SELF-PACED LEARNING MODULE

COLLEGE DEPARTMENT

MODULE 12
Subject:

FUNDAMENTALS OF ACCOUNTING 2

AISAT COLLEGE – DASMARIÑAS, INC.

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 Unit Accounting
Module Share Capital
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |2

INFORMATION SHEET PR-12.1.1

“Share Capital”

OVERVIEW
The owners’ equity section of a corporation’s statement of financial position is called shareholders’
equity. Shareholders’ equity has two major components – share capital (contributed or paid-in capital)
and retained earnings. Share Capital reflects the amount of resources received by a corporation as a
result of investment by shareholders, donations or other share capital transactions. Retained earnings
(or accumulated profits/losses) is the amount of capital accumulated and retained through the
profitable operations of the business.

Share Capital
It is the shares to be subscribed and paid in or secured to be paid in by the shareholders, either in
money, property or service, at the time of organization of the corporation or afterwards, and upon
which it is to conduct its operations. The share, contributed or paid-in capital is further divided into the
following:
Legal Capital. Capital contributed by shareholders comes from the sale of shares of stock. The shares of
stock issued are generally referred to as share capital. Legal capital, which must remain in the
corporation for the protection of corporate creditors.
Share Premium. It is the portion of the paid-in capital representing amounts paid by the shareholders in
excess of par. It may also result from transactions involving treasury stocks, retirement of shares,
donated capital, share dividends and any other “gain” on the corporation’s own stock transactions.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 3rd
FINAL
12 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module Share Capital
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |3

Illustration: Let's look at the stockholders' equity section of a balance sheet. We'll assume that a
corporation only issues common stock. The stock has a par value of $0.10 per share. There are 10,000
authorized shares, and of those, 2,000 shares have been issued for $50,000. At the balance sheet date,
the corporation had cumulative net income after income taxes of $40,000 and had paid cumulative
dividends of $12,000, resulting in retained earnings of $28,000.

TWO BASIC TYPES OF SHARES

Share capital is divided into transferrable share of stock. A share of stock represents the interest or right
of a shareholder in a corporation and is evidenced by a certificate of stock. Share capital includes all types
of ownership shares in a corporation. Shareholders acquire either of the following basic types of share
capital.

Ordinary share. This share represents basic ownership class of the corporation. When only one class of
share is issued, it must be ordinary share Ordinary shares are the entity’s residual equity.

Preference Share. This share gives its owners certain advantages over ordinary shareholders. These
special benefits relate either to the receipt of dividends when declared before the ordinary shareholders
(preferrred as to dividends) or to priority claims on assets in the event of corporate liquidation.

TERMS RELATED TO SHARE CAPITAL

Authorized Share Capital. The number of authorized shares indicates the maximum number of shares the
corporation can issue as specified in the articles of incorporation. When a business applies for
incorporation, its approved application will specify the classes (or types) of stock, the par value of the
stock, and the number of shares it is authorized to issue. (Shares are often issued in exchange for cash.
However, shares of stock can be issued in exchange for services or plant assets.)

To illustrate, assume that the organizers of a new corporation need to issue 1,000 shares of common stock
to get their corporation up and running. They keep in mind, however, that in one year they will need to

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 3rd
FINAL
12 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module Share Capital
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |4

issue additional shares to fund a planned factory expansion. Five years from now they foresee buying out
another company and realize they will need to issue more shares at that time for the acquisition. As a
result, they decide that their articles of incorporation should authorize 100,000 shares of common stock,
even though only 1,000 shares will be issued at the time that the corporation is formed.

Issued Share Capital. These are shares which have been sold and paid for in full. When a corporation sells
some of its authorized shares, the shares are described as "issued." The number of issued shares is often
considerably less than the number of authorized shares. Corporations issue (or sell) shares of stock to
obtain cash from investors, to acquire another company (the new shares are given to the owners of the
other company in exchange for their ownership interest), to acquire certain assets or services, and as an
incentive/reward for key officers of the corporation. The "par value" of a share of stock is sometimes
defined as the legal capital of a corporation. The par value of common stock is usually a very small
insignificant amount that was required by state laws many years ago.

Subscribed Share Capital. It is the portion of the authorized share capital that has been subscribed but not
yet fully paid.

Outstanding Share Capital. These are issued shares, which are in the hands of the shareholders. The
number of outstanding shares will equal the difference between the issued shares and the treasury
shares.

Treasury Stocks. These are issued shares acquired by the corporation but not retired and are therefore,
awaiting to be reissued at a later date.

CONSIDERATIONS FOR ISSUANCE OF SHARES

Share capital may be issued in exchange for any of the following considerations:
1. Actual cash paid to the corporation
2. Tangible or intangible properties actually received by the corporation.
3. Labor already performed for or services actually rendered to the corporation.
4. Previously incurred indebtedness by the corporation.

SHARE ISSUANCES FOR CASH

When the issuance of ordinary share for cash is recorded, and the issue price is the same as the par value
of the share, the par value of the shares is credited to Ordinary shares and debited to Cash.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 3rd
FINAL
12 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module Share Capital
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |5

** With Par Value **

Issuing Share Capital at Par
Illustration: Cloud9 Co. is authorized to issue P1,000,000 ordinary shares divided into 10,000 shares, with
a par value of P100 per share. The diversified company issued on cash basis 2,000 shares at par. The share
issuance entry will be:
Cash 200,000
Ordinary Shares 200,000
The amount of P200,000 invested in the corporation is called paid-in capital or contributed capital. The
credit to Ordinary Shares increases the share capital of the corporation.

Issuing Share Capital Above Par

Illustration: Suppose the 2,000 shares were sold at P150 per share, the entry follows:
Cash 300,000
Ordinary Shares 200,000 S
hare Premium 100,000
The excess of 100,000 is not a gain. The company can neither earn a profit nor incur loss when it issues
shares to or acquires shares from its shareholders.

** Without Par Value **

Issuing No-Par Share Capital
Illustration: Suppose Cloud9 Co. has two classes of shares – preference shares and no-par ordinary shares.
5,000 ordinary shares were issued for P85,000. The entry to record the issue of these no-par shares will
be:
Cash 85,000
Ordinary Shares 85,000

Note: When shares without par value are sold, the proceeds should be credited to the Ordinary Shares
account. Accounting for issuance of preference shares is basically the same as that of ordinary shares.
Note, however, that Section 6 of the Corporation Code of the Philippines prohibits the issue of no-par
value preference shares.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 3rd
FINAL
12 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module Share Capital
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |6

SUBSCRIPTION OF SHARES
There are times when a corporation sells its shares directly to investors on a subscription basis. The
subscription contract is a legally binding contract which provides for the number of shares subscribed, the
subscription price, the terms of payment and other conditions of the transaction. A subscriber becomes a
shareholder upon subscription but the stock certificates evidencing ownership over shares of stocks are
not issued until the full collection of the subscription.

Illustration: Assume that 5,000 shares of P10 par value ordinary share of Cloud9 Co. were sold on
subscription at P12 per share on Sept. 1, 2008 to Ms. San Diego. Subscription installments of P24,000 and
P36,000 will be due on Sept. 16 and 30, respectively.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 3rd
FINAL
12 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module Share Capital
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |7

Subscriptions Receivable is a shareholders’ equity account. It is presented in the statement of financial

position as a deduction from the related subscribed ordinary shares; however, when it is collectible within
one year, this may be shown as a current asset. It is debited for the total proceeds of the subscriptions to
the ordinary shares and credited for the collections on the subscriptions.

There are instances when a subscriber fails to settle the subscriptions in full on the date specified in the
subscription contract or in the call made by the board of directors. In such case, the subscribed shares are
declared delinquent shares. The usual remedy is to dispose of these shares in a public auction for the
account of the delinquent subscriber. These shares will be sold to the person who is willing to pay the
“offer price” which includes the full amount of the subscription balance plus accrued interest, cost of
advertisement and expenses of auction sale in exchange of for the smallest number of shares. This person
is referred to as the highest bidder.

Illustration: Assuming the same facts as above except that the subscriber failed to settle part of his
subscriptions in the amount of P48,000. After complying with the legal procedures pertaining to
delinquency sale, a public auction was held. The offer price is P56,000 including P3,000 accrued interest
and P5,000 expenses of sale. Three binders are willing to pay the offer price, namely:
Big Bang 4,300 shares
Choco Mucho 4,500 shares
Beng Beng 4,700 shares
Big Bang is the highest bidder. The 5,000 shares are deemed fully paid. Ms. San Diego, the original
subscriber, gets 700 shares and Big Bang receives 4,300 shares.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 3rd
FINAL
12 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module Share Capital
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |8

Subscriptions Receivable 60,000

Subscribed Ordinary Shares 50,000
Share Premium 10,000
To record subscriptions above par

If there is no bidder, the corporation may bid for the delinquent shares and the total amount due shall
be credited as paid in full in the books of the corporation. These shares shall be considered as treasury
shares. All the other entries will be the same except for the following:
Treasury stock 56,000
Receivable from Highest Bidder 8,000
Subscriptions Receivable 48,000
To record purchase of own shares

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 3rd
FINAL
12 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module Share Capital
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |9

WRITTEN WORK PR-12.4.1

PERFORMANCE TASK Title: ACCOUNTING FOR SHARE CAPITAL
PERFORMANCE TASK Objective: ▪ After completing this written work, you were being knowledgeable
about issuance of shares.

PROCESS/ PROCEDURE:
Answer the following questions. Show your solutions.

1. Shaba Company exchanges a piece of equipment for 4,000 shares of Leonard Company’s
ordinary share capital that has a P100 par value. The equipment costs Shaba P1,000,000 when
purchased five years ago, and currently has a fair value of P560,000. The equipment has a
recorded accumulated depreciation of P550,000 in the books of Shaba. What is the amount
credited to Share premium - Ordinary as a result of this exchange?

2. HK Company was authorized to issue 10,000 preference shares of P200 par value and 100,000
ordinary shares of P20 par value. Subscription for 4,000 preference shares was received at P225
per share with a down payment of 25%. The balance is payable after 60 days. What is the
amount of Share Premium - Preference recognized by HK upon receipt of the preference shares
subscription?

3. The shareholders’ equity of Shine Corporation at the end of 2021 and 2020 are as follows:

2021 2020
12% Preference Share P1,000,000 P600,000
Capital, P100 par
Ordinary Share Capital, P20 2,000,000 1,800,000
par
Share Premium - Preference 160,000
Share Premium - Ordinary 800,000 400,000

What is the average issue price per share of the preference issued in 2021?

Assessment Method: PERFORMANCE TASK Criteria Checklist

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 3rd
FINAL
12 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module Share Capital
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 P a g e | 10

WRITTEN WORK CRITERIA CHECKLIST PR-1-12.4.1

Did I … CRITERIA SCORING
1 2 3 4 5
1. Logic and key points. All ideas are logically presented.
2. Content. Content of the essay flows and is passionate.
3. Cleanliness. Very clean and well presented.
4. Spelling and Grammar. No error in spelling and grammar.
5. Word usage. Word choice and usage are professionals.

GRADES

Teacher’s Remarks □ Quiz □ Recitation □ Project

5 - Excellently Written
4 - Very Satisfactory Written
3 - Satisfactory Written
2 - Fairly Written
1 - Poorly Written

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 3rd
FINAL
12 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director