Shareholders’ Equity B.

Mendoza
SHE

- Contributed capital
o Shares itself (acquisition or issuance, reacquisition, reissuance, retirement, conversion)
o Subscribed capital
- Earned capital
- Recapitalization

Contributed capital or Shareholders’ Equity

Share Capital xxx OS or PS @par *classify if there are two types

Subscribed SC xxx @par *unpaid portion of the share capital
Less: Subscription
Receivable xxx *Net Subscribed Capital
Share Premium xxx Paid up capital in excess of par
Total Paid in Capital xxx *Contributed Capital
Retained Earnings xxx
OCI xxx **Earned Capital
Less: Treasury Shares xxx
TOTAL SHE xxx

METHODS OF ACCOUNTING FOR SHARE CAPITAL

Memorandum Method Journal Entry Method

Upon authorization, the company makes a memo entry. DR: Unissued SC
CR: Authorized SC

LEGAL CAPITAL – is the portion of paid in capital which cannot be returned to stockholders in any form (cash,
property, or stock dividends) during the lifetime of the corporation

w/ par w/out par

Issued SC Issued SC
Plus: Subscribed SC Plus: Subscribed SC
Plus: Paid in excess of stated value/Share Premium*
*Exception: Wasting Asset Doctrine (liquidating dividends in wasting)

ORGANIZATION COSTS

Legal fees in incorporation expensed outright

Incorporation fees expensed outright
Share issuance cost Debited to:
I - Share Premium from issuance
II - Retained earnings

ISSUANCE OF SHARES
Con > Capital Con < Capital
Excess is credited to SP – Issuance or The share is called a watered share.
Additional Paid In Capital in excess of Par Value Excess is debited to Discount on Share Capital

SPECIFIC RULES

Non-cash consideration: In exchange for liability: Two or more shares:

I. FV of asset received I. FV of shares issued
I. Relative Fair Value
II. FV of shares issued II. FV of liability
II. Residual Approach
III. Par of shares issued III. CA of liability

SUBSCRIPTION OF SHARES
A written contract by which one engages to take and pay for the capital stock of a corporation in some future date.

Upon subscription: Upon collection: Upon FULL PAYMENT:

Subscription Receivable Cash Subscribed SC
Subscribed SC Subscription Receivable Share Capital
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Shareholders’ Equity B. Mendoza
Share Premium

DELINQUENT

If a stock subscriber does not pay in full his unpaid stock subscription on the date fixed by the board of directors, he
may be declared a delinquent subscriber.

Not Auctioned Auctioned

Forfeited downpayment With highest bidder Without highest bidder
Subscribed SC The bidder who is willing to purchase the Treated as a treasury share.
lowest number of shares for the highest
Share Premium
amount which is the balance of SR, interest out Acquired by the Corporation:
Subscription Receivable of that SR, and expense on auction.
Share Premium - Forfeited DP Treasury shares
Collection: SR
Cash Advances on Auction Sale
Subscription Receivable SSC
Advances on Auction Sale SC

If corporation cannot acquire the shares,

Issuance:
treated as Forfeited Downpayment
Subscribed SC
Share Capital
2k shares @5par
2k subscribed @8
Already collected 6,000 cash

REACQUISITION OF SHARES
Treasury shares are company’s own stock previously issued, reacquired but not cancelled.

Reacquisition: Reissuance: Retirement:

Record always at reacquisition If Reissue > Reacquisition, CR: SP - TS If Issuance > Reacquisition, CR: SP - retirement
COST If Reissue < Reacquisition, DR: SP - TS or RE If Issuance > Reacquisition, DR: SP - TS or RE

Treasury Shares Case 1: Case 2: Case 1: Case 2:

Cash Cash Cash SC SC
TS SP - TS SP SP
SP - TS RE TS SP - TS or RE
TS SP - retirement TS

DONATED CAPITAL
Transactions credited to Donated Capital account are donations received from shareholders. Donations received from
parties other than shareholders are credited to appropriate income or liability account. (Gov’t : GG, Others : Income)

Asset Entity’s own shares

Asset (@fair)
Upon receipt of donation Memo entry
Donated capital
Cash
Loss (if any) Cash
Upon sale
Asset Donated capital @SP
Gain (if any)

DERECOGNITION OF SHARE CAPITAL

Retirement (direct) Conversion
Share Capital Share Capital - PS
Share Premium Share Premium - PS
Cash Share Capital - OS

Balancing figure: Balancing figure:

If DR, then RE If DR, then RE
If CR, then SP - Retirement If CR, then SP - OS

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Shareholders’ Equity B. Mendoza
EARNED CAPITAL – RE and OCI

RETAINED EARNINGS

Retained earnings represent the cumulative amount of profits/losses, dividends and other capital adjustment.
Retained earnings may be appropriated or unappropriated. Normally credit but when it is debit, the term used is
“deficit” or “accumulated losses”

RE, beginning xxx

Net income xxx
Less: Dividends* xxx
RE, ending xxx

*DIVIDENDS (CPSL)
Dividends are resources distributed to entity’s shareholders.
• Dividends out of earnings (cash, non-cash, stock, liability)
• Dividends out of capital (liquidating)

Trust Fund Doctrine

This doctrine holds that the assets of the corporation as represented by its capital stock are “trust fund” to be
maintained unimpaired and to be used to pay corporate creditors.

Shares entitled to dividends are those issued and outstanding

Number of share capital issued xxx

Add: Subscribed share capital xxx
Total xxx
Less: Treasury shares xxx
Total outstanding shares xxx*

CASH DIVIDENDS
Date of Declaration Date of Record Date of Payment
RE No entry Dividends payable
Dividends payable Cash

Cash Dividends:
OS: Dividend = Dividend per share x Outstanding shares*
PS: Fixed annual = Rate x Par value per share x Outstanding shares*

CASH DIVIDENDS with PREFERENCE SHARE:

1. Cumulative - prior year CD even if not declared (dividend in arrears)
2. Non-cumulative - only the current year CD
3. Participating - balance after sharing the basic dividend is divided to OS and PS by virtue of their book value
4. Non-participating - no participation to PS after basic dividend.

Basic dividend = Rate x Shares x Par

Example:
Common, 2 par, 1m shares, 2m
8% PS, 10-par, 100k shares, 1m
2 years dividend in arrears
Total Cash Dividend = 600k

Non-cumulative,
OS PS Total
Non-participating
Basic dividend 2m x 8% = 160k 1m x 8% = 80k 240k
Dividend in arrears - -
BALANCE 360k 360k
520k 80k 600k

Non-cumulative,
OS PS Total
Participating
Basic dividend 2m x 8% = 160k 1m x 8% = 80k 240k
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Shareholders’ Equity B. Mendoza
Dividend in arrears - -
BALANCE 360k x 2/3 = 240k 360k x 1/3 = 120k 360k
400k 200k 600k

Cumulative,
OS PS Total
Non-participating
Basic dividend 2m x 8% = 160k 1m x 8% = 80k 240k
Dividend in arrears 2 years (1m x 8%) = 160k 160k
BALANCE 200k - 200k
360k 240k 600k

Cumulative,
OS PS Total
Participating
Basic dividend 2m x 8% = 160k 1m x 8% = 80k 240k
Dividend in arrears 2 years (1m x 8%) = 160k 160k
BALANCE 200k x 2/3 = 133,333 200k x 1/3 = 66,667 200k
293,333 306,667 600k

PROPERTY DIVIDENDS
PFRS 5: PPE, Intangibles, Investment in Associate

Date of Declaration Date of Record Date of Reporting and Settlement Date of Payment
Under PFRS 5
Under PFRS 5
Lower of CA or FVLCTS
Dividends payable is CA
Difference is impairment Under PFRS 5
vs FVLCTS
loss Lower of CA or FVLCTS, additional
NCA-HFD is at CA
impairment loss or reversal gain
Difference is treated as
NCA-held for sale
No entry gain or loss
Noncurrent asset
Not under PFRS 5
@FV Not under PFRS 5
Not under PFRS 5
@FV, any increase/decrease is
RE effected in RE
Dividends payable

CASH OR NON-CASH ALTERNATIVE

If an entity gives its owners a choice of receiving either a non-cash asset or a cash alternative, the entity shall estimate
the dividend payable by considering both the fair value of each alternative and the associated probability of owners
selecting each alternative. (IFRIC 17 par. 12)

SHARE DIVIDENDS
New issuance of shares Share of Other Entities Treasury Shares
at par or FV [Treated as property at cost
dividend]
Retained earnings Retained earnings
Shares dividend payable Shares dividend payable - TS
Small dividend Large dividend
a. percentage Less than 20% of 20% or more of
declared outstanding shares outstanding
b. amount to FV or par value of
Par value of
be charged to shares, whichever is
shares
RE higher
c. amount Excess of fair value
None
credited to SP over par value

LIQUIDATING DIVIDEND
Date of Declaration Date of Record Date of Payment
Capital Liquidated No entry Dividends payable
Dividends payable Cash
Capital liquidated is a deduction from SHE.

RECAPITALIZATION
Recapitalization when there is a change in the capital structure of the company. The old shares are cancelled and new
shares are issued. Examples include:
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Shareholders’ Equity B. Mendoza
• Change from par to no-par or no-par to par
Share capital - OS
Share premium - OS
Share capital – OS
*Balancing: if DR: RE, if CR: SP - Recapitalization
• Reduction of par value or stated value
SC – OS
SP – Recapitalization
• Share split (split-up or split-down)
Memo entry

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Accounting for Income Taxes B. Mendoza