SHARE CAPITAL (CAPITAL STOCK)

Share Capital

• Also known as capital stock• It is the amount fixed by the corporate charter

to be subscribed and [aid in or secured to be paid in by the shareholders of a corporation either in money or in property, labor or services upon the organization of a corporation or afterwards.

Classes of Share Capital

• There are two classes of share capital:

- Ordinary share capital (common stock)- Preference share capital (preferred stock)

Ordinary Share Capital

• Entitles the holder to an equal or pro-rata division of profits without any preference or advantage over any class of shares.

Preference Share Capital

• Entitles the holder to enjoy priority as to distribution of dividends and distribution of assets upon corporate liquidation.

• Dividends – are corporate profits distributed to its shareholders.

Other terms

• Par value share capital – has a nominal or face value stated on the face of the stock certificate and in the articles of incorporation.

• No par but with stated value share capital – has a nominal value stated in the articles of incorporation but not on the face of the stock certificate.

• No par, no stated value share capital – has no nominal value stated either in the articles of incorporation or on the face of the stock certificate.

Authorized Share Capital

• The maximum number of shares (both preference and ordinary shares) that a corporation may issue is termed as authorized shares.

• The authorized share capital is determined by multiplying the authorized shares by the par or stated value of the share capital.

• Authorized share capital may be recorded under the journal entry method or the memorandum entry method.

Illustrative Problem

• The Monster, Inc. was organized on January 1 , 2012 with authorized share capital as follows:10,000 shares of 10% preference share capital with a par value of P100 per share200,000 shares ordinary share capital with a par value of P10 per share

Illustrative Problem

• Memorandum Entry Method2012Jan. 1 Authorized to issue 10,000 shares of 10%

preference share capital with a par value of P100 per share 1 Authorized to issue 200,000 shares of ordinary share capital with a par value of P10 per share.

Illustrative Problem

• Journal Entry Method2012Jan. 1Unissued Pref. Share Capital 1M

Authorized Pref. Share Capital1M

Unissued Ordinary Share Cap. 2MAuthorized Ordinary Share Cap.

2M

Issuance of Share Capital

• A share capital may be issued in exchange for cash, non-cash assets, services, liability or other for of securities.

• It may be sold also on a subscription basis.• Outstanding share – a share capital issued to a

shareholder

Issuance for Cash

• The Monster, Inc. was organized on January 1, 2012 and is authorized to issue 100,000 shares of P10 par value ordinary shares. Subsequently, 25,000 shares were sold.

Issuance for Cash

• Case 1 – The issuance price is P10 (at par)Cash 250,000

Ordinary Share Capital 250,000• Case 2 – The issuance price is P15 (above par)

Cash 375,000Ordinary Share Capital 250,000Ordinary Share Premium 125,000

Issuance for Cash

• Case 3 – The issuance price is P8 (below par)Cash 200,000Discount on Ord. Sh. Cap. 50,000

Ordinary Share Capital250,000

Issuance in Exchange for Non-Cash Assets

• The Monster, Inc. issued 10,000 shares of its P10 par ordinary share capital in exchange for land.

Case 1 – The land has a market value of P175,000.

Land 175,000Ordinary Share Capital 100,000Ordinary Share Premium 75,000

Issuance in Exchange for Non-Cash Assets

• Case 2 – The land has no known market value. The fair market value of ordinary share capital on the date of exchange is P15.

Land 150,000Ordinary Share Capital 100,000Ordinary Share Premium 50,000

Issuance in Exchange for Non-Cash Assets

• When a share capital is issued in exchange for non cash assets, the asset received is recorded at its fair market value of the share capital issued, whichever is more clearly determinable.

Issuance in Exchange for Non-Cash Assets

• Case 3 – There is no known market value for both land and the ordinary share capital.

Land 100,000Ordinary Share Capital 100,000

-if no market is known for both the asset received or the share capital issued, the exchange should be recorded using the par value of the share capital.

Issuance in Exchange for Services Rendered

• The Monsters, Inc. issued 1,000 shares of P10 par ordinary share capital in payment for the services of the lawyer rendered during incorporation.

Issuance in Exchange for Services Rendered

• Case 1 – The services of the lawyer is valued at P25,000.

Pre-operating Expenses 25,000Ordinary Share Capital 10,000Ordinary Share Premium 15,000

Issuance in Exchange for Services Rendered

• Case 2 – There is no known fair market value for the services of the lawyer. The fair market value of the ordinary share capital issued is P15 per share.

Pre-operating Expenses 15,000Ordinary Share Capital 10,000Ordinary Share Premium 5,000

Issuance in Exchange for Services Rendered

• Case 3 – There is no known market value for both the services rendered and the ordinary share capital issued.

Pre-operating Expenses 10,000Ordinary Share Capital 10,000

Sale of Share Capital on a Subscription Basis

• Subscription is a contract between a subscriber (buyer of share capital) and a corporation (seller) whereby the former purchases shares of stock of the latter with the payment to be made at a later date.

• The corporation issues the corresponding stock certificate upon full payment of subscription.

Illustrative Problem

• On June 1, 2012, the Monsters, Inc. received subscription for P5,000 shares of its P10 par value ordinary share capital at P15. A down payment of 25% was received and the balance was paid in full on July 1, 2012.

Illustrative Problem

Jun 1 OSC Subscription Rec. 75,000OSC Subscribed 50,000Ord. Share Premium 25,000

Cash 18,750OSC Subscription Rec. 18,750

Illustrative Problem

Jul 1 Cash 56,250OSC Subscription Rec. 56,250

OSC Subscribed 50,000Ordinary Share Capital 50,000