Republic of the Philippines

City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City
Tel. No. (047) 224-2089 loc. 314

DETAILED LEARNING MODULE

Title: Accounting for Corporation - Share Capital

Module No. 6

I. Introduction
In this module, you will learn the procedures on how to account share capital related transactions.

II. Learning Objectives

After studying this module, you should be able to:
1. Identify the basic components of shareholder’s equity.
2. Illustrate and record the subscription process and issuance of shares.
3. Define treasury shares and record its purchase, reissuance and retirement.
4. Preparation of Statement of Shareholder's Equity

III. Topics and Key Concepts

Shareholders' Equity

Share capital
Preference Shares - P50 par, 1,000 shares authorized, P 50,000
issued and outstanding
Ordinary Shares - P5 par, 30,000 shares authorized,
20,000 shares issued and outstanding P 100,000
Shares Premium - Ordinary 50,000 150,000
Total Share Capital P 200,000

Retained Earnings 80,000

Total Shareholders' Equity P 280,000

Shareholders’ Equity
• Owners’ equity section of corporation’s statement of financial position
• It has two major components: Share Capital and Retained Earnings

Definition of Terms
Share Capital reflects the amount of resources received by a corporation as result of investment by
shareholders, donations or other share capital transactions. It is the portion of the paid in capital
representing the total par or stated value of the shares issued.

Authorized Share Capital is the maximum number of shares that the corporation can issue as specified
in the article of incorporation (Maximum no. of shares x Par value = Authorized Share Capital)

Issued Share Capital are shares which have been sold and paid in for full.

Subscribed share capital is the portion of the authorized share capital that has been subscribed but not
yet fully paid and therefore still unissued.
 Republic of the Philippines
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City
Tel. No. (047) 224-2089 loc. 314

Outstanding Share Capital - issued shares which are in the hands of the shareholders.
(Total number of issued shares – Total number of treasury shares = Total number of outstanding shares)

Share premium is the portion of the paid in capital representing excess over the par or stated value.
Common sources of share premium are:
a. Excess over par value or stated value
b. Resale of treasury shares at more than cost
c. Distribution of stock dividends
d. Donated shares/capital

Retained earnings - the amount of capital accumulated and retained through the profitable operations
of the business. It represents the cumulative balance of periodic earnings, dividend distributions, prior
period errors and other capital adjustments.

Treasury shares are corporation’s own shares that have been issued and then reacquired but not
canceled. It is a deduction to shareholders’ equity.

Share Capital
• It is divided into shares evidenced by a share certificate.
• A share represents the interest or right of a shareholder in the corporation such as right to share
in earnings (dividend).
• Share certificate is the instrument or document that evidences the ownership of a share. As a
general rule, a share certificate is issued only when the subscription is fully paid.
• Share Capital may be par value share or no-par value share.
o Par value share is one with specified value fixed in the articles of incorporation and
appearing on the share certificate. The purpose of the par value share is to fix the
minimum price of the shares
o No par share is one without any value appearing on the face the share certificate. It is
simply called as “no par” because it has no par value appearing on the face of the shares
certificate. But a no par share has always an “issued value” or “stated value” based on
the consideration for which it is issued.

Classes of share capital

1. Ordinary Share Capital – composed of ordinary shares. It is so called as ordinary shares
because the ordinary shareholders have the same rights and privileges.
2. Preference Share Capital - composed of preference shares. It is so called as preference shares
because of the preferences granted to the shareholders such as claims on dividends and net assets
in the event of liquidation.

Legal Capital
The portion of the paid in capital arising from issuance of share capital which cannot be returned to the
shareholders in any form during the lifetime of the corporation

The amount of legal capital is determined as follows:

a. In the case of par value shares, legal capital is the total par value of the shares issued and
subscribed.
 Republic of the Philippines
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City
Tel. No. (047) 224-2089 loc. 314

b. In case of no-par shares, legal capital is the total consideration received from shareholders
including share premium.

Trust Fund Doctrine

• It holds that the share capital of a corporation as trust fund for the protection of the creditors.
• It is illegal to return such legal capital to shareholders during the lifetime of the corporation.

Accounting for Share Capital

1. Memorandum method – No entry is made to record the authorized share capital.
2. Journal Entry method – The authorization to issue share capital is recorded by debiting unissued
share capital and crediting authorized share capital.

Note: Only memorandum method will be discussed to this handout. Kindly refer to your book for further
discussion and examples for journal entry method.

Illustration – Memorandum method

1. An entity was authorized to issue share capital of P 4,000,000 divided into 40,000 shares with par
value of P100

Memo entry – The entity was authorized to issue share capital of P 4,000,000 divided into 40,000
ordinary shares with par value of P100

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

Subscription Receivable 1,000,000
Subscribed Ordinary Shares (10,000 shares x 100 par value) 1,000,000

3. Collect 25% of the above subscription

Cash 250,000
Subscription Receivable 250,000

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

Cash 450,000
Subscription Receivable 450,000

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

Less: 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 Ordinary Shares 600,000
Ordinary Shares 600,000

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

Cash 500,000
Ordinary Shares 500,000
A cash subscription is directly credited to share capital account. It is not necessary to set up a
subscription receivable account.
 Republic of the Philippines
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City
Tel. No. (047) 224-2089 loc. 314

If a statement of financial position is prepared, the share capital would be shown under shareholders’
equity as follows:
Ordinary share, P100 par, 40,000 shares authorized,
11,000 shares issued 1,100,000
Subscribed Ordinary Shares 400,000
Subscription Receivable (300,000)
Shareholders' Equity 1,200,000

Issuance of Share Capital

For par value shares, the proceeds shall be credited to the share capital account to the extent of the par
value, with any excess being reflected as share premium.

For example, if 10,000 ordinary shares of P100 par value are sold at P150 per share, the journal entry
is:
Cash 1,500,000
Ordinary Shares (10,000 x 100) 1,000,000
Share premium 500,000

For no-par value shares, the proceeds shall be credited to the share capital account to the extent of stated
value and any excess is credited to share premium.

For example, if 20,000 ordinary shares of P50 stated value are issued at P80 per share, the journal entry
is:
Cash 1,600,000
Ordinary Shares (20,000 x P50) 1,000,000
Share premium 600,000

Issuance of Share Capital for Non-Cash Consideration

If share capital is issued for noncash consideration such as tangible property, intangible property and
services, the share capital is recorded at an amount equal to the following in the order of priority:
a. Fair value of the noncash consideration received
b. Fair value of the shares issued
c. Par value of the shares issued

Illustration
An entity issued 10,000 ordinary shares of P100 par value in exchange for land with a fair value of P
1,500,000. The fair value of the shares issued is P180 per share or a total of P 1,800,000.

If the fair value of the land is used, the journal entry is:
Land 1,500,000
Ordinary Shares 1,000,000
Share premium 500,000

If the fair value of the shares is used, the journal entry is:
 Republic of the Philippines
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City
Tel. No. (047) 224-2089 loc. 314

Land 1,800,000
Ordinary Shares 1,000,000
Share premium 800,000
If the par value of the shares is used, the journal entry is:
Land 1,000,000
Ordinary Shares 1,000,000

An entity issued 1,000 ordinary shares of P100 par value to lawyers for their legal services in getting
the corporation organized. The fair value of such services is reliably determined to be P 120,000.
Organization expenses 120,000
Ordinary Shares 100,000
Share premium 20,000

Treasury Shares
These are an entity’s own shares that have been issued and then reacquired but not canceled.
These requisites must be present in order that shares can qualify as treasury shares:
a. The shares must be the entity’s own shares. The acquisition of shares of another entity is not
treasury but an investment.
b. The shares must have been issued originally. Treasury shares can be legally reissued at an
amount lower than its cost while unissued shares must be issued at least at par or stated value.
c. The shares are reacquired but not cancelled. If the shares are cancelled, they are considered
as retired shares.

Accounting for Treasury Shares

• Treasury shares shall be recorded at cost, regardless of whether the shares are acquired below
or above the par or stated value.
• If the treasury shares are acquired for cash, the cost is equal to the cash payment.
• If the shares are acquired for noncash consideration, the cost is usually measured by the carrying
amount of the noncash asset surrendered.

Illustration
If an entity acquired 2,000 shares with par of P100 at P150 per share, the journal entry is
Treasury Shares 300,000
Cash 300,000

Reissuance at cost
If the treasury shares are subsequently reissued at P150 per share, the journal entry is:
Cash 300,000
Treasury Shares 300,000

Reissuance at more than cost

If the treasury shares are subsequently reissued at P200 per share, the excess of the reissue price over
the cost is treated as share premium and recorded as follows:
Cash 400,000
Treasury Shares 300,000
Share premium - treasury shares 100,000
Gain on sale of treasury shares shall not be credited to income but recognized directly in equity as share
premium.
 Republic of the Philippines
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City
Tel. No. (047) 224-2089 loc. 314

Reissuance at below cost

If the treasury shares are subsequently reissued at P100 per share, the excess of the cost over the reissue
price is charged to the following in the order mentioned:
a. Share premium from treasury shares of the same class
b. Retained Earnings

In other words, the “loss” on the sale of treasury share is debited to share premium from treasury shares
of the same class, if any, and when this balance is exhausted, it is charged to retained earnings.

In the foregoing example, if there are no previous transactions involving treasury shares, the journal
entry is:
Cash 200,000
Retained Earnings 100,000
Treasury Shares 300,000

Another Illustration
Ordinary share capital, 10,000 shares, P100 par 1,000,000
Share premium - original issuance 200,000
Share premium - treasury shares 20,000
Retained earnings 500,000
Treasury Shares, 2,000 shares at cost 300,000

If subsequently, the treasury shares are reissued at P100 per share, the journal entry is:
Cash 200,000
Share premium - treasury shares 20,000
Retained Earnings 80,000
Treasury Shares 300,000
Observe that the share premium from original issuance is not touched.

Retirement of Treasury Shares

• If treasury shares are subsequently retired, the share capital account is debited at par value or
stated value and the treasury account is credited at cost
• If the retirement results in a gain, meaning the par value exceeds the cost of treasury shares,
such gain is credited to share premium from treasury shares.

For example, if 1,000 ordinary shares with par of P100 are held as treasury at a cost of P 80,000, and
subsequently retired, the journal entry is:
Ordinary Shares 100,000
Treasury Shares 80,000
Share premium - treasury shares 20,000

If the retirement results in a loss, meaning, the cost of the treasury shares exceeds the par value, such
loss is debited to the following in the order given:
a. Share premium from original issuance
b. Share premium from treasury shares
c. Retained Earnings
 Republic of the Philippines
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City
Tel. No. (047) 224-2089 loc. 314

Illustration
Ordinary share capital, 50,000 shares, P100 par 5,000,000
Share premium - original issuance 500,000
Share premium - treasury shares 100,000
Retained earnings 1,000,000
Treasury Shares, 5,000 shares at cost 750,000

The subsequent retirement of the treasury shares is recorded as follows:

Ordinary Shares (5,000 x 100) 500,000
Share premium - original issuance 50,000
Share premium - treasury shares 100,000
Retained earnings 100,000
Treasury Shares 750,000

Note that the share premium from original issuance is canceled on a pro rata basis in the absence of
specific amount identified with the treasury shares.

Donated Shares
• It refers to shares received by entity from its shareholder by way of donation.
• Donated shares are actually treasury shares and may therefore be reissued at any price without
any discount
• Donated shares are secured without cost and consequently, the entity’s assets, liabilities and
shareholders’ equity are not affected but the number of outstanding shares is reduced.
• However, the reissue or resale of donated shares increases assets and donated capital or share
premium.

Illustration
Shareholders donated to the entity an aggregate of 10,000 ordinary shares of their shareholdings with
par of P100. The receipt of the donated shares by the entity is simply recorded by means of
memorandum entry as follows:
“Received from shareholders as donation 10,000 ordinary shares with P100 par value”

If the 10,000 donated shares are subsequently sold for P150 per share, the journal entry is:
Cash 1,500,000
Donated Capital 1,500,000

If the donated capital shares are retired or canceled prior to reissuance, the journal entry is:
Ordinary shares 1,000,000
Donated Capital 1,000,000

The donated capital is part of share premium.

IV. Teaching and Learning Materials and Resources

1. Partnership and Corporation Accounting by Ballada
 Republic of the Philippines
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City
Tel. No. (047) 224-2089 loc. 314

V. Learning Task
Problem 6-1 (Subscription of Shares)
Faith Inc. has been authorized to issue 125,000 shares of P10 par ordinary shares. The following 2021
transactions relate to the initial issuance of Faith share:
Feb 1 Faith Inc. sold subscriptions for 25,000 shares of stock. The shares have a subscription
price of P15 per share. One-third of the subscription price was received as a down
payment.
15 Faith Inc. sold 10,000 shares for P180,000
Mar 1 An installment amounting to one-third of the subscription price was received
19 Faith Inc. exchanged 200 shares of stock for a new two-way radio system having a fair
market value of P3,800
Apr 1 The final one-third of the subscription price was received and the share was issued.

Required:
Prepare journal entries to record the transactions.

Problem 6-2 (Issuance of Ordinary and Preference Share)

Happy Corporation was organized on Jan 1, 2021. It is authorized to issue 20,000 shares of 6% P50 par
value preference shares, and 50,000 shares of no-par ordinary share with stated value of P10 per share.
The following stock transactions were completed during the year.

Jan 10 Issued 10,000 ordinary shares for cash at P35 per share.
Mar 1 Issued 10,000 preference shares for cash at P55 per share.
Apr 1 Issued 2,500 ordinary shares for land. The asking price of the land was P90,000; the fair
market value of the land was P85,000.
May 1 Issued 7,500 ordinary shares for cash at P40 per share.
Aug 1 Issued 1,000 ordinary shares to lawyers in payment of their bill for P50,000 pertaining to
services rendered in helping the corporation organize.
Sept 1 Issued 500 ordinary shares for cash at P60 per share.
Nov 1 Issued 2,000 preference shares for cash at P53 per share.

Required:
1. Journalize the transactions
2. Prepare the share capital section of the shareholders’ equity as at Dec 31, 2021.