SHARE CAPITAL (CAPITAL STOCK). Share Capital. Also known as capital stock - PowerPoint PPT Presentation
SHARE CAPITAL (CAPITAL STOCK)
SHARE CAPITAL (CAPITAL STOCK)Share CapitalAlso known as capital stockIt 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 CapitalThere are two classes of share capital:
Ordinary share capital (common stock)Preference share capital (preferred stock)
Ordinary Share CapitalEntitles the holder to an equal or pro-rata division of profits without any preference or advantage over any class of shares.Preference Share CapitalEntitles 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 termsPar 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 CapitalThe 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 ProblemThe 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 shareIllustrative ProblemMemorandum 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 ProblemJournal Entry Method2012Jan. 1Unissued Pref. Share Capital1MAuthorized Pref. Share Capital1MUnissued Ordinary Share Cap.2MAuthorized Ordinary Share Cap.2M
Issuance of Share CapitalA 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 shareholderIssuance for CashThe 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 CashCase 1 The issuance price is P10 (at par)Cash250,000Ordinary Share Capital250,000Case 2 The issuance price is P15 (above par)Cash375,000Ordinary Share Capital250,000Ordinary Share Premium125,000Issuance for CashCase 3 The issuance price is P8 (below par)Cash200,000Discount on Ord. Sh. Cap. 50,000Ordinary Share Capital250,000Issuance in Exchange for Non-Cash AssetsThe 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.Land175,000Ordinary Share Capital100,000Ordinary Share Premium 75,000Issuance in Exchange for Non-Cash AssetsCase 2 The land has no known market value. The fair market value of ordinary share capital on the date of exchange is P15.Land150,000Ordinary Share Capital100,000Ordinary Share Premium 50,000
Issuance in Exchange for Non-Cash AssetsWhen 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 AssetsCase 3 There is no known market value for both land and the ordinary share capital.Land100,000Ordinary Share Capital100,000
-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 RenderedThe 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 RenderedCase 1 The services of the lawyer is valued at P25,000.
Pre-operating Expenses25,000Ordinary Share Capital10,000Ordinary Share Premium15,000Issuance in Exchange for Services RenderedCase 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 Expenses15,000Ordinary Share Capital10,000Ordinary Share Premium 5,000Issuance in Exchange for Services RenderedCase 3 There is no known market value for both the services rendered and the ordinary share capital issued.
Pre-operating Expenses10,000Ordinary Share Capital10,000Sale of Share Capital on a Subscription BasisSubscription 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 ProblemOn 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 ProblemJun 1 OSC Subscription Rec.75,000OSC Subscribed50,000Ord. Share Premium25,000Cash18,750OSC Subscription Rec.18,750Illustrative ProblemJul 1Cash56,250OSC Subscription Rec.56,250
OSC Subscribed50,000Ordinary Share Capital50,000