Module 3: Shareholders’ equity
Mabuhay and welcome to Module 3: Shareholders’ equity
Class, the owner’s equity section of every Corporation is the Shareholders’ equity.
As future CPAs, you need to fairly present Shareholders’ equity in the financial statements.
But before we start, let us first read the ILOs.
Reminder: Always have a calculator, paper, and pen while studying every module. It is a good thing that you practice the illustrations in
your handwriting. As they say, practice makes perfect.
Intended Learning Outcomes (ILOs):
At the end of the topic, the students are expected to be able to:
1. Articulate the nature and concept of shareholders' equity;
2. Prepare a Shareholders' equity section;
3. Account for the subscription of shares and issuance share capital transactions;
4. Account for treasury shares transactions,
5. Account for Share split up and split down.
3.1 Corporation and Shareholders' equity
Shareholders' equity is the owner's equity of the corporation. It is also called Stockholders' equity.
Since shareholder's equity is the owner's claim on the corporation; it is the residual interest of owners in the net assets of a corporation.
Corporation is:
1. An artificial being - it has an entity separate and distinct from its owners;
2. Created by operation of law - all its rights and powers are created by operation of law;
3. Having the right of succession - it can continue to operate regardless if they are changes in the ownership structure;
4. Powers expressly authorized by law - Corporation can enter into a contract, can sue and be sued.
Corporation Code of the Philippines is a general law that governs a private corporation. The new corporation code of the Philippines
took effect on February 23, 2019.
3.2 Articles of Incorporation
The articles of Incorporation is proof of the corporation’s existence. It is filed and granted by the Security Exchange Commission
(SEC).
Important details of Articles of Incorporation:
1. Name of the corporation
2. Place and date of Incorporation - pertains to the corporation's citizenship. Domestic corporation - when the place of
incorporation is within Philippines Foreign corporation - when the place of incorporation is outside the Philippines
3. List of incorporators - these are the people who form the corporation.
Old Corporation code: Incorporators are minimum of 5 but not more than 15 only.
New Corporation code: Single person (whether natural or artificial) can form a corporation, provided, it can pay the P1,000,000
minimum capitalization lump sum only.
4. Purpose of the corporation - It is the legal reason why the corporation exists. Example: Educational institution's primary
purpose is to give quality education.
5. Officers - These are the immediate people needed before a corporation start the operation.
o Generally, Incorporators are the directors who comprise the board of directors (BOD).
o The BOD is the governing body of the corporation.
o From the BOD, they will elect the following:
o Chief Executive Officer (CEO) / President- the chief governing officer
o Corporate secretary - responsible to account for the minutes of meetings and the board's resolution.
o Treasurer - the officer who will hold the corporation's finances including the minimum paid-up capital deposited in a
trust fund.
o Compliance Officer - responsible for the corporation's compliance with government agencies.
7. Provision to the term of corporate existence - Under the Old corporation code, the corporation exists for only up to 50 years.
Under New corporation code, the corporation can exist perpetually.
8. Capitalization - it pertains to the corporations' sources of capital.
3.3 Shares and shareholders
Shares represent the interest or ownership in the corporation.
Share capital / Capital stock is the amount fixed in the Articles of incorporation to be subscribed and paid up.
The four rights of a shareholder (generally ordinary shareholders):
1. Share in the earnings of the corporation
2. Vote in the election of directors and the determination of certain corporate policies (ordinary shareholders only)
3. Subscribe for additional share issues or the Right of pre-emption
4. Share in the net assets of the corporation upon liquidation
Share capital may be:
1. Par value - as specific value fixed in the articles of incorporation and appearing on the share certificate.
2. No par value - no specific amount appearing on the face of the share certificate.
The minimum Par value is P5.00 if no amount is indicated in the articles of incorporation and no stated value.
Ordinary shareholders bear the ultimate risk of loss and receive the benefits of the success of the corporation.
Preference shareholders have preferences granted.
1. The preference usually pertains to the preference shareholders' claim on dividends and net assets in event of liquidation.
2. The preference shareholders have only limited or fixed return on investment.
3.4 Component of shareholders' equity
Authorized shares - The maximum number of shares that the corporation may issue as indicated in the Articles of
Incorporation.
Issued shares - The number of shares issued to shareholders and are fully paid by the shareholders or the corporation
itself.
Outstanding shares - The number of shares issued by the corporation and still in the hands of shareholders as of a specific
date.
Treasury shares - The shares reacquired by the corporation from its shareholders. The corporation holds the
shares.
Issued shares 100,000
Less: Treasury shares 10,000
Outstanding shares 90,000
Subscribed shares - Shares subscribed by the shareholders but are paid in installment (not yet fully paid).
Subscription receivable - Amount still unpaid by the shareholder upon subscription of shares.
Share premium - Excess of cost of shares over the par value.
Legal capital - It is the portion of paid-in capital that cannot be returned to the shareholders during the lifetime of the
corporation.
Trust fund doctrine - The Corporation cannot pay dividends over retained earnings
Retained earnings - Cumulative earnings of the corporation. Dividends declared is debited to Retained
earnings.
Contributed capital - It pertains to the consideration paid by the shareholders.
Revaluation surplus - It is an account that resulted in a quasi-reorganization and is part of shareholders' equity.
Terms used may interchange but would have the same meaning in Accounting parlance:
US GAAP IAS
Common stock Ordinary shares
Preferred stock Preference shares
Paid In Capital in excess of par Share premium
Paid In Capital in excess of treasury stocks Share premium - treasury shares
Treasury stocks Treasury shares
Retained earnings Retained earnings
Pro-forma Shareholders' equity:
Authorized share capital xxxxx
Unissued share capital (xxxxx)
Share capital xxxxx
Subscribed share capital xxxxx
Legal capital xxxxx
Share premium xxxxx
Subscription receivable (xxxxx)
Contributed capital xxxxx
Retained earnings xxxxx
Revaluation surplus xxxxx
Shareholders' equity xxxxx
3.5 Memorandum entry for subscription of shares
There are two methods in accounting for the authorized shares and incorporating transactions:
1. Memorandum entry - Use only a memorandum entry in recording the authorized share capital of the corporation.
2. Journal entry method - Debited Unissued share capital and Credited Authorized share capital to record authorized share
capital of the corporation.
SUBSCRIPTION OF SHARES
Let us illustrate, Minorka Corporation-related data:
No. of shares Par value Total Amount
Authorized ordinary shares 1,000,000 P1 P1,000,000
multiplied by minimum subscription 25%
Minimum subscribed shares P 250,000
multiplied by minimum payment 25%
Minimum paid-up capital P 62,500
We record the minimum paid-up capital transactions using the memorandum entry:
Memorandum entry: To record 1,000,000 authorized shares at P1 par value.
Debit Credit
To record subscribed shares:
Subscriptions receivable 250,000
Subscribed capital 250,000
To record the initial payment of subscribed shares:
Cash 62,500
Subscriptions receivable 62,500
To record full payment of subscribed shares:
Cash 187,500
Subscriptions receivable 187,500
To record issued shares for fully paid shareholders:
Subscribed capital 250,000
Share capital 250,000
3.6 Journal entry method for subscription of shares
We again, use the data of Minorka Corporation regarding capitalization for journal entry method:
To record authorized shares: Debit Credit
Unissued share capital 1,000,000
Authorized share capital 1,000,000
To record subscribed shares:
Subscriptions receivable 250,000
Subscribed capital 250,000
To record the initial payment of subscribed shares:
Cash 62,500
Subscriptions receivable 62,500
To record full payment of subscribed shares:
Cash 187,500
Subscriptions receivable 187,500
To record issued shares for fully paid shareholders:
Subscribed capital 250,000
Unissued share capital 250,000
Take note: Regardless, whether you use the Memorandum entry method or Journal entry method, the same result should be provided.
The only differences are the account used in the journal entry.
Can you identify the different accounts used in the 2 methods?
3.7 Issuance of shares in exchange of cash
Share capital is credited only when the shares are fully paid.
Subscribed capital is credited on the point of subscription and shares have not been fully paid yet.
Share premium - When the purchase price of the shares is higher than the par value amount of the shares, the excess of which is
credited share premium.
To illustrate: Kylie Company issued 10,000 shares at P1 par value in exchange for cash of P15,000.
Related journal entry:
Debit Credit
Cash 15,000
Share capital 10,000
Share premium 5,000
3.8 Issuance of shares in exchange of noncash assets
Shares issued for noncash consideration are measured in priority:
1st priority Fair value of noncash consideration received
2nd priority Fair value of the shares issued
3rd priority Par value of the shares issued
The Pro-forma journal entry to record issuance of shares in exchange of noncash consideration:
Debit Credit
Land / Equipment / (or related Noncash asset) xxxxx
Share capital xxxxx
Share premium xxxxx
Again, if there is an excess on the amount debited over the par value of shares issued, it is credited to share
premium.
Illustration: Artista issued additional shares of 5,000 in exchange for equipment.
Par value of the share P10
The fair value of the share P50
The fair value of the equipment P225,000
What is the related journal entry?
Debit Credit
Equipment 225,000
Share capital 50,000
Share premium 175,000
To record issued shares.
Assuming, no available data for the fair value of the equipment, what would be the related journal entry?
3.9 Issuance of shares in exchange of services rendered
According to PFRS No.2, shares issued in exchange of services shall be recorded at:
1. The fair value of services rendered or
2. The fair value of the shares issued
Note: It is not a priority but choose the one that is reliably determinable.
Organization costs - Outright expense of all costs related to the incorporating of a corporation and before the full
operation.
The Pro-forma journal entry to record issuance of shares in exchange for services:
Debit Credit
Expense xxxxx
Share capital xxxxx
Share premium xxxxx
Again, if there is an excess on the amount debited over the par value of shares issued, it is credited to the share
premium.
Artista issued additional shares of 1,000 for the service rendered by
the independent lawyer of the corporation concerning Organization cost.
Contract with the lawyer P200,000
The fair value of the shares P250
Par value P100
What is the related journal entry?
Debit Credit
Legal expense 250,000
Share capital 100,000
Share premium 150,000
To record issued shares.
Why do you think that the fair value of the shares became the basis and not the contract with the lawyer?
3.10 Share issuance costs
Share issuance costs are transaction costs that are directly attributable to the issuance of new shares. It shall be deducted from equity,
net of any related income tax benefit.
Hence, it is debited to Share premium or to Retained earnings (if no related share premium are available).
Example of share issuance costs generally are:
1. Legal fees,
2. CPA fees,
3. Underwriting fees,
4. Commission fee,
5. DST,
6. Filing fee (SEC),
7. Advertising cost,
8. Printing cost of the certificate,
9. Publication fee (in the newspaper).
Share listing fees are stock market listing costs that are treated as an outright expense. Examples of share listing fees are roadshow
presentation and public relations (PR) fees.
Joint costs are costs incurred partly as share issuance costs and stock market listings costs. (related to share issuance) . Example of
joint costs generally are:
1. Audit and other professional advice about share issuance.
2. Opinion of counsel
3. Tax opinion
4. Fairness opinion and valuation report
5. Prospectus design and printing
Note: Joints costs are allocated pro-rata based on outstanding issued & listed new shares and outstanding newly listed old existing
shares
Pro-forma journal entry:
Debit Credit
To record share issuance costs:
Share premium xxxxx
Cash xxxxx
To record share listing costs:
Share listing fee (Expense) xxxxx
Cash xxxxx
To record joint costs related to share issuance:
Share premium xxxxx
Share listing fee xxxxx
Cash xxxxx
3.10.1 Share issuance cost (Illustrative problem)
Let us apply the concepts by solving the illustrative problem:
Artista Company undertakes an initial public offering (IPO) for the listing and issuance of 75,000new shares and listing of 25,000 old
existing shares.
Consultant fee - PR P60,000
Documentary stamp tax 10,000
Listing fee 300,000
Newspaper publication fee 200,000
Fairness Opinion & valuation report 130,000
Other joint costs 375,000
SEC filing fee 15,000
Tax opinion 100,000
Underwriting fees 80,000
3.11 Delinquent shares
Delinquent Subscription is unpaid and defaulted subscription of shares.
In case, the subscriber of share defaulted on payment, a public auction will occur for the unpaid subscription.
Offer Price includes unpaid subscriptions, interest accrued, and other expenses incurred related to the delinquent
sale.
Highest Bidder - the person willing to pay the offer price at the smallest number of shares. The excess share given to the
highest bidder will be given to the original subscriber.
In case there is no bidder, the corporation will reacquire the share making the offer price as the cost of treasury
shares.
To record payment of delinquent shares:
Debit Credit
Cash or Treasury shares xxxxx
Subscription receivable xxxxx
Interest income xxxxx
Advances on delinquency sale xxxxx
To record issued shares:
Subscribed share capital xxxxx
Share capital xxxxx
3.12 Treasury shares
Treasury shares (T/S) are shares issued by the corporation to its shareholders but reacquired by the corporation either through
purchase or donation.
Keynotes:
1. Treasury shares are recorded at cost regardless if it is above or below its par value.
2. Treasury shares have a debit balance and are a deduction to total shareholders' equity.
3. Treasury shares must be Appropriated in Retained earnings to be legally allowed.
4. When treasury shares are reissued at above their original cost, the excess is credited to Share premium - Treasury shares.
5. When treasury shares are reissued at below their original cost, the difference is a charge to a)Share premium of the same
treasury share class and then b) Retained earnings.
6. When treasury shares are retired, the related share capital is debited at par value, together with the related share premium on
the issuance of shares and the related shares premium on treasury shares.
Illustrative problem (Reacquisition of shares):
ABS-CBN Company reacquired the shares of stockholder Angel Locsin for 200,000. The number of shares held by Angel is 10,000 with
a P10 par value.
Debit Credit
Treasury shares 200,000
Cash 200,000
Assuming, ABS-CBN reissued the 5,000 shares for P150,000.
Debit Credit
Cash 150,000
Treasury shares 100,000
Share premium- T/S 50,000
Assuming, ABS-CBN reissued the remaining 5,000 treasury shares for P40,000.
Debit Credit
Cash 40,000
Share premium-TS 50,000
Retained earnings 10,000
Treasury shares 100,000
Illustrative journal entries (Retirement of treasury shares):
Treasury shares for retirement are P12,000, Share capital 10,000 and the related share premium of the original share is P2,000.
Scenario 1: No gain or loss (All balances are only assumed) SC + SP = TS
Debit Credit
Share capital 10,000
Share premium (original issuance) 2,000
Treasury shares 12,000
Scenario 2: Gain exist. Any gain is recorded at Share premium - treasury shares.
Treasury shares for retirement are P11,000, Share capital 10,000 and the related share premium of the original share is P2,000.
SC + SP > TS
Debit Credit
Share capital 10,000
Share premium (original issuance) 2,000
Treasury shares 11,000
Share premium - treasury shares 1,000
Scenario 3: Loss exist SC + SP < TS
The Loss is debited in order of priority (if related Share premium is fully exhausted, then, Retained earnings is
debited):
1. Share premium from original issuance
2. Share premium from treasury shares
3. Retained earnings
Treasury shares for retirement are P15,000, Share capital 10,000 and the related share premium of the original share is P2,000 while
the share premium - treasury share is P1,000.
Debit Credit
Share capital 10,000
Share premium (original issuance) 2,000
Share premium - treasury shares 1,000
Retained earnings 2,000
Treasury shares 15,000
3.13 Share split
Share split- A corporation restructures its capital without capitalizing retained earnings or changing the amount of legal capital but
increasing or decreasing the number of shares outstanding.
1. Split up - Increasing no. of shares issued and decreasing par value per share.
2. Split down - Decreasing no. of shares issued and increasing par value per share.
Regardless, if Split up or Split down, the total investment cost will still be the same. A memo entry will suffice.
For example, Rapunzel Corporation owns 10,000 shares of Belle Company with a par value per share of 100. Assuming, it is 2 for 1,
determine the no. of shares, par value per share, and total investment cost, under split up and split down.
Original Split up Split Down
Number of shares 10,000 20,000 5,000
Par value per share 100 50 200
Total Investment Cost 1,000,000 1,000,000 1,000,000
