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THEORY OF ACCOUNTS
SHARE CAPITAL AND RETAINED EARNINGS

Authorized Share Capital – the amount fixed in the articles of incorporation to be subscribed and paid-in or secured to
be paid in by the shareholders of the corporation

Subscribed Share Capital – portion of the authorized share capital that has been subscribed but not yet fully paid and
still unissued; reported in the SHE minus related subscription receivable that are not currently collectible.

Share Capital – pertains to the portion of the paid-in capital that represents the total par or stated value of the shares
issued; contains common and preferred stocks.

Share Premium (previously APIC) – portion of the paid in capital representing excess over the par or stated value;
common sources of share premium:
 Excess over par value or stated value
 Resale of treasury shares at more than acquisition cost
 Distribution of share dividend – market value of share is more than par or stated value
 Issuance of share warrants
 Donated capital
 Quasi-reorganization and recapitalization

Par value share – one with specific value fixed in the articles of incorporation and on the share certificate; purpose is to
fix the minimum issue price of the share; par value of a share can be as low as one centavo

No par value share – one without any value appearing on the face of the share certificate; but always has an “issued
value” or “stated value” that may be fixed by the board of directors in their articles of incorporation; minimum stated
value is P5

Ordinary Share Capital (formerly known as Common Stock)

 If there is only one type of share capital, it must be ordinary share capital
 Ordinary shares derive their name from the fact that all shareholders have the same rights and privileges.
Ordinary shareholders do not have a preference over one another.
 The key advantages of being an ordinary shareholder include:
o The ordinary share grants the owner the right to vote
o To share in profits
o To subscribe for increased share capital issuances through their pre-emptive right, which means that
before these shares are offered to outsiders, ordinary shareholders have first access to them
o In the event of a liquidation, to share in all assets after creditors’ and preference shareholders’ claims
have been satisfied.
 The key disadvantages of being an ordinary shareholder include:
o The ordinary shareholders have no fixed or specific return on investment
o Their financial reward is dependent on the operations of the entity.
 If the entity is exceptionally profitable, the holdings of ordinary shareholders will become more
valuable.
 Conversely, if an entity suffers losses, the value of the ordinary shareholders’ equity will be
reduced as fewer assets are available to satisfy residual claims.

Preference Share Capital (formerly known as Preferred Stock)

 The term “preferred share” refers to the rights provided to stockholders.
 In the event of a liquidation, the preferences usually refer to the preference shareholders’ claims on dividends
and net assets.
 The return on investment for preference shareholders is limited or fixed return on investment.

Legal Capital – pertains to the portion of the paid-in capital resulting from the issuing of share capital that cannot be
returned to the shareholders in any way throughout the corporation’s lifetime. The following formulas are used to
determine legal capital:
 The aggregate par value of the shares issued and subscribed is the legal capital in the case of par value shares.
 Legal capital is the total consideration received from shareholders, including the excess over the stated value, in
the case of no-par value shares.

Trust Fund Doctrine – states that a corporation’s share capital is treated as a trust fund for the protection of creditors.
As a result, returning such legal capital to shareholders during the corporation’s lifetime is prohibited. The corporation,
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on the other hand can pay dividends to shareholders, but only up to the amount of retained earnings. Accordingly, it is
illegal to pay dividends if the entity has a deficit.

Deposits on subscriptions to a proposed increase in share capital may be reported as part of shareholders’ equity as a
separate line item in the equity section.

2 Methods of Accounting for Share Capital:

1. Memorandum Method
 To record the authorized share capital, NO ENTRY is made.
 Only a memorandum is made for the total authorized share capital. When share capital is issued, it is
credited to the share capital account.
2. Journal Entry Method
 By debiting unissued share capital and crediting authorized share capital, the authorization to issue
share capital is recorded.
 The unissued share capital account is credited when share capital is issued.

Accounting for Issuance of Share Capital

 With par value  proceeds credited to share capital account up to par value and excess as share premium
 Without par value  proceeds credited to share capital account
 No par with stated value  proceeds credited to share capital up to stated value and excess as share premium
 When shares are issued at discount:
o Shares are considered to be issued at a discount when they are sold for less than par or stated value.
o The issuance of shares at a discount is prohibited under our Corporate Code. As a result, when a
shareholder sells a share at a discount, the discount is not considered a loss to the issuing company, but
the shareholder is held liable.
o As a result, the issue of the shares therefore is not canceled but the shareholder must pay for the
discount.
o A discount should be accounted for separately (Discount on Share Capital account) because it is an
investment deficiency.
o The discount on share capital account is treated as a deduction from the total shareholders’ equity.
o It is worth noting that the prohibition on issuing shares at a discount only applies to the initial issue of a
share, not to a subsequent transfer of that share by the entity.
o As a result, treasury shares can be sold or reissued for less than their par or stated value without
violating the law.

Measurement of share capital

a. issued for noncash consideration:
i. fair value of noncash consideration received
ii. fair value of the shares issued
iii. par value or stated value of the shares issued
b. issued for services already rendered (in accordance to the applicable law and PFRS 2, paragraph 10):
i. fair value of services rendered
ii. fair value of the shares issued
iii. par value or stated value of the shares issued
c. issued to extinguish financial liability:
i. fair value of equity instruments issued
ii. fair value of liability extinguished
iii. carrying amount of liability extinguished

Share issuance costs – direct costs to sell equity shares; typically include legal fees, CPA fees, underwriting fees,
commissions, cost of printing certificates and documentary stamps, SEC filing fees, and the cost of advertising and
promotion or newspaper publication.
 deducted from share premium arising from the share issuance (according to PAS 32, paragraph 37, transactions
costs directly related to the issue of additional shares shall be deducted from equity, net of any associated
income tax benefit)
 if share premium is insufficient, debited to “share issuance costs” account which is a contra-equity account as a
deduction from the following (in order of priority):
a. deduction from share premium from original issuance
b. retained earnings

Costs of public offering of shares – costs that relate to stock market listing; not incremental costs directly attributable to
the issuance of new shares; not termed “equity transaction costs” because no equity instrument has been issued;
recorded as EXPENSE in the income statement (according to the PIC); Examples:
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1. broker’s commission
2. road show presentation
3. public relations consultant’s fees
Joint costs or transaction costs that are related jointly to the concurrent listing and issuance of new shares and listing of
old existing shares shall be allocated between the newly issued and listed shares and the newly listed old existing shares
(PAS 32, paragraph 38). According to the PIC, the joint costs shall be allocated pro rata on the basis of outstanding newly
issued and listed shares and outstanding newly listed old existing shares.

Delinquent subscription
 The Corporation Code provides that the board of directors may declare unpaid subscriptions due and payable at
any time.
 The official declaration is referred to as a call, and it is typically made in the form of a board resolution specifying
the date of payment of unpaid subscriptions.
o If a shareholder fails to make a payment on the specified date, the shareholder is declared delinquent
and the delinquent share is sold at public auction.
o At the public auction, the highest bidder will receive as many delinquent shares as necessary to cover
the unpaid subscription, interest accrued on the subscription, advertising expenses and other costs of
sale.
 The highest bidder is the individual willing to pay the offer price for the delinquent shares in
exchange for the least number of shares. Typically, the offer price includes the following:
 Balance due on the subscription
 Interest accrued on the subscription due
 In the absence of bidders, the entity may purchase the delinquent shares for itself. The
delinquent subscriber is then released from liability for the deemed fully paid subscription.

Accounting for Callable Preference Shares

 A callable preference share is one that can be redeemed at a specified price at the entity’s discretion.
 In contrast to redeemable preference shares, callable preference shares have no fixed redemption date because
they are subject to the issuer’s “call”.
 A callable preference share is classified as an “equity instrument” rather than a financial liability, as the issuer’s
option to redeem the share for cash does not meet the “textbook” definition of a financial liability.
 When the preference shares are called in at a price greater than their original price, the excess is debited to
retained earnings.
 As a result, the excess of the call price over the par value of the preference shares is charged to the following:
1. Share premium from original issuance of the preference share
2. Retained earnings
 Meanwhile, when preference shares are called in at less than original issue price, the difference is simply
credited to share premium related to ordinary shares.

Accounting for Redeemable Preference Shares

 According to PAS 32, paragraph 18, redeemable preference share is defined as:
o A preference share that provides for mandatory redemption by the issuer for a fixed or determinable
amount at a future date.
o A preference share that gives the holder the right to require the issuer to redeem the instrument for a
fixed or determinable amount at a future date.
 Depending on the redemption date, a redeemable preference share shall be classified as current or noncurrent
financial liability.
 The difference between the redemption price and the financial liability is accounted for as gain or loss on
redemption under PAS 32, paragraph 66.

Accounting for Convertible Preference Shares

 A convertible preference share is one that allows the holder to exchange their shares for other securities issued
by the issuing company.
 Because operations are successful and earnings on the ordinary shares are unlimited, a preference shareholder
may convert their preference share to an ordinary share.
 A preference shareholder can convert the preference share into bonds, thus converting the equity from owner
to creditor.
 Preference shares are usually convertible into common stock.

Treasury shares – an entity’s own shares that have been issued and then reacquired but not canceled. The following are
3 major requisites to be qualified as treasury shares:
1. The shares must be owned by the entity. Purchasing shares in another company is not treasury, but rather an
investment.
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2. The shares must have been originally issued. This criterion differentiates between treasury shares and unissued
shares.
a. Treasury shares must be reissued at a discount without incurring any discount liability, whereas
unissued shares must be issued at least at par or stated value.
b. Treasury shares and unissued shares are identical in all other aspects. Both are considered equity rather
than assets.
3. The shares are reacquired but not cancelled.

 Legal limitations on treasury shares include:

o The Corporation Code states that “no corporation shall redeem, repurchase, or reacquire its own shares,
regardless of class, unless it has an adequate quantity of unrestricted retained earnings to cover the cost
of said shares.”
o As a result, the corporation may acquire treasury shares only up to the amount of retained earnings.
o Allowing the corporation to acquire treasury shares when it has no retained earnings or a deficit would
be comparable to the corporation indirectly returning capital to shareholders, which would violate the
trust fund doctrine.
o What is expressly prohibited cannot be accomplished through indirection. To protect legal capital,
retained earnings must be appropriated up to the cost of treasury shares and not declared as dividend
until the treasury shares are subsequently reissued.

Accounting for Treasury Shares:

 Recorded at cost, regardless of whether they are acquired at an amount below or above its par or stated value.
 If cash is used to acquire treasury shares, the cost is equivalent to the cash paid.
 PAS 32 does not provide any guidance on the acquisition of treasury shares for noncash consideration.
o However, PAS 32, paragraph 33 states that no gain or loss on the acquisition, sale, issue or cancellation
of an entity’s equity instrument shall be recognized.
o As a result, if the treasury shares are acquired for noncash consideration, the cost is commonly
measured using the carrying value of the noncash asset surrendered.
 Corporations can acquire treasury shares only to the extent of the retained earnings balance; deducted from
total SHE
 If reissued at MORE than cost, “gain” is credited to share premium from treasury shares
 If reissued at LESS than cost, “loss” is debited to the following accounts in the order of priority:
i. Share premium from treasury shares of the same class
ii. Retained earnings
 If not reissued but retired, gain on retirement is credited to share premium from treasury shares
 If not reissued but retired, loss on retirement is debited to the following:
i. Share premium from original issuance
ii. Share premium from treasury shares of the same class
iii. Retained earnings
 The following information shall be included in the disclosure concerning treasury shares:
o Number of treasury shares held.
o The restriction on the distribution of dividends equal to the cost of treasury shares from retained
earnings
 PAS 32, paragraph 33, states that when an entity repurchases its own equity instruments, the treasury shares
are deducted from equity.
 According to PAS 32 Application Guidance 36, an entity’s own equity instruments are NOT treated as financial
assets regardless of the reason for reacquisition.

Accounting for Donated Capital

 Donated shares are those that an entity received as a donation from its shareholders.
o Donated shares are actually treasury shares, they may be reissued at any price without incurring any
discount liability.
o Donated shares are secured at no cost, which has no effect on the entity’s assets, liabilities or
shareholders’ equity, but reduces the number of outstanding shares.
o Reissue or resale of donated shares, on the other hand, increases assets and donated capital or share
premium.
 Contributions from shareholders, including shares of an entity, shall be recorded at fair value with a credit to
donated capital.
 Entities occasionally receive gifts or grants of funds or other assets from non-shareholders that are designated
for property and equipment additions.
 When capital gifts or grants are received or receivable, they must be recorded at fair value. Capital gifts or
grants from non-shareholders are generally considered subsidies and are therefore credited to income.
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 If such items are not subsidies, the offsetting credit shall be a liability account until the restrictions are satisfied.
When the restrictions on capital gifts or grants are satisfied, the capital gifts or grants are transferred to income.

Assessment on shareholders – may be levied when shares are issued at a discount or when the company is in urgent
need of financial assistance. When shares are originally issued at a discount, the discount is actually a receivable from
the shareholder.

Recapitalization – occurs when there is a change in the capital structure of the entity; old shares are canceled and new
shares are issued; could be any of the following:
a. Change from par to no-par
b. Change from no-par to par
c. Reduction of par value – reduction in par value is credited to share premium
d. Reduction of stated value – reduction in stated value is credited to share premium
e. Share split
 Split up or share split – higher number of shares with reduction in par or stated value; This action is
driven mostly by a desire to raise the number of outstanding shares in order to lower the unit market
price. The company usually executes this kind of activity to accumulate funds.
i. To record a share split, no formal entry is required.
ii. A memorandum for the number of new shares issued in exchange for the old shares, as well as
an indication of the new par value or stated value is sufficient.
 Split down or reverse share split – smaller number of shares with increase in par or stated value; In this
instance, shareholders can keep their holdings in the company and selling these shares may not be a
priority for them owing to an increase in the par value or stated value, which may make it difficult for
investors to purchase.

Rights issue (stock right) – granted to existing shareholders to enable them to acquire new shares at a specified price
during a specified period
 This represents the legal right of shareholders called right of preemption  When a company’s share capital is
increased and new shares are issued, the new issue must first be offered in proportion to current shareholders’
shareholdings before subscriptions from the general public are accepted.
 This is represented by a share warrant  the certificate or instrument proving ownership over a rights issue
o The amount of shares the holder may purchase as well as the exercise price are specified on the share
warrants confirming the rights issuance.
 The exercise price is usually LOWER than the current market value of the shares.

Accounting for Rights Issue

 no entry is required – issued usually without consideration
 memorandum entry to indicate the number of rights issued to shareholders
 for expiration of rights, only a memorandum entry is necessary
 subsequent issuance of new shares upon exercising the stock rights would require a normal entry of issuing
share capital. Also, a memorandum is prepared to reflect the reduction in the number of shares claimable as a
result of the rights being exercised.

Accounting for Preference Shares issued with Share Warrants

 Warrants may be incorporated in the issuance of various forms of securities, such as bonds and preference
shares, as an additional to make the securities more appealing to prospective investors.
 When share warrants and preference shares are issued concurrently, two securities are sold: the preference
shares and the share warrants.
 As a result, the received consideration will be allocated between the preference share and the share warrants
based on their market value.

RETAINED EARNINGS – the cumulative balance of periodic net income or loss, dividend distributions, prior period errors,
effects of change in accounting policy, reclassifications of some components of OCI and other capital adjustments
 “deficit”  if with debit balance; not an asset but a reduction in shareholders’ equity; “accumulated losses” is
the IFRS term.
 Unappropriated – that portion which is free and can be declared as dividends to shareholders
 Appropriated – that portion which is restricted and not available for dividend declaration

Dividends – distribution of earnings or capital to shareholders in proportion to their shareholdings

 Dividends out of earnings – declared from retained earnings; common forms: cash, property or share
 Dividends out of capital – distributions of capital to shareholders; liquidating dividends
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3 Important Dates in Dividends Distribution:
1. Date of declaration – the liability to pay dividend shall be recognized when the dividend is appropriately
authorized and is no longer at the discretion of the entity
2. Date of record – the date on which the stock and transfer book of the company will be closed for registration.
Only stockholders who were registered as of this day are eligible to receive dividends. No entry is required on
this date but a list of the shareholders entitle to received dividends is prepared.
3. Date of settlement – the date on which dividend liability will be settled or paid

Cash dividend – the most prevalent sort of payout.

 Dividends can be expressed in the following ways:
o A fixed sum of pesos per share
o A percentage of the par or stated value

Property dividend – dividends in kind; distribution of earnings to the shareholders in the form of noncash assets;
 IFRIC 17:
 Paragraph 11: Initially measured at the fair value of the asset to be distributed; Paragraph 13: to be increased or
decreased as a result of the change in fair value of the asset at every year-end and on the date of settlement 
directly in retained earnings
 Paragraph 14: on settlement date: difference between the carrying amount of the dividend payable and the
carrying amount of the noncash asset distributed  recognized in profit or loss
 Paragraph 12: provides that an entity gives its owners a choice of either a noncash asset or a cash alternative,
the entity shall estimate the dividend payable by considering both the fair value of each alternative and the
associated probabilities of owners selecting each alternative. At the end of each reporting period and at the date
of settlement, the entity shall adjust the dividend payable based on the alternative chosen through equity or
retained earnings.
 PFRS 5, paragraph 15A:
 A noncurrent asset classified for distribution to owners  valued at the lower of carrying amount and fair value
less cost to distribute  if latter is lower than the former at the end of a reporting period, difference is
accounted for as impairment loss

Scrip dividend – are like notes in that they are official evidence of indebtedness to pay a sum of money at some future
time.

Bond dividend – do not pay dividends immediately. Instead, the company promises to pay dividends at a later date and
issues bonds to owners in lieu of cash. The purpose is to postpone dividend payment.
 The sole distinction between bond and scrip dividends is that the former has a longer maturity date.
 Bonds that pay dividends always have interest attached to them. This indicates that the company accepts a set
responsibility to make annual interest payments on the principal amount of the bond at the maturity date. It
should be noted that the company is taking on this obligation in exchange for nothing more than credit for
declaring the dividend.

Share dividend – bonus issue (IFRS term); distribution of the earnings of the entity in the form of the entity’s own
shares; share dividend payable is NOT a liability; but an addition to the share capital in the SHE
 Ordinary share dividends and special share dividends are two terms for share dividends.
 Special share dividends are dividends in terms of ordinary shares paid to preference shareholders or preference
shares granted to regular shareholders.
 As to how much should be capitalized from the retained earnings, the IFRS does not mention share dividends.
As a result, in accounting for share dividends, guidance is based on local GAAP.
 If share dividend is 20% or more (LARGE)  par or stated value is debited to RE (because it is expected to have
a material effect on the share market value)
 If share dividend is less than 20% (SMALL)  fair value of the share on the date of declaration is debited to RE
(because empirically, it does not result in a lower market price for the outstanding shares)
o If FV < par or stated value  par or stated value is capitalized
o If FV > par or stated value  excess is credited to share premium from share dividend

Fractional share dividends:

 The entity may issue warrants for fractional shares and provide holders enough time to accumulate enough
warrants for a full share.
 In lieu of a fractional share, the entity may pay cash.
o This is only possible if share dividends are paid from retained earnings.
o The cash payment of share dividends is illegal if the source of the income is share premium.
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Special cases in accounting for share dividends:
 Treasury shares may be reissued as dividends  cost of treasury shares debited to RE
 If shareholders elect to receive cash in lieu of share dividend  amount of optional cash dividend debited to RE
 For closely held entities  par value or stated value debited to RE
 If share dividends are declared on the basis of a proposed increase in authorized share capital, although
application with SEC has already been filed but not yet approved as of end of reporting period:
o Proposed increase shall not be reflected in the statement of financial position prior to SEC approval but
disclosed in NFS
o If proposed increase is approved by SEC after the end of reporting period and the share dividends are
subsequently effected before the issuance of the statements, the new authorized share capital may be
presented; share dividend may be shown as part of the issued share capital and disclosed in NFS

Dividends out of capital (Liquidating dividend) – refers to when capital is returned to shareholders. When an entity is
dissolved and liquidated, liquidating dividends are usually paid to shareholders.

Dividends as expense
 Distributions to holders of equity instruments shall be debited directly to equity by the entity, according to PAS
32, paragraph 35  dividends out of earnings are therefore charged to RE.
o However, distributions to holders of equity instruments designated as a financial liability are treated the
same as interest expense on a bond under paragraph 36.
 Dividends classified as an expense may be included in the income statement either with interest on other
obligations or as a separate line item, according to paragraph 40. (Example: dividends on redeemable
preference shares)

3 Kinds of Appropriation of Retained Earnings (purpose is to limit declaration of dividends):

1. Legal appropriation – required by law (e.g. RE appropriated for the cost of treasury shares). The legal capital
cannot be returned to the shareholders until the entity is dissolved and liquidated, resulting in this
appropriation.
2. Contractual appropriation – required by contract; usually with bondholders and preference shareholders for
redemption. The fact that the terms of the bond and preference share issues may impose dividend payment
restrictions leads to this appropriation.
3. Voluntary appropriation – discretion by management (e.g. for plant expansion, increase in working capital,
contingencies). This could be due to management’s desire to save money for expansion or to cover potential
damages in the event of a disaster.
Appropriated RE  still part of total RE and total SHE; may be canceled if no longer required or needed

Statement of Retained Earnings – relates the income statement to the statement of financial position by displaying
changes that directly affect an entity’s retained earnings. This statement is now part of the Statement of Changes in
Equity and is no longer a required component of the financial statements. Items that directly affect RE are the following:
 Net income/loss for the period – profit or loss (IAS term)
 Prior period errors – shown as an adjustment to the beginning balance of RE
 Dividends to shareholders – deducted from RE
 Effects of change in accounting policy – shown as an adjustment to the beginning balance of RE
 Appropriation of RE – deducted from the remaining unappropriated RE balance; if an appropriation is cancelled,
it is reversed or added back to the unappropriated balance.
 Subsequent reclassification of components of the OCI reclassified to RE

Reserves – no official definition of this term in any accounting standard or in the Conceptual Framework.
 The usage of equity reserves is determined by whether the reserve is part of distributable equity or non-
distributable equity under the IAS.
 The fraction of distributable equity that can be distributed to shareholders as dividends without impairing the
entity’s legal capital is known as distributable equity  refers to “unallocated retained earnings”.
 The part of non-distributable equity that cannot be distributed to shareholders in any way during the entity’s
lifetime is known as non-distributable equity reserves  items other than the aggregate par or stated value of
share capital and unappropriated RE. The following are included in the list of non-distributable items:
o Share premium reserve or APIC – the excess over par or stated value
o Appropriation reserve – basically for earmarking of RE for a certain purpose which may be legal,
contractual or voluntary. Technically known as retained earnings appropriated.
o Asset revaluation reserve – emanates from property, plant and equipment revaluation. It refers to the
excess of fair value or depreciated replacement cost of the revalued property over carrying amount.
Technically known as revaluation reserve.
o Other comprehensive income
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Statement of changes in equity – a formal statement that illustrates how the elements or components of the
shareholders’ equity have changed over a certain period of time. It usually shows the following:
 Total comprehensive income for the period
 The effects of changes in accounting policies and corrections of errors on each component of equity
 A reconciliation between the carrying amount at the beginning and end of the period for each component of
equity, separately disclosing changes from:
o Profit of loss
o OCI items
o Transactions involving owners in their capacity as owners, showing contributions and distributions to
owners individually.

Quasi-reorganization – procedure of restating asset, liabilities and capital in conformity with fair value for the purpose
of eliminating a deficit; may be accomplished through:
a. Recapitalization – deficit is eliminated against the share premium from recapitalization
b. Revaluation – deficit is eliminated against the revaluation surplus
Reasons for quasi-reorganization:
 Large deficits
 Approved by shareholders and creditors
 Cost basis of the accounting for PPE becomes unrealistic
o The SEC may allow a financially troubled company to go through a quasi-reorganization and as part of
that process, may be allowed to revalue its PPE if their current value is significantly higher than cost.
 A “fresh start” appears to be desirable or advantageous to all parties concerned
Retained earnings subsequent to quasi-reorganization shall be restricted to the extent of the deficit wiped out during
the reorganization and CANNOT be declared as dividend. Losses subsequent to quasi-reorganization CANNOT be
charged to the remaining revaluation surplus. The quasi-reorganization shall be disclosed for at least 3 years.

PFRS for SMEs

Equity  SAME with full PFRS with respect to:
a. Recording of equity instruments
b. Treasury shares
c. Compound financial instruments
d. Equity swap or extinguishment of financial liability by issuing equity instrument
e. Dividends
f. Other related equity matters

MULTIPLE CHOICE:

1. If shares are issued for a noncash consideration, the shares issued shall be measured by
a. Fair value of the shares issued
b. Par value of the shares issued
c. Fair value of the noncash consideration received
d. Carrying amount of the noncash consideration received

2. If shares are issued to extinguish a financial liability, what is the initial measurement of the shares issued?
a. Par value of the shares issued
b. Fair value of the shares issued
c. Fair value of liability extinguished
d. Book value of the shares issued

3. “Loss” from sale of treasury shares shall be charged to

a. Loss on sale of treasury shares to be reported as other expense
b. Retained earnings and then share premium from treasury shares
c. Share premium from treasury shares and then retained earnings
d. Share premium from original issuance, share premium from treasury shares and then retained earnings

4. Which statement is true concerning share capital transactions?

a. Deposits on subscription to a proposed increase in share capital should be reported as part of
shareholders’ equity.
b. Subscription receivable from sale of share capital not currently collectible should be reflected as
deduction from the related subscribed share capital.
c. Discount on share capital should be shown as deduction from total stockholders’ equity.
d. All of these statements are true concerning share capital transactions.
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5. Transaction costs directly attributable to the issuance of new shares include all of the following, except
a. Documentary stamp tax
b. Underwriting fee
c. SEC registration fee for new shares
d. Road show presentation

6. When an entity calls in all of the preference shares for more than the original issue price, the excess paid above
the original issue price should be
a. Accounted for as loss on exchange
b. Charged against share premium on ordinary shares
c. Charged to discount on preference shares
d. Charged against retained earnings

7. When preference shares are purchased and retired by the issuing entity for less than original issue price, proper
accounting for the retirement
a. Increases amount of dividends to ordinary shareholders
b. Increases the contributed capital of the ordinary shareholders
c. Increases reported income for the period
d. Increases the treasury shares

8. Contributed capital does not include

a. Share premium on ordinary and preference shares
b. Preference share capital
c. Capital resulting from reissuance of treasury shares at a price above acquisition price
d. Capital accumulated by retention of earnings

9. Only a memorandum entry is made when

a. Entities grant share warrants to executives and employees as a form of compensation
b. Entities include share warrants to make a security more attractive
c. Entities issue rights to existing shareholders
d. All of the choices are correct

10. The preemptive right of an ordinary shareholder is the right to

a. Share proportionately in corporate assets upon liquidation.
b. Share proportionately in any new issue of shares of the same class.
c. Receive cash dividends before distribution to preference shareholders.
d. Exclude preference shareholders from voting rights.

11. When shareholders may elect to receive cash in lieu of share dividend, the amount to be charged to retained
earnings is equal to
a. Optimal cash dividend
b. Fair value of the shares
c. Par value of the shares
d. Book value of the shares

12. Treasury shares may be reissued as dividends, in which cash what amount should be charged to retained
earnings?
a. Cost of the treasury shares
b. Par value of the treasury shares
c. Fair value of the treasury shares on the date of declaration
d. Fair value of the treasury shares on the date of issuance

13. Which statement is incorrect concerning retained earnings?

a. Appropriated retained earning shall be clearly distinguished from unappropriated retained earnings
b. A deficit is a debit balance in retained earnings
c. A deficit in retained earnings shall be presented as an asset
d. When the deficit exceeds the total of the other capital account balances, the excess is a capital
deficiency

14. An entity shall review and adjust the carrying amount of the dividend payable at the end of each reporting
period and at the date of settlement with any changes in the carrying amount of the dividend payable
recognized
 TOA-12
a. In equity as adjustment to the amount of distribution
b. In profit or loss
c. As adjustment of share premium
d. As component of other comprehensive income

15. If the issuing entity has only one class of share capital, a transfer from retained earnings to share capital equal to
the fair value of the shares issued is ordinarily a characteristic of
a. Either a share dividend or a share split
b. Neither a share dividend nor a share split
c. A share split but not a share dividend
d. A share dividend but not a share split

16. When a share dividend is declared and issued

a. Total shareholders’ equity does not change.
b. Total shareholders’ equity decreases.
c. The current ratio increases.
d. The amount of working capital decreases.

17. An appropriation of retained earnings for future plant expansion will result in
a. The establishment of a fund to help finance future plant expansion.
b. The setting aside of cash to be used for future plant expansion.
c. A decrease in cash with an equal increase in the investment in fund.
d. The disclosure that management does not intend to distribute in the form of dividends assets equal to
the amount of the appropriation.

18. A restriction of retained earnings is most likely to be required by

a. Purchase of property, plant and equipment
b. Purchase of treasury shares
c. Payment of last maturing series of a serial bond issue
d. Funding of past service cost

19. Which of the following is not a legal restriction related to profit distribution?
a. The amount distributed must be in compliance with the laws governing corporations.
b. The amount distributed can never exceed the net income reported for the year.
c. Profit distribution must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital contracts as to preferences.

20. Immediately after a quasi-reorganization, the retained earnings account

a. Has a zero balance
b. Remains the same as it was before
c. Is frozen and dated, and subsequent transactions will be shown separately
d. Has a debit balance equal to the writedown of the assets which were overstated
 TOA-12

THEORY OF ACCOUNTS
SHARE CAPITAL AND RETAINED EARNINGS

ANSWER KEY

1.C 11.A

2.B 12.A

3.C 13.C

4.D 14.A

5.D 15.D

6.D 16.A

7.B 17.D

8.D 18.B

9.C 19.B

10.B 20.A