Corporation

Shareholders Equity or Stockholders (SHE) is the equity of a corporation

PH- Stockholders, Capital Stock-> Additional Paid in Capital
International- Shareholders, Share Capital -> Share Premium
Components of SHE: Generally ang kanilang normal balances ay credit except contra
accounts
1. Contributed Capital (+)
- Refers of investment
2. Other Comprehensive Income (+)
- Exp. Revaluation Surplus
- if loss (-)
3. Retained Earnings (+) (Deficits (-) /Accumulated Profits (+) [Losses] (-))
4. Treasury Shares (Debit)
-reacquired shares/buyback
- contra equity account, deduction (always)
Share System
In the absence of restrictive provisions, each shares carries the following rights:
1. To share proportionately in profits and losses.
2. To share proportionately in management (the right to vote for directors)
- The higher the number of shares, the higher power na meron ka.
3. In assets upon liquidation
4. In any new issues of shares of the same class – called preemptive right
- Ikaw muna ang pag bebentahan ng shares before I issue sa mga bagong stockholders.
Par Value
- Designated peso amount per share that is established in the articles of incorporation and is
printed on each share certificate.
No Par Share
- This share does not carry a par value. The entire consideration received shall be treated as
legal capital and shall not be available as dividends. Under the Revised Corporation Code (R.A
No. 11232) no-par value share must be issued for a consideration of at least five pesos per
share.
- Dapat meron paring Stated Value
- Pag part ng Legal Capital, bawal ideclare yun as dividends
Trust Fund Doctrine
- Hold that the share capital of a corporation is considered as trust fund for the protection of
creditors.
- Purpose is to protect the creditors
It is illegal to return legal capital shareholders during the lifetime of the corporation.
Legal Capital
Par Value Shares
- Par Value of issue and subscribed shares (+).
- Issued (Fully Paid) Subscribe (Not Yet Fully Paid)
- Hindi kasama sa computation ang Subscription Receivable (-) ng Legal Capital
- Any excess over par ay hindi part ng Legal Capital
- Kung ano na compute mong Par Value yun na yung Legal Capital mo
- Subscription Receivable (-) is a contra equity account
- Pag isesettle ang Subscription Receivable within 1 year makakasama sya sa current
asset

No-Par Value Shares

 Stated value of issued and subscribed plus share premium
- Total Consideration Received
-yung buong natanggap mo including share premium is part of the legal capital
- Yung buong contributed capital mo, yun na ang legal capital mo rin
Variety of Owners
Ordinary Shares – represents the residual corporate interest.
 Bears ultimate risk of loss.
 Receives the benefits of success
 Not guaranteed dividends nor assets upon dissolution.
Preference shares – are created by contract, when shareholders’ sacrifice certain rights in
return for other rights or privileges, such as dividend preferences and preferences in terms of
claims to net assets in the event of liquidation.
-Normal they do not have the right to participate in management therefore wala silang influence
control.
Contributed Capital (also known as paid-in-capital) is the cash and other asset that
shareholders have given a company in exchange for stock.
Paid in Capital
- Par and excess
-total consideration na natanggap mo as as issuing corporation
Components of Contributed Capital
1. Share Capital (par value or stated value of ordinary and preferred share)
2. Share premium
 Excess over par or stated value
 Resale of Treasury Shares at more than cost
 Donated Capital
 Issuance of share warrants
 Distribution of share dividends
 Quasi-reorganization and recapitalization
Issuance of Share
1. Shares issued for cash
2. Shares in exchanged for Non-cash consideration (patent)
Value of shares is equal to:
 FV of noncash consideration received.
 FV of shares issued
 Par Value or stated value
Accounting for Share Capital
 Memorandum method – no entry is made to record the authorized share capital.
 Journal entry method – the authorization share capital and crediting authorized share
capital.

Issued = Authorize – unissued

Journal entry at the date issuance:
Video Electronic Corporation is organized with 10,000 ordinary shares authorized P2 par
value. If VEC issues 500 shares for cash at P10 per share, it makes the following entry:
Cash 5,000
Share Capital 1,000
Share Premium 4,000

*Cash 500 shares x P10 per share = 5000

*Share Capital 500 shares x P2 par value = 1000
*Share Premium, pwedeng balancing figure
or 10 per share – 2 par value = 8 x 500 shares = 4000
*Legal Capital
- With Par Value
2 par value x 500 shares = 1000
- Without Par Value but indicated is stated value
500 shares x P10 per share = 5,000
Video Electronic Corporation is organized with 10,000 ordinary shares authorized no par
value. If VEC issues 500 shares for cash at P10 per share, it makes the following entry:
Cash 5,000  Legal Capital
Share Capital 5,000
Video Electronic Corporation is organized with 10,000 ordinary shares authorized no par
value shares P2 stated value. If VEC issues 500 shares for cash at P10 per share, it makes
the following entry:
Cash 5,000
Share Capital 1,000
Share Premium 4,000
Issuance of Shares
Cost of Issuing Stock
Direct costs incurred to sell shares, such as
- underwriting cost
- accounting and legal fees
- printing costs, and
- taxes,
should reduce the proceeds received from the sale of the shares.
Consequently, share premium arising from the share issuance will decrease due to the cost of
share issuance.
Issue price = P10
Issued shares = 1,000
par value = P5
cost of issuing stock = P500
Journal Entry:
Cash 10,000  1,000 x 10
Share Capital 5,000  1,000 x 5
Share Premium 5,000  10-5= 5 x 1,000
SP 500  cost issuing stock
Cash 500
Cash 9,500  10,000-500
Share Capital 5,000
Share Premium 4,500  5,000 – 500
If SP from issuance is insufficient:
1. SP from previous issuance
2. RE
Reacquisition of Shares
Corporations purchase their outstanding of excess cash to shareholders.

 Provide tax-efficient distributions of excess cash to shareholders.

 Increase earnings per share and return on equity
Basic EPS = Net Income/ Weighted Average Common Stock Outstanding
Outstanding = Issued – Treasury
if you buyback some of your shares or reacquired
Treasury will Increase
Outstanding will decrease
WACSO will decrease
EPS will increase
They easier way to increase is to buyback your shares and store it to treasury
 Provide shares for employee compensation contracts or to meet potential merger needs
 Prevent takeover attempts or to reduce the number of shareholders
 Make a market in shares
Treasury Shares
- are an entity’s own shares that were previously issued but are subsequently reacquired but
not cancelled.
- An entity may acquire its previously issued shares only if it is has sufficient unrestricted
retained earnings.
- Treasury shares are presented as deduction in the shareholders equity.
Treasure are accounted using the cost method.
JE at the date of purchase:
Treasury Shares xx
Cash xx
Pacific Company issued 100k shares of $1 par value ordinary shares at a price of $10 per
share. In addition, it has retained earnings of $300k.
Cash 1,000,000
Sc 100,000
Sp 900,000
Pacific Company issued 100k shares of $1 par value ordinary shares at a price of $10 per
share. In addition, it has retained earnings of $300k.On Jan. 20, 2015, Pacific acquires 10k of
its shares at $11 per share. Pacific record the reacquisition as follows.

Treasury Shares 110,000  10,000 x 11

Cash 110,000
Illustration: The equity section for pacific after purchase of the treasury shares.
Equity
Share Capital 100,000
Share Premium 900,000
Retained Earnings 300,000
Less: Cost of treasury shares (10,000) (110,000) = 1,190,000
Sale of Treasury Shares
- Reissuance other term.

 Above Cost
 Below Cost
 At Cost,
Both increase total assets and equity.
JE at the Date of reissuance above cost:
Cash xx
Treasure Shares xx
Share Premium – Treasury Share xx
JE at the Date of reissuance below cost:
Cash xx
Share Premium- TS xx
Retained Earnings xx
Treasury Shares xx
Order of priority:
Debit SP-TS
If insufficient ang SP-TS Debit to RE
Sale of Treasury above cost. Pacific acquired 10k treasury shares at P11 per share. It now sells
1,000 shares at P15 per share on March 10. Pacific records the entry as follows.
Cash 15,000  1,000 shares x P15 per share
TS 11,000  10,000 treasury shares x P11 per share
SP-Treasury 4,000  15-11 = 4x 1,000 shares
Total equity increases by how much?
15,000 increase – kung magkano natanggap yun ang increase sa equity.
Sale of Treasury below cost. Pacific sells an additional 1,000 treasury shares on March 21 at
P8 per share, it records the sale as follows
Cash 8,000  1,000 T shares x P8 per share
SP-Treasury 3,000  it can be offset by 4,000
Treasury Shares 11,000  1,000 T s x P11 per share
What if P6 per share?
Cash 6,000  1,000 T shares x P6 per share
SP-Treasury 4,000
RE 1,000
Treasury Shares 11,000  1,000 T s x P11 per share
* Pag una pa lang ng problem or reissuance price ay above na will be charge ng buo kay RE
Cash
RE
TS
Retirement of TS
- If TS are subsequently retired, the share capital account is debited at par value or stated value
and TS account is credited at cost. Retirement may either result in a ‘gain’ or ‘loss’
- There is a ‘gain’ if par value exceeds cost of treasury shares, otherwise there is a ‘loss’
-PV is 1 and Cost is 11 it will be a loss
- In case of gain, share premium- TS is credited.
- In case of a loss, the loss is debited in the ff. order of priority:

 Share Premium from original issuance

 SP from TS
  Retained Earnings
Example:
If 1,000 OS with par of P100 are held as Treasury at cost of 80,000, and subsequently
retired, how much is share premium-TS from this transaction, if there’s any? Prepare JE
PV>Cost
Solution
Par Value of Shares = 1,000 Ordinary Stock x par of P100 = 100,000
Cost of TS= 80,000
SP-TS= excess of par over cost = 100k-80k=20,000

Ordinary Share Capital 100,000

Treasury Shares 80,000
Share premium- TS 20,000
Example:
OSC, 50k shares,P100 par 5M
SP- Original issuance 500k
SP- Treasury Shares 100k
RE 1M
TS,5k shares a cost 750k
Assuming the Treasury shares are retired, what is the JE?
OSC 500k
SP-issuance 50k
SP- Treasury Shares 100k
RE 100k
TS 750k
5k share at cost divide by 50k shares = 10%
5m x 10% is equal to 500k
500k original issuance x 10% is equal to 50k

Retained Earnings
 Represents the cumulative profits (net of losses, distributions to owners, and
other adjustments) which are not yet distributed as dividends but rather retained
to be reinvested in the business or to settle debt.
 Change in estimate – cant affect directly the RE
 Change in Accounting Policy – account to RE
Total RE may consist of:
1.) Unrestricted – available for future distribution as dividends
2.) Appropriated (Restricted) – Not available for distribution unless the restriction is
subsequently reversed. May be legal, contractual or voluntary/discretionary appropriation.
Total RE will still include appropriated RE to the total stockholder’s equity.
Dividends
 Are distributions of earnings to the shareholders in proportion to their shareholdings
 Maximum amount of dividends is equal to the unappropriated RE.
Types of Dividends:
 Cash Dividend - Income
 Property Dividend - Income
 Share Dividend- Not Income, recapitalization
 Scrip/Bond Dividend -Income
 Liquidating Dividend – Not Income
 Return on Capital is Income, Return of Capital is Not Income
Only outstanding shares are entitled for Dividends (Issued Share less Treasury Shares)
Outstanding Shares – Ito yung mga shares hawak ng mga ating stockholders.
- pertains to shares issued and held by shareholders and those that are subscribed.
Outstanding shares exclude unissued shares and treasury shares.
TS – Shares that can be reacquired but not cancelled
Dates relevant to the accounting for dividends
Dates of Declaration
The date on which the directors authorize the payment of dividends to shareholders.
Dividends/ RE xx
Dividends Payable xx
Date of Record
The date on which the stock and transfer book of the corporation will be closed for registration.
Date of Payment
The Date on which dividend liability is to be paid
Dividend Payable xx
Cash xx
JE of Subscribe Shares:
Subs Receivable
Subs Share Capital
Share premium (if has excess)
*Collected from payment to stockholder
Cash
Subs /R
Preference Share Dividends
Non-Cumulative – Not entitled to any accumulative Dividends. Dividends not declared in the
current period considered lost permanently
Cumulative - Dividends not declared in a given year accumulates. Accumulated dividends must
be paid in full when dividends are declared in succeeding periods before any dividend can be
paid on the ordinary shares.
Participating - Provides for additional dividends to be paid to its holders after dividends of a
specifies amount or rate are paid to the ordinary shareholders.
Non- Participating – Limits the dividends for any year to the dividend rate.
IF THE PROBLEM IS SILENT, PREFERENCE IS NON - CUMULATIVE AND NON
PARTICIPATING.
Example cumulative:
8% Cumulative Preference Share, par P10, 10k shares is 10k, 2022 current year, last payment
of dividends is 2019. ON Dec. 31, 2022, Company declared 50k dividend.
Accumulated Dividends?
PS= 24k
OS= 26k
10,000 shares x par P10 = 100,000
100,000 X 8%= 8,000
8,000 x 3 years (2020, 2021, 2022) = 24,000
Example Non - cumulative:
PS= 8k
OS= 42k
Cash Dividends
Dividends is distributed to the preferences and ordinary shares in the ff. order.
 Dividends in arrears on non-cumulative preferences shares, if any
 Current Dividends on Preferences Shares
 Ordinary Shares.
The capital structure of BTS company as of Dec. 31, 2021 is as follows:
PSC, 10%, P100 par, 10,000 Share 1,000,000
OSC, P10, 300,000 shares 300,000
The company declared 90,000 dividends in 2021 and 600,000 in year 2022.
Required:
1. Compute the 2022 Dividends of PS and OS assuming PS is non-cumulative, Non-
Participating.
10% x 1,000,000 = 100,000
PS= 100,000
OS= 500,000
Cumulative, Non- Participating:
100,000 – 90,000 = 10,000 in arrears
PS = 10k + 100,000 = 110k
OS= 490k
1. Compute the 2022 Dividends of PS and OS assuming PS is non-cumulative
Participating.
PS=100k + 125k = 225k
OS= 375k
600,000- 100,000 = 500,000
500k x ¼ =125k
Cumulative, Participating:
100,000 – 90,000 = 10,000 in arrears
600k – 110k = 490k
490k x ¼ = 122,500
PS= 232,500
OS= 367,500
Share dividends are accounted as follows:
 Small Share Dividends – If the share dividends declared is less than 20% of the
outstanding shares, the share dividends are accounted for at fair value.
 Large Share Dividends – If the share dividends declared is 20% or more of the
outstanding shares, the share dividends are accounted for at par value.
To determine where it is below or more than:
Outstanding share= 100k
Share to be distributed= 25k
100/25 = .25 or 25%
Declaration of Share Dividends JE:
* LARGE SD
RE
Share Dividends Distributable
R/E = Decrease
SDD = Equity as an addition
* SMALL SDD
RE
SDD
Share Premium
Share Split/ Stock Split
- To reduce the market value of shares
- No entry recorded for a share split.
- Decrease par value and increased number of shares.
- Dadami yung number of shares but decrease in par value
- 2 for 1 = normal , 1 for 2 = reversed
- Increases the number of share outstanding and decreases the par or stated value per share.
A Share Dividend

 Increases the number of shares outstanding

 Does not decrease the par value
 Increases the total par value of outstanding shares.

2 for 1 split
100,000 shares at P1 par
100k x 2/1 = 200,000
1 x ½ = .50
3 for 2
100,000 shares at P1 par
100k x 3/2 = 150k
1 x 2/3 = .67