SHAREHOLDER’S EQUITY – SHARE WARRANTS

 At the time of expiration of share warrants

 When shares are issued with share warrants when the same will not be exercised, the entry
attached, the shareholders are given the right to to record is:
acquire a specified number of ordinary shares
(common stock) of the issuing party at a given Share Warrants Outstanding XXX
price within a certain time. Share Premium – Unexercised Share Warrants XXX
 Share warrants are usually issued by the issuing
party as a “sweetener” to make the securities
more attractive to prospective investors, and to
be able to dictate better prices for the sale of
the securities (either shares or bonds).
 When share warrants are issued together with
preference shares, there is actually a sale of two
(2) securities – the preference shares and the
share warrants.

 How should the issue price of shares with share

warrants be accounted for?
The proceeds shall be assigned first to the shares, at At the time of issuance of the preference shares and
their market value if sold without the warrants; then the share warrant, the entry to record is:
remainder of the issue price is assigned to the warrants
as part of equity. Cash 750,000
 Issue Price = Equity (Shares) + Equity (Warrants) Preference Share Capital* 500,000
 Residual Approach Share Premium – Preference Shares 194,444
 Two instances: Share Warrants Outstanding 55,556
1. Market price of the shares without the warrants
is readily determinable * 5,000 X P100
2. Market price of the shares without the warrants ** 694,444 – 500,000
is not readily determinable
At the time of the actual exercise of share warrants
requiring the issuance of ordinary shares with cash
 At the time of issuance of the preference
payment assuming allshare warrants will be exercised,
shares and share warrant, the entry to record
the entry to record is:
is:
Cash* 175,000
Cash XXX
Share Warrants Outstanding 55,556
Preference Share Capital XXX
Ordinary Share Capital ** 125,000
Share Premium – Preference Shares XXX
Share Premium 105,556
Share Warrants Outstanding XXX
* 5,000 X 35
*The share warrants outstanding account is reported as
** 5,000 X 25
part of share premium.
At the time of expiration of share warrants assuming all
 At the time of the actual exercise of share
share warrants will not be exercised, the entry to record
warrants requiring the issuance of ordinary
is:
shares with cash payment, the entry to record
is:
Share Warrants Outstanding 55,556
Share Premium – Unexercised Share Warrants 55,556
Cash XXX
Share Warrants Outstanding XXX
Ordinary Share Capital XXX
Share Premium XXX
SAMPLE PROBLEM: (Market values of the warrant is not
known)
ABC Corporation issued 5,000 preference shares of P100
par value for P750,000 with 5,000 share warrants giving
the holders the right to acquire 5,000, P25 par value
ordinary shares at P35 per share. On the date of the
issuance, the market value of the preference share ex-
warrant, P125.
NOTE: The procedure is simply to allocate to the
security with a known market value an amount equal to
its market value, and the balance is allocated to the
other security.
Preference Shares (5,000 X 125) P625,000
Share Warrants (750,000 – 625,000) 125,000
TOTAL PAYMENT P750,000
At the time of issuance of the preference shares and
share warrant, the entry to record is:
Cash 750,000
Preference Share Capital* 500,000
Share Premium – Preference Shares 125,000
Share Warrants Outstanding 125,000
* 5,000 X P100
SAMPLE PROBLEM: (Market values of the preference
shares and warrants are not known)
ABC Corporation issued 5,000 preference shares of P100
par value forP750,000 with 5,000 share warrants giving
the holders the right to acquire 5,000, P25 par value
ordinary shares at P35 per share. On the date of the
issuance, the market value of the preference share ex-
warrant and share warrants are not known but the
market value of the ordinary shares is P50.
NOTE: The basis for allocation is the market value of the
ordinary share. An amount is allocated to the share
warrants equal to the intrinsic value and the balance is
allocated to the preference shares.
Market Value of the Ordinary Share P50
Option Price or Exercise Price 35
Intrinsic Value of Share Warrant 15
Multiply: No. of Ordinary Shares 5,000
Total Intrinsic Value of Share Warrants 75,000
Issue Price P750,000
Intrinsic Value of Share Warrants ( 75,000)
Amount Assigned to Preference Shares P675,000
At the time of issuance of the preference shares and
share warrant, the entry to record is:
Cash 750,000
Preference Share Capital* 500,000
Share Premium – Preference Shares 175,000
Share Warrants Outstanding 75,000
* 5,000 X P100
APPROPRIATION OF RETAINED EARNINGS
 The Retained Earnings or Accumulated Profits
and Losses (under IFRS) account represents the
total earnings of the corporation derived from
its operations since its incorporation. This also
includes prior period adjustments, dividends
declared and paid to the shareholders, and
other amounts transferred to the contributed
capital accounts (and vice versa).
 A debit balance in retained earnings, called
deficit, may arise if the accumulated losses, and
distributions exceed the accumulated earnings.
At every reporting year-end, closing entries are recorded
in the books of account of the corporation to transfer
the profit or loss to the Retained Earnings account.
If the Profit or Loss Summary account has a credit
balance (indicating a profit), the entry is:
Income XXX
Expense XXX
Profit or Loss Summary XXX
Profit or Loss Summary XXX
Retained Earnings XXX
If the Profit or Loss Summary account has a debit
balance (indicating a loss), the entry is:
Income XXX
Profit or Loss Summary XXX
Expense XXX
Retained Earnings XXX
Profit or Loss Summary XXX
 Participating Preference Share
The holder is entitled to additional dividends
proportionate to the ordinary shareholders on the basis
of the total par value, in excess of a fixed amount or
rate.

At the time of establishment of appropriation of

portion of unrestricted or unappropriated retained
earnings, the entry to record is:
Retained Earnings XXX
Retained Earnings – Appropriated XXX

At the time when the appropriation is no longer

necessary because the conditions for which it is
established no longer exist, the entry to record is:
Retained Earnings - Appropriated XXX
Retained Earnings XXX

ALLOCATION OF CASH DIVIDENDS BETWEEN

PREFERENCE SHARE AND ORDINARY SHARE

 Preference 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 (preferred as to dividends) or to
priority claims on assets in the event of
corporate liquidation (preferred as to assets).
 Normally, preference share, as the name CUMULATIVE AND NON-PARTICIPATING
suggests, has priority over ordinary shares in
terms of dividends. – Cash dividends must be
paid to preference share before ordinary share
is paid any dividends.
 The amount of dividends payment to preference
shares depends on the type and preferential
rights attached to the preference share capital.

Preference shares may be:

 Cumulative or non-cumulative; and/or
 Participating or non-participating.

Cumulative Preference Share

The holder is entitled to any dividends not declared in
the prior period (dividends in arrears), such that when
dividends are declared in the current period, the
dividends in arrears are to be satisfied first.
CUMULATIVE AND FULLY PARTICIPATING

NON-CUMULATIVE AND PARTICIPATING