ACC 221 SHE Edited

 It is an artificial being created by operation of
law, having the right of succession and the

powers, attributes and properties expressly
authorized by law or incident to its existence.
 artificial being
 created by operation by law
 It has the right of succession
 It has the powers, attributes and properties
expressly
 Created by operation 1. Name of the Corp.
of law. 2. Purpose
 Corporation Code of 3. Principal place
the Philippines. office.
 5 or more persons, 4. Term not exceeding
not exceeding 15, 50 years.
majority are residents 5. Names and
of the Phil. residences of
 Articles of incorporators.
Incorporation. 6. Names and adresses
of incorporating
directors.
7. Etc.
 any person, partnership, association or
corporation, singly or jointly with others but
not more than fifteen (15) in number, may
organize a corporation for any lawful purpose
or purposes. Each incorporator must
subscribed to at least one share of the
capital stock.
 Equity: Shareholder’s equity

 Commences from the moment SEC issues
Certificate of Incorporation.
 Must commence operation within 2 years from
date of incorporation
 If not, Corporate powers shall cease.
 Formal Organization – requires adoption of
By-Laws and election of officers, etc.
 Rules of action adopted by the corporation
for its internal government and for the
government of its officers, shareholders or
members.
 Filed with the SEC within 1 month from
incorporation date.
 Failure – revocation of its registration.
1. TIME, PLACE, Director – Must be a
MANNER OF registered owner of
CALLING AND RULES at least one share of
FOR MEETINGS OF stock.
SHAREHOLDERS AND - Majority of them
DIRECTORS. must be residents of
2. The number, the Philippines.
qualifications,
duties, powers and
length of office of
directors.
 3. Appointment, duties, powers,
compensation and length of office of
corporate officers other than directors.
 4. Manner of issuing share certificates.
 5. The method of amending by-laws.
 6. Any other rules governing the acts of
officers and directors.
 25% OF AUTHORIZED NUMBER OF SHARE HAS
BEEN SUBSCRIBED.
 At least 25% of subscribed capital has been
paid.
 Paid in capital must not be less than 5,000.
 25%-25% rule
 Authorized Share capital – 4,000,000
 40,000 shares Par 100 per share
 Subscribed share capital
4,000,000(25%)= 1,000,000
 Paid up Capital
1,000,000(25%)= 250,000
 Corporators
 Incorporators -
originally forming
the corporation
 Shareholders -
stock
 Members – non
stock
 Minutes Book -
 Stock/Transfer Book
 Books of Accounts
 Subscription Book
 Shareholder’s Ledger
 Subscriber’s Ledger
 Share Certificate Book
 Represent costs  Includes:
incurred in forming or 1. Legal fees
organizing a 2. Incorporation fees
corporation.
3. Share issuance costs
 Shall be recognized as
expense when
incurred.
 Share issuance cost –
debited to APIC or
Share premium, if
not sufficient, the
excess is expensed.
 PhilippineTerm  IASTerm
Capital Stock Share Capital
Subscribed Capital Subscribed Share capital
Stock
Common Stock Ordinary Share capital
Preferred Stock Preference share capital
APIC Share Premium
Retained Accumulated Profit/Loss
Earnings(deficit)
 Retained Earnings  Appropriation
Appropriated Reserve
 Revaluation Surplus  Revaluation
 Treasury Stock Reserve
 Treasury Shares
 Current asset if collectible currently
 If not, deduction to subscribed share capital.
 ADDITIONAL PAID IN CAPITAL/Share Premium

- The portion of the paid in capital
representing excess over the par or stated
value.
A. Excess over par value or stated value
B. Resale of treasury shares at more than
cost
C. Donated Capital
D. Issuance of detachable share warrants
E. Distribution of stock dividends
F. Quasi-reorganization and recapitalization
 TOA PROPOSED INCREASE IN SHARE CAPITAL MAY
BE REPORTED AS PART OF SHAREHOLDER’S
EQUITY AS A SEPARATE ITEM IN THE EQUITY
SECTION.
 any person, partnership, association or
corporation, singly or jointly with others but
not more than fifteen (15) in number, may
organize a corporation for any lawful purpose
or purposes. Each incorporator must
subscribed to at least one share of the
capital stock.
 Owner’s Equity for Sole Proprietorship
 Partners’ Equity for Partnership
 Shareholders’ Equity for Corporation
 Sole proprietor for Sole proprietorship
 Partners for Partnership
 Shareholders for Corporation
Cash 10,000
Capital 10,000
For the investment of single
proprietorship.
Cash 30,000
A, Capital 10,000
B, Capital 10,000
C,Capital 10,000
For the investment of Partners
Cash 50,000
Share Capital 50,000
Income Summary xx
Capital xx
Scenario for Net Income closed to the sole

proprietor’s capital.
Income Summary xx
A,Capital xx
B, Capital xx
C,Capital xx
Inc. Summary xx
Retained Earnings xx
Retained Earnings xx
Dividends Payable xx
 Corporation which have capital stock divided
into shares and authorized to distribute to
the shareholders of such shares, dividends or
allotments of the surplus of the profits on
the basis of the shares held.
 Philippine term IFRS term
 Capital stock Share Capital
 Subscribed capital stock Subscribed Share Capital
 Common Stock Ordinary Share Capital
 Preferred Stock Preference Share Capital
 Additional paid in capital Share Premium
 Retained Earnings (deficit) Accumulated profits (losses)
 Retained earnings appropriated Appropriation Reserve
 Revaluation surplus Revaluation Reserve
 Treasury Stock Treasury Share

A corporation, which no part of its income is
to be distributed as dividends to its
members, trustees or officers.
- Fur furtherance of the corporations
activities for which the corporation is
established.
 Theseare those who compose a corporation
at any time. This term includes
incorporators, shareholders or members.
 This refers to shareholders or members
mentioned in the articles of incorporation as
originally forming and composing the
corporation and who are signatories thereof.
 These are corporators in a stock corporation.
This is also known as stockholders.
 Theseare persons who have agreed to take
and pay for original, unissued shares of a
corporation formed or to be formed, but
have not yet fully paid for its subscription.
 This term refers to the rules of action
adopted by the corporation for its internal
government and for the government of its
officers, shareholders or members.
 Thisrefers to the residual interest of owners
in the net assets of a corporation.
 Itis the maximum amount of capital fixed in
the articles of incorporation to be subscribed
and paid in or secured to be paid in by the
shareholders of the corporation.
 Thisis the portion of the paid in capital
which represents the total par or stated
value of the shares issued.
 Ordinary share capital

 Preference share capital
 This is a share with specific value fixed in
the articles of incorporation and such value
appears in the share certificate.

 This is one without any value appearing on
the face of the share certificate. It may have
a stated value which may be fixed in the
articles of incorporation or by the BOD or the
shareholders.
 Minimum stated value of a no par value

shares is 5 pesos.
 This
class of share entitles the shareholder to
an equal pro-rata division of profits without
any preference.
 Thisclass of share entitles the shareholder to
certain advantages or benefits over the
holders of ordinary shares.
 Thisis a preference share which gives the
holder the right to exchange the holdings for
other securities of the issuing corporation.
 The amount at which the corporation cannot
return to its shareholders during the lifetime of
the business in protection of creditors.
 “Trust Fund Doctrine”
 Parvalue shares – legal capital is the total par

value of issued and subscribed shares.
 (10,000 + 3,000 ) * 100 = 1,300,000
 No par value shares = total consideration

Assume that an entity has the following data presented at
year-end:
Preference share capital, P100 par 1,150,000
Share Premium - Preference 400,000
Ordinary Share Capital, P10 par 2,500,000
Share Premium – ordinary 1,000,000
Subscribed ordinary share capital 475,000
Retained Earnings 1,800,000
Subscriptions Receivable-ordinary 200,000
Questions:
1. Determine the amount of legal capital
2. Compute the amount of shareholders’ equity to be
presented in the statement of financial position.
3. Determine the amount of contributed capital.
 In case the entity issued shares with par
value, it represents the total par of the
issued and subscribed shares, to wit:
Total 4,125,000
Share Premium – Preference 400,000
Retained Earnings 1,800,000
Subscriptions Receivable-ordinary (200,000)
Total Shareholders’ equity 7,125,000
Share Premium – Preference 400,000
Subscriptions Receivable-ordinary (200,000)
5,325,000
Memorandum Approach:
1. Love corporation was authorized to issue
share capital of P6,000,000 with a par value
of P100.
Answer: Memo only
2. Issued 5,000 shares for P150 per share.

Cash 750,000
Share Premium 250,000
 Received cash subscription of 2,000 shares at
par.
Cash 200,000
 Issued7,000 shares for P840,000.

Cash 840,000
1. Love corporation was authorized to issue
share capital of P6,000,000 with a par
value of P100.
Unissued Share Capital 6,000,000
Authorized share Capital 6,000,000
2. Issued 5,000 shares for P150 per share.

Cash 750,000
Unissued Share Capital 500,000
3. Received cash subscription of 2,000 shares
at par.
Cash 200,000
4. Issued 7,000 shares for P840,000.

Cash 840,000
 Received subscriptions to 500 shares for P120 per
share. Par value of shares was 100.
 Memo approach:
Subscriptions Receivable 60,000
Subscribed share Capital 50,000
Cash 60,000
Subscribed Share capital 50,000

 Received subscriptions to 500 shares for P120 per
share. Par value of shares was 100.
 Journal entry approach:
Subscribed share Capital 50,000
Cash 60,000
Subscribed Share capital 50,000

Order of preference:
(1) fair value of the noncash consideration
received,
(2) (2) fair value of the shares issued and (3)
par value of the shares issued. This means
that reference 2 is used only where the
entity cannot reliably estimate the fair
value of property received and
(3) reference 3 is used where reference 1 and
2 is not available.
 An entity issued 10,000 ordinary shares of
100 par value in exchange for land with a fair
value of 1,500,000. the fair value of the
shares issued is 180 per share or a total of
1,800,000.
 If
the fair value of the land is used:
Land 1,500,000
Ordinary share 1,000,000
Share premium 500,000
 If
the FV of shares is used:
Land 1,800,000
Ordinary share capital 1,000,000
If the par value of shares is used:
Land 1,000,000
Share Capital 1,000,000
 This is actually an investment deficiency
accounted as follows:
Assume the following example:
If 10,000 shares of 100 par value are sold for
800,000 cash, the journal entry is
Cash 800,000
Discount on share capital200,000
Issuance at a discount refers to original issue

hence does not include treasury shares
reissaunce.
 Is a share capital issued for inadequate or
isufficient consideration.
 It has an effect of overtstatement of asset
and the capital of the corporation.
 Illustration
A land with fair value of 800,000 is received
for 10,000 shares of 100 par value. To create
a water in the share capital, the issuance of
the shares is recorded as fully paid as
follows:
Land 1,000,000
Share capital 1,000,000
To correct:
Discount on share capital 200,000
Land 200,000
 The problem:
Ordinary share capital, 10,000 shares, 100 par
value
Share premium 20 per share
Retained earnings 300,000
Answer the following additional transactions:

a. Purchase of 2,000 treasury shares at 110.
b. Reissue the 500 treasury shares at 130.
c. Reissue the 600 treasury shares at 100.
d. Reissue the 550 treasury shares at 110.
e. Retired the remaining treasury shares.
 Treasury shares 220,000
Cash 220,000
2,000 (110) = 220,000
Cost method: Debit treasury shares at cost

and when sold or retired credit also at cost.
 Cash 65,000
Treasury shares 55,000
Share premium treasury -10,000
No gain recorded because this is a SHE

transaction.
 Cash 60,000
Share premium-TS 6,000
Debit the assumed loss to the share premium –

TS account, if there is none then charge it to
retained earnings.
 Cash 60,500
2,000 treasury shares purchased
- 500 reissued at 130
- 600 resissued at 100
- 550 reissued at 110
- 350 shares remaining
Ordinary shares 350(100) 35,000

Share premium – OS 3,500
Treasury shares 350(110)38,500
The SP-OS available is 350(20) = 7,000

Illustration:
PS capital, 10,000 at 100PV 1,000,000
OS capital, 100,000 issued, 30PV 3,000,000
Share premium – PS 200,000
Share premium – ordinary 1,000,000
Retained earnings 2,000,000
Preference share capital 1,000,000
Share premium – P/S 200,000
OS capital 900,000
Share premium – Ordinary 300,000
3(10,000)=30,000(30 PV)= 900,000
1,200,000 – 900,000 = 300,000

5(10,000)=50,000 (100) = 1,500,000
1,500,000 – 1,200,000 = 300,000 charge

against retained earnings
 An equity instrument callable at the option
of the issuer corporation.
 Illustration:
An entity issued 10,000 callable preference
shares with par value of 100 at 120 per
share.
Cash 10,000*120 1,200,000
P/S capital 1,000,000
Share premium- PS 200,000
Cash 1,500,000
If it was called in for 110:
PS Capital 1,000,000
Cash 1,100,000
Share premium – OS 100,000
 Classifiedas current or non current liability
 With mandatory redemption
 The option is at the option of the holder
Illustration:
An entity issued 10,000 PS at par value of 100.
The P/S have mandatory redemption by the
issuer for 1,200,000.
 Cash 1,000,0000
Redeemable PS 1,000,000
If there is a dividend declared:

Interest expense 100,000
Cash 100,000
Upon redemption:
Redeemable P/S 1,000,000
Loss on redemption 200,000
Cash 1,200,000
 Typical examples
1. Change form par to no par
2. Change from no par to par
3. Reduction of par value
4. Reduction of stated value
5. Split up
6. Split down
Ordinary share capital, 100 par,
50,000 shares 5,000,000
All the 50,000 shares are called in and 50,000 no

par shares with stated value of 50 are issued.
Share premium – recap. 3,000,000
50,000*50 = 2,500,000
5,500,000 – 2,500,000 = 3,000,000
 OS capital, no par 100 stated
value, 50,000 shares 5,000,000
 Retained earnings 2,500,000
Case 1: All the 50,000 shares are called in and
50,000 shares of 50 par value are issued.
OS capital 5,000,000
OS Capital 2,500,000
Share premium recap. 2,500,000
50,000 * 50 = 2,500,000
Case 2: All the 50,000 shares are called in and
50,000 shares of 150 par value are issued.
OS capital 5,000,000
OS Capital 7,500,000
50,000 * 150 = 7,500,000

 OS capital, 50,000 shares, 100 par 5,000,000
 Share premium 500,000
A recapitalization is effected whereby the

par value of 100 is reduced to 80 per share.
 OS capital 20*50,000 1,000,000

Share premium – recap. 1,000,000
 Split up – there is an increased number of
shares, in effect a reduced par value; but the
TOTAl SHE remains the same amount.
 Split Down - there is an decreased number of
shares, in effect an increased par value; but
the TOTAl SHE remains the same amount.
 Example
 OS capital 50,000 shares, 100 par 5,000,000
Share premium 2,000,000
 Split up: for every one ordinary shares it was
split to 4 new ordinary shares.
 50,000*4 = 200,000 new shares
 100/4 = 25
 OS capital, 200,000 shares, 25 par 5,000,000

 Share premium 2,000,000
SHE 8,000,000
============
 OS capital 50,000 shares, 100 par 5,000,000
SHE 8,000,000
Reverse split for every 5 shares held new one share

is issued.
50,000/5 = 10,000 new shares
100 * 5 = 500 new par
10,000 * 500 = 5,000,000 OS

Therefore no change in total SHE.
 Allocate the price on the basis of their fair
value.
 An entity issued 20,000 PS of 100 par for
3,250,000 with 20,000 warrants to acquire
10,000 50 par OS at 60 per share. On the
date of issuance, MV are:
 PS ex-warrant 120
 Warrant 10
MV Fraction Allocation
PS 2,400,000 24/26 3,000,000
Warrant 200,000 2/26 250,000
Total 2,600,000 3,250,000
20,000 * 120 = 2,400,000

20,000 * 10 = 200,000
Cash 3,250,000
PS capital 20,000*100 2,000,000
Share warrants outstanding 250,000
Cash 10,000 *60 600,000
SW outstanding 250,000
OS capital 10000* 50 500,000
PS, 20,000 par 100 are issued for 3,250,000
together with 20,000 warrants to acquire
20,000 OS 50 par at 60 per share.
The market value of OS on that date is 100.
MV of OS 100
Less: Exercise price 60
Intrinsic value of warrant 40
* 20,000
Total 800,000
Cash 3,250,000
PS capital 20,000*100 2,000,000
Share warrants out.. 800,000
3,250,000-800,000=2,450,000
- 2,000,000
= 450,000 share premium
 No entry is required when share warrants are
issued to existing shareholders.
 No entry also is required upon the expiration

of the shares rights.
 Cash XX
Share capital XX
If cash received is equal to par.
If more than par

Cash XX
Share capital XX
Share premium XX

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 It is an artificial being created by operation of

law, having the right of succession and the

 Equity: Shareholder’s equity

 ADDITIONAL PAID IN CAPITAL/Share Premium

Scenario for Net Income closed to the sole

 Ordinary share capital

 Minimum stated value of a no par value

 Parvalue shares – legal capital is the total par

 No par value shares = total consideration

2. Issued 5,000 shares for P150 per share.

 Issued7,000 shares for P840,000.

2. Issued 5,000 shares for P150 per share.

4. Issued 7,000 shares for P840,000.

Subscribed Share capital 50,000

Subscribed Share capital 50,000

If the par value of shares is used:

Issuance at a discount refers to original issue

Answer the following additional transactions:

2,000 (110) = 220,000

Cost method: Debit treasury shares at cost

No gain recorded because this is a SHE

Debit the assumed loss to the share premium –

Ordinary shares 350(100) 35,000

The SP-OS available is 350(20) = 7,000

3(10,000)=30,000(30 PV)= 900,000

1,200,000 – 900,000 = 300,000

5(10,000)=50,000 (100) = 1,500,000

1,500,000 – 1,200,000 = 300,000 charge

If it was called in for 110:

If there is a dividend declared:

All the 50,000 shares are called in and 50,000 no

50,000 * 150 = 7,500,000

A recapitalization is effected whereby the

 OS capital 20*50,000 1,000,000

 OS capital, 200,000 shares, 25 par 5,000,000

Reverse split for every 5 shares held new one share

10,000 * 500 = 5,000,000 OS

20,000 * 120 = 2,400,000

The market value of OS on that date is 100.

 No entry also is required upon the expiration

If more than par

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