MODULE 14 EQUITY

LEARNING OBJECTIVES:
1. Discuss the characteristics of the corporate form of organization.
2. Identify the key components of equity.
3. Explain the accounting procedures for issuing shares.
4. Describe the accounting for treasury shares.
5. Explain the accounting for and reporting of preference shares.
6. Describe the policies used in distributing dividends.
7. Identify the various forms of dividend distributions.
8. Explain the accounting for small and large share dividends, and for share splits.
9. Indicate how to present and analyze equity.

OVERVIEW
Shareholders’ Equity represents monetary contributions from a company’s stock (equity) owners
and from the course of its operations. Along with liabilities, Shareholders’ Equity forms another
major source of funding for companies. Companies can choose to fund themselves through the
sale of their shares of stock and through retained earnings, which they have accumulated over
the course of their existence.

Acquiring new knowledge

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A synchronous discussion for this lesson will be scheduled on October 6, 2023 (Tuesday 7:30
– 8:30 AM)

Shareholders’ equity
Shareholders’ equity is the residual interest in the assets of a corporation after deducting all its
liabilities.

The components of shareholders’ equity include the following:

1. Contributed capital (Capital stock)
 Preference share capital (Preferred stock)
 Ordinary share capital (Common stock)
 Subscribed share capital (subscribed capital stock)
 Subscription receivable (as deduction)
 Share dividends distributable
 Share premium (Additional paid-in capital)
2. Retained earnings (appropriated and unappropriated)
3. Treasury stocks
4. Other comprehensive income
 Revaluation surplus
 Cumulative unrealized fair value gain/losses on FVOCI securities
 Translation differences of foreign operations
 Effective portion of cash flow hedges
 Preferred Stock Stock that has special rights and takes priority over common stock

Common Stock Par Value Par value of units of ownership of a corporation

Represents capital received by a company when its shares are sold

Share Premium (APIC) above their par value

Common stock that had been issued and then reacquired

Treasury Stock (bought back) by a company

Total amount of earnings of a company since its inception

Retained Earnings minus dividends and losses (if any)

Corporate form of organization

Share System
In the absence of restrictive provisions, each share carries the following rights:
1. To share proportionately in profits and losses.
2. To share proportionately in management (the right to vote for directors).
3. To share proportionately in assets upon liquidation.
4. To share proportionately in any new issues of shares of the same class—called
the preemptive right.

Issuance of Shares
Accounting problems:
1. Par value shares.
2. No-par shares.
3. Shares issued in combination with other securities.
4. Shares issued in non-cash transactions.
5. Costs of issuing shares.

Par Value Shares

Low par values help companies avoid a contingent liability.
Corporations maintain accounts for:
 Preference Shares or Ordinary Shares.
 Share Premium

Illustration:
An entity issues 5,000 shares with par value of 100 per share for 120 per share. The issuance
is recorded as follows:
Cash 600,000
Share capital 500,000
Share premium 100,000
Issued price (5,000 x 120) 600,000
Par value (5,000 x 100) 500,000
Share premium (5,000 x 20) 100,000
Note: The excess of issued price over the par value is share premium.
No-Par Shares
Reasons for issuance:
 Avoids contingent liability.
 Avoids confusion over recording par value versus fair market value.

No-par value shares is one without peso value fixed in the articles of incorporation. However,
a no-par value share has a stated value which is also indicated in the articles of incorporation
but not on a share certificate issued. Par value and no-par value share are distinguished by the
presence or absence of a value per share on the share certificate issued. Under the
Corporation Code, no-par value shares should not be issued for a consideration less than 5
pesos per share. Upon issuance the excess of issued price over the stated value s credited to
share premium.
Pro forma entry upon issuance:
Cash xx
Share capital xx
Share Premium xx

Shares Issued with Other Securities

Two methods of allocating proceeds:
 Proportional method.
 Incremental method.

Illustration:
Ozz Corp. issues 1,000 5 par value ordinary shares and 1,000 20 par value preference shares
for a lump sum of 60,000. At the issue date, the ordinary shares were selling for 36 and the
preference shares were selling for 28.
The entry to record the issuance is as follows:
Cash 60,000
Preference Share 20,000
Ordinary Share 5,000
Share Premium – PS 6,250
Share Premium – OS 28,750

Issue Price 60,000

Allocated to Preference share 26,250
Allocated to Ordinary share 33,750
Allocation using relative fair value: Allocation
FV of PS (1,000 x 28) = 28,000 28/64 x 60,000 = 26,250
FV of OS (1,000 x 36) = 36,000 36/64 x 60,000 = 33,750
64,000 60,000
The excess of allocated proceeds over par value is share premium.

Shares Issued in Noncash Transactions

The general rule: Companies should record shares issued for services or property other than
cash at the
 fair value of the goods or services received.
 If the fair value of the goods or services cannot be measured reliably, use the fair
value of the shares issued.
Illustration:
On December 1, 2023, Tris Corporation exchanged 20,000 shares of its 10 par value ordinary
shares held in treasury for a used machine. The treasury shares were acquired by Tris at a cost
of 40 per share, and are accounted for under the cost method. On the date of the exchange,
the ordinary shares had a fair value of 55 per share (the shares were originally issued at 30
per share).
Entry:
Machinery 1,100.000
TS 800,000

Shares issued for services or property other than cash should be recognized at:
1. fair value of the goods or services received.
2. If the fair value of the goods or services cannot be measured reliably, use the fair value
of the shares issued.
Since the fair value of property received is not determinable, priority 2 shall be used.
FV of shares (20,000 x 55) = 1,100,00; the difference between FV and cost of TS is
share premium

Costs of Issuing Stock

Direct costs incurred to sell shares, such as
 underwriting costs,
 accounting and legal fees,
 printing costs, and
 taxes,
should reduce the proceeds received from the sale of the shares.

Share issuance cost

Issuing shares entails expenditures, such as regulatory fees, legal, accounting, and other
professional fees, commissions and underwriter’s fees, printing cost of certificates, and
documentary stamp tax and other transaction taxes.

These expenditures, called share issuance cost, are deducted from any resulting share
premium from the issuance. If share premium is insufficient, the excess is charge to retained
earnings.

Illustration:
On January 1, 20x1, XYZ Co. issued 1,000 shares with par value of 100 for 120 per share.
Share issuance cost amounted to 5,000.
The entries are as follows:
Cash (115 x 1,000) 115,000
Share Capital (1,000 x 100) 100,000
Share Premium ((120-5-100) x 1,000) 15,000

Reacquisition of Shares
Corporations purchase their outstanding shares to:
 Provide tax-efficient distributions of excess cash to shareholders.
 Increase earnings per share and return on equity.
 Provide shares for employee compensation contracts or to meet potential merger
needs.
 To reduce the number of shareholders.
 Make a market in the shares.
Purchase of Treasury Shares
 Cost method (more widely used). TS shall be recognized at cost
TS xx
Cash xx

Sale of Treasury Shares

 Above Cost (I.P. >Cost = SP)
 Below Cost (I.P.<Cost = Indicated loss charge to
SP-TS/RE

Retiring Treasury Shares

Decision results in
 cancellation of the treasury shares and
 a reduction in the number of shares of issued shares.
Par > Cost = SP
Par < Cost = SP orig.; /SP – TS; /RE

Illustration:
On January 1, 20x1, the statement of financial position of XYZ Co. shows the following
information:
Share capital (100 par) 800,000
Share premium 160,000
Retained earnings 540,000
Total shareholders’ equity 1,500,000

Case 1: Acquisition of treasury stock.

On July 1, 20x1, XYZ acquires 1,000 shares at 90.
Treasury shares (1,000 x 90) 90,000
Cash 90,000

Case 2: Reissuance at more than cost.

On Sept. 1, reissues the 1,000 treasury shares at 140.
Cash (1,000 x 140) 140,000
Treasury shares (1,000 x 90) 90,000
Share premium – TS 50,000

Case 3: Reissuance at below cost

Assume that on Sept. 1, 20x1, reissues the 1,000 shares at 60.
Cash (1,000 x 60) 60,000
Retained earnings 30,000
Treasury shares (1,000 x 90) 90,000

When treasury shares are subsequently reissued at below cost, the excess of cost over the
reissuance price is debited to the following order of priority:
a. Any balance in “share premium – treasury shares” arising from the same class of share
capital.
b. If the balance in “share premium – treasury shares” is insufficient, any excess is debited
to retained earnings.

Illustration: Retirement of shares

 On January 1, 20x1, the statement of financial position of XYZ Co. shows the following:
Share capital (100 par) 800,000
Share Premium 160,000
Share Premium – treasury shares 5,000
Retained earnings 535,000
Total shareholders’ equity 1,500,000

Case 1: Retirement cost less than original price

XYZ reacquires 1,000 shares at 80 per share on July 1, 20x1 and retires them on
September 1, 20x1.
July 1
Treasury shares (1,000 x 80) 80,000
Cash 80,000
Sept. 1
Share capital (1,000 x 100) 100,000
Share premium – original issuance 20,000
Treasury shares 80,000
Share premium – retirement 40,000

Case 2: Retirement cost greater than original issuance price

XYZ reacquires 1,000 shares at 140 on July 1, 20x1 and immediately retires them.
July 1
Share capital (1,000 x 100) 100,000
Share premium – original issuance (1,000 x 20) 20,000
Share premium – treasury shares 5,000
Retained earning (balancing figure) 15,000
Cash (1,000 x 140) 140,000

When shares are reacquired and immediately retired, the excess of cost over the original issued
price shall be charge to:
1. Share premium from treasury stock
2. Retained earnings

Preference Share
Features often associated with preference shares.
1. Preference as to dividends.
2. Preference as to assets in the event of liquidation.
3. Convertible into ordinary shares.
4. Callable at the option of the corporation.
5. Non-voting.

Features of Preference Shares

 Cumulative
 Participating
 Convertible
 Callable
 Redeemable

The accounting for preference shares at issuance is similar to that for ordinary shares.
Dividend Policy

Few companies pay dividends in amounts equal to their legally available retained
earnings. Why?
 Maintain agreements with creditors.
 Meet state incorporation requirements.
 To finance growth or expansion.
 To smooth out dividend payments.
 To build up a cushion against possible losses.

Types of Dividends
1. Cash dividends.
2. Property dividends.
3. Liquidating dividends.
4. Share dividends.

All dividends, except for share dividends, reduce the total equity in the corporation.

Cash Dividends
 Board of directors vote on the declaration of cash dividends.
 A declared cash dividend is a liability.
 Companies do not declare or pay cash dividends on treasury shares.

Three dates:
a. Date of declaration
b. Date of record
c. Date of payment

Illustration: Roadway Freight Corp. on June 10 declared a cash dividend of 50 cents a share
on 1.8 million shares payable July 16 to all shareholders of record June 24.

At date of declaration (June 10)

Retained Earnings 900,000
Dividends Payable 900,000

At date of record (June 24) No entry

At date of payment (July 16)

Dividends Payable 900,000
Cash 900,000

Property Dividends
 Dividends payable in assets other than cash.
 Restate at fair value the property it will distribute, recognizing any gain or loss.

Accounting for Property dividends

The liability recognized on the declaration of property dividends is accounted for as follows:
a. The property dividends payable is initially measured at the fair value of the non-cash
assets at date of declaration.
 b. At the end of each reporting period and on settlement date, property dividends payable
is adjusted for changes in fair value.
c. On settlement date, any difference between the carrying amounts of dividends payable
and asset distributed is recognized in profit or loss.

Accounting for non-cash assets declared as property dividends

The accounting for the non-cash asset declared as property dividend depends on whether the
non-cash asset was previously classified as noncurrent asset or current asset.

If the property dividend is a noncurrent asset it shall be, subject to the requirements of PFRS 5
Non-current Assets held for sale and discontinued Operation, reclassified as “Non-current asset
held for distribution to owners” and subsequently accounted for under PFRS 5.

Under PFRS 5, a “Non-current asset held for distribution to owner” is initially and subsequently
measured at the lower of its carrying amount and fair value less cost to distribute.

A loss is recognized if the fair value less cost to distribute is below to carrying amount. A
subsequent increase in fair value less cost to distribute is recognized as a gain but only to the
extent of the cummulative losses recognized in previous period. In no case shall the asset be
measured in excess of its original carrying amount. Gain in losses on measurement are
recognized in profit or loss. Moreover depreciation ceases during the period that the asset is
classified as “Non-current asset held for distribution to owner.

If the property dividend is a current asset, it shall be accounted for under its previous
accounting. No reclassification is needed.

Illustration 1: Non-current asset declared as property dividend

On July 1, 2023, ABC Co. declared as property dividends 10,000 shares held as investment in
associate with carrying amount of P1,000,000. Information on fair values is shown below:
Date Fair value
July 1, 2023 800,000
Dec. 31, 2023 1,100,000
Feb. 1, 2023 950,000
The pertinent entries on July 1, 2023 are as follow
July 1, 2023 Retain Earnings 800,000 800,000
Property dividends payable

July 1, 2023 NCA held for distribution to owners 800,000 1,000,000

Impairments loss 200,000
Investment in associate

Notes:
  “Retained earnings” and “Property dividends payable” are recognized at fair value on
declaration date.
 The investment in associate is reclassified to “non-current asset held for distribution to
owners” and measured at the lower of its carrying amount and fair value less cost to
distribute.
 The excess of the carrying amount over the fair value less distribution cost is recognized
as impairment loss (1,000,000 -800,000 = 200,000)

If the property dividend are not yet distributed to the owners as of December 31, 20x1. The
pertinent entries are as follows:
Dec.31, Retained earnings 300,000 300,000
20x1 Property dividends payable
To adjust dividends for the change in fair value.

NCA held for distribution to owners 200,000 200,000

Gain on impairment recovery
To recognized gain on impairment recovery

Notes:
 The fair value adjustment to the “property dividends payable” is recognized directly to
retained earnings.
 The gain on impairment recovery is recognized only to the extent of previous impairment

The property dividends payable is settled on February 1, 20x2.

The pertinent entries are as follows:
Feb. 1, Property dividends payable 150,000 1
20x2 Retained earnings
To adjust dividends payable for the change in fair value

Property dividends payable 950,000 1

Loss on distribution of property dividend 50,000
NCA held for distribution to owners
To record the distribution of property dividends.

Notes:
 The property dividends payable is again adjusted to fair value on settlement date.
  The difference between the carrying amount of property dividends payable and the asset
distributed is recognized in profit or loss.

Liquidating Dividends
Any dividend not based on earnings reduces amounts paid-in by shareholders.

Illustration: McChesney Mines Inc. issued a “dividend” to its ordinary shareholders of

1,200,000. The cash dividend announcement noted that shareholders should consider 900,000
as income and the remainder a return of capital. McChesney Mines records the dividend as
follows.

Date of declaration
Retained Earnings 900,000
Share Premium—Ordinary 300,000
Dividends Payable 1,200,000

Share Dividends
 Issuance by a company of its own shares to shareholders on a pro rata basis,
without receiving any consideration.
 When share dividend is less than 20 percent of the ordinary shares outstanding,
company transfers fair market value from retained earnings (small share
dividend).

Accounting for share dividends

Share dividend is accounted for as follows:
a. If share dividend declared are considered “small” meaning less than 20% of the
outstanding shares, the dividends are accounted for at fair value, the difference
between fair value and par value is credited to share premium.
b. If share dividends declared are considered “large” meaning 20% or more of the
outstanding shares, the dividends are accounted for at par value. Retained earnings is
debited at par value of the share dividends. Accordingly, no share premium arises.

Illustration: Vine Corporation has outstanding 1,000 shares of 100 par value ordinary
shares and retained earnings of 50,000. If Vine declares a 10 percent share dividend, it
issues 100 additional shares to current shareholders. If the fair value of the shares at the
time of the share dividend is 130 per share, the entry is:

Date of declaration
Retained Earnings 13,000
Ordinary Share Dividend Distributable 10,000
Share Premium—Ordinary 3,000

Share Split
 To reduce the market value of shares.
 No entry recorded for a share split.
 Decrease par value and increased number of shares.

Share Split and Share Dividend Differentiated

 Large Share Dividend – 20 percent or more of the number of shares previously
outstanding.
 ► Same effect on market price as a share split.
► Par value transferred from retained earnings to share capital.

Presentation of Equity

Presentation of Statement of Changes in Equity

MODULE # 14 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
EQUITY
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1.Effective December 31, 2023, the stockholders of Joshtin Company approved a two-for-one split of the
company’s ordinary share, and an increase in authorized ordinary share shares from 100,000 shares (par
value P20 per share) to 200,000 shares (par value P10). Joshtin’s stockholders’ equity accounts
immediately before issuance of the stock split shares were as follows:
Ordinary share, par value P20; 100,000 shares authorized; 50,000 shares
outstanding 1,000,000
Share premium 150,000
Retained earnings 1,350,000
What should be the balances in Joshtin’s share premium and retained earnings accounts immediately after
the stock split is effected?
Share premium Retained earnings
a. 0 500,000
 b. 150,000 350,000
c. 150,000 1,350,000
d. 1,150,000 350,000

2. Of the 125,000 shares of ordinary share issued by Tina Company, 25,000 shares were held as treasury
stock at December 31, 2022. During 2023, transactions involving Tina’s ordinary share were as follows:
January 1 through October 31 – 13,000 treasury shares were distributed to officers as part of a stock
compensation plan.
November 1 – A 3 – for – 1 stock split took effect.
December 1 – Tina purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares
were not retired.

At December 31, 2023, how many shares of Tina’s ordinary share were issued and outstanding?
Issued Outstanding
a 375,000 334,000
b 375,000 324,000
c 334,000 334,000
d 324,000 324,000

3. On July 1, 2023, Kristine Company issued rights to stockholders to subscribe to additional shares of its
ordinary share. One right was issued for each share owned. A stockholder could purchase one additional
share for 10 rights plus P30 cash. The rights expired on December 31, 2023. On July 1, 2023, the market
price of a share with the right attached was P40 while the market price of one right alone was P2. All stock
rights were exercised on December 31, 2023. Kristine’s stockholders’ equity on June 30, 2023 comprised
the following:
Ordinary share, P25 par value, 40,000 shares issued and outstanding
1,000,000
Share premium 600,000
Retained earnings 800,000

What is the contributed capital on December 31, 2023?

a. 2,400,000
b. 1,600,000
c. 1,100,000
d. 1,720,000

4. On July 1, year 1, Jerome Corp. issued rights to stockholders to subscribe to additional shares of its
common stock. One right was issued for each share owned. A stockholder could purchase one additional
share for 10 rights plus 15 cash. The rights expired on September 30, year 1. On July 1, year 1, the market
price of a share with the right attached was 40, while the market price of one right alone was 2. Jerome’s
stockholders’ equity on June 30, year 1, comprised the following:
Common stock, 25 par value, 4,000 shares issued and outstanding 100,000 Additional paid-in capital
60,000 Retained earnings 80,000 By what amount should Jerome’s retained earnings decrease as a result
of issuance of the stock rights on July 1, year 1?
a. 0
 b. 5,000
c. 8,000
d. 10,000

5. Jerome Company reported the following equity accounts:

Preference share capital, 23,000 shares, P52 par value 1,196,000

Additional Paid in Capital - Preference shares 322,000
Ordinary share capital, 145,000 shares, P66 par value 9,570,000
Additional Paid in Capital - Ordinary Shares 1,885,000
Subscribed ordinary share capital 3,200,000
Retained earnings 2,354,700

From what Jerome Company has reported, what is the legal capital?
a. 10,766,000
b. 16,173,000
c. 12,973,000
d. 13,966,000

6. At its date of incorporation, Joseph, Inc. issued 100,000 shares of its 10 par ordinary shares at 11 per
share. During the current year, Joseph acquired 20,000 ordinary shares at a price of 16 per share and
accounted for them by the cost method. Subsequently, these shares were reissued at a price of 12 per
share. There have been no other issuances or acquisitions of its own ordinary shares. What effect does the
reissuance of the shares have on the following accounts?
Retained Earnings Share Premium
a. Decrease Decrease
b. No effect Decrease
c. Decrease No effect
d. No effect No effect

7. Ozz Company issued 1,000,000 shares of P38 par value for P50 per share in year 2022. In 2023, the
entity reacquired 200,000 shares at P67 per share. Immediately, all of these reacquired shares were
retired.

What amount should be debited to share premium and retained earnings, respectively in connection of the
retirement of the shares?
a. 11,000,000 2,400,000
b. 5,800,000 2,400,000
 c. 3,400,000 2,400,000
d. 13,400,000 2,400,000

8. Ozz Corp. issues 1,000 5 par value ordinary shares and 1,000 20 par value preference shares for a lump
sum of 60,000. At the issue date, the ordinary shares were selling for 36 and the preference shares were
selling for 28. The Share Premium—Ordinary account will be credited for
a. 31,000
b. 36,000
c. 26,250
d. 28,750

9. Tris Corporation was organized on January 1, 2023, with an authorization of 1,200,000 ordinary shares with
a par value of 6 per share. During 2023, the corporation had the following capital transactions:
January 5 issued 675,000 shares @ 10 per share
July 28 purchased 90,000 shares @ 11 per share
December 31 sold the 90,000 shares held in treasury @ 18 per share
Tris used the cost method to record the purchase and reissuance of the treasury shares. What is the total
amount of share premium as of December 31, 2023?
a. -0-.
b. 2,070,000.
c. 2,700,000.
d. 3,330,000.

10. On December 1, 2023, Tris Corporation exchanged 20,000 shares of its 10 par value ordinary shares held
in treasury for a used machine. The treasury shares were acquired by Tris at a cost of 40 per share, and
are accounted for under the cost method. On the date of the exchange, the ordinary shares had a fair value
of 55 per share (the shares were originally issued at 30 per share). As a result of this exchange, Tris's total
equity will increase by
a. 200,000.
b. 800,000.
c. 1,100,000.
d. 900,000.

11. Angel Co. issues 10,000 shares of 10 par value convertible preference shares for 12 cash per share. Each
share is convertible into 4 ordinary shares. On this date the 1 par value ordinary shares are selling for 3 per
share. Approximately 2 years later, Angel’s shareholders convert their preference shares into ordinary
shares. On the date of conversion the preference shares are selling for 16 and the ordinary shares are
selling for 5 per share. The journal entry on the date of issuance will include which of the following?
a. Credit Share Capital—Preference 20,000.
b. Credit Share Premium—Ordinary 20,000.
c. Credit Share Capital—Preference 100,000.
 d. Debit Share Premium—Ordinary 20,000.

12. In 2023, Ozz, Inc., issued for 103 per share, 60,000 shares of 100 par value convertible preference shares.
One share of preference shares can be converted into three shares of Ozz's 25 par value ordinary shares
at the option of the preference shareholder. In August 2021, all of the preference shares were converted.
The fair value of the ordinary shares at the date of the conversion was 30 per share. What total amount
should be credited to share premium—ordinary as a result of the conversion of the preference shares into
ordinary shares?
a. 1,020,000.
b. 780,000.
c. 1,500,000.
d. 1,680,000.

13. On March 1, 2023, Tris Corporation issued 800,000 of 8% nonconvertible bonds at 104, which are due on
February 28, 2032. In addition, each 1,000 bond was issued with 25 detachable share warrants, each of
which entitled the bondholder to purchase for 50 one share of Tris ordinary shares, par value 25. The
bonds without the warrants would normally sell at 95. On March 1, 2023, the fair value of Tris’s ordinary
shares was 40 per share and the fair value of the warrants was 2. What amount should Tris record on
March 1, 2023 as share premium—share warrants?
a. 40,000
b. 41,600
c. 72,000
d. 83,200

14. During year 1, Kaila Co. issued 5,000 shares of 100 par convertible preferred stock for 110 per share. One
share of preferred stock can be converted into three shares of Kaila’s 25 par common stock at the option of
the preferred shareholder. On December 31, year 3, when the market value of the common stock was 40
per share, all of the preferred stock was converted. What amount should Kaila credit to Common Stock and
to Additional Paid-in Capital—Common Stock as a result of the conversion?

Common stock Additional paid-in capital

a. 375,000 175,000
b. 375,000 225,000
c. 500,000 50,000
d. 600,000 0

15. In 2022, Kyutsi-a Co. acquired 10,000 shares of its P1 par value common stock at P6 per share. During
2023, Kyutsi-a Co. issued 3,000 of these shares at P50 per share. Kyutsi-a Co. uses the cost method to
account for its treasury stock transactions. What is the balance of the treasury stock from the issuance of
the 3,000 shares?
a.P108,000
b.P42,000
c.P6,000
d.P102,000