FinAcc3 Shareholders Equity

RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig
LESSON 2
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MODULE NO. 2: STOCKHOLDER’S EQUITY
1. Nature of Corporation
2. Share Capital transactions, Share Rights, Share Warrants, Share Options
and Share Appreciation Rights
3. Retained Earnings
4. Dividend transactions
5. Recapitalization and Quasi-reorganization
6. Book Value per share
Overview
This module is prepared for the students to understand the nature of

Stockholders’ Equity.
This module discusses items to be included in computing total
stockholders’ equity, determine different sources of corporate capital, classes
of share capital, how to record transactions relating to share rights, share
warrants, share options and share appreciation rights, elements affecting the
retained earnings balance, dividend transactions, record the effects of
recapitalization and quasi-reorganization and computing book value per
share.
This module will cover a brief discussion of the theory and standard
behind the topic, exercises and practice problem the cover the said topic.
INTERMEDIATE ACCOUNTING PART 3 1

Study Guide
This module is designed for the students to understand provisions,

contingencies and other liabilities. This module includes:
1. Topic Discussions - to be read by the students to fully understand the
topic.
2. Assessment – to be accomplished by the students after the
discussion to test their skills and understanding to the subject matter.
3. Assignment – activity to be done by students to be submitted to the
instructor. This is to reinforce or advance the student’s learning. It is
relevant to the past, current, and future lessons.
To complete the requirements of this module, the students are required to:
1. Read and understand the topic discussion and the guided exercises
2. Accomplish the assessment.
3. Accomplish the assignment due on next meeting.
Learning Outcomes
At the end of the discussion, the students are expected to:

1. Describe the nature of corporation and identify the different sources of
corporate capital and its features.
2. Record share capital transactions and transactions relating to share
rights, share warrants, share options and share appreciation rights.
3. Identify the elements affecting the retained earnings balance, record
dividend transactions, effects of recapitalization, quasi-reorganization
and book value per share.
Topic Presentation

Corporation is an artificial being created by operation of law, having the right of

succession and the powers, attributes and properties expressly authorized by law or
incident to its existence. It has juridical personality, which is separate and distinct
from its owners.
The Corporation Code provides that 5 or more persons not exceeding 15 a
majority of whom are residents of the Philippines, may form a private corporation
for any lawful purpose or purposes by filing with the Securities and Exchange
Commission the articles of incorporation, duly executed and acknowledged before a
notary public.
Stockholders Equity is the residual interest of owners in the net assets of a
corporate enterprise. This is measured by the excess of assets over liabilities.
COMPONENTS OF CORPORATION
1. Corporators are those who compose the corporation whether shareholders
or members or both.
2. Incorporators are those corporators mentioned in the articles of
incorporation as originally forming and composing the corporation.
3. Shareholders or Stockholders are owners of shares in a stock corporation.
Shareholders may be natural or artificial persons but only natural persons can
be incorporators.
4. Members are corporators of a nonstock corporation.
PRESENTATION ON THE STATEMENT OF FINANCIAL POSITION
In a corporate enterprise, funds contributed by shareholders, retained earnings,
reserves representing appropriations of retained earnings and reserves representing
capital maintenance adjustments are shown separately on the statement of financial
position.
The shareholder’s equity section of the statement of financial position should be
presented in sufficient details to provide a clear understanding of the capital structure
of the enterprise and the sources of capital currently in use.
When more than one class of share capital exists, the various classes should be
listed separately in the order of their preferences in liquidation.
COMPONENTS OF STOCKHOLDERS EQUITY:
 Contributed (Paid-in) Capital

 Retained Earnings
 Other Comprehensive Income
-Revaluation Surplus
-Unrealized Gains/Losses on Available for Sale Securities
-Foreign Currency Translation Adjustment Gains and Losses
-Other Comprehensive Income (that are taken directly to equity)
Other contra-shareholders’ equity accounts are also reported such as:

-Share Capital Subscription Receivable

-Treasury Shares
ELEMENTS OF SHAREHOLDERS’ EQUITY

Philippine Term IAS Term
Capital Stock Share Capital
Subscribed capital stock Subscribed Share Capital
Common Stock Ordinary Share Capital
Preferred Stock Preference Share Capital
Additional Paid in Capital Share Premium
Retained Earnings (deficit) Accumulated profits (losses)
Retained Earnings appropriated Appropriation Reserve
Revaluation Surplus Revaluation Reserve
Treasury Stock Treasury Share
CONTRIBUTED CAPITAL
It is known as “Paid in Capital” represents the amount invested or contributed by

owners. It is composed of share capital and Additional Paid in Capital (APIC).
Share Capital represents the contribution equal to the par or stated value of the
shares purchased by owners or the total contribution by owners, in case of no-par, no
stated value share capital.
The minimum consideration or issue price for no-par share as provided for in the
Corporation Code is P5. A no-par share cannot be issued for less than P5.
APIC represents contribution in excess of the par or stated value of the share capital.
APIC may arise from issuance of share capital in excess of par or stated value,
resale or retirement of treasury shares at more than cost, distribution of share
dividends (also called capitalization or bonus issue), issuance of detachable share
purchase warrants, changes in par value (stock recapitalization), donation of assets
to the corporation and transactions resulting to corporate readjustment or quasi-
reorganization.
REVALUATION SURPLUS
It is the excess of revalued amount over the carrying amount of the revalued asset.
LEGAL CAPITAL
-Represents the par value of all share capital issued and subscribed. This is the
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 corporation.
For an enterprise that issues share capital with par value:

Legal Capital= Share Capital + Subscribed Share Capital
For an enterprise that issues no par value share capital:
Legal Capital= Share Capital + Subscribed Share Capital + Paid in Capital in
Excess of Stated Value

ORDINARY SHARE (COMMON STOCK)

-Represents the residual ownership interest in the corporation. They bear the
ultimate risk of loss and receive the benefits of the success of corporation. They
control the management of the corporation.
Basic rights of ordinary shareholders:
1. right to share proportionately in profits and losses
2. right to share proportionately in management (voting right)
3. right to share proportionately in corporate assets upon liquidation.
4. right to share proportionately in any new issues of share capital of the same
class (pre-emptive right) or stock right.
PREFERENCE SHARE
-A special class of shares that possesses certain preferential rights that are not found
in ordinary shares. It is usually issued with a par value and the dividend preference is
expressed as a percentage of the par value. Generally, they have no voting right.
Common features attached to preference shares:
-cumulative preference share
-participating preference share
-convertible preference share
-callable preference share
-redeemable preference share
Authorized shares, issued shares, and outstanding shares:

 Issued shares represent the number of shares that the corporation has
issued to its shareholders as of a specific date.
 Outstanding shares are the shares of stock that have been issued and are
still in the hands of the shareholders as of a specific date. OS= Issued
shares-Treasury shares
 Treasury shares represent shares that have been issued to shareholders
and have been reacquired by the corporation, either by purchase or by
donation but not retired. It carries no voting or preemptive right. It does not
ordinarily participate in any type of dividends and has no right as to assets in
the event of liquidation.
 Subscribed shares are the shares of stock that will be issued upon
completion of an installment purchase contract with an investor.
Preincorporation subscription requirement:
The Corporation Code provides that the Securities and Exchange Commission shall
not register any stock corporation unless 25% of its authorized number of shares has
been subscribed, and at least 25% of the subscription has been paid. However, in
no case, shall the paid in capital be less than P 5,000.
TRUST FUND DOCTRINE
It holds that the share capital of a corporation is considered as trust fund for the
protection of creditors. It is illegal to return the legal capital to shareholders during the
lifetime of corporation.

ACCOUNTING FOR SHARE CAPITAL:

1. Memorandum method- No entry is made to record the authorized share
capital. Only a memorandum is made for the total authorized share capital.
When share capital is issued, it is credited to share capital account.
2. Journal entry method- The authorization to issue share capital is recorded
by debiting unissued share capital and crediting authorized share capital.
When share capital is issued, it is credited to the unissued share capital
account.
MEMORANDUM METHOD:
1. An entity was authorized to issue share capital of P4,000,000 divided
into 40,000 shares with par value of P100.
Memo entry- The entity was authorized to issue share capital of P4,000,000,
divided into 40,000 shares with par value of P100.
2. Received subscription to 10,000 shares at par.

Subscription receivable 1,000,000
Subscribed share capital 1,000,000
3. Collected 25% on the above subscription.

Cash 250,000
Subscription Receivable 250,000
4. Received full payment for 6,000 shares originally subscribed.

Cash 450,000
Subscription price (6,000 x 100) 600,000

Partial Payment (25% x 600,000) (150,000)
Balance 450,000
5. Issued the share certificates for 6,000 shares which are fully paid.
Subscribed share capital 600,000
Share Capital 600,000
The Corporation Code provides that shares are issued only when
subscriptions are fully paid.
6. Received a cash subscription for 5,000 shares at par.

Cash 500,000
Share Capital 500,000
STATEMENT OF FINANCIAL POSITION:

Share Capital, P100par, 40,000 shares authorized,
11,000 shares issued 1,100,000
Subscribed share capital, 4,000 shares 400,000
Subscription receivable (300,000)
Shareholders’ equity 1,200,000

JOURNAL ENTRY METHOD:
1. Unissued Share Capital 4,000,000

Authorized Share Capital 4,000,000
2. Subscription receivable 1,000,000

Subscribed Share Capital 1,000,000
3. Cash 250,000
4. Cash 450,000
5. Subscribed Share Capital 600,000

Unissued Share Capital 600,000
The issuance of share capital is credited to the unissued share capital account
6. Cash 500,000
Unissued share capital 500,000
STATEMENT OF FINANCIAL POSITION:

Authorized Share Capital, P100par, 40,000 shares 4,000,000
Unissued shares capital, 29,000 shares (2,900,000)
Issued share capital 1,100,000
Subscribed share capital, 4,000 shares 400,000
Subscription receivable (300,000)
Shareholders’ equity 1,200,000
Issuance of share capital:
The Corporation Code provides that a “share shall not be issued for a consideration
less than the par or stated value thereof”
The law further provides that shares without par value cannot be issued for less than
P5. In the Philippines, the no-par share must have a stated value of at least P5.
 Issued for Cash: when par or no-par value share with stated value is issued
for cash, the proceeds should be credited to Share Capital Capital account to
the extent of the par or stated value of the shares, with the excess being
reflected as APIC.
 Issued for Consideration other than Cash: the proceeds should be
measured by the fair market value (FMV) of the property or the services
received. If the FMV of the property or services is not available, the
transaction is recorded using the FMV of the share capital issued. In case the
shares are issued for outstanding liabilities set off should be the measure for
recording the equity. If shares are issued in consideration for goods, or
services received from an employee, IFRS 2 Share Based Payment, requires
that the transaction be recorded at the FMV of the equity instruments issued.

Any excess of the FMV over the par value of the shares issued is credited to
Share Premium.
Share Capital is recorded at an amount equal to the following in the
order of priority:
1. Fair value of non cash consideration received
2. Fair value of the shares issued
3. Par Value of the shares issued
 Sold on Subscription: Subscription is a legally binding contract between the

corporation and the subscriber (investor) which provides that the subscriber
will buy a certain number of shares at an agreed price with the payment
spread over a specified time period.
 Shares issued at discount: When shares sold at a price which is below par
or stated value, they are said to be issued at a discount. Our Corporation
Code prohibits the issue of share at a discount. The discount is not
considered a loss to the issuing corporation but the shareholder is held liable
therefor.
For 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
Share Capital 1,000,000
DELINQUENT SUBSCRIPTION
If the shareholder does not pay on the date fixed, the shareholder is declared
delinquent and the delinquent share will be sold at public auction
HIGHEST BIDDER
It is the person who is willing to pay the “offer price” of the delinquent shares for the
smallest number of shares.
The offer price normally includes:
1. Balance due on the subscription
2. Interest accrued on the subscription due
3. Expenses of advertising and other costs of sale
JOURNAL ENTRIES FOR SUBSCRIPTION:

1. Subscription price > par value:

ILLUSTRATION:
Assume the following data for HIP Corporation. Dave subscribed to 1,000 shares of
P100 par value ordinary shares at par. A 25% downpayment was given by Dave, the
balance being payable in 2 equal installments. Dave paid the first installment but
defaulted in the second. The unpaid subscription was offered for sale at a public
auction. Advertising costs amounted to P5,000. Harley made a bid for 800 shares,
Idaba for 700 shares and Punzalan for 600 shares.

Shares Issued with other securities:

When 2 or more classes of equity securities are issued for a single payment, the
lump sum price is allocated among the classes of securities issued based on their
relative market values (proportional method).
Illustration:
SAAP Corporation issued for a lump sum price of P 178,000 1,000 Ordinary shares
with par value of P 100 and 500 preference shares with par value of P 50. On that
date of issuance, SAAP’s ordinary share were selling at P 135, while its preference
shares were selling at P 90.
Total market values are as follows:
If not all fair market values of classes of securities are determinable, the residual
method may be used.
Assume in our proceeding example that no fair market value for preference shares is
determinable. The allocation is made as follows:

SHARE ISSUE COSTS AND STOCK ASSESSMENTS
Those costs include registration and other regulatory fees, amounts paid as legal
and printing costs and stamp duties. The transaction costs of an equity transaction
are accounted for as deduction from equity (net of any related income tax benefit), by
a charge to APIC (Share Premium) pertaining to that issue. If there is no APIC, Share
issue costs are recorded as expenses.
Transaction costs that relate to the issue of a compound financial instrument (bonds
with share warrants) are allocated to the liability and equity components of the
instrument in proportion to the allocation of proceeds.
COSTS OF PUBLIC OFFERING OF SHARES
Costs that relate to stock market listing shall be recorded as expense in the income
statement because these are not considered as costs of an “equity transaction” since
no equity instrument has been issued.
JOINT COSTS
Transaction costs that relate jointly to the concurrent listing and issuance of new
shares and listing of old existing shares shall be allocated between the newly issued
and listed shares and the newly listed old existing shares. Philippine Interpretations
Committee concluded that joint costs shall be allocated prorate on the basis of
outstanding newly issued and listed shares and outstanding newly listed old existing
shares.
Examples:
1. Audit and other professional advice relating to prospectus
2. Opinion of counsel
3. Tax Opinion
4. Fairness opinion and valuation report
5. Prospectus design and printing

ILLUSTRATION:
SAAP Corporation undertakes initial public offering (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 tax 25,000
Fairness opinion and valuation report 125,000
Tax Opinion 100,000
Newspaper publication 200,000
Listing fee 300,000
Other joint costs 275,000
COST OF PUBLIC OFFERING:

Listing Fess 300,000
SHARE ISSUANCE COSTS:

Documentary Stamp Tax 25,000
Newspaper publication 200,000
Total 225,000
JOINT COSTS
Fairness opinion and valuation report 125,000
Tax Opinion 100,000
Other joint costs 275,000
Total joint costs 500,000
ENTRIES:
1. Cost of public offering:
Stock listing fee 300,000
Cash 300,000
2. Share Issuance costs (if the new shares are issued at more than par)
Share Premium 225,000
Cash 225,000
Share Issuance Costs (if the new shares are issued at par)
Share issuance costs 225,000
Cash 225,000
3. Allocation of joint costs:
Outstanding Fraction Allocated
Newly issued and listed shares 700,000 7/10 350,000
Newly listed old existing shares 300,000 3/10 150,000
1,000,000 500,000

Stock listing fee 150,000
Cash 500,000
WATERED SHARE
 Watered share is share capital issued for inadequate or insufficient
consideration.
 Consideration received < par or stated value but the share capital is issued as
fully paid.

 As a result, asset is overstated and capital is overstated.
A building with fair value at P800,000 is received for 10,000 shares of P100par value.
To create a water in the share capital, the issuance of 10,000 shares is recorded as
fully paid as follows:
Building 1,000,000
Share Capital 1,000,000
To correct the accounts:
Discount on Share Capital 200,000
Building 200,000
CALLABLE PREFERENCE SHARE
It is one which can be called in for redemption at a specified price at the option of
the corporation. It has no definite redemption date as this dependent on the call
of the issuer. It is an equity instrument rather than a financial liability.
An entity issued 10,000 callable preference shares with par value of P100 at P120
per share. The entry to record the issuance:
Cash (10,000 X 120) 1,200,000

Preference Share Capital (10,000 X 100) 1,000,000
Share Premium-PS 200,000
Subsequently, the preference shares are called in at P150 per share. The entry to
record the call:
Preference Share Capital 1,000,000

Retained earnings 300,000
Cash (10,000 X 150) 1,500,000
 When preference shares are called in at more than original issue price of the
preference shares, the excess is debited to Retained Earnings.
 If call price > par value of PS, the excess is charged to: a) Share Premium
from original issuance of the PS b.) Retained Earnings
 When preference shares are called in at less than original issue price,
difference is credited to Share Premium from Ordinary Shares
REDEEMABLE PREFERENCE SHARE
-Provides for 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 for a
fixed or determinable amount at a future date.
-It has a mandatory redemption date or one which must be redeemed at the option of
holder.
-It shall be classified as current or non-current liability depending on the redemption
date.
-Dividends paid to holder of redeemable PS shall be accounted for as interest
expense

An entity issued 10,000 preference shares at the par value of P100 per share. The
preference shares have mandatory redemption by the issuer for P1,200,000.
To record the issuance of redeemable PS:

Cash (10,000 X 100) 1,000,000
Redeemable preference shares 1,000,000
If dividend of P100,000 is paid to the redeemable preference shareholders:

Interest expense 100,000
Cash 100,000
Subsequently, if the PS are redeemed by the issuer for P1,200,000:

Redeemable PS 1,000,000
Loss on redemption 200,000
Cash 1,200,000
On January 1, 2020, an entity issued PS for cash equal to the par value of
P6,000,000.
The PS are redeemable at the option of the PS holders. No dividends are to be paid
on these shares, but the preference shareholders have the right to require the issuer
to redeem the shares on January 1,2022 for P6,615,000. The interest rate implicit in
this agreement is 5% compounded annually.
01/01/20: Cash 6,000,000

Redeemable PS 6,000,000
12/31/20: Interest expense 300,000

Accrued interest payable 300,000
(5% X 6M)
12/31/21: Interest expense 315,000

(5% X 6,300,000)
01/01/22: Redeemable PS 6,000,000

Cash 6,615,000
CONVERTIBLE PREFERENCE SHARE
-it is one which gives the holder the right to exchange the holdings for other securities
of the issuing corporation
ILLUSTRATION
Preference Share Capital, 10,000 shares, P100 par 1,000,000
Ordinary share capital, 200,000 shares authorized, 100,000
Shares issued, P30 par 3,000,000
Share Premium-OS 1,000,000
Retained Earnings 2,000,000

CASE 1
The preference share is converted into ordinary share in the ratio of 1 preference
share for 3 ordinary shares.
Preference share capital 1,000,000
Share Premium- PS 200,000
Ordinary Share Capital (30,000 X 30) 900,000
Share Premium-OS 300,000
CASE 2
The preference share is converted into ordinary share in the ratio of 1 preference
share for 5 ordinary shares
Preference Share Capital 1,000,000
Retained Earnings 300,000
Ordinary share capital (50,000 X 30) 1,500,000
REACQUISITION OF SHARE CAPITAL
Shares reacquired for immediate retirement:

 The Share Capital is debited equal to the par (or stated value, in case of no-
par with stated value) of the shares retired.
 APIC or Paid in Capital in Excess of Stated Value is debited equivalent to the
amount of the credit at the date the shares were originally issued.
 Cash is credited equal to total retirement price.
 If retirement price < original issue price of shares being retired, the difference
is credited to APIC.
 If the retirement price > original issue price , the difference is debited to APIC
from previous retirement or treasury share transactions of the same class of
stock and Retained Earnings.
Assume that an enterprise acquires 1,000 of its own P100 par value with preference
shares preference shares. These shares were originally issued at P110. Retirement
of the preference shares would be recorded as follows:
1. Assume a retirement price of P105 per share.

Preference Share Capital 100,000
Cash 105,000
Paid in Capital from Retirement of PS 5,000
2. Assume a retirement price of P120 per share.

Preference Share Capital 100,000
Retained Earnings* 10,000
Cash 120,000
*APIC from previous retirement of PS if any is charged; any deficiency is

charged to Retained Earnings.
Treasury Shares Acquired by Purchase

 No gain or loss is recognized in profit or loss on the purchase, sale, issue or

cancellation of an entity’s own equity instruments. The consideration paid or
received shall be recognized directly in equity.
 Upon acquisition, treasury share is recorded at cost irrespective of whether
these are acquired above or below the par value. Upon resale of the treasury
shares, Treasury share account is credited at its cost.
 If the reissue price < cost of treasury share, difference is charged to APIC
from Treasury shares (to the extent of its balance) and any remainder of the
difference is charged to Retained Earnings
 If the reissue price > cost of treasury share, the entire excess is credited to
APIC, not to Retained Earnings.
Let’s assume that 1,000 shares of P100 par ordinary shares were reacquired at
P150 per share. The entry to record the reacquisition is:
Treasury Shares 150,000

Cash 150,000
Assume that 400 of the treasury shares were subsequently sold at P160 share and
the remaining 600 were later sold at P140 per share.
The resale of the 400 shares at P160 is recorded as follows:

Cash (400 shares X 160) 64,000
Treasury Shares (400shs X 150) 60,000
Paid in Capital from Treasury Shares 4,000
The resale of the 600 shares at P140 at a later date is recorded as follows:
Cash (600 shs X 140) 84,000
Paid in Capital from Treasury Shares 4,000
Treasury Shares (600 shs X 150) 90,000
Limitation on Treasury Shares: A corporation can reacquire or repurchase treasury

shares to the extent only of its unappropriated retained earnings balance. When a
corporation has treasury share recorded at cost an amount of retained earnings
equal to such cost should be appropriated for that purpose. This appropriation of
retained earnings is necessary so as not to impair legal capital even with the
purchase of the treasury shares.
Donated Treasury Shares:

Shares may be donated to enable the company to raise capital by reselling the
shares.
Since donated shares are acquired without any cost, the transaction does not affect
the corporation’s assets, liabilities and shareholder’ s equity. The receipt of donated
shares does not affect the total issued shares, but it decreases the outstanding
shares.
The receipt of donated shares is recorded by memorandum entry. If the market price
of the share capital is known at the time donation, the receipt maybe recorded by
debiting Treasury Shares and crediting Donated Capital or APIC appropriately
described, for an amount equal to the market value of the donated shares.

If the receipt of the donated shares was recorded by a memorandum entry, the entire
proceeds from the subsequent resale of these donated shares are credited to
Donated Capital or Paid in Capital from Donated Shares. If the donated shares were
recorded at market value at time of receipt, only the excess of the reissue price over
the market value is credited to Donated Capital or Paid in Capital from Donated
Shares.
Assume that several shareholders donated to the corporation, a portion of their

holdings totaling 1,000 shares of P100 par value ordinary shares. Subsequently, all
donated shares were reissued at P130 per share.
1. Assume there is no available market price for the shares at this time.
Memo: One thousand (1,000) shares of P100 par value ordinary shares were
received as donation from various shareholders.
Cash 130,000
Donated Capital 130,000
2. Market price for donated ordinary share is known at P120 per share.
Cash 130,000
The total amount of shareholders’ equity is not affected by the choice of method used
to account for the donated treasury shares.
SHARE SPLIT OR STOCK SPLIT
Stock Split (share split under IAS) is the issuance by an enterprise of its own ordinary
shares to its ordinary shares without consideration and under conditions indicating
that such action is prompted mainly by a desire to increase the number of
outstanding shares. The purpose is to effect a reduction in their unit market price and
thereby obtain a wider distribution and improved marketability of the shares. This is
accompanied by a reduction in the par value of the share capital.
REVERSE SHARE SPLIT
It decreases the number of shares outstanding with a corresponding increase in the

value of shares. This action would raise the unit market price of the corporation’s
shares of stock.
Share split and reverse share split are recorded in the books by a memorandum
entry and the total shareholders’ equity are not changed in effecting the split.
Assume the following equity balances for GBC Corporation:

Ordinary Share Capital, P100 par, 10,000 shares issued & outstanding P1,000,000
On this date, a 2 for 1 share split is effected.
The effect of the share split is recorded through memorandum entry:

Memo: Effected a 2 for 1 share split, reducing the par value to P50 and
increasing the number of shares issued to 20,000
Assuming, instead, that a 1:2 share split is effected:
Memo: Effected a 1 for 2 share split, increasing the par value to P200 and
decreasing the number of shares issued to 5,000.
STOCK RIGHTS, WARRANTS AND OPTIONS
Stock rights or rights issue are rights issued to existing shareholders entitling them
to maintain a proportionate interest in the ownership of the corporation when new
shares are to be issued. It gives the holders the privilege to purchase shares at a
price lower than the prevailing market price of the shares of stock.
Share Warrants represent the certificate or instrument evidencing ownership over

the rights issue. It states the number of shares the holder may purchase as well as
exercise price.
A memorandum entry listing the number of additional shares that maybe acquired
through the exercise of the rights is necessary so that the corporation may hold a
sufficient number of unissued shares. If the rights are exercised, the usual journal
entry is to record the issuance of shares for cash. If the rights expire, another
memorandum entry is made.
SPPP Corporation had 800,000 shares outstanding P100 par value ordinary share
capital and decided to issue additional 200,000 shares. It issued 800,000 stock rights
to its existing shareholders, giving the holders thereof the right to purchase one
ordinary share at P120 per share for every 4 rights submitted (800,000/200,000). On
the date of distribution of the stock rights, each share of SPPP Corporation sells for
P140. Of the 800,000 rights distributed by SPPP Corporation, 600,000 rights were
exercised. The remaining rights expired.
Entries:
1. Issuance of rights:
Memo: Issued 800,000 stock rights to shareholders permitting them to
purchase one share of P100 par ordinary share at P120 for every 4 rights
submitted.
2. Exercise of rights:
Cash 18,000,000
Ordinary Share Capital 15,000,000
Share Premium-Ordinary Shares 3,000,000
600,000/4= 150,000
150,000 X 120= 18,000,000
150,000 X 100= 15,000,000
150,000 X 20= 3,000,000
3. Expiration of 200,000 rights:

Memo: 200,000 of the 800,000 stock rights issued to shareholders expired.
SHARE WARRANTS ATTACHED TO OTHER SECURITIES
 Share warrants are sold by corporation for cash in conjunction with the issue
of another security, usually preference shares or bonds.

 When preference shares are issued with detachable warrants, the proceeds
should be allocated to both preference shares and warrants based on the fair
value of the 2 securities at the time of issuance. The value attached to the
warrants is credited to Ordinary Share Warrants Outstanding or any
appropriate account (Paid in Capital from Warrants or Share Warrants
Outstanding) which is reported in balance sheet as APIC.
 If the warrants are exercised, the value assigned to the ordinary share is the
value allocated to the warrants plus the cash proceeds from the issuance of
the ordinary shares. If the rights are allowed by the holders to expire, the
value assigned to the warrants may be transferred to another paid in capital
account (Paid-in Capital from Expired Share Warrants).
San Miguel Corporation issues 1,000 shares of P100 par value preference shares at
P130 per share. Each preference share includes one detachable warrant that entitles
the holder to purchase one share of P50 par ordinary shares at P60 per share. At
that time, the market values are as follows: Preference share without warrants
attached- P126; Warrants – P4; Ordinary Share- P75. Subsequently, all of the
warrants were exercised.
Journal entries to record the issue of preference shares with warrants and the
subsequent exercise of the warrants are as follows:
Cash (1,000 X 130) 130,000

Preference share Capital (1,000 X 100) 100,000
Premium-Preference 26,000
Ordinary Share Warrants Outstanding 4,000
Allocation of issue price:

To preference shares: 130,000 X 126/130= 126,000
To warrants: 130,000 X 4/130= 4,000
Cash (1,000 x 60) 60,000

Ordinary Share Warrants Outstanding 4,000
Ordinary Share Capital (1,000 x 50) 50,000
Share Premium Ordinary 14,000
Assume that only 600 warrants were exercised and the remaining 400 warrants
expired. Journal entries for the exercise and expiry of warrants are as follows:
Cash (600 x 60) 36,000

Ordinary Share Warrants Outstanding (600 x 4) 2,400
Ordinary Share Capital (600 x 50) 30,000
Share Premium-Ordinary 8,400
Ordinary Share Warrants Outstanding (400 X 4) 1,600

Paid-in Capital from Expired Warrants 1,600
SHARE OPTIONS
It is a contract that gives the holder the right, but not the obligation, to subscribe to
the entity’s shares at a fixed or determinable price for a specified period. Share
options are granted to officers and employees of an enterprise as part of
compensation plan and as compensation for services received. It is within the scope
of IFRS 2, Share based payment.

Share based transactions under IFRS 2 fall under any of the following classifications:
(a) Equity-settled share based payment transactions, in which the entity receives
goods or services as consideration for equity instruments of the entity
(including shares or share option).
(b) Cash-settled share based payment transactions, in which the entity acquires
goods or services by incurring liabilities to the supplier of those goods or
services for amounts that are based on the price (value) of the entity’s shares
or other equity instruments of the entity and
(c) Transactions in which the entity receives or acquires goods or services and
the terms of the arrangement provide either the entity or the supplier of those
goods or services with a choice of whether the entity settles the transaction in
cash (or other assets) or by issuing equity instruments.
Based on above, share options fall under (a) equity-settled share based payment
transaction.
Share Options that vest based on service condition

If share options granted vest based on the completion of a specified period of
service, the amount of compensation expense shall be spread over the required
service period, called the vesting period. The amount of compensation expense shall
be based on the fair value of the options at the grant date.
SCENARIO 1: All options are vested
On January 2, 2020, the shareholders of HCP Company approved a plan that grants
the company’s four executives options to purchase 2,000 shares each of the
company’s P50 par value ordinary shares. The options are granted on January 2,
2020 and maybe exercised anytime from January 1, 2020 to December 31, 2022.
Based on an option pricing model used by the enterprise, the fair value of the option
is P35. The option price per share is P60 and the market price of the ordinary shares
on January 2, 2020 is P90 per share. At the end of 2020, all options were expected
to vest. All options vested and were exercised at the end of 2020.
The journal entries are as follows:

01/01/2020: Memo: Granted options to 4 executives to purchase 2,000 shares
each of P50 par value ordinary shares at P60 per share. The options
are exercisable any time from January 1, 2020-December 31, 2022.
12/31/2020: Compensation Expense 140,000

Share Options Outstanding 140,000
Total options granted (2,000 X 4) 8,000

Market price of each option X 35
Total value of options P 280,000
Number of vesting years (2020 and 2021) /2
Annual compensation expense as a result of share options P 140,000

12/31/2022: Share Options Outstanding 280,000

Cash (8,000 X 60) 480,000
Ordinary Share Capital 400,000
Share Premium-Ordinary Shares 360,000

SCENARIO 2: Some of the options granted did not vest
On January 2, 2020, the shareholders of HCP Company approved a plan that grants
the company’s four executives options to purchase 2,000 shares each of the
Based on an option pricing model used by the enterprise, the fair value of the option
is P35. The option price per share is P60 and the market price of the ordinary shares
on January 2, 2020 is P90 per share.
On June 30, 2021, an executive with option to purchase 2,000 shares decided to
migrate to Singapore and resigned from HCP Company. On March 2, 2022, all of the
three remaining executives exercised their options.
If during the vesting period, some options are cancelled due to non completion of the
minimum required service period, the total value of the remaining options which has
not been charged to expense shall be recognized as expense over the remaining
number of years in the vesting period.
The journal entries are as follows:

01/01/2020: Memo: Granted options to 4 executives to purchase 2,000 shares
each of P50 par value ordinary shares at P60 per share. The options
are exercisable any time from January 1, 2020-December 31, 2022.

Total options granted (2,000 X 4) 8,000

Market price of each option X 35
Total value of options P 280,000
Number of vesting years (2020 and 2021) /2
Annual compensation expense as a result of share options P 140,000
06/01/2021: Memo: Options for the purchase of 2,000 shares previously granted on
January 1, 2020 were cancelled because the executive holding the
options resigned.

Total value of remaining options (6,000 X 35 X 2/2) P 210,000

Cumulative compensation expense previously recognized (140,000)
Compensation Expense-2021 P 70,000
03/01/2022: Cash 360,000

SCENARIO 3: All options vested; but some options were not exercised

The entity shall make no subsequent adjustment to total equity after the vesting date,
even if some of the options that already vest are cancelled before their expiration
date. However, this requirement of PFRS/IFRS 2 does not preclude the entity from
recognizing a transfer within equity.
Using the data of scenario 1 and assume that all the 4 executives who have been
granted the share options stayed with the company until the end of 2021. Hence, all
the options vested. On June 30, one of the executives resigned from the company
without exercising the options. Thus, 2,000 options were cancelled. All the remaining
options were exercised on December 31, 2022.
01/01/2020: Memo: Granted options to 4 executives to purchase 2,000 shares each

of P50 par value ordinary shares at P60 per share. The options are
exercisable any time from January 1, 2020-December 31, 2022.


06/30/2022: Share Options Outstanding 70,000

Paid in Capital from Unexercised Share Options 70,000
(2,000 options X P35)
12/31/2022: Cash (6,000 x 60) 360,000

Ordinary Share Capital (6,000 x 50) 300,000
SCENARIO 4: Estimates exist at each end of the reporting date of the number
of options expected to vest.
MBBN Company granted 100 share options to each of its 500 employees on January
1, 2020. The option plan allows the employees to purchase a share of the entity’s
P100 par value ordinary shares capital at P120. On January 1, 2020, the fair value of
each option was determined to be P24 based on option pricing model used by the
company. The option plan requires the employees receiving the options to be in the
employ of the company at least until December 31, 2022. Options are exercisable
starting January 1, 2023 and they expire on December 31, 2024.
Actual and revised estimates of employees leaving the company during 2020,2021 &
2022 are as follows:
2020: 25 employees left; 30 more employees are expected to leave before

December 31, 2022.
2021: 20 employees left; 15 more employees are expected to leave before
December 31, 2022.
2022: 10 employees left.
Of the 44,500 options that vested, 44,000 were exercised on December 31, 2023 and
the remainder lapsed.

The amounts of Compensation Expense to be recognized as a result of the share

option plan during 2020, 2021 and 2022 are computed as follows:
2020: Number of options expected to vest 100 x (500-25-30) 44,500

X Fair value of each option X P 24
Total fair value of options expected to vest P 1,068,000
Proportion of year completed over vesting period 1/3
COMPENSATION EXPENSE-2020 P 356,000
2021: Number of options expected to vest 100 x (475-20-15) 44,000

Total fair value of options expected to vest P 1,056,000
Proportion of years completed over vesting period 2/3
CUMULATIVE COMPENSATION EXPENSE P 704,000
Compensation expense previously recognized (356,000)
2022: Number of options that actually vested 100 x 445 44,500

Total fair value of vested options P 1,068,000
Journal entries for years 2020 through 2024:
12/31/2020: Compensation expense 356,000



12/31/2023: Cash (44,000 x 120) 5,280,000

Share Options Outstanding (44,000 X 24) 1,056,000
Ordinary Share Capital (44,000 X 100) 4,400,000
Share Premium 1,936,000
12/31/2024: Share Options Outstanding (500 x 24) 12,000

Paid in Capital from Unexercised Options 12,000
SCENARIO 5: Use of intrinsic value to assign amount to options
In some cases when the market price of the options cannot be reliably determined by
the enterprise, the intrinsic value method may be used to assign a value to the share
options. The INTRINSIC VALUE is the excess of the market price of a share over the
strike price (exercise price).
For instance, if a share sells for P150 in the market and the exercise price is P130,
the intrinsic value is P20.

The intrinsic value method requires remeasurement of compensation expense at

each reporting date and at the date when the options are exercised.
On January 2, 2020, the shareholders of NSSMA Company approved a plan that

grants the company’s four executives options to purchase 2,000 shares each of the
The option price per share is P60 and the market price of the ordinary shares on
January 2, 2020 is P90 per share; P96 on December 31, 2020 and P100 on
December 31, 2021.
The following are entries during 2020 and 2021 assuming that no executive left the
company during these vesting years.

Total options granted 2,000 x 4 8,000

Intrinsic Value at 12/31/2020 (96-60) x 36
Total value of options P288,000
Divided by number of vesting years (2020 & 2021) 2
Compensation Expense in 2020 P144,000

Total options granted 2,000 x 4 8,000

Intrinsic Value at 12/31/2020 (100-60) x 40
Total value of options P320,000
Compensation Expense in 2021 P176,000
Assuming that the options were exercised on June 30, 2022 when the market price of
an ordinary share is P 105, the following entries would be made.

Remeasurement of options based on intrinsic value.
Total intrinsic value 8,000 x (105-60) P 360,000

Compensation Expense -2022 P 40,000
Cash (8,000 X 60) 480,000

If market value of the option is available on the date of grant, this market value is
used to measure the amount of compensation expense recorded over the vesting
period. Any subsequent change in the market value during vesting year is ignored.
Share Options that vest based on performance condition

This performance conditions are as follows: achieving a specified growth rate in

terms of profits or gross revenue or reaching a specified increase in market price of
the entity’s shares. Accounting for performance-based share options depends on
whether the options are based on market performance features or non-market
performance features.
Non-market performance conditions: vesting based on achieving specific growth
rate in revenue or in profits, achieving a specific increase in earnings per share or
vesting based on non-financial targets.
Market based performance conditions: achieving a specified share price of the
entity’s equity instruments and achieving a specified target share price relative to an
index or market prices.
Market Condition
If the grant of share options is based on market performance features, the best
estimate of the length of vesting period is made at the date of grant, while the
number of employees expected to be entitled to the options shall be estimated at
each reporting date. Compensation expense is recorded at the end of each vesting
year, irrespective of whether that market condition is satisfied.
On January 1, 2020, SGV & Co, issued 3,000 share options to its key employees that
will vest once its share price equals P90. Each employee who received the options is
required to be employed with the company at the time the condition is met in order to
receive the options. The share options will expire in 3 years. On the date of grant, it is
expected that the market condition will be satisfied in 3 years. Based on the pricing
model used by the company, the market value of the share option on the date of
grant is P25.
The total compensation expense that will be recognized over the 3-year period is
P75,000 if all the employees satisfied the required service condition. At the end of
each year in the expected vesting period, compensation expense of P25,000 will be
recognized, irrespective of whether the condition of reaching P90 share price is
satisfied.
Journal entries for 2020, 2021 and 2022 are as follows:



The above entries are made irrespective of whether the market price of the company
reached P90 before the expiration of the option.
When there is acceleration to the vesting period because the targeted market price is
reached before the end of the three-year period in the foregoing example, the
compensation expense is accordingly adjusted. If the market price of the share
reached P90 in 2021 in the foregoing illustration, the compensation expense in 2021
will be adjusted to P50,000 computed as follows:

Total value of the options, 01/01/2020 (3,000 X P25) P 75,000

Compensation expense recognized in 2020 as a result of the option grant (25,000)
Compensation expense recognized in 2021 P 50,000
Non-Market Condition
The amount recognized for goods or services received during the vesting period shall
be based on the number of share options expected to vest based on number of
employees that will complete the required service period and on the achievement of
the non-market condition.
The entity shall revise that estimate, when necessary if subsequent information
indicates that the number of share options expected to vest differs from the previous
estimates. On vesting date, the entity shall revise the estimate to equal the number of
equity instruments that ultimately vested.
SCENARIO 1: SHARE OPTIONS THAT VEST BASED ON REVENUE
Assume that on December 31, 2020, RCAM Company issued 2,000 share options to
each of the 5 key executives that will vest once revenues reach P100 million a year
until December 31, 2023. The options expire on January 1, 2024. The employee
must still be in the employ of the company at the time the share options vest. Based
on the pricing model used by the company, the market value of the option on the
date of grant is P30.
At the end of 2021, it is expected that none of the executives who have been granted
the share options will leave the company until 2024. It is also estimated that revenue
of P100 million will be reached by the year 2023. Thus, compensation expense of
P100,000 will be recognized by the company. The following entry shall be made on
December 31, 2021 based on the estimate of the company.

10,000 X 30= 300,000 / 3 years= 100,000
If the total annual revenue during 2022 reached P100 million, the vesting of the share
options accelerates and the remaining compensation expense related to the 10,000
share options shall be recognized as follows:

300,000-100,000= 200,000
If the P100 million annual revenue had not been reached by the end of the year 2022
but it is still expected that the condition will be satisfied in the year 2023, the
compensation expense recognized in 2022 will be P 100,000 and the remaining P
100,000 will be recognized in 2023.
If the revenue condition was not satisfied up to the end of 2023, the compensation
expense recorded in previous years shall be reversed. The adjustment is treated as a
change in accounting estimate affecting the compensation expense of the current
period. Thus, in effect on a cumulative basis, no compensation expense is recorded
as a result of the share options if the non-market condition has not been satisfied.

SCENARIO 2: SHARE OPTIONS THAT VEST BASED ON PROFIT
On January 1, 2020, CFAM Company granted 100 share options to each of its 500
employees for the purchase of the company’s ordinary share capital at P120 per
share. The options are exercisable by employees who are in the employ of the
company until the exercise of the options. The share options will vest as follows:
End of 2020, if earnings increase by 15%

End of 2021, if earnings over 2 years (2020 and 2021) increase by an average of
12%.
End of 2022, if earnings over 3 years (2020 through 2022) increase by an average of
10%
On January 1, 2020, the fair value of each option is P24.
Actual and estimate of the entity’s earnings are as follows:
End of 2020: actual, 12%; estimated earnings in 2021, 12%

End of 2021: actual, 10%; estimated earnings in 2022, 8%
End of 2022: actual, 11%
Actual and estimate of the employees who leave the company are as follows:
2020: 20 employees left; additional employees expected to leave, 40

2021: 15 employees left; additional employees expected to leave, 20
2022: 16 employees left.
SOLUTION:
Actual and estimated number of employees:
Best estimate at the end of 2020: 500-20-40=440

Best estimate at the end of 2021: 500-(20+15)-20=445
Actual at the end of 2022: 500-(20+15+16)=449
Best Estimate of the vesting period at each reporting date:

(440 X 100 options X 24/2 years)

Total value of options expected to vest: 445 X 100 X P24 P 1,068,000

Proportion of vesting period 2/3

Cumulative compensation expense P 712,000

Amount previously recognized (528,000)
Compensation expense in 2021 P 184,000

Total value of options that actually vested: 449 X 100 X P24 P 1,077,600
Cumulative compensation expense P 365,600
SHARE APPRECIATION RIGHTS (SARs)
Incentives for impressive performance of the company may also be granted to key
employees in the form of cash based on the increase in the market value of the
company’s shares from the date of grant. SARs are examples of cash-settled share-
based payment transactions. The entity shall measure the fair value of the liability at
each reporting date and at the date of settlement with any changes in fair value
recognized in profit or loss for the period.
EXAMPLE 1: Number of share appreciation rights is based on number of

employees, use of fair value method
On January 1, 2020, RCAM Corporation grants 100 cash share appreciation rights to
each of its 400 employees on the condition that the employees remain in its employ
at least until December 31, 2022.
The number of employees who left during 2020 and the estimated number of
employees still expected to leave until December 31, 2022 as estimated at the end of
2020 and 2021 are as follows:
2020: 20 employees left; 35 employees expected to leave until December 31, 2022
2021: 15 employees left: revise estimate, 15 employees expected to leave until
December 31, 2022
2022: 10 employees left
The entity estimates the fair values of the SARs at end of each year as follows: 2020-
P12.40; 2021-P15.20; 2022-P16.40; 2023-P18;2024-P21.
The market values of the ordinary share are available on the following dates:
January 1, 2020 P 60.00
December 31, 2020 71.00
December 31, 2021 74.00
December 31, 2022 76.40
December 31, 2023 78.00
December 31, 2024 81.00
All share appreciation rights were exercised on December 2024.
Solution:
Number of employees expected to stay until December 31, 2022 as estimated at the
end of each year:
2020: 400-20-35= 345

2021: 400-20-15-15= 350

2022: 400-20-15-10= 355
Computation of Compensation Expense as a result of SARs:
SARs are measured at fair value at the end of each reporting date. At the date of
exercise the employees are to be paid an amount equal to the intrinsic value.
2020: 345 x 100 x P12.40 X 1/3= 142,600

2021: (350 X 100 X P15.20 X 2/3)-142,600= 212,067
2022: (355 X 100 X P16.40)-354,667= 227,533
After the vesting date (December 31, 2022), until the share appreciation rights are
exercised, the SARs are measured at each reporting date at fair value. Thus, as a
result of remeasurement, additional compensation expense shall be recognized in
2023 and 2024 as follows:
2023: Total fair value of the SARs (355 X 100 X P18) P 639,000
Less: Previous fair value (355 X 100 X P16.40) 582,200
Compensation expense 56,800
2024: Intrinsic value at date of exercise (35,500 X P21) 745,500
Less: Previous fair value 639,000
Compensation expense 106,500
The following are the entries relating to the share appreciation rights:

Share Appreciation Rights Payable 142,600





Cash 745,500
EXAMPLE 2: Number of SARs is based on level of revenue, use of intrinsic

value
San Andres Company issued SARs to its Chief Executive Officer on January 1, 2020.
The SARs maybe exercised beginning January 1, 2023 provided that the officer is
still in the employ of the company at the date of exercise. Each right provides for a
cash payment equal to the amount the share price of San Andres Company exceeds

P50. The equivalent number of shares for SARs will be based on the level of sales of
the company at December 31, 2022 as follows:
Level of sales Equivalent shares granted

P250M-P400M 10,000
Above P400M-P750M 15,000
Above P750M 20,000
The level of sales actually achieved by the enterprise and the share price at the end
of each year are:
Year Level of Sales Share Price, end of year
2020 350M P74
2021 410M 85
2022 760M 95

Increase in share price (74-50) 24

Number of shares based on sales 10,000
Total appreciation 240,000
Divided by number of years in vesting period 3 years
Compensation expense in 2020 80,000


X Number of years completed over total vesting period X 2/3
Cumulative compensation expense in 2020 & 2021 350,000
Less: Compensation expense recognized in 2020 (80,000)
Compensation Expense in 2021 270,000


X Number of years completed over total vesting period X 3/3
Cumulative compensation expense in 2020 - 2022 900,000
Less: Compensation expense recognized in 2020 & 2021 (350,000)
Compensation Expense in 2022 550,000
Assuming that the SARs are exercised on January 1, 2023, the entry for the payment
is:
12/31/23: Share Appreciation Rights Payable 900,000

Cash 900,000
Assuming that SARs are still unexercised at December 31, 2023 and that the fair
value of the SARs is already P1,000,000, an entry is made to adjust the Share

Appreciation Rights Payable from 900,000 to 1,000,000. The change in the fair value
of the SARs is an adjustment to the current year compensation expense.

SHARE BASED TRANSACTIONS WITH CASH ALTERNATIVES
Some share-based payment arrangements permit the employees to choose whether

to receive cash or equity instruments that is the choice given to employees. In this
situation, a compound financial instrument has been granted. The total value of the
compound financial instrument has to be bifurcated into its debt component and
equity component . The residual approach is applied.
Fair value of the compound financial instrument XX

Less: Fair value of the debt component at grant date XX
Value assigned to equity instrument XX
ILLUSTRATION
On January 1, 2020, an entity granted to its chief operations officer the right to
choose either 5,000 ordinary shares or to receive cash payment equal to 4,000
shares. The grant is conditional upon completion of 2 years of service. The entity
estimates that the value of the share alternative at the date of grant is P60 per share.
Par value per share is P40.
The fair values per share at January 1, 2020, December 31, 2020 and December 31,
2021 are P65, P68 and P72.
The officer exercised his rights on June 30, 2022 when the market price of each
share is P75.
SOLUTION:
Fair value of the equity alternative (5,000 X P60) P 300,000

Less: Fair value of debt component (4,000 X 65) 260,000
Fair value of equity component 40,000
Fair value of liability:

12/31/2020 (4,000 X P68) 272,000
12/31/2021 (4,000 X P72) 288,000
06/30/2022 (4,000 X P75) 300,000
Journal entries:
40,000/2= 20,000
272,000/2=136,000


40,000/2= 20,000
288,000-136,000=152,000

300,000-288,000=12,000
If the officer chooses the cash settlement:

Cash 300,000
Paid in Capital from Unexercised Share Options 40,000
If the officer opted the equity alternative, the settlement is recorded as:
RETAINED EARNINGS
CURRENT PROFIT / LOSS

-at the end of each accounting period, closing entries are made.
If the Profit or Loss Summary account has a credit balance (indicating a net
income), the entry is:
Profit or Loss Summary XX
Retained Earnings XX
If the Profit or Loss Summary account has a debit balance (indicating a net loss):
Retained Earnings XX
Profit or Loss Summary XX
DIVIDENDS
Distribution of corporate income to its shareholders on a prorate basis. It is
distributed out of accumulated earnings of corporation except for liquidating dividend
which represents return to the shareholders of their investments.
FORMS OF DIVIDENDS

1. Cash
2. Non cash assets (property dividends)
3. Notes or other evidence of corporate indebtedness (scrip or liability)
4. Corporate own share capital (stock dividends or bonus issue)
CASH DIVIDENDS
-maybe expressed as a percentage of the par value of the Share Capital or as a peso
amount per share.
The Board of Directors of San Juan Corporation at its meeting on December 1, 2020,
declares a dividend of P2.00 per share, payable on February 1, 2021, to
shareholders of record on December 27, 2020. At time of declaration, San Juan
Corporation has 50,000 ordinary shares outstanding.
12/31/20: Retained Earnings (Dividends) 100,000

Cash Dividends Payable 100,000
02/01/21: Cash Dividends Payable 100,000
Cash 100,000
PROPERTY DIVIDENDS
-may be distributed in the form of equity or debt securities held in other companies in
order to facilitate the divisibility and delivery of the assets to the shareholders.
Assume that on October 10, 2020, GBC Corporation declared property dividends
distributable on March 31, 2021 in the form of pieces of equipment with carrying
value of P320,000 (cost P500,000 and updated accumulated depreciation of
P180,000) and with fair value of P350,000. On December 31, 2020, the equipment’s
fair value slightly fell to P340,000 and on March 31, 2021, the assets fair value
increased to P370,000.
10/10/20: Retained Earnings 350,000

Property Dividends Payable 350,000
10/15/20: Assets Held for Distribution 320,000

Accumulated Depreciation 180,000
Equipment 500,000
12/31/20: Property Dividends Payable 10,000

03/31/21: Retained Earnings 30,000

Property Dividends Payable 30,000
03/31/21: Property Dividends Payable 370,000

Assets Held for Distribution 320,000
Gain on Disposal of assets 50,000
SHARE DIVIDENDS (BONUS ISSUE)

-It is also termed capitalization or bonus issue under IAS. It is a pro rata distribution
of corporation’s own shares to its shareholders. It does not affect total assets and
total shareholders’ equity because it’s simply represents a transfer of capital from
retained earnings to contributed capital thus termed as capitalization.

-Number of shares of bonus issue represents less than 20% of shares previously
outstanding (small bonus issue) @ market value per share on declaration date
-Proportion of additional shares issued is large in relation to the total shares
previously outstanding (20% or more) (large bonus issue) @par value.
The capital structure of San Jose Corporation at December 31, 2019 is as follows:
Ordinary Share Capital , P10 par, 10,000 shares issued and outstanding 1,000,000
SMALL BONUS ISSUE

On February 1, 2020, the Board of Directors declared 15% bonus issue distributable
on March 31, 2020. The market value per share on declaration date is P15.

Share Dividends Distributable 150,000
Share Premium-Ordinary 75,000
15% X 100,000=15,000 X15=225,000
03/01/20: Share Dividends Distributable 150,000

LARGE BONUS ISSUE

On February 1, 2020, the board of directors declared a 30% bonus issue distributable
on March 31, 2020. The market value per share on declaration date is P15.

30% X 100,000= 30,000 X 10= 300,000
03/31/20: Share Dividends Distributable 300,000

FRACTIONAL SHARE WARRANTS

-A share dividend results in some shareholders being entitled to a fraction of a share.
Assume that the large bonus issue of 300,000 shares declared includes 25,000 full
shares and 5,000 fractional shares.
Retained Earnings (Dividends) 300,000


Fractional Share Warrants Outstanding 50,000
Assume further that only 4,500 full shares are issued and the remaining 500
fractional shares expired:
Fractional Warrants Outstanding 50,000

Paid in Capital from Expired warrants 5,000

SCRIP DIVIDENDS
-corporation issues promissory notes called scrip requiring the corporation to pay
dividends at some future date.
Assume that San Gabriel Corporation declares 10% scrip dividends on April 1, 2020
payable on April 1, 2021 with interest rate of 12%. The total par value of the
outstanding shares of San Gabriel Corporation is P1,000,000.

Scrip Dividends Payable 100,000
10% X 1,000,000
12/31/20: Interest Expense 9,000
Interest Payable 9,000
100,000 X 12% X 9/12
04/01/21: Scrip Dividends Payable 100,000

Interest Payable 9,000
Interest Expense 3,000
Cash 112,000
LIQUIDATING DIVIDENDS
-represent return of contributed capital rather than distribution of earnings
Assume that on December 31, 2020 San Rafael Corporation declares P400,000 cash
dividends to its ordinary shareholders. The balance of the retained earnings on this
date is P300,000 and as such, P100,000 of the dividends are liquidating.
Retained earnings 300,000

Additional Paid in Capital 100,000
Dividends Payable 400,000
ALLOCATION OF CASH DIVIDENDS BETWEEN PREFERENCE SHARES AND

ORDINARY SHARES
-CUMULATIVE PREFERENCE SHARE has a right to receive current dividends as
well as any dividends in arrears before ordinary shareholders receive any dividends.
-PARTICIPATING PREFERENCE SHARE provides for additional dividends to be
paid to its holder after dividends of a specified amount or rate are paid to ordinary
shareholders.
San Ildefonso Corporation declared and paid cash dividends of P200,000 and
P424,000 for years 2020 and 2021 respectively. The company’s capital structure for
the 2-year period remained unchanged as follows:
12% Preference Share Capital, P200 par; 10,000 shares issued

and outstanding P2,000,000
Ordinary Share Capital, P20 par, 50,000 shares issued and
Outstanding 1,000,000
Determine the total dividend and dividend per share for both preference and ordinary
shares for years 2020 and 2021 under the following independent assumptions:
a. Non-cumulative and non-participating

b. Cumulative and non-participating. At the beginning of 2020, unpaid dividend

on the preference shares is P50,000.
c. Cumulative and fully participating. There are no unpaid dividends at the
beginning of 2020.
d. Non-cumulative and participating up to a total of 14%
Solution:
Annual dividend:
Preference share (2,000,000 X 12%) P 240,000
Ordinary Share (1,000,000 X 12%) 120,000
a. NON-CUMULATIVE AND NON-PARTICIPATING

2020 Preference Ordinary
Current dividends 200,000 None
Per share 20
2021
Current dividends 240,000
Excess to ordinary
(424,000-240,000) 184,000
Per Share 24 3.68
b. CUMULATIVE AND NON-PARTICIPATING. At the beginning of 2020,

unpaid dividend on the preference shares is P50,000.
Dividend in arrears 50,000 None
Current dividends 150,000
Total 200,000
Per share 20
2021
Dividend in arrears 90,000
Current dividends 240,000 94,000
Total 330,000 94,000
Per Share 33 1.88
c. CUMULATIVE AND FULLY PARTICIPATING. There are no unpaid

dividends at the beginning of 2020.
Per share 20
2021
Dividend in arrears 40,000
Current dividends 240,000 120,000
Excess (2:1)
24,000 X 2/3 16,000
24,000 X 1/3 8,000
Total 296,000 128,000
Per Share 29.60 2.56
d. NON-CUMULATIVE AND PARTICIPATING up to total of 14%

Per share 20
2021
Current dividend 240,000 120,000

Additional participation of 240,000 120,000

Preference shares 2% X 2M 40,000
Ordinary 2% X 1M 20,000
Excess to ordinary shares 4,000
Total 280,000 144,000
Per Share 28.00 2.88
Additional participation of PS is 2% (14%-12%). If the participation of the PS

is not limited (fully participating), the excess of P64,000 (424,000-240,000-
120,000) is divided proportionately computed as follows:
Preference Ordinary
64,000 X 2/3 42,667
64,000 X 1/3 21,333
Apparently, the amount of P42,667 is in excess of the limited participation of

P40,000.
APPROPRIATIONS OF RETAINED EARNINGS

-To indicate that a portion of retained earnings is unavailable for dividends.
3 Reasons:
 Legal Requirements. The amount of appropriation is equal to the
cost of the treasury shares
 Contractual Agreements. As a result of a contractual agreement as
when the corporation issues long term bonds or retained earnings
appropriated for bonded indebtedness.
 Discretionary Actions. This includes restriction related to planning
for future expansion or in anticipation of potential future losses. These
may be called as retained earnings appropriated for plant expansion
or retained earnings appropriated for loss contingencies.
Appropriations of retained earnings may be accounted for by (1) making journal

entries or (2) reporting the restrictions in a note accompanying the financial
statements or a parenthetical note in the shareholder’s equity section of the
statement of financial position.
The appropriation entry is –

Retained Earnings xx
Retained Earnings Appropriated for Treasury Shares xx
Retained earnings appropriated equal to the
cost of treasury shares
The retained earnings appropriated account should specify the purpose for which it is
appropriated. In the entry above, the appropriation is for the cost of the treasury
shares.
Note that the appropriation does not affect the total amount of retained earnings and
the total amount of shareholder’s equity. It should also be noted that appropriation
does not necessarily represent any cash fund. The appropriation is only a means of
disclosing how much of retained earnings is unavailable for dividend declaration.
When the appropriation is no longer needed (meaning, the purpose has already been
attained), the initial journal entry if any, is reversed. Thus, if the treasury shares had
been reissued the appropriated retained earnings will be cancelled, as follows:

Retained Earnings Appropriated for Treasury Shares xx

Retained Earnings xx
Correction of Prior Period Errors
Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more periods arising from failure to use, or misuse of, reliable
information that was available when financial statements for those periods were
authorized for issue and could reasonably be expected to have been obtained and
taken into account in the preparation of those financial statements. Such errors
include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud (Paragraph 5, IAS 8
Accounting Policies Changes in Accounting Estimates and Errors).
Prior period errors result to either a net understatement or net overstatement of the
balance in the retained earnings account. The adjustment that should be taken up in
the retained earnings is net of the related income tax. If the adjustment results to a
net understatement in prior period net income, such adjustment is credited to the
retained earnings account, net of applicable income tac. If the adjustment results to a
net overstatement in the net income in the prior period, the retained earnings account
is charged, net of the related income tax.
Cumulative Effect of Change in Accounting Policy
IAS 8 defines accounting policies as the specific principles, bases, conventions, rules
and practices applied by an entity in preparing and presenting financial statements.
IFRSs set out accounting policies that the IASB concluded will result in relevant and
reliable financial information about the reporting enterprise. In the absence of a
Standard or an Interpretation, management shall select accounting policies that will
result to relevant and reliable presentation of the transactions of the enterprise and
shall consider the applicability of the following sources in descending order
(Paragraph 11, IAS 8):
(a) The requirements and guidance in Standards and Interpretations dealing with
similar and related issues; and
(b) The definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Framework.
Paragraph 13 of the same Standard states that an entity shall select and apply its
accounting policies consistently for similar transactions, other events and conditions,
unless a Standards or an Interpretation specifically requires or permits categorization
of items for which different policies may be appropriate. If a Standard or an
Interpretation requires or permits such categorization, an appropriate accounting
policy shall be selected and applied consistently to each category.
Although comparability of financial statement is enhanced if accounting policies are

left unchanged from period to period, it is inappropriate for an entity to leave its
accounting policies unchanged when the change would result to financial statements
providing reliable and more relevant information about the effects of transactions,
other events or conditions on the entity’s financial position, financial performance or
cash flow.
Thus, changes in accounting policies are either involuntary or voluntary. An

involuntary change is one that is required by a Standard or an Interpretation, while a

voluntary change is one that is effected because the management believes that it
would result to a more reliable information and more relevant presentation of the
performance and financial position of the enterprise.
An involuntary change in accounting policy shall be accounted for by the entity

following the transitional provisions in the specific accounting standard or
interpretation. Such transitional provisions generally result to an adjustment in the
beginning balance of retained earnings. A voluntary change in accounting policy
is treated retrospectively, unless it is impracticable to do so, with the cumulative
effect being treated as an adjustment to the beginning balance of retained earnings.
In both cases, the adjustment to the beginning balance of retained earnings requires
a charge or a credit to the account, net of the applicable income tax.
Quasi-reorganization
A corporation that incurs losses over a long period may find itself in serious financial
difficulty. With continued losses, retained earnings may have been reduced to a very
low amount or to a deficit. Rather than enter into formal bankruptcy or other legal
proceedings, it may be more beneficial for the corporation to establish a new
management group and at the same time engage in a process termed as quasi-
reorganization.
A quasi-reorganization is primarily an accounting procedure that involves a

revaluation of corporate assets and liabilities and a restatement of the corporate
capital structure to enable the corporation to have a “fresh start” toward financial
solvency and profitability.
SEC guidelines on quasi-reorganization require that only financially distressed

companies may apply and that these companies must have substantial surplus in the
market value of its property, plant and equipment as established by independent
appraisers. The amount of revaluation surplus set up through appraisal should be
adequate to absorb the deficit that is intended to be eliminated in the quasi-
reorganization.
After the quasi-reorganization, the corporation must have a zero balance in retained
earnings. In its subsequent financial statements, the retained earnings must be
“dated” for a period of approximately 10 years to show the fact and the date of the
quasi-reorganization. In addition, for a period at least three years from the quasi-
reorganization date, the amount of accumulated deficit eliminated should be
disclosed in the financial statements.
To illustrate the nature of a quasi-reorganization, assume that ABC Corporation has

suffered losses from operations for some time. The company decides to undergo a
quasi-reorganization. This was approved by the shareholders and creditors of the
corporation as well as the SEC. an appraisal of property, plant and equipment was
recommended on the basis of an unrealistic valuation of these assets. The following
restatements and information are relevant to the quasi-reorganization.
1. The property, plant and equipment costing P5,000,000 with accumulated

depreciation of P1,500,00 are determined to have a fair value of P5,250,000.
2. The inventory should be written down by P200,000.
3. Accounts payable amounting to 150,000 are not recognized in the accounts.
4. The Retained Earnings account has a debit balance (deficit) or 1,000,000 prior to
the quasi-reorganization.

The following journal entries are made to effect and complete the quasi-
reorganization:
Property, Plant and Equipment 2,500,000

Revaluation Surplus 1,750,000
5.M- 1.5M = 3.5M
5.25M-3.5M = 1.75M
1.75M/ 3.5M = 50% increase
50% x 5M = 2.5M
50% x 1.5M = 750,000

Inventory 200,000
Accounts Payable 150,000
Revaluation Surplus 1,350,000
1.0M + 200,000 +150,000
Immediately after the quasi-reorganization, retained earnings accounts has a zero

balance. Subsequent to the quasi-reorganization, retained earnings to the extent of
the deficit wiped out shall be restricted and cannot be declared as dividends.
Quasi-reorganization may also be effected through recapitalization. A recapitalization

is a change in the corporate capital structure which may be accomplished by any or
combination of the following:
• Change in par or stated value;

• Exchange of par to no par share or vice versa.
When quasi-reorganization is effected through recapitalization, accounting

procedures normally involve the following steps:
1. write down of assets to fair values or realizable values;

2. effecting recapitalization, creating enough, additional paid in capital to absorb the
resulting deficit; and
3. cancellation of the resulting deficit against the additional paid in capital.
To illustrate, assume that Company X has suffered losses from operations for some
time. The company decides to undergo a quasi-reorganization. This was approved by
the shareholders and creditors of the corporation as well as by the SEC. As a result
of the quasi-reorganization, the company’s property, plant and equipment with total
carrying amount of 2,000,000 (valued at cost of 4,000,000 less accumulated-
depreciation of 1,800,000, have been determined to have recoverable amount of
1,500,00.)
Before write-down of assets, the company’s shareholders’ equity balances are as

follows:
Ordinary Share Capital, P50 par, P3,000,000
Retained Earnings (600,000)

The company will redeem its P50 par ordinary shares and will issue equal number of
ordinary shares with par value of P30.
The following are the entries for the write down of property, plant and equipment and
for the recapitalization:

Property, Plant and Equipment
1,000,000
Decrease in carrying amount value is
25% (which is 500,000/2,000,000
25% x 4,000,000 = 1,000,000
25% x 2,000,000 = 500,000
Ordinary Share Capital, P50 par 3,000,000

Ordinary Share Capital, P30 par
1,800,000
Share Premium – Ordinary
1,200,000
3,000,000/50 x 30
After recording the impairment in the value of property, plant and equipment the
balance of the deficit increased to P1,000,000 (which is P600,000 + P500,000),
whereas total share premium after recapitalization is now P1,350,000 (i.e. P150,000
+ 1,200,000). The deficit is then cancelled against the share premium account in the
following entry.
Share Premium – Ordinary 1,100,000

The shareholder’s equity balances after the quasi-reorganization are as follows:

Ordinary Share Capital P1,800,000
Share Premium – Ordinary 250,000
Retained Earnings -0
Total Shareholder’s Equity P2,050,000
REVALUATION SURPLUS
An entity may choose to value its property, plant and equipment and intangible
assets using either the cost model or revaluation model. The choice of the model
used is applicable to an entire class of property, plant and equipment and intangible
assets. The use of the revaluation model gives rise to an unrealized increment in
capital termed as revaluation surplus. This item is reported in the statement of
financial position as a separate item in the shareholder’s equity section.
STATEMENT OF CHANGES IN EQUITY
An entity shall present a statement of changes in equity showing the following on the
face of the statement.

a. The total comprehensive income for the period, showing separately the
following on the profit or loss and the other comprehensive income for the
period;
b. for each component of equity, the effects of changes in accounting policies

and correction of errors recognized in accordance with IAS 8.
An entity shall also present, either on the face of the statement of changes in equity
or in the notes:
a. the amounts of transactions with equity holders acting in their capacity as

equity holders, showing separately distributions to equity holders;
b. the balance of retained earnings at the beginning and end of the period, and
the changes during the period; and
c. a reconciliation between the carrying amount of each class of contributed

equity and each reserve at the beginning and the end of the period separately
disclosing each change.
BOOK VALUE PER SHARE
Book value per share represents the equity that an ordinary shareholder has in the
net assets of the corporation from owning one share capital stock. It is the amount
that would be paid on each share assuming that the company is liquidated and that
assets are realized at their carrying amounts. The book value measurement is
sometimes used as a factor in the evaluating the value or worth of a share of stock.
One Class of Outstanding Share Capital

When a company has only one class of share capital outstanding the
computation of book value per share is relatively simple.
Total Shareholders’ Equity

Number of outstanding shares
When shares of stock are reacquired and reported as treasury shares, the cost of the
treasury shares is deducted in arriving at the total shareholders’ equity and the
number of treasury shares is deducted from the number of shares issued in arriving
at the shares outstanding.
When share of stock have been subscribed for but are unissued, share capital
subscribed is included in the total shareholders’ equity and the number of shares
subscribed is added to the number of shares outstanding.
To illustrate, assume the following shareholders’ equity of ABC Corporation:
Ordinary Shares, P20 par (90,000 shares) 1,800,000
Subscribed Ordinary Share, P20 par (10,000 shares) 200,000
Treasury Shares, 5,000 shares at cost 125,000

The book value per share is computed as follows:

Total shareholders’ equity
(1,800,000+200,000+550,000+1,200,000-125,000) 3,625,000
Number of outstanding shares
(90,000 + 10,000 + 5,000) ÷ 95,000
Book value ordinary share 38.16
More Than One Class of Share Capital

When more than one class of share capital is outstanding, it is necessary to
consider the rights of the different classes of shareholders. Since preference shares
have a prior claim on the net assets over ordinary shareholders, the shareholders
equity related to them should first be determined. The excess of the total
shareholders’ equity over the equity related to the preference shareholders is the
equity related to the ordinary shareholders.
The equity related to the preference shareholders would be the amount
distributable to them in the event of corporate liquidation. This equity considers the
liquidation value and the special dividend rights of the preference shares
Preference shares may have a liquidation value equal to its par value, an
amount greater than the par value or any specified peso amount. In addition,
preference shares may have certain rights in retained earnings as a result of special
dividend privileges. For example, if preference shares are cumulative and the terms
of the preference issue provide that dividends in arrears must be paid upon
liquidation regardless of any retained earnings or debit balance reported on the
books, equity equivalent to the dividends in arrears must be assigned to preference
shares even though this impairs or eliminates the equity relating to ordinary
shareholders.
Assume the following shareholders' equity reported by ABC Corporation on
December 31, 2010:
Preference 12% Share, P200 par, 10,000 shares 2,000,000
Ordinary Share, P50 par, 100,000 shares 5,000,000
a. The preference share has a liquidation value of P220. Dividends on preference

shares have been paid up to December 31, 2010. Book values on December 31,
2010 are as follows:
Total shareholders' equity 7,550,000
Equity identified with preference shares:
Liquidation value (220 x 10,000) 2,200,000
Equity identified with ordinary shares 5,350,000
Book values per share:

Preference share (2,200,000/10,000) 220.00
Ordinary share (5,350,000/100,000) 53.50
b. The preference share has a liquidation value of P220 and is cumulative with
dividends three years in arrears (including the current year) that must be fully paid
in the event of liquidation. Book values on December 31, 2010 are as follows:
Total shareholders' equity P7,550,000


Liquidation value P2,200,000
Dividends in arrears
2M x 12% x 3 years 720,000 2,920,000
Equity identified with ordinary shares P4,630,000
Ordinary share (4,630,000/100,000) 46.30
c. The preference share has a liquidation value of P220 and is cumulative with
dividends three years in arrears (including the current year) that must be paid in
the event of liquidation to the extent of the retained earnings balance.
Book values on December 31, 2010 are as follows:
Total shareholders' equity P7,550,000
Liquidation value P2,200,000
Dividends in arrears
2M x 12% x 3 years=720,000
(amount provided is up to the extent of the
retained earnings balance only) 550,000 2,750,000
Equity identified with ordinary shares P4.800.000
Ordinary share (4,800,000/100,000) 48.00
Problem 1:
At the beginning of the current year, Ria Company issued 10,000 ordinary shares of
P20 par value and 20,000 convertible preference shares of P20 par value for a total
of P800,000.
At this date, the ordinary share was selling for P36 and the convertible preference
share was selling for P27.
1. What amount of the proceeds should be allocated to the preference shares?

a. 600,000
b. 540,000
c. 480,000
d. 440,000
2. What amount of the proceeds should be allocated to the ordinary shares?

a. 360,000
b. 200,000
c. 320,000
d. 400,000

3. What amount should be recorded as share premium from the issuance of

preference shares?
a. 180,000
b. 100,000
c. 80,000
d. 0
4. What amount should be recorded as share premium from the issuance of ordinary
shares?
a. 200,000
b. 160,000
c. 120,000 1,000,000
d. 0
2,500,000
Problem 2:
7,500,000
Tunn Company reported the following balances on December 31, 2019.
12% nonparticipating, noncumulative preference share capital,
par value of P100, 10,000 shares
10% fully participating, cumulative preference share capital,
par value of P100, 25,000 shares
Ordinary share capital, par value of P100, 75,000 shares
The entity plans to declare cash dividends. It has not paid a cash or share dividend
before.
There has been no change in the capital balances since the entity started operations
five years ago.
The entity reported the following net income and loss for the five years of operations:
2015 1,500,000 loss
2016 1,000,000 loss
2017 500,000 loss
2018 1,750,000 income
2019 6,250,000 income
If the maximum amount available for dividend on December 31, 2019 is declared and
paid, what amount should be distributed to
1. 12% Preference shareholders?

a. 600,000
b. 120,000
c. 300,000
d. 150,000
2. 10% Preference shareholders?
a. 1,970,000
b. 1,250,000
c. 250,000
d. 500,000
3. Ordinary shareholders?
a. 3,750,000
b. 2,910,000
c. 500,000

d. 750,000
Problem 3:
Culture Company provided the following on December 31, 2019:

Ordinary share capital, P20 par value, 200,000 shares 4,000,000
Preference share capital, 6% P100 par value, cumulative 1,000,000
and fully participating, 10,000 shares outstanding
Preference dividends have been in arrears for 2017 and 2018.
On December 31, 2019, cash dividend of P900,000 was declared.
1. What amount should be recorded as dividend payable to preference
shareholders?
a. 324,000
b. 220,000
c. 276,000
d. 180,000
2. What amount should be recorded as dividend payable to ordinary
shareholders?
a. 576,000
b. 672,000
c. 624,000
d. 720,000
Problem 4:
On December 31, 2019 and 2020, Carr Company had outstanding 40,000 6%
cumulative preference shares of P100 par value and 200,000 ordinary shares of P10
par value.
On December 31, 2019, preference dividends in arrears amounted to P120,000.
Cash dividends declared in 2020 totaled P440,000.
1. What amount should be reported as dividend payable to preference shares in
2020?
a. 440,000
b. 360,000
c. 320,000
d. 240,000
2. What amount should be reported as dividend payable to ordinary shares in
2020?
a. 200,000
b. 120,000

c. 80,000
d. 0
Problem 5:
On January 31, 2019, Jester Company granted 50,000 share appreciation rights to
employees. The vesting period is 4 years. The agreement required the entity to pay
cash based on the excess of market price over the predetermined price of P100. The
market price per share is P120 on December 31, 2019 and P130 on December 31,
2020.
On December 31, 2020, Jester Company modified the agreement and canceled the
50,000 share appreciation rights. Instead, Jester Company granted 50,000 share
options provided that the employees remain with the entity for the next two years. On
this date, the fair value of the share option is P70.
The options are exercisable at the end of the remaining two-year period. The option
price is P110 and the par value is P100.
Only 40,000 share options were exercised on December 31, 2022 and 10,000
options were forfeited.
1. What amount should be reported as compensation expense for 2019?

a. 250,000
b. 500,000
c. 400,000
d. 300,000
a. 1,000,000
b. 1,500,000
c. 750,000
d. 500,000
a. 2,625,000
b. 1,750,000
c. 875,000
d. 500,000
a. 2,800,000
b. 2,400,000
c. 900,000
d. 175,000
Problem 6:
Karen Company provided following data at year-end:

2019 2020
10% cumulative preference shares, P50 par 2,000,000 2,000,000
2,500,000 2,000,000
Ordinary shares, P10 par
1,500,000 1,300,000
Share premium 4,800,000 4,200,000
Retained earnings 1,800,000
Net income for the year
On July 1, 2019, 50,000 ordinary shares were issued.

The preference dividends were paid in 2018 but not declared during 2019.
The market price of the ordinary share was P50 on December 31, 2019.
1. What is the book value per preference share for 2019?

a. 50
b. 55
c. 60
d. 45
2. What is the book value per ordinary share for 2019?
a. 34.40
b. 35.20
c. 38.22
d. 39.11
Problem 7:
At the beginning of current year, Ashe Company was organized with authorized
capital of 100,000 shares of P200 par value.
January 10 Issued 25,000 shares at P220 a share
March 25 Issued 1,000 shares for legal services when the fair value was
P240 a share
September 30 Issued 5,000 shares for a tract of land when the fair value was
P260 a share
1. What amount should be reported as share capital?
a. 7,640,000
b. 6,200,000
c. 7,440,000
d. 5,000,000
2. What amount should be reported for share premium?
a. 840,000
b. 800,000
c. 540,000
d. 500,000
Problem 8:
At the beginning of current year, Guess Company was organized and authorized to
issue 100,000 shares with P50 par value.

During the current year, the entity had the following transactions relating to
shareholder's equity:
• Issued 10,000 shares at P70 per share.

• Issued 20,000 shares at P80 per share.
• Reported net income of P1,000,000.
• Paid dividends of P200,000.
• Purchased 3,000 treasury shares at P100 per share.
1. What amount should be reported as share capital at year-end?

a. 1,500,000
b. 3,300,000
c. 1,200,000
d. 1,800,000
2. What amount reported as share premium at year-end?

a. 800,000
b. 200,000
c. 600,000
d. 0
3. What amount should be as total shareholders' equity at year-end?

a. 2,800,000
b. 3,000,000
c. 3,300,000
d. 2,000,000
4. What amount should be reported as contributed capital at year-end?

a. 2,300,000
b. 1,500,000
c. 3,000,000
d. 2,000,000
Problem 9:
At the beginning of current year, Hanna Company reported the following
shareholders' equity:
Share capital, P10 par, outstanding 225,000 shares 2,250,000

Share premium 1,500,000
Retained earnings 2,000,000
During the current year, the entity had the following transactions:
• Acquired 10,000 treasury shares for P50 per share or P500,000.
• Sold 5,000 treasury shares at P60 a share.
• Sold 2,000 treasury shares at P45 per share.
• Net income for the year was P2,000,000.
1. What amount should be reported as total amount of share premium at year-end?

a. 1,500,000

b. 1,560,000
c. 1,540,000
d. 2,550,000
2. What amount should be reported as share capital at year-end?
a. 2,250.000
b. 2,150,000
c. 2,320,000
d. 2,300,000
3. What amount should be reported as total shareholders' equity at year-end?

a. 8,140,000
b. 8,300,000
c. 8,250,000
d. 8,290,000
Problem 10:
The shareholders of Dorr Company approved a two-for-one share split and an
increase in authorized shares from 100,000 shares with P20 par value to 200,000
shares with P10 par value.
The shareholders’ equity accounts immediately before the split shares were share
capital P1,000,000, share premium P150,000 and retained earnings P1,350,000.
1 . What is the balance of the share premium after the share split is effected?
a. 1,150,000
b. 2,300,000
c. 150,000
d. 300,000
2. What is the balance of the retained earnings after the share split is effected?
a. 1,350,000
b. 2,700,000
c. 1,500,000
d. 2,350,000
References
 Robles, N., Empleo, P. (2010). Intermediate Accounting 3. Millennium Books,

Inc.
 Valix, C., Peralta, J., and Valix, C.A. (2016). Financial Accounting Volume 2.
GIC Enterprises & Co., Inc.

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RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

MODULE NO. 2: STOCKHOLDER’S EQUITY

This module is prepared for the students to understand the nature of

INTERMEDIATE ACCOUNTING PART 3 1

This module is designed for the students to understand provisions,

At the end of the discussion, the students are expected to:

INTERMEDIATE ACCOUNTING PART 3 2

Corporation is an artificial being created by operation of law, having the right of

 Contributed (Paid-in) Capital

Other contra-shareholders’ equity accounts are also reported such as:

INTERMEDIATE ACCOUNTING PART 3 3

-Share Capital Subscription Receivable

ELEMENTS OF SHAREHOLDERS’ EQUITY

It is known as “Paid in Capital” represents the amount invested or contributed by

For an enterprise that issues share capital with par value:

INTERMEDIATE ACCOUNTING PART 3 4

ORDINARY SHARE (COMMON STOCK)

Authorized shares, issued shares, and outstanding shares:

Preincorporation subscription requirement:

TRUST FUND DOCTRINE

INTERMEDIATE ACCOUNTING PART 3 5

ACCOUNTING FOR SHARE CAPITAL:

2. Received subscription to 10,000 shares at par.

3. Collected 25% on the above subscription.

4. Received full payment for 6,000 shares originally subscribed.

Subscription price (6,000 x 100) 600,000

6. Received a cash subscription for 5,000 shares at par.

STATEMENT OF FINANCIAL POSITION:

INTERMEDIATE ACCOUNTING PART 3 6

JOURNAL ENTRY METHOD:

1. Unissued Share Capital 4,000,000

2. Subscription receivable 1,000,000

5. Subscribed Share Capital 600,000

STATEMENT OF FINANCIAL POSITION:

Issuance of share capital:

INTERMEDIATE ACCOUNTING PART 3 7

 Sold on Subscription: Subscription is a legally binding contract between the

JOURNAL ENTRIES FOR SUBSCRIPTION:

2. Subscription price > par value:

INTERMEDIATE ACCOUNTING PART 3 8

3. Subscription price > par value:

INTERMEDIATE ACCOUNTING PART 3 9

Shares Issued with other securities:

Total market values are as follows:

INTERMEDIATE ACCOUNTING PART 3 10

SHARE ISSUE COSTS AND STOCK ASSESSMENTS

COSTS OF PUBLIC OFFERING OF SHARES

INTERMEDIATE ACCOUNTING PART 3 11

COST OF PUBLIC OFFERING:

SHARE ISSUANCE COSTS:

Share Premium 350,000

INTERMEDIATE ACCOUNTING PART 3 12

 As a result, asset is overstated and capital is overstated.

CALLABLE PREFERENCE SHARE

Cash (10,000 X 120) 1,200,000

Preference Share Capital 1,000,000

REDEEMABLE PREFERENCE SHARE

-Provides for mandatory redemption by the issuer for a fixed or determinable

INTERMEDIATE ACCOUNTING PART 3 13

To record the issuance of redeemable PS:

If dividend of P100,000 is paid to the redeemable preference shareholders:

Subsequently, if the PS are redeemed by the issuer for P1,200,000: