Share capital

Mrs. Paz Castro

Share Capital

Overview

Corporations separately report contributed capital and accumulated profits in accordance with some legal provisions.

The owners’ equity section of a corporation’s statement of financial position is called shareholders’ equity.

Shareholders’ equity has two major components: Share capital (contributed or paid-in capital) reflects the

amount of resources received by a corporation as a result of investment by shareholders, donations or other share capital transactions.

Retained earnings (accumulated profits or losses) is the amount of capital accumulated and retained through the profitable operations of the business.

Shareholders’ Equity

Share Capital

Preference Shares – P50 par, 1,000 shares authorized, issued and outstanding

P 50,000

Ordinary Shares – P5 par, 30,000 shares authorized, 20,000 shares issued and outstanding

P100,000

Share Premium - Ordinary 50,000 150,000

Total Share Capital P200,000

Retained Earnings 80,000

Total Shareholders’ Equity P280,000

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.

Legal capital: Capital contributed by shareholders comes from the sale of

shares of stock. 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.

The amount of legal capital is determined as follows: In case of par value shares, legal capital is the aggregate par

value of all issued and subscribed shares. In case of no-par shares, legal capital is the total consideration

received by the corporation for the issuance of its shares to the shareholders including the excess of issue price over the stated value (Section 6, par. 3, Corporation Code of the Philippines).

Share premium (or Additional Paid-in Capital): 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.

Two Basic Types of Shares

A share of stock represents the interest or right of a shareholder in a corporation and is evidenced by a certificate of stock.

Ordinary share: The basic ownership class of the corporation. Ordinary shares are the entity’s residual equity.

Preference share: These special benefits relate either to the receipt of dividends

when declared before the ordinary shareholders (preferred as to dividends) or to priority claims on assets in the event of corporate liquidation (preferred as to assets).

Terms Related to Share Capital

Authorized share capital: the number of authorized shares 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. Any increase of decrease in the authorized share capital requires prior approval of the SEC and formal amendment to the articles of incorporation.

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 Shares account or Preference Shares 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 only when the issued shares are retired, redeemed or canceled by the corporation.

Subscribed share capital: it is the portion of the authorized share capital that has been subscribed but not yet fully paid. This 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.

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 be reissued at a later date.

Accounting for Issuance of Share Capital

When shares with par value are sold, the proceeds should be credited to the share capital account to the extent of the par value of the shares, with any excess being reflected as share premium.

When shares without par value are sold, the proceeds should be credited to the share capital account. If the no-par stock has a stated value, the excess proceeds over stated value may alternatively be credited to share premium.

Section 65 of the Corporation Code prohibits the original issue of share capital (or capital stock) for a consideration less than the par or stated value (i.e. issued at a discount).

Corporations set the par value of their ordinary shares at nominal amounts such as P1 per share. The par value is no indication of its market value; it merely indicates the amount per share to be entered in the share capital account.

Considerations for Issuance of Shares

Share capital may be issued in exchange for any of the following considerations: Actual cash paid to the corporation. Tangible or intangible properties actually received by the

corporation. Labor already performed for or services actually rendered to

the corporation. Previously incurred indebtedness by the corporation.

In issuing its share capital, a corporation may avail of the services of an investment banker who is a specialist in marketing shares to investors.

The investment banker may underwrite a share issue which means that the banker agrees to buy the shares of the corporation and sell them to investors.

The underwriter bears this risk in return for gains from selling the shares at a price higher than that paid to the corporation.

An investment banker who is not willing to underwrite may handle a share issue on a best effort basis. The banker undertakes to sell as many shares as possible at a set price but the corporation bears the risk on unsold shares.

Share issue costs include costs associated with preparing, printing and filing the relevant documentation and marketing the share issue.

Accounting for share issue costs is covered in paragraph 37 of International Accounting Standards (IAS) No. 32, Financial Instruments: Presentation: An entity typically incurs various costs in issuing or acquiring its own equity

instruments. Those costs might include registration and other regulatory fees, amount paid to legal, accounting and other professional advisers, printing costs and stamp duties. The transaction costs of an equity transaction are accounted for as a deduction from equity (net of any related income tax benefit) to the extent they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. The costs of an equity transaction that is abandoned are recognized as an expense.

Share Issuance for Cash

Most share issues are for cash since the primary reason for issuing shares is to raise capital for a corporation’s operating activities.

With par value: Issuing share capital at par:

Ex.: Narsan Holdings is authorized to issue P1,000,000 ordinary shares divided into 10,000 shares, with a par value of P100 per share. The diversified company issued on cash basis 2,000 shares at par. The issuance entry will be:

Cash 200,000Ordinary Shares 200,000

The amount of P200,000 invested in the corporation is called paid-in capital or contributed capital. The credit to Ordinary Shares increases the share capital of the corporation.

Issuing share capital above par: Ex.: Suppose the 2,000 shares were sold at P150 per share, the

entry follows:

Cash 300,000

Ordinary Shares 200,000

Share Premium 100,000 This sale of shares increases the corporation’s contributed capital

by P300,000. When the shares with par value are sold, the proceeds should be credited to the Ordinary Shares account to the extent of the par value – in this case, P200,000; with any excess to be reflected in the Share Premium account. The excess of P100,000 is not a “gain”. The company can neither earn a profit nor incur a loss when it issues shares to or acquires shares from its shareholders.

Without par value: Issuing no-par share capital:

Ex.: Morning Star Travel is a domestic corporation engaged in the business of organizing tour packages for Asian and European visitors to the Philippines. The company which is located at J. Bocobo St., Manila, has two classes of shares – preference shares and no-par ordinary shares. 5,000 ordinary shares were issued for P85,000. The entry to record the issue of these no-par shares will be:

Cash 85,000Ordinary Shares 85,000

When shares without par value are sold, the proceeds should be credited to the Ordinary Shares account. Accounting for issuance of preference shares is basically the same as that of ordinary shares. Section 6 of the Corporation Code prohibits the issue of no-par value preference shares.

Issuing no-par share capital with stated value: Ex.: Suppose that Morning Star Travel’s no-par ordinary shares

have a stated value of P20. The company issued 5,000 shares at P25 per share. The entry will be:

Cash 125,000

Ordinary Shares 125,000 When shares without par value are sold, the proceeds should be

credited to the Ordinary Shares account. If the no-par stock has a stated value, the excess proceeds over stated value – in this case, P5 per share, may alternatively be credited to share premium.

Cash 125,000


Share Premium 25,000

Subscription of Shares

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 transaction.

A subscriber becomes a shareholder upon subscription but the stock certificates evidencing ownership over shares of stocks are not issued until the full collection of the subscription. Ex.: Warranty Auto Shop, Inc. is a quality car care center

located at St. Paul St., San Antonio Village, Makati City. Assume that 5,000 shares of P10 par value ordinary shares of the company were sold on subscription at P12 per share on Sept. 1, 2013 to Ashley Langga. Subscription installments of P24,000 and P36,000 will be due on Sept. 16 and 30, respectively.

Subscriptions Receivable 60,000Subscribed Ordinary Shares 50,000Share Premium 10,000

To record subscriptions above par.

Cash 24,000Subscriptions Receivable 24,000

To record initial installment.


To record final installment.

Subscribed Ordinary Shares 50,000Ordinary Shares 50,000

To record issuance of stock certificates.

Subscriptions 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 subscriptions to the ordinary shares and credited for the collections on the subscriptions.

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 account of the delinquent subscribers. 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. This person is referred to as the highest bidder.

Ex.: Assuming the same facts as above except that the subscriber failed to settle part of his subscriptions in the amount of P48,000. After complying with the legal procedures pertaining to delinquency sale, a public auction was held. The offer price is P56,000 including P3,000 accrued interest and P5,000 expenses of sale. Three bidders are willing to pay the offer price, namely:

Lenore Loqueloque 4,300 sharesLuz Un 4,500 sharesFelipe Niza Jr. 4,700 shares

Loqueloque is the highest bidder. The 5,000 shares are deemed fully paid. Ashley Langga, the original subscriber, gets 700 shares and Loqueloque received 4,300 shares.

Subscriptions Receivable 60,000Subscribed Ordinary Shares 50,000Share Premium 10,000

To record subscriptions above par.


To record partial initial installment.

Receivable for Highest Bidder 3,000Interest Revenue 3,000

To record accrued interest on delinquent shares.

Receivable from Highest Bidder 5,000Cash 5,000

To record auction expenses.

Cash 56,000Receivable from Highest Bidder 8,000Subscriptions Receivable 48,000

To record sale at public auction.

Subscribed Ordinary Shares 50,000Ordinary Shares 50,000

To record issuance of stock certificates.

If there is no bidder, 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. These shares shall be considered as treasury shares.

All the other entries will be the same except for the following:

Treasury Stock 56,000

Receivable from Highest Bidder 8,000

Subscriptions Receivable 48,000

To record purchase of own shares. A stockholder may be sued directly by creditors to the extent of

their unpaid subscriptions to the corporation (Keller vs. COB Marketing, 141 SCRA 86).

Share Issuances for Non-cash Considerations

International Financial Reporting Standards (IFRS) No. 2, Share-Based Payment, Equity-Settled Share-Based Payment Transactions, paragraph 10 to 13, provides the following: Share-based payments to non-employees are measured at fair

value of the goods or services rendered. If the fair value of the goods or services received cannot be reliably determined, then the fair value of the equity instruments is used. The measurement date is the date the entity obtains the goods or the counterparty renders services.

Share-based payments to employees including stock options, the transaction should be measured at the fair value of the equity instruments granted because the fair value of the service provided by the employees generally is not reliably measurable. The fair value of the stock options must be determined at the date the options are granted.

An equity settled share-based payment transaction is one in which the entity receives goods or services as consideration for equity instruments of the entity including shares and share options.

The term “fair value” is the amount for which an asset can be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable and willing parties in arm’s length transactions. The fair value of the shares is determined using the following three-tier measurement hierarchy: observable market prices if available, market data with reference to a recent transaction in the entity’s shares, or a recent independent fair valuation of the entity or its principal assets.

Issuing shares for assets: Ex.: APL Construction and Development Corporation is a medium-sized

closely held company based in Quezon City. A group of Taiwanese investors would like to acquire shares of the company because if its tremendous earnings potential. After much thought on the part of its president, Az Penaflorida, the investors were allowed to make investments. One on the considerations given was a tract of land in Iloilo City with a fair value of P1,000,000. The entry to record the issue of 900 shares of P1,000 par ordinary shares in exchange for the land is as follows:

Land 1,000,000



To record issuance of 900 shares of stock in exchange for land.

Issuing shares for services or outstanding liabilities: A corporation may issue shares in exchange for legal,

accounting or other services. When shares are issued for services in connection with the

incorporation, the account Organization Expense may be debited at an amount equal to the fair value of such services (per IFRS 2, par. 10). Shares shall not be issued for future services.

Per IAS No. 38, Intangible Assets, start-up costs which consists of establishment costs such as legal and secretarial costs incurred in establishing a legal entity are recognized as an expense when incurred. Organization cost should be expensed immediately. Before IAS No. 38, costs of this nature are considered intangible assets.

Ex.: Dynasty BookSource Asia, Inc. engaged the services of a promoter during its formation and organization. The corporation issued 800 shares of P100 par value ordinary shares for the services. The fair market value of such services is P100,000. The entry will be:

Organization Expense 100,000Ordinary Shares 80,000Share Premium 20,000

To record issuance of 800 shares of stock in exchange for services.

If ordinary share is issued for an outstanding liability, the amount of the liability set off should be the measure for recording.

Two Methods of Accounting for Share Capital

There are two methods of accounting for share capital authorization and issuance, namely: the journal entry method and the memorandum method.

Ex.: Lucky Draw Corporation was authorized to issue P400,000 ordinary shares divided into 4,000 shares with a par value of P100 per share. On Aug. 13, 2013, the company received subscriptions for 1,000 shares at par from various individuals. As at Sept. 20, 2013, 600 of the subscribed shares have been fully paid and the stock certificates issued correspondingly. Next day, the company issued 400 shares at par for cash. The entries are as follows:

JOURNAL ENTRY METHOD MEMORANDUM METHOD

Authorization:

Unissued Ordinary Shares

400,000 Memo entry: The company was authorized to issue P400,000 ordinary shares, divided into 4,000 shares, with P100 par.

Authorized Ordinary Shares

400,000

Shares subscription at par:

Subscriptions Receivable

100,000 Subscriptions Receivable

100,000

Subscribed Ordinary Shares

100,000 Subscribed Ordinary Shares

100,000

Subscriptions fully collected:

Cash 60,000 Cash 60,000

Subscriptions Receivable

60,000 Subscriptions Receivable

60,000

If a statement of financial position is prepared on Sept. 21, 2013, a portion of the shareholders’ equity section will appear as follows:

Issuance of stock certificates after full payment of subscriptions:

Subscribed Ordinary Shares

60,000 Subscribed Ordinary Shares

60,000


60,000 Ordinary Shares 60,000

Cash subscriptions at par:

Cash 40,000 Cash 40,000


40,000 Ordinary Shares 40,000

JOURNAL ENTRY METHOD

Shareholders’ Equity:

Authorized Ordinary Shares, P100 par, 4,000 shares

P400,ooo

Less: Unissued Ordinary Shares, 3,000 shares

300,000

Issued Ordinary Shares P100,000

Subscribed Ordinary Shares P 40,000

Less: Subscriptions Receivable 40,000 - P100,000

MEMORANDUM METHOD

Shareholders’ Equity

Ordinary Shares, P1oo par, 4,000 shares authorized, 1,000 share issued

P100,000

Subscribed Ordinary Shares P40,000

Less: Subscriptions Receivable 40,000 - P100,000

Treasury Stocks

Shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation either by purchase, redemption, donation or through other lawful means.

Such shares may again be disposed of for reasonable price fixed by the board of directors.

Section 41 of Corporation Code provides that a stock corporation has the power to purchase its own shares for a legitimate purpose provided it has unrestricted retained earnings.

Some of the reasons for the purchase of treasury stock are as follows: (1) to support employee stock compensation plans; (2) to improve the stock market price by decreasing the supply of shares; (3) to avoid takeover by an outside party.

Paragraph 33 of IAS No. 32, Financial Instruments: Presentation, states that, if an entity reacquires its own equity instruments, these instruments (‘treasury shares’) shall be deducted from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments. Such treasury shares may be reacquired and held by the entity or by other members of the consolidated group. Consideration paid or received shall be recognized directly in equity.

There are two methods of accounting for treasury stock transactions, namely: (1) par or stated value method and (2) cost method.

In the first method, treasury stock is debited for an amount equal to the par or stated value of the stock reacquired. The cost method is the preferred method is the preferred method of accounting for treasury stocks by the Accounting Standards Council as stated in SFAS No. 18, par. 6.

Purchase of treasury stock: When the cost method is used, treasury stock is recorded at

cost regardless of whether the share is acquired below or above par or stated value.

The purchase of treasury shares does not decrease the number of shares issued; only the outstanding shares decrease. The effect of the purchase is to decrease both total assets and total shareholders’ equity.

Ex.: Plantation EcoResort is a world class destination in Indang, Cavite. The operations have been successful. To consolidate control over the enterprise and this avoid a corporate takeover by outsiders, the board of directors decided to minimize outstanding shares by purchasing 1,500 shares with a par value of P1,000 for P2,000.

The entry will be:

Treasury Stock 3,000,000

Cash 3,000,000

To record acquisition of treasury shares.

Reissuance of treasury stock: At cost: assume that the treasury shares are subsequently

reissued at cost.

Cash 3,000,000


To record reissue of treasury shares at cost.

Above cost: assume that all treasury shares were reissued at P2,500 per share.

Cash 3,750,000


Share Premium – Treasury 750,000

To record reissue of treasury shares above cost.

Treasury stock is always debited for the cost of the shares purchased or credited for the cost of the shares reissued. There is no reference to par value.

Below cost: assume that the 1,500 treasury shares were reissued at P1,500 per share.

Cash 2,250,000



To record reissue of treasury shares below cost.

The excess of the cost over reissue price of P750,000 should be debited to share premium-treasury to the extent of its balance. In the absence of any balance in this account, the “loss” is debited to retained earnings.

Retirement of treasury stock: The shares purchased may be subsequently retired. The

Ordinary Shares account is reduced by its par value. The number of shares issued is reduced by the stock retired. The treasury stock account is credited at cost.

With gain on retirement: assume that Plantation EcoResort purchased the treasury shares for P750 per share. Observe that there is a “gain” on retirement if the cost of treasury shares is less than par value.

Ordinary Shares 1,500,000



To record retirement of treasury shares. With loss on retirement: assume that a total of 10,000 shares have been

issued at P1,500 per share prior to the purchase of treasury shares. Plantation EcoResort purchased 1,500 treasury shares for P2,000 per share; these were not reissued and were ultimately retired.

Ordinary Shares 1,500,000




To record retirement of treasury shares.

The “loss” on retirement of P1,500,000 should be debited to the following accounts in the order given: Share premium to the extent of the credit when the share is issued; Share premium from treasury stock transactions of the same class

of share; Retained earnings.

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 designed as donated capital (SFAS No. 18, par. 28).

If the donation is in the form of shares of the corporation, the account share premium or donated capital is credited at the time the shares are reissued.

Ex.1: Jocker’s Food Industries 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 350,000Donated Capital 350,000

To record receipt of the donated service van. The donated asset increases the total assets and total

shareholders’ equity by the fair market value of the assets received. Donated capital is shown as part of share premium.

Ex.2: assume that the Jocker’s Food Industries received 500 of P100 par value ordinary shares from its major shareholder as a gift. The receipt of the donated share is recorded by means of a memorandum entry as follows: “Received 500 ordinary shares as donation.”

This transaction does not affect the assets, liabilities or shareholders’ equity of the corporation. The number of shares received as donation will reduce the outstanding shares.

These donated shares are essentially treasury stocks which may reissued at any price. The sale of these donated shares will increase assets and shareholders’ equity. Assume that the 500 shares were issued at P80 per share. The entry will be:

Cash 40,000

Donated Capital 40,000

To record sale of donated shares.

Homework 6

What is meant by “share capital”?In delinquency sale, the delinquent shares are sold to

the highest bidder. Who is the highest bidder?Treasury stocks may be reissued at cost, above cost

or below cost. State the accounting treatment for the difference between the cost and reissue price of treasury stocks.

On the balance sheet, a company must disclose all of the following except the number of sharesa. Authorizedb. Issuedc. Unissuedd. Outstanding

If a company reissued at P200 per share 100 shares of treasury stock that it had previously acquired for P280 per share and there wasn’t any Share Premium-Treasury, it would debita. Loss on Sale of Treasury Stock for P8,000

b. Share Premium-Ordinary for P8,000

c. Retained Earnings for P8,000

d. Treasury Stock for P8,000

Evans Corporation is authorized to issue 400,000 shares of P85 par value ordinary shares. Journalize the following transactions:Feb. 10 Sold 75,000 shares of ordinary shares at P86 per

share; received cash.

27 Issued 21,500 shares of ordinary shares in exchange for land with a fair market value of P920,000 and a

building with a fair market value of P1,087,500.

Mar. 3 Sold 28,000 shares of ordinary shares at P86.50 per share; received cash.

Seatwork 6

What are the two components of shareholders’ equity? Discuss each briefly?

Distinguish share of stock and certificate of stockWhat are treasury stocks? Cite some reasons for

their purchase.Authorized share are the

a. Number of shares that have been distributed to shareholdersb. Total number of shares that can be issued by the company at

any timec. Number of shares that are owned by shareholders at the

balance sheet dated. Number of share the company has repurchased

Mizona Corp. issued 10,000 shares of its P1 par value ordinary shares for a building. The building has a fair value of P500,000. Mizona’s ordinary shares is currently selling for P45 per share. Mizona Corp. should record the building ata. P10,000

b. P440,000

c. P450,000

d. P500,000

Cooper Corporation’s articles authorized the issuance of 100,000 ordinary shares. Cooper sold the following ordinary shares during 2011.Feb. 12 Sold 1,000 shares for P100,000

July 10 Sold 5,000 shares for P630,000

Nov. 5 Sold 7,500 shares for P1,050,000 Required: prepare journal entries to record each issuance,

assuming that The ordinary shares has a P100 par value. The ordinary shares has a P10 stated value. The ordinary shares has no-par or stated value.

Business

Share capital