thus in the example, the shareholder has a discount
liability P200,000. The journal entry is:

Discount on share capital 200,000

Land 200,000

Service reserve

The reverse of watered share. When asset is understated or liability is overstated with a consequent
understatement of capital. Secret reserve usually arises from the following;

1. Excessive provision for depreciation, depletion, amortization and doubtful accounts.

2. Excessive writedown of receivables, inventories and investments.
3. Capital expenditures are recorded as outright expense.
4. Fictitious liabilities are recorded.

Who is the highest bidder?

Is the person who is willing to pay offer price of the delinquent share for the smaller number of shares.
The offer price normally includes the ff.

1. Balance due on subscription

2. Interest accrued on the subscription due
3. Expenses of advertising and other cost of sale

illustration

No bidder : computation
Callable preference share

Is onne which can be called in for redemption at a specified price at the option of the corporation

No definite redemption date as this is dependent on the “call’ of the issuer.

Is an equity instrument rather than a financial liability because the option of the issuer to redeem the
share for cash does not satisfy the “textbook’ definition of a financial liability.

Illustration;

Preference shares are called in at more than the original issue price of the preference shares, the excess
is debited to retaining earnings.

Accordingly, the excess of the call price over the par value of the preference share is charged to the ff:

1. Share premium from original issuance of the preference share

2. Retained earnings

On the other hand, less than original issue price, the difference is simply credited to share premium
related to ordinary shares.

Redeemable preference share

Mandatory redemption by the issuer for the fixed

Gives the holder the right to require the issuer to redeem the instrument for a fixed

Shall be classified as current or noncurrent financial liability depending on the redemption date.

Illustration: mandatory

Illustration: option of the preference shareholders

Convertible preference share

Gives the holder the right to exchange the holding for other securities of the issuing corporation
Preference shareholder may convert the preference share into ordinary share because operation are
successful and earning on the ordinary share are unlimited.

PS may convert the preference share into bonds which is actually a change of equity from that of an
owner to tthat of a creditor. Normally, preference share is convertible into ordinary share.

Illustration: