ACCOUNTING FOR

CORPORATION –
SHARE CAPITAL
Source: Partnership and Corporation, Ballada
Prepared by Greg O. Saclot
for BSBA 1st Year Students
SHAREHOLDERS’ EQUITY

Is the owners’ equity of a corporation’s statement of

financial position. The major components are:
a. Share capital
b. Retained Earnings
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 services, at the time of organization of the
corporation or afterwards, and upon which it is to
conduct its operations. The share is further divided
into:
a. Legal capital
b. Share Premium
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 is
that portion of the contributed capital or the minimum
amount of paid-in capital, which must remain in the
corporation for the protection of corporate creditors.
LEGAL CAPITAL

In case of par value shares, the legal capital is the

aggregate par value of all issued and subscribed
shares.
In case of no-par shares, legal capital is the total
contributed received by the organization for the
issuance of its shares to the shareholders including the
excess of issue price over the stated value.
SHARE PREMIUM

Previously known as Additional Paid-in Capital. It is

the portion of the paid-in capital representing amounts
paid by 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.
RETAINED EARNINGS

(or accumulated profits or losses) is the amount of

capital accumulated and retained through profitable
operations of the business.
TWO BASIC TYPES OF SHARES
1. Ordinary Shares – This share represents the basic
ownership class of the corporations.
2. Preference Shares – This share gives the owners
certain advantages over ordinary shareholders. The
special benefits relate either to the receipt of
dividends when declared before the ordinary
shareholders (preference as to dividends) or to
priority claims on assets in the event of corporate
liquidation (preference as to assets).
TERMS RELATED TO SHARE CAPITAL

Authorized share capital. The number of authorized share

indicates the maximum number of shares the corporation can
issue as specified in the article of incorporation. This
maximum number of shares when multiplied by the par
value of the share will yield the authorized share capital.
Note that any increase or decrease in the authorized share
capital requires approval of the SEC and formal amendment
to the articles of incorporation.
TERMS RELATED TO SHARE CAPITAL

Issued Share Capital. These are shares which have been

sold and paid for in full. Issued shares may include treasury
shares. Share capital, either Ordinary Share account or
Preference Share account, is credited for the total par value
of fully collected subscriptions or in the case of no-par value
shares, for the total consideration received in relation to the
issue. Share Capital is debited when the issued shares are
retired, redeemed or canceled by the corporation.
TERMS RELATED TO SHARE CAPITAL

Subscribed Share Capital. It is the portion of the

authorized share capital that has been subscribed but not yet
fully paid. The shareholders’ equity account is credited for
the total par value of the shares subscribed and debited for
the total par value of the fully collected subscriptions.
TERMS RELATED TO SHARE CAPITAL

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 Stock. These are issued shares acquired by the

corporation but not retired and are therefore, awaiting to the
reissued at a later date.
CONSIDERATIONS FOR ISSUANCE OF SHARES

1. Actual cash paid to the corporation.

2. Tangible and 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.
 ACCOUNTING FOR
ISSUANCE OF SHARE CAPITAL

When shares with par value are sold:

Cash (or any asset received)
Share Capital (at par value of the shares)
Share Premium (excess over par value)
When shares with no-par value are sold:
Cash (or any asset received)
Share Capital (full consideration received)
 PAR VALUE SHARE ISSUANCE FOR CASH
Issuing Share capital at Par:
Cash xxx
Ordinary Shares xxx

Issuing Share Capital above Par:

Cash xxx
Ordinary Shares xxx
Share Premium xxx
 NO-PAR VALUE SHARE ISSUANCE FOR CASH

Issuing Share without stated value:

Cash xxx
Ordinary Shares xxx

Issuing Share Capital with stated value:

Cash xxx
Ordinary Shares (at stated value) xxx
Share Premium xxx
 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 transactions. A
subscriber becomes a shareholder upon subscription but
the stock certificates ownership over shares of stocks are not
issued until the full collection of the subscription.
 ACCOUNTING FOR SUBSCRIPTION OF SHARES

Subscription Receivable
Subscribed Ordinary Shares
Share Premium
To record subscriptions above par.

Cash
Subscription Receivable
To record initial installment.
 ACCOUNTING FOR SUBSCRIPTION OF SHARES

Cash
Subscription Receivable
To record final installment.

Subscribed Ordinary Share

Ordinary Share
To record issuance of stock certificates.
 ACCOUNTING FOR SUBSCRIPTION OF SHARES

Subscription 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 subscription to the ordinary
shares and credited for the collections on the subscriptions.
ACCOUNTING FOR DELINQUENT SHARES

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 amount 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 for the
smallest number of shares. The person is referred to as the highest bidder.
ACCOUNTING FOR DELINQUENT SHARES
Subscription Receivable
Subscribed Ordinary Shares
Share Premium
To record subscriptions above par.

Cash
Subscription Receivable
To record partial initial installment.
ACCOUNTING FOR DELINQUENT SHARES

Receivable from Highest Bidder

Interest Revenues
To record accrued interest on delinquent shares.

Receivable from Highest Bidder

Cash
To record auction expenses.
ACCOUNTING FOR DELINQUENT SHARES
Cash
Receivable from Highest Bidder
Subscription Receivable
To record sale at public auction.

Subscribed Ordinary Shares

Ordinary Shares
To record issuance of stock certificate.
ACCOUNTING FOR DELINQUENT SHARES
If there are no bidders, 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.

Treasury Stock
Receivable from Highest Bidder
Subscription Receivable
To record purchase of own shares.
 TWO METHODS OF
ACCOUNTING FOR SHARE CAPITAL

Journal Entry Method Memorandum Method

Unissued Ordinary Shares Memo entry: The corporation was authorized to issue
Authorized Ordinary Shares P400,000 ordinary shares, divided into 4,000 shares,
Authorization to issue shares from SEC. with P100 par.

Subscription Receivable Subscription Receivable

Subscribed Ordinary Shares Subscribed Ordinary Shares
To record subscription of shares at par. To record subscription of shares at par.
 TWO METHODS OF
ACCOUNTING FOR SHARE CAPITAL

Journal Entry Method Memorandum Method

Cash Cash
Subscription Receivable Subscription Receivable
To record final installment on subscription. To record final installment on subscription.

Subscribed Ordinary Shares Subscribed Ordinary Shares

Unissued Ordinary Shares Ordinary Shares
To record issuance of stock certificates. To record issuance of stock certificates.

Cash Cash
Unissued Ordinary Shares Ordinary Shares
To record cash subscription at par. To record cash subscription at par.
 SHAREHOLDERS’ EQUITY
USING JOURNAL ENTRY METHOD

Authorized Ordinary Shares, P100 par, 4,000 shares P400,000

Less Unissued Ordinary Shares, 3,000 shares 300,000
Issued Ordinary Shares, 1,000 shares at P100 par P100,000
Subscribed Ordinary Shares P40,000
Less: Subscription Receivable 40,000 -
 SHAREHOLDERS’ EQUITY
USING MEMORANDUM METHOD

Ordinary Shares, P100 par, 4,000 shares authorized,

1,000 shares issued P100,000
Subscribed Ordinary Shares P40,000
Less: Subscription Receivable 40,000 -
ACCOUNTING FOR TREASURY STOCKS

Treasury Stock 3,000,000

Cash 3,000,000
To record acquisition of 1,500 treasury shares with P1,000 par value for
P2,000 each.
 ACCOUNTING FOR TREASURY STOCKS
Cash 3,000,000
Treasury Stock 3,000,000
To record reissue of treasury shares at cost.

Cash 3,750,000
Treasury Stock 3,000,000
Share Premium – Treasury 750,000
To record reissue of 1,500 treasury shares at P2,500 per share. (ABOVE COST)

Cash 2,250,000
Retained Earnings 750,000
Treasury Stock 3,000,000
To record reissue of 1,500 treasury shares at P1,500 per share. (BELOW COST)
ACCOUNTING FOR TREASURY STOCKS

Ordinary Shares 1,500,000

Retained Earnings 1,500,000
Treasury Stock 3,000,000
To record retirement of 1,500 treasury stock with P1,000 par value,
acquired at P2,000 each. (Assume that original issue price was at par.)
 SUMMARY OF THE EFFECTS ON ASSETS,
LIABILITIES, AND EQUITY
Transactions Assets Liabilities Shareholders’
Equity
Issuance of Shares Increase No effect Increase

Purchase of Treasury Decrease No effect Decrease

Stock

Re-issuance of Increase No effect Increase

Treasury Stock
 DONATED CAPITAL

Contributions, including shares of the corporation, received

from shareholders, should be recorded at the fair market
value of the items received, with the credit going to share
premium. If significant, such contributions may be
designated as donated capital. If the donations is in the
form of shares of the corporation, the amount share premium
or donated capital is credited at the time the shares are
reissued.
 DONATED CAPITAL

Illustration. Jocker’s Food Industries Inc. received a new

service van from its major shareholder as a gift. The
donated asset has a cash price of P350,000. The entry will
be as follows:
Service Vehicle 350,000
Donated Capital 350,000
 DONATED CAPITAL
Illustration. Jocker’s Food Industries Inc. received 500 of P100 par
value ordinary shares from its major shareholders as a gift. The entry
will be as follows:
“Received 500 ordinary shares as donation.”

Assume that the 500 shares were issued at P80 per share, the entry
will be:
Cash 40,000
Donated Capital 40,000
 CALLABLE PREFERENCE SHARES

Callable preference shares give the issuing corporation the right to

purchase (retire) the shares from its holders at a specified price. The
amount paid to call and retire a preference share is its call price. It is
important to state that the redemption date is not definite for it is
dependent on the corporation exercising its “call”
 CALLABLE PREFERENCE SHARES
Illustration. A corporation issued 10,000 callable P50 par value preference shares for P60 per
share. The entry will be:
Cash (10,000 shares at P60) 600,000
Preference Shares (10,000 shares at P50) 500,000
Share Premium – Preference 100,000

Later, the shares were called in at P75 per share. The entry will be:
Preference Shares 500,000
Share Premium – Preference 100,000
Retained Earnings 150,000
Cash 750,000
 REDEEMABLE PREFERENCE SHARES

A preference share that provides for mandatory

redemption by the issuer for a fixed or determinable
amount at a fixed or determinable future date or gives
the holder the right to require the issuer to redeem the
instrument at or after a particular date for a fixed or
determinable amount, is a financial liability.
 REDEEMABLE PREFERENCE SHARES

The entry to record issuance of redeemable preference shares is as follows:

Cash (1,000 shares at P1,000 each) 1,000,000
Redeemable Preference Shares Liability 1,000,000
 CONVERTIBLE PREFERENCE SHARES

Preference share is more attractive to investors if it

carries a right to exchange preference shares for a
fixed number of ordinary shares. When a
corporation prospers and its ordinary shares increases
its value, convertible preference shareholders can
share in this success by converting into the more
valuable ordinary shares.
 CONVERTIBLE PREFERENCE SHARES

Illustration.
Preference Shares, P200 par value, 10,000 shares P 2,000,000
Ordinary Shares, P60 par value, 200,000 shares
authorized, 100,000 shares outstanding 6,000,000
Share Premium – Preference 400,000
Share Premium – Ordinary 2,000,000
Retained Earnings 4,000,000
Total Shareholders’ Equity P14,400,000
 CONVERTIBLE PREFERENCE SHARES

If the preference shares are all converted into ordinary shares in a 1:3 ratio, the
entries:
Preference Shares (10,000 shares at P200 par) 2,000,000
Share Premium – Preference 400,000
Ordinary Shares (10,000 shares x 3 x P60 par) 1,800,000
Share Premium – Ordinary 600,000

Note: When convertibility is not provided in the articles of incorporation, the preference
shares cannot be converted into ordinary shares.
 RECAPITALIZATION

This is manifested when there is a change in the capital structure of

the corporation. The typical capitalization are as follows:
a. Change from Par to No-Par
b. Change from No-Par to Par
c. Reduction of Par Value
d. Reduction of Stated Value
 RECAPITALIZATION

Change from Par to No-Par

Illustration. Following is the shareholders’ equity of a corporation:
Ordinary Shares, P50 par value, 50,000 shares P2,500,000
Share Premium 250,000
Retained Earnings 1,250,000
Total Shareholders’ Equity P4,000,000
 RECAPITALIZATION

If all the par value shares are cancelled and replaced with the same
number of shares of P25 stated value shares, the recapitalization
entries will be:
Ordinary Shares (50,000 shares at P50 par) 2,500,000
Share Premium 250,000
Ordinary Shares (50,000 shares at P25) 1,250,000
Share Premium – Recapitalization 1,500,000
 RECAPITALIZATION

Change from No-Par to Par

Illustration. Following is the shareholders’ equity of a corporation:
Ordinary Shares, no-par value, 50,000 shares P2,500,000
Retained Earnings 1,250,000
Total Shareholders’ Equity P3,750,000
 RECAPITALIZATION

If all the no-par value shares are cancelled and replaced with the same
number of shares of P75 par value shares, the recapitalization entries
will be:
Ordinary Shares (50,000 shares no-par) 2,500,000
Retained Earnings 1,250,000
Ordinary Shares (50,000 shares at P75) 3,750,000
 RECAPITALIZATION

Reduction of Par Values

Illustration. Following is the shareholders’ equity of a corporation:
Ordinary Shares, P100 par value, 25,000 shares P2,500,000
Share Premium 250,000
Retained Earnings 1,000,000
Total Shareholders’ Equity P3,750,000
 RECAPITALIZATION

If the par value is reduced to P80, the recapitalization entries will be:
Ordinary Shares (25,000 shares x P20) 500,000
Share Premium – Recapitalization 500,000
 RECAPITALIZATION

Reduction of Stated Values

Illustration. Following is the shareholders’ equity of a corporation:
Ordinary Shares, P100 stated value, 25,000 shares P2,500,000
Retained Earnings 1,000,000
Total Shareholders’ Equity P3,500,000
 RECAPITALIZATION

If the stated value is reduced to P80, the recapitalization entries will

be:
Ordinary Shares (25,000 shares x P20) 500,000
Share Premium – Recapitalization 500,000
 SHARE-BASED PAYMENTS

For discussion in intermediate accounting for BSA

students.
Thank you!