1st Semester | A.Y.

2022-2023

MODULE 8
COMPONENTS OF STOCKHOLDERS’
EQUITY

BEACTG 03
FINANCIAL ACCOUNTING &
REPORTING

JESUSA N. CALMA CPA, MBA

Instructor

Institute of Business and Computing Education

BSA-2A
BSA-2B
BSA- 2C
BSA- 2D

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 MABALACAT CITY COLLEGE
Institute of Business and Computing Education
1st Semester, Academic Year 2022-2023

BEACTG 03 – FINANCIAL ACCOUNTING & REPORTING

MODULE 8 : COMPONENTS OF STOCKHOLDERS’ EQUITY

I. LEARNING OBJECTIVES:
1. Identify the components of owner’s equity.
2. Formulate stockholder’s equity.
3. Classify and accounts the terms in the stockholder’s equity .
4. Analyze the accurate valuation of terms in the stockholder’s equity.

II. TOPIC OUTLINE:

1. STOCKHOLDERS’EQUITY OF BUSINESS OWNERSHIPS

III. LESSON PROPER

LESSON 1 : STOCKHOLDER’S EQUITY

Stockholder’s equity represents the claim of the owners against the assets of the corporation. In
all forms of business organizations, the equity is the excess of assets over liabilities. In a single
proprietorship, it is called Owner’s Equity. In partnership, it is called Partners’ Equity and in
corporation, it is called Stockholder’s Equity. However, in a corporation, distinction is made
between the invested capital and the earnings or losses accumulated through the years in the
business, which is called Retained Earnings.

COMPONENTS OF STOCKHOLDER’S EQUITY

1. Capital Stock;
2. Subscribed Capital Stock;
3. Additional Paid-In Capital
4. Retained Earnings;
5. Revaluation Increment in Property; and
6. Treasury Stock.

Capital stock is the portion of the paid-in capital representing the total par or stated value of
the shares issued.

Subscribed capital stock is the portion of the authorized capital stock that has been
subscribed but not yet fully paid and therefore still unissued. The subscribed capital stock is
shown minus subscription receivable not collectible currently.

Additional paid – in capital is the portion of the paid-in capital representing excess over the
par or stated value. The common sources of addition paid-in capital are:
1. Excess over par value or stated value;
2. Resale of treasury stock at more than cost;
3. Donated stock;
4. Issuance of detachable stock purchase warrants;
5. Distribution of stock dividends; and
6. Quasi-reorganization and recapitalization.

Retained Earnings represents the cumulative balance of periodic earnings, dividend

distributions, prior period adjustments, and other capital adjustments.

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 Revaluation increment in property is the excess of sound value of assets over the net book
value.

Treasury stock is the corporation’s own stock that has been issued and then reacquired but
not cancelled.

Deposits on subscription to a proposed increase in capital stock may be shown as part of

the stockholder’s equity as a separate item in the capital stock section.

Deficit – it is a deficit when the balance of the Retained Earnings account is a debit balance.

As a review, the Income and Expense summary, after closing the nominal accounts (sales,
purchases, expenses and other income), will be closed to Retained Earnings.

Income and expense summary XXX

Retained Earnings XXX
To close Income and Expense Summary to Retained Earnings

It is the reverse when it is a loss. Retained Earnings has two kids, namely: The Unappropriated
Retained Earnings and Appropriated Retained Earnings. Unappropriated Retained Earnings
represent the portion, which is free and can be declared as dividends to stockholders.

Appropriated Retained Earnings represents the portion, which has been restricted and,
therefore, is not available for any dividend declamation.

When the Retained Earnings account has a debit balance, it is called deficit. A deficit is not an
asset but a deduction from stockholder’s equity.

When the deficit exceeds the total of the other capital account, the phrase “Capital deficiency” is
used instead of “Stock holder’s Equity” in the main heading of the credit side of the Balance
sheet.

Stock holder’s Equity Illustrated:

Paid-In Capital
12% Cumulative Preferred Stock,
Authorized to issue 5,000 shares,
Par value P 100, issued shares of which
2,900 shares are in the treasury XXX
Less: discount on preferred shares XXX P XXX

Common Stock
Authorized 10,000 shares par value P 30
Issued 5,000 shares XXX
Subscribed capital stock 1,000 shares XXX
Less: Subscription receivable XXX XXX XXX
Additional Paid-In Capital
Capital in excess of par value – Preferred XXX
Paid-in capital from sale of treasury stock XXX XXX
Total Paid-In Capital XXX

Retained Earnings
Appropriated for:
Plant expansion XXX
Contingencies XXX
Cost of treasury stocks XXX XXX
Unappropriated XXX XXX
Revaluation increment on property XXX
Total XXX
Less: Cost of treasury stock – Preferred (XX)
Total Stockholders’ Equity XXX

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Dividends are distributions of earnings or capital to the stockholders in proportion to their
stockholdings/ These can be in the form of cash, property, or their own shares. Dividends are
classified into two, namely:
a. Dividends out of earnings
b. Dividends out of capital

Dividends can only be declared from Retained Earnings. If the company has a deficit, dividends
cannot be declared or paid. It will violate the trust funds doctrine. There are three important
dates when dividends are declared.
a. Date of declaration is the date on which the directors authorize the payment of dividends
to stockholders. Liability for the dividends must be recognized on this date.
b. Date of record is the date on which the stock and transfer book of the corporation will be
closed for registration. Only those stockholders registered as of such date are entitled to
receive dividends. NO entry is required on this date but a list of the stockholders entitled
to receive dividends is made.
c. Date of payment is the date on which the dividend liability is to be paid.

Example of dividend declaration:

The board of directors at their meeting on June 1, 2008 declared a dividend of P 10 per
share, payable on
September 30, 2008, to stockholders recorded as of July 31, 2008.

ENTRIES:

June 1, 2008 Retained earnings XXX

Cash dividends payable XXX

July 31, 2008 No Entry

September 30 Cash dividends payable XXX

Cash XXX

CASH DIVIDENDS

Cash dividends are dividends payable in cash. Dividends may be expressed as follows:
1. A certain amount of pesos per share usually for no-par stocks.
2. A certain percent of the par or stated value. If the stock is P 100 par value and a 10%
dividend is declared, the stockholders gets P 10 per share as dividend.

LIABILITY DIVIDENDS

Liability dividends are payable in cash in the near future. The is done by the corporation
because Retained Earnings may be sufficient but the cash may be insufficient to cover the
working capital requirement. This kind of dividend may be in the form of scrip and bond. Both
bonds and scrip are pieces of evidence of indebtedness, a promise to pay a sum of money at
some future time.

SCRIPT DIVIDENDS

Assume that script dividends are declared in the amount of P 150,000 payable in four
months with interest of 14%.

Entries:
Retained Earnings 150,000
Scrip dividends payable 150,000

When scrip dividends are redeemed,

Scrip dividends payable 150,000
Interest expense (*150,000 X 14% X 4/12) 7,000
Cash 157,000

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PROPERTY DIVIDENDS

The corporation can pay dividends out of the assets of the corporation if no cash is
available. If the non-cash asset to be paid by the corporation is merchandise, the entry will be:

Retained Earnings XXX

Property dividend payable XXX
If the dividend will be paid, the entry is:

Property dividend payable XXX

Merchandise inventory XXX

STOCK DIVIDENDS

When stock dividends are declared by the corporation, this is a distribution of the
corporation’s own stock of course coming from the unissued shares. It means that the Retained
earnings of the corporation is in effect capitalized. The stock dividends affect only the
stockholder’s equity: a decrease in Retained Earnings and an increase in the capital stock
account.

ILLUSTRATION
Common Stock
Authorized, 20,000 shares
Issued an outstanding, 10,000 shares P 1,000,000
Additional paid in capital 600,000
Retained earnings 800,000
A 20% stock dividend was declared. (20% of 10,000 shares will be 2,000 shares). 20%
of P 1,000,000 is P 200,000.

The entry to record the declaration is:

Retained Earnings 200,000
Stock dividends payable 200,000

Issuance of stock dividends

Stock dividends payable 200,000
Common stocks 200,000

When the Balance Sheet is prepared before the stock dividend is issued, the stock
dividends payable will be added to the common stocks.

DIVIDENDS OUT OF CAPITAL

When dividends are paid out of capital, it is called liquidating dividends. Liquidating
dividends are only paid when the corporation is dissolved and liquidated. Can a corporation pay
liquidating dividends during the lifetime of the corporation? The answer is no. The reason is, it is
illegal because it violates the trust fund doctrine. Is there an exception? Yes. Only wasting asset
corporation can declare liquidating dividends under the wasting asset doctrine. Wasting asset
corporation is a corporation engaged solely in the exploitation of natural resources.

LIMITATION ON THE APPROPIRATION OF RETAINED EARNINGS

1. Legal appropriation – under the trust fund doctrine.

2. Contractual appropriation – under the term of bond issue.
3. Voluntary or discretionary appropriation – the management may want to use the
Retained Earnings for plant expansion.
Example: Retained Earnings appropriated for plant expansion, appropriated for
contingencies (like pending lawsuit, self-insurance, inventory decline).

Entry to restrict Retained Earnings for plant expansion:

Retained Earnings XXX
Retained Earnings appropriated for plant expansion XXX

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When the appropriation is no longer needed because the condition for which it is established no
longer exists, the entry above will be reversed.

Appropriated for plant expansion XXX

Retained Earnings XXX

RETAINED EARNINGS IN THE BALANCE SHEET

The details of the Retained Earnings account should be clearly shown in the Balance
Sheet. It must show the total Retained Earnings including both appropriated and
unappropriated.

Partial Stockholder’s Equity Section

Stockholder’s Equity:

Retained Earnings: 300,000

Unappropriated or Free Appropriated:
Plant expansion 50,000
Contingencies 20,000
Sinking fund 50,000
Treasury stocks 50,000 170,000
Total retained earnings 470,000

ACCOUNTING FOR TREASURY STOCKS

SFAS No. 18 recognized only one method of accounting for treasury stocks and that is
the Cost Method. Regardless of whether the stock is acquired below or above the par and
stated value, treasury stock should be recorded at cost. What is cost? Cost is equal to cash
payment. If the treasury stock is acquired for non-cash consideration, the cost is usually
measured by the recorded amount or book value of the non-cash asset surrendered.

ILLUSTRATION: 1,000 Shares of stocks with par value with par value P 100 are acquired at P
150 per share. The entry for the acquisition of stocks will be:

Treasury stocks 150,000

Cash 150,000

I. If the treasury stocks are reissued at P 150 per share, the entry is:
Cash 150,000
Treasury stocks 150,000

II. If the treasury stocks are reissued at P 200 (more than cost), the entry is:
Cash 150,000
Treasury stocks 150,000

III. If the treasury stocks are reissued below cost, the excess of cost over the reissue
price is charged to the following in this order:
First : Additional paid-in capital from treasury stocks of the same class
Second : Retained Earnings for the remaining balance

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 IV. REFERENCES

Books :
1.Financial Accounting and Reporting for Services and Merchandisers – International Edition
2019 by Zenaida Vera Cruz-Manuel
2. Basic Accounting – 2019 issue – by Win Ballada, and Susan Ballada, DomDane Publishers
and Made Easy Books.
3. Fundamentals of Accounting – Part 1, By:Tulio, VillaBlanca, Abon, Abdon, Albay and Inigo
4. Worktext in Basic Accounting (Service and Merchandising) by:Cecilia Hugo – Macapilit
5.Fundamentals of Basic Accounting, By: Leonardo E. Aliling
6. Fundamentals of Accounting – Voume 1, By: Patricia M. Empleo
7. Intermediate Accounting Part 1-3 by Zeus Vernon B. Millan 2018 edition

Online Resources:
Open Education Resources – Accounting and Finance /Principles of Accounting (Textbook,
Modules, Tests and Video presentation of lectures)
https://guides.library.sc.edu/OER
Corporate Financia Institute -Free Accounting Course – Introduction to Accounting
https://course.corporatefinanceinstitute.com
https://www.indeed.com/career-advice/career-development/cash-vs-accrual
https://www.accountingcoach.com/blog/what-is-the-statement-of-financial-position
http://www.accountingmcqs.com/Statement-of-Financial-Position
YouTube Channels:
https://www.youtube.com/playlist?list=PLuXyIbtL4zN-21X2xN7roYVaIDTIMfRHu
Filipino Accounting Tutorial
CPA Strength
Executive Finance
Corporate Finance Institute

V. DISCLAIMER

OFFICIAL MCC MODULE DISCLAIMER

It is not the intention of the author/s nor the publisher of this module to have monetary gain in
using the textual information, imageries, and other references used in its production. This
module is only for the exclusive use of a bona fide student of Mabalacat City College.

In addition, this module or no part of it thereof may be reproduced, stored in a retrieval system,
or transmitted, in any form or by any means, electronic, mechanical, photocopying, and/or
otherwise, without the prior permission of Mabalacat City College.

Prepared by:

JESUSA N. CALMA ,CPA, MBA

Instructor

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