SHAREHOLDER’S EQUITY

SHAREHOLDER’S EQUITY

◦ It is the residual interest in the

assets of a corporation after
deducting all its liabilities
COMPONENTS OF
SHAREHOLDER’S EQUITY
◦ Share Capital
◦ Retained Earnings
◦ Other Components of Equity
◦ Treasury Shares
SHARE CAPITAL
◦ Preference Share Capital
◦ Ordinary Share Capital
◦ Subscribed Share Capital
◦ Subscription Receivable
◦ Share Dividends distributable
◦ Discount on Share Capital
◦ Capital Liquidated
◦ Share Premium
 ACCOUNTING FOR
SHARE CAPITAL
1. Authorized Capitalization
MEMORANDUM METHOD
The authorized capitalization is P1,000,000
divided into 10,000 shares with par value of P100

JOURNAL ENTRY METHOD

Unissued Share Capital 1,000,000
Authorized Share Capital 1,000,000
 ACCOUNTING FOR
SHARE CAPITAL
2.Subscription
MEMORANDUM METHOD
JOURNAL ENTRY METHOD

Cash 62,500
Subscription Receivable 187,500
Subscribed Share Capital 250,000
 ACCOUNTING FOR
SHARE CAPITAL
3.Collection of Subscription Receivable
MEMORANDUM METHOD
JOURNAL ENTRY METHOD
Cash 150,000
Subscription Receivable 150,000

Subscribed Share Capital 200,000

Unissued Share Capital 200,000
ORDINARY SHARE CAPITAL

◦ It represents the residual corporate

interest that bears the ultimate risk
of loss and received the benefits
of success.
ORDINARY SHARE CAPITAL

◦ The following are the basic rights of

ordinary shareholders:
 Right to attend and vote in
shareholder’s meeting
 Pre-emptive Right
 Right to Dividends
 Right to share in the net assets of the
corporation upon liquidation
PREFERENCE SHARE CAPITAL

◦ These are shares that give the holders

thereof certain preference over other
shareholders.
◦ It may include priority claims over:
 Dividends
 Net assets of the corporation in the event
of liquidation
PREFERENCE SHARE CAPITAL
REDEEMABLE CALLABLE
PREFERENCE PREFERENCE
SHARE SHARE

Holder has the right Issuer has the right to

to redeem at a set call at a set date
date
Classified as Classifiedas equity
financial liability instrument
SHARES ISSUED AT A DISCOUNT
◦ The discount is the difference between
the consideration received and the par or
stated value of the shares issued.

◦ Journal Entry:
Cash 80,000
Discount on Share Capital 20,000
Share Capital 100,000
SHARE PREMIUM

◦ Excess of subscription price over par

value or stated value
◦ Excess of reissuance price over cost
of treasury shares issued
◦ Distribution of SMALL stock
dividends
RETAINED EARNINGS
◦ It represent the cumulative profits, net of
losses, distribution to owners, and other
adjustments which are retained in the
business and not yet distributed to
shareholders.
◦ It may consist of:
 Unrestricted Retained Earnings
 Appropriated Retained Earning
DIVIDENDS DISTRIBUTED OUT
OF UNRESTRICTED RE
◦ Cash Dividends
 Liability Dividends
 Scrip Dividends
 Bond Dividends
◦ Property Dividends
◦ Share Dividends
ACCOUNTING FOR
CASH DIVIDENDS
◦ It may be declared as a certain amount
per share or as a certain percentage of par
value of the shares
◦ Only outstanding shares are entitled to
dividends
ACCOUNTING FOR
PROPERTY DIVIDENDS
◦ The property dividends payable is initially
measured at Fair Value of non-cash assets
at date of declaration.
◦ At the end of each reporting period
property dividends payable is adjusted for
changes in FV
◦ On settlement date, the difference between
the CA of dividends payable and the asset
distributed is recognized in P/L
ACCOUNTING FOR
SHARE DIVIDENDS
◦ Share dividends reduce retained earnings
but do not affect total shareholder’s equity,
total assets, or total liabilities
◦ If the share dividends are considered large,
the shares are accounted for at fair value.
◦ If the share dividends are considered large,
the shares are accounted for at par value.
◦ When treasury shares are declared as
dividends, cost method is used.
RETAINED EARNINGS
Dividends
Example:
At the beginning of the current year, Flash
Company had retained earnings of P4,000,000.
During the year, the entity reported net income
of P2,000,000, sold treasury shares at a gain of
P720,000, declared a cash dividend of
P1,200,000 and declared and issued a small
share dividend of 60,000 shares with P10 par
value when the fair value of the share was P20.
RETAINED EARNINGS
Dividends

Retained Earnings – January 1 4,000,000

Net Income 2,000,000
Cash Dividend (1,200,000)
Share Dividend (1,200,000)
Retained Earnings – December 31 3,600,000
OTHER COMPONENTS OF
EQUITY
◦ Revaluation Surplus
◦ Cumulative unrealized gains or losses on
FV changes in Investment in FVOCI
equity securities
◦ Exchange difference on translating
foreign operations
◦ Effective portion of cash flow hedges
QUASI-REORGANIZATION

◦ Quasi-reorganization may be effected

through:
 Revaluation of PPE
 Recapitalization
QUASI-REORGANIZATION
◦ The basic approach to quasi-reorganization
is as follows:
 Assets and liabilities are revalued upwards or
downwards
 Any resulting credit balance is revaluation
surplus used to wipe out any deficit
 If recapitalization is made, any resulting share
premium shall also be used to wipe out any
deficit
 Disclosures required by relevant regulations are
provided in the financial statements for a
minimum period of 3 years.
RECAPITALIZATION
◦ Recapitalization is accomplished through
any of the following:
 Changes from par to no-par, or vice-versa
 Reduction of par value or stated value
 Share splits or reverse splits
RECAPITALIZATION
◦ Example:
The shareholders’ equity of ABC Co befor
recapitalization is as follows:
Share Capital, P100 par 1,000,000
Share Premium 200,000
Retained Earnings 300,000
RECAPITALIZATION
Changes from par to no-par
◦ ABC Co. recalls and cancels the 10,000
shares and replaced them with 20,000 no-
par shares with stated value of P5 per
share.
Share Capital 1,000,000
Share Premium 200,000
Share Capital 100,000
Share Premium-recapitalization 1,100,000
RECAPITALIZATION
Reduction of par of stated value
◦ ABC Co. reduces the par value to P80
per share
Share Capital 1,000,000
Share Premium 200,000
Share Capital 800,000
Share Premium-recapitalization 400,000
RECAPITALIZATION
Share split
◦ ABC Co. declares a 2 for 1 share split
Issued 20,000 shares with par value of P50 as a result
of 2 for 1 split of 10,000 old shares with par value of
P100

◦ ABC Co. declares a 1 for 2 share split

Issued 5, 000 shares with par value of P200 as a result
of 1 for 2 split of 10,000 old shares with par value of
P100
TREASURY SHARES
Shares must be the entity’s own shares
The shares must have been issued
originally
The shares are reacquired but no
cancelled.
It is recorded at cost.