HANDOUT AP-2301 (PART 1)

AUDIT OF SHAREHOLDERS’ EQUITY

1. Add Share Capital

2. Add Subscribed Share Capital
Contributed 3. Add Share Premium
Capital 4. Less Subscription Receivable if
Current

1. Unappropriated Retained
Accumulated Earnings
Components 2. Appropriated Retained
of SHE Comprehensive
Income Earnings
3. Accumulated Other OCI

1. Treasury Shares
Contra Equity 2. Discount on Share Capital
Accounts 3. Liquidated Capital

I. DEFINITION OF TERMS
a. Shareholders’ Equity – Residual Interest of owners in the net assets of a corporation measured
at excess of assets over liabilities.
b. Share Capital – Portion of authorized share capital already paid and issued.
c. Subscribed Share Capital – portion of the authorized share capital that has been subscribed but
not yet fully paid and therefore, still unissued.
d. Legal Capital – A portion of the paid-in capital arising from its issuance which cannot be returned
to the shareholders in any form during the lifetime of the corporation.
NOTE: Subscription Receivable is ignored in computing the legal capital.

Share Capital at Par – Ordinary and Preferred xx

Subscribed Share Capital – Ordinary and Preferred xx
Share Dividends Payable xx
Share Premium in Excess of Par (only if no-par value share) xx
TOTAL LEGAL CAPITAL xx

II. KINDS OF SHARE CAPITAL

a. Par Value Share – One with specific value fixed in the AOI and share certificate.
b. No Par Value Share – One without any value appearing on the share certificate.
Has always an issued or stated value which may be fixed in the AOI or by the Board of
Directors.
The issue price must be greater > 5.00

III. CLASSES OF SHARE

Ordinary Share Preference Share
Return on Investment Residual Fixed
Priority During Liquidation Least Priority Highest Priority
Rights and Privileges given to shareholders Same May vary
Can be issued with no par value? Yes No
With voting rights? Yes No

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MYLENE P. ALFANTA, CPA
IV. ISSUANCE OF SHARE CAPITAL
a. Issuance for Cash Consideration Face Value

b. Issuance for Non-Cash Consideration 1. Fair Value of NCC Received

2. Fair Value of Shares Issued
3. Par Value of Shares Issued

c. Issuance for Services 1. Fair Value of Services

2. Fair Valued of Shares Issued
Whichever is reliably determined

V. KINDS OF COST RELATING TO SHARE CAPITAL

Share Issuance Costs Listing Costs Joint Costs

Cost of Public
Relates jointly to the
Offering of shares
concurrent listing and
Direct costs to sell share NOT directly
Nature issuance of new shares,
capital. attributable to the
and listing of old existing
issuance of new
shares.
shares.

General Rule:
DEDUCTED from SP from
Current Issuance
Exceptions:
Accounting
If above is insufficient,
Treatment
deducted from the following
order of priority:
1. SP from Previous
Issuance
2. Retained Earnings
ALLOCATED between the
newly issued and listed
EXPENSED in the
shares, and the newly listed
Income Statement
old existing shares pro rata
based on the outstanding
number of shares.

Underwriting and
Audit and other
Commission
Professional Advice
Accounting and
relating to
Legal Fees Road Show
Prospectus
Printing Costs Presentation
Opinion of Counsel
Documentary Public
Examples Tax Opinion
Stamps Relations
Fairness Opinion
Filing Fees with Consultant
and Valuation
SEC Fee
Report
Cost of Advertising
Prospectus Design
or promoting the
and Printing
issuance

Example: Listing Fee 300,000 – Expensed Immediately

Share Issuance Costs 225,000 – Contra Equity Account
Joint Costs 500,000 – Allocated below: (Assume outstanding shares)

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MYLENE P. ALFANTA, CPA
 Allocation: Outstanding Fraction Cost
Newly Issued and Listed 700,000 7/10 350,000
Newly Listed Old Existing Shares 300,000 3/10 150,000
Total Joint Costs 1,000,000 10/10 500,000

Journal Entry:
1. Share Listing Fee 300,000
Cash 300,000
#
2. Share Premium 225,000
Cash 225,000
#

3. Share Premium 350,000

Share Listing Fee 150,000
Cash 500,000
#

VI. RETIREMENT OF SHARES

Retirement of shares is known as cancellation of issued shares. In accordance with the trust fund
doctrine, there should be an unrestricted balance of retained earnings before retirement.

Charged to: Journal Entry

Share Capital xx
Retirement Share Premium xx
Gain on
Price < Original Share Premium Cash (Retirement Price) xx
Retirement
Issue Price SP – Retirement xx
#

Share Capital xx
Following Order:
Share Premium xx
Retirement 1. Related Share
Loss on SP – Retirement xx
Price > Original Premium (SP-
Retirement Retained Earnings xx
Issue Price Retirement)
Cash (Retirement Price) xx
2. Retained Earnings
#

VII. TREASURY SHARES

Treasury Shares are an entity’s own shares that have been issued and then reacquired but not canceled.
Must have the following three requisites to be qualified as Treasury Shares.
1. The shares must be the entity’s OWN shares.
2. The shares must have been ISSUED originally.
3. The shares are REACQUIRED but not canceled.

1. REACQUISITION OF TREASURY SHARES

a. Treasury shares shall be measured at COST, regardless of whether the shares are acquired
below or above par value.
b. The cost is equal to:
If acquired for Cash Consideration = Face Amount
If acquired for Non-Cash Consideration = Carrying Amount

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MYLENE P. ALFANTA, CPA
 c. Journal Entry:
Treasury Shares (at cost) xx
Cash xx
#

2. REISSUANCE OF TREASURY SHARES

Types of
Accounting Treatment Journal Entry
Reissuances

Cash xx
Journal Entry during acquisition
1. At Cost Treasury Shares xx
shall be reversed.
#

Excess reissue price over cost is Cash xx

2. At More than treated as Share Premium – TS. Treasury Shares xx
Cost No gain or loss shall be Share Premium – TS xx
recognized. #

Excess of cost over reissue price is

Cash xx
charged in the following order of
Share Premium – TS xx
3. At Below priority:
Retained Earnings xx
Cost a. Share Premium – TS of the
Treasury Shares xx
same class
#
b. Retained Earnings

Note: Reissue Price is equal to Face Value if cash consideration and to Fair Value if non-cash
consideration.

3. RETIREMENT OF TREASURY SHARES

Types of
Accounting Treatment Journal Entry
Retirement

No additional account is
Share Capital xx
1. Original Issue recognized.
Share Premium – OI xx
Price = Cost Share Capital and Share Premium
Treasury Shares xx
of TS are based on original issue price
#
and Treasury Share is at cost.

Excess is equal to Gain on Share Capital xx

2. Original Issue Retirement. Share Premium – OI xx
Price > Cost But such gain is not included in Treasury Shares xx
of TS Profit or Loss, but credited to Share Share Premium – TS xx
Premium – TS. #

Excess is equal to Loss on

Share Capital xx
Retirement.
Share Premium – OI xx
3. Original Issue But such loss is not included in
Share Premium – TS xx
Price < Cost Profit or Loss but debited in the
Retained Earnings xx
of TS following order of priority:
Treasury Shares xx
a. Related Share Premium - TS
#
b. Retained Earnings

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MYLENE P. ALFANTA, CPA
VIII. SHARE RIGHTS OR RIGHTS ISSUE
This is granted to existing shareholders to enable to acquire new shares at a specified price during a
specified period. This is equivalent to the right of pre-emption.
a. Issuance of Share Rights = Memorandum Entry only
b. Expiration of Share Rights = Memorandum
c. Exercise of Share Rights = Memorandum Entry for the decrease of number of shares
and issuance of share rights is in the same manner of issuance
of share capital.

IX. RETAINED EARNINGS

a. Basic Formula
Retained Earnings, Beginning xx
+ Net Income (Loss) xx
– Dividends Declared xx
+ Prior Period Errors xx
+ Changes in Accounting Policy xx
+ Reclassifications of OCI xx
+ Other Capital Adjustments resulting from equity instruments xx
Retained Earnings, End xx

b. Kinds of Retained Earnings

Unappropriated Retained Earnings – free portion and can be declared as dividends.
Appropriated Retained Earnings – restricted portion and therefore, cannot be declared
as dividends unless the restriction is subsequently reversed.

c. Types of Appropriation
Legal Appropriation
Contractual Appropriation
Voluntary Appropriation
d. Accounting for Appropriation
Establishment of Appropriation
- Appropriations required by law and the trust fund doctrine.
Example: Cost of Treasury Shares
- Appropriations required by contract
Example: For bond or preference share redemption
- Appropriations as part of management discretion.
Example: For plant expansion and other contingencies
RE – Unappropriated xx
RE – Appropriated xx

Appropriation is no longer necessary RE – Appropriated xx

RE – Unappropriated xx
e. Effect to Accounts
Appropriation do not affect shareholders’ equity as well as the total retained earnings balance
since bot types comprise the total retained earnings.

X. DIVIDENDS
Distribution of earnings or capital to the shareholders in proportion to their shareholdings.
a. Essential Dates for Dividends
Date of Declaration - When directors authorized the payment of dividends.
Date of Record - When stock and transfer book is already closed.
Date of Payment - When liability for dividends is paid.

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MYLENE P. ALFANTA, CPA
 b. Kinds of Dividends
Cash Dividends – May be expressed as:
✓ A certain amount of pesos per share. Example: P5.00 per share.
✓ A certain percent of the par or stated value. Example: 7% Dividend.
Property Dividends – Also called Dividends in Kind, and are distribution to owners in the
form of non-cash assets.
Share Dividends

XI. SHARE BASED COMPENSATION

A compensation arrangement established by the entity whereby the entity’s employees shall receive
equity shares in exchange for their services or the entity incurs liabilities to the employees in amount
based on the price of equity shares.

Classification of Share-Based Compensation

a. Share Options – Equity Settled Compensation

Granted to employees to enable them to acquire shares of the entity during

Definition
a specified period upon fulfillment of certain conditions at a specified date.

1. Fair Value Method

Compensation = FV of Share Option at grant date
This is used if problem is silent.
Measurement 2. Intrinsic Value Method
Compensation = Intrinsic Value of Share Options
Intrinsic Value = Market Value – Option Price
This method is only used if FV cannot be estimated reliably

1. If Share Options vest immediately

Employee is not required to complete a specified period of
service before entitlement to share options.
Compensation = Recognized fully as Expense
Recognition 2. If Share Options do not vest immediately
Employee must compete a specified service period before
entitlement to share options.
Compensation = Recognized as Expense over the service
or vesting period.

1. Recognition of Compensation
Salaries – Share Options xx
Share Options Outstanding xx

Journal Entries 2. Exercise of Options

Cash (at option price) xx
Share Options Outstanding xx
Share Capital (at par) xx
Share Premium xx

b. Share Appreciation Rights - Cash Settled Compensation

Entitles an employee to receive cash equal to excess of market

Definition value over predetermined price for specific number of shares.
Entity shall recognize a liability to pay cash in the future.

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MYLENE P. ALFANTA, CPA
 Compensation = Fair Value of Liability at the reporting date and
shall be remeasured at every end of the period.
Measurement Changes in Fair Value = Recognized in Profit or Loss
Fair Value of Liability = Market Value of Share – Predetermined
Price for a specific number of shares

1. If Share Options vest immediately

Employee is not required to complete a specified period of
service before entitlement to share options.
Compensation = Recognized fully as Expense
Recognition 2. If Share Options do not vest immediately
Employee must compete a specified service period before
entitlement to share options.
Compensation = Recognized as Expense over the service
or vesting period.

1. Recognition of Compensation and Increase of MV at year-end

Salaries xx
Accrued Salaries Payable xx

2. Decrease of MV at year-end
Journal Entries Accrued Salaries Payable xx
Gain on Reversal of SAP xx

3. Settlement Date
Accrued Salaries Payable xx
Cash xx

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MYLENE P. ALFANTA, CPA
 EXERCISE PROBLEMS

PROBLEM 1:
The following data were compiled prior to preparing the balance sheet of the Conviction
Corporation as of December 31, 2005:

Authorized common stock, P100 par value 4,000,000

Cash Dividends Payable 160,000
Donated Capital 800,000
Gain on Sale of Treasury Stock 80,000
Net Unrealized Loss on available for sale Securities 96,000
Premium on Capital Stock 320,000
Premium on Bonds Payable 240,000
Reserve for Bond Sinking Fund 400,000
Reserve for Depreciation 600,000
Revaluation Increment on Property 800,000
Retained Earnings, Unappropriated 720,000
Subscribe Capital Stock 480,000
Stock Subscriptions Receivables 120,000
Stock Warrants Outstanding 200,000
Treasury Stock, at Cost 144,000
Unissued Common Stock 800,000

Compute for the following:

A B C D
1. Common Stock Issued 4,000,000 3,200,000 3,056,000 3,680,000
2. Additional Paid-In Capital 320,000 1,400,000 1,320,000 1,200,000
3. Appropriated Ret. Earnings 400,000 544,000 1,000,000 650,000
4. Total Shareholders’ Equity 6,760,000 6,640,000 6,480,000 6,240,000
5. Legal Capital 3,200,000 3,680,000 3,560,000 4,000,000

PROBLEM 2:
The shareholders’ equity of Dandelion Company, after its first year of operation in 2021 shows
the following:

Date Transactions Debit Credit

Jan 1 Issued 6,000 shares at par of P100 in
exchange for real property with a market
value of P800,000; authorized is 20,000
shares 600,000
Jan 15 Sold 8,000 shares at P120 960,000
Mar 10 Purchased 800 Dandelion Shares at P150 120,000
May 15 Loss on Sale of Machinery 40,000
June 10 Sold 400 Treasury Shares 68,000
Dec 31 Cash Dividends declared payable January 80,000
15, 2022
Dec 31 Profit for the Year 316,000

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MYLENE P. ALFANTA, CPA
Questions:
1. The adjusted share capital as of December 31, 2021 is:
a. P 1,340,000
b. P 1,360,000
c. P 1,400,000
d. P 1,560,000

2. The total share premium as of December 31, 2021 is:

a. P 160,000
b. P 168,000
c. P 360,000
d. P 368,000

3. The total retained earnings as of December 31, 2021 is:

a. P 136,000
b. P 144,000
c. P 156,000
d. P 196,00

4. The adjusted total equity on December 31, 2021 is:

a. P 1,704,000
b. P 1,744,000
c. P 1,904,000
d. P 1,944,000

5. The book value per share of Dandelion Company on December 31, 2021 is:
a. P 125.29
b. P 128.20
c. P 132.22
d. P 140.00

PROBLEM 3: Periwinkle Company was formed on July 1, 2019. It was authorized to issue
600,000 shares of P10 par value ordinary shares and 200,000 shares of 8 percent P25 par value,
cumulative and nonparticipating preference shares. Periwinkle Company has a July 1 – June 30
fiscal year. The following information relates to the shareholders’ equity accounts of Periwinkle
Company:

Ordinary Shares
Prior to the 2021-2022 fiscal year, Periwinkle Company had 220,000 of outstanding ordinary
shares issued as follows:
1. 190,000 shares were issued for cash on July 1, 2019 at P31 per share.
2. On July 24, 2019, 10,000 shares were exchanged for a plot of land which cost the seller
P140,000 in 2013 and had an estimated market value of P440,000 on July 24, 2019.
3. 20,000 shares were issued on march 1, 20021; the shares had been subscribed for P42
per share on October 31, 2020.

During the 2021-2022 fiscal year, the following transactions regarding ordinary shares took pace:

2021:
Oct. 1 4,000 shares were issued for cash at P46 per share

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MYLENE P. ALFANTA, CPA
Nov. 30 Periwinkle purchased 4,000 of its own ordinary shares on the open market at P39
per share.
Dec. 15 Periwinkle declared a 5% stock dividend for shareholders of record on January 15,
2022, to be issued on January 31, 2022. Periwinkle was having a liquidity problem
and could not afford a cash dividend at the time. Periwinkle’s ordinary shares were
selling at P52 per share on December 15, 2021.

2022:
June 20 Periwinkle sold 1,000 of its own ordinary shares that it had purchased on
November 30, 2021 for P42,000.

Preference Shares
Periwinkle issued 100,000 preference shares at P44 per share on July 1, 2020.

Cash Dividends
Periwinkle has followed a schedule of declaring cash dividends in December and June with
payment being made to shareholders of record in the following month. The cash dividends which
have been declared since inception of the company through June 30, 2022, are shown below:

Declaration Date Ordinary Shares Preference Shares

12/15/20 P0.30 per share P1.00 per share
06/15/21 P0.30 per share P1.00 per share
12/15/21 ---- P1.00 per share
No Cash Dividends were declared during June 2022 due to the company’s liquidity problems.

Retained Earnings
As of June 30, 2021, Periwinkle’s retained earnings account had a balance of P1,380,000. For
the fiscal year ending June 30, 2022, Periwinkle reported net income of P80,000.

In March 2021, Periwinkle received a term loan from JST National Bank. The bank requires
Periwinkle to establish a sinking fund and restrict retained earnings for an amount equal to the
sinking fund deposit. The annual sinking fund payment of P100,000 is due on April 30 each year;
the first payment was made on schedule on April 30, 2022.
1. What is the ordinary share capital account balance at June 30, 2022?
a. P 2,350,000
b. P 2,320,000
c. P 2,510,000
d. P 2,500,000

2. The total share premium – ordinary shares at June 30, 2022, is:
a. P 5,435,000
b. P 5,579,000
c. P 4,970,000
d. P 5,693,00

3. The unappropriated retained earnings at June 30, 2022 should be

a. P 788,000
b. P 571,000
c. P 217,000
d. P 1,033,000

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MYLENE P. ALFANTA, CPA
 4. The total number of ordinary shares issued and outstanding of Periwinkle at June 30,
2022, should be:
a. 248,000
b. 251,000
c. 232,000
d. 235,000

5. The total shareholders’ equity at June 30, 2022. Should be:

a. P 13,117,000
b. P 13,576,000
c. P 12,783,000
d. P 13,000,000

PROBLEM 4:
At the beginning of year 1, Entity A grants share options to each of its 100 employees working in
the sales department. The share options will vest at the end of year 3, provided that the employees
remain in the entity’s employ, and provided that the volume of sales of a particular product
increases by at least an average of 5 percent per year. If the volume of sales of the product
increases by an average of between 5 percent and 10 percent per year, each employee will
receive 100 share options. If the volume of sales increases by an average of between 11 percent
and 15 percent each year, each employee will receive 200 share options. If the volume of sales
increases by an average of 16 percent or more, each employee will receive 300 share options.

On grant date, Entity A estimates that the share options have a fair value of P20 per option. Entity
A also estimates that the volume of sales of the product will increase by an average of between
11 percent and 15 percent per year, and therefore expects that for each employee who remains
in service until the end of year 3, 200 share options will vest. The entity also estimates on the
basis of a weighted average probability, that 20 percent of employees will leave before the end of
year 3.

By the end of year 1, seven employees have left and the entity still expects that a total of 20
employees will leave by the end of year 3. Hence, the entity expects that 80 employees will remain
in service for the three-year period. Product sales have increased by 12 percent and the entity
expects this rate of increase to continue over the next 2 years.
By the end of year 2, a further five employees have left, bringing the total to 12 to date. The entity
now expects only three more employees will leave during year 3, and therefore, expects a total
of 85 employees will remain at the end of year 3. Product sales have increased by 20 percent,
resulting in an average of 16 percent over the two years to date. The entity now expects that sales
will average 16 percent over the three-year period, and hence expects each sales employee to
receive 300 share options at the end of year 3.

By the end of year 3, a further two employees have left. Hence, 14 employees have left during
the three-year period, and 86 employees remain. The entity’s sales have increase by an average
of 16 percent over the three years.

Based on the preceding information, answer the following:

1. What is the compensation expense for year 1?
a. P 53,333
b. P 106,667
c. P 160,000
d. P 172,000

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MYLENE P. ALFANTA, CPA
 2. What is the compensation expense for year 2?
a. P 168,000
b. P 180,000
c. P 233,333
d. P 286,667

3. What is the compensation expense for year 3?

a. P 114,667
b. P 176,000
c. P 188,000
d. P 282,667

4. What is the cumulative compensation expense for years 1, 2 and 3?

a. P 172,000
b. P 320,000
c. P 344,000
d. P 516,000

5. At the end of year 2, the entity should report share options outstanding of:
a. P 226,667
b. P 286,667
c. P 328,000
d. P 340,000

PROBLEM 5:
On January 1, 2021, Entity B grants share options to each of its 100 employees working in the
sales department. Each of these employees receives 10 share options. The share options will
vest on December 31, 2023, provided that the employees remain in the entity’s employ. On
January 1, 2021, fair value per option is P30.

On December 31, 2021, it is expected that during the whole vesting period of three years, 10% of
the employees will leave entity B. On December 31, 2022, this expectation is revised to 30%.
Finally, by December 31, 2023, 20% of the employees left Entity B.

There is also a performance condition in addition to the service condition. According to the
performance condition, the options only vests if the entity B’s share price on December 31, 2023
exceeds its share price on January 1, 2021 by at least 20%. On December 31, 2021 and on
December 31, 2022, it is expected that this target will be met. However, the target is not met by
December 31, 2023.

Based on the preceding information, answer the following:

1. What amount of compensation expense should be recognized in 2021?
a. P 9,000
b. P 14,000
c. P 10,000
d. P 0

2. What amount of compensation expense should be recognized in 2022?

a. P 0
b. P 9,000
c. P 5,000
d. P 10,000

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MYLENE P. ALFANTA, CPA
 3. What amount of compensation expense should be recognized in 2023?
a. P 14,000
b. P 10,000
c. P 9,000
d. P 0

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MYLENE P. ALFANTA, CPA