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Shareholder's equity represents the ownership interest in a corporation. It includes contributed capital from shareholders as well as retained earnings. Contributed capital includes share capital at par value, share premium, and subscribed share capital. Retained earnings represent accumulated net income less any dividends. Other comprehensive income is an accumulated account for certain unrealized gains and losses. Shares must be issued for at least par value and any excess received is recorded as share premium. Legal capital includes issued share capital, subscribed share capital, and share premium and this amount cannot be returned to shareholders.

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23 views5 pages

She 1

Shareholder's equity represents the ownership interest in a corporation. It includes contributed capital from shareholders as well as retained earnings. Contributed capital includes share capital at par value, share premium, and subscribed share capital. Retained earnings represent accumulated net income less any dividends. Other comprehensive income is an accumulated account for certain unrealized gains and losses. Shares must be issued for at least par value and any excess received is recorded as share premium. Legal capital includes issued share capital, subscribed share capital, and share premium and this amount cannot be returned to shareholders.

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cynthia bansil
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© © All Rights Reserved
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SHAREHOLDER’S EQUITY

Shareholder’s Equity
- It is the equity or capital of a corporation.
- Normal balance is credit.
- Owners claim against the assets of a corporation.
- Residual balance = Assets minus Liabilities.

Components:
1. Contributed Capital
2. Other Comprehensive Income (OCI)
3. Retained Earnings
4. Treasury Shares – contra-equity account

CONTRIBUTED CAPITAL
- Contributed by owners
4 Components:
1. Share Capital
- Issued
- Always at par value.
- If no par, always at stated value.

Types of Share Capital:


• Ordinary – who bare risk and considered the real owners, having voting rights.
• Preference – still owners but their functions is para lang silang investors, preferred,
inuuna, may priority sila over the ordinary.
“If merong declaration of dividends, mauuna mong babayaran yung mga Preference Shareholders,
if the the corporation becomes insolvent and needs to be liquidated, after the liquidation the assets
will be first distributed to the Preference Shareholders.”

So, bakit may bumibili pa ng Ordinary? Hindi nalang Preference?


- Even though inuuna yung mga preference wala naman silang Voting Rights. Marami pa
rin ang bumibili ng ordinary rather than the preference because fixed ang return sa ordinary,
may dividend rate silang sinusundan.
- Sa reference, kahit sila ang inuuna, limited lang ang kanilang nakukuha.

“Hindi puwedeng lumagpas sa PAR VALUE ang ating Share Capital”


Example: Share Capital @par – ₱10.00
Sold SC - ₱12.00
“The excess ₱2.00 will go to Share Premium”

2. Share Premium
- Also known as “additional paid-in-capital”
7 Things included in Share Premium:
• Excess over par value.
• Resale of Treasury Shares @ more than cost.
• Donated Capital – donated by shareholders.
• Issuance of share warrants – share warrants are issued when we want our investors
to issue to our shares.
• Issuance of Convertible Bonds Payable – may equity component, yung share
premium conversion privilege.
• Distribution of small stock dividends – measurement is @ fair value unless par is
higher.
• Quasi Reorganization or Recapitalization.

3. Subscribed Share Capital


- Unissued
4. Subscription Receivable
- The remaining balance or the unpaid balance of the subscribed share capital.
- Treatment depends on when it is expected to be received.
- If within 12 months or less, include it in Current Assets.
- If beyond 1 year, not part of Current Assets, treat it as a contra-equity account.
- If silent, treat it as a contra-equity account.

OTHER COMPREHENSIVE INCOME


- A real account, it is accumulated.

CUAGU meaning:
C – Change in Revaluation Surplus
U – Unrealized Gain or Loss on Change in Fair Value of Investment in Financial Asset at
Fair Value through Other Comprehensive Income. (Equity Investment or Debt Investment)
A – Actuarial Gains or Losses / Remeasurements
G – Gains or Losses on Translation.
U – Unrealized Gains or Losses on the Forward Contracts Classified as Cash Flow Hedge

“Some of these can be reclassified to P&L”

RETAINED EARNINGS
- Also known as “accumulated profit”
COMPUTATION
Retained Earnings, Beg. xx
Net Income xx
Dividends (xx)
Retained Earnings, End xx

2 Kinds of Retained Earnings:


• Appropriated (Reserves)
- Restricted as to dividend distributions
• Unappropriated
- Unrestricted
- Dividends declared and distributed.
“Debit Balance” – possible if patuloy ang pag-incur ng losses.
“Negative balance in the retained earnings accounts” also called as “Deficit.”

ISSUANCE OF SHARE CAPITAL


- Talking about the first issuance, re-issuance is possible but that would be treasury shares.
- Galing sa unissued shares.
- Share should not be issued for a consideration less than the par or stated value.
- “Share issued @ discount is illegal”
Discount is not a loss of the corporation; it is a liability of the shareholders.
ENTRY
Cash xx
Discount (contra-equity) xx
Share Capital xx

• SHARE ISSUED FOR CASH


ENTRY
Cash (Proceeds) xx
Share Capital @par xx
Share Premium (Excess) xx

• SHARE ISSUED IN EXCHANGE FOR NON-CASH CONSIDERATION – know the


value of the shares first.

Value of Shares: (in order of priority)


1. Fair Value of non-cash consideration received.
2. Fair Value of shares.
3. Par Value or stated value.

• ISSUANCE OF TWO OR MORE EQUITY SECURITIES


- Account it separately.
- Allocate the proceeds.
- Example: Issued Ordinary and Preference at the same time.

1. Relative Fair Value Approach


- All of FV of the securities are given.
- Allocate the proceeds based on their relative FV.
2. Residual Approach
- Not all FV are given.
ACCOUNTING FOR SHARE CAPITAL
• Memorandum Method
ENTRY
Memo Entry
If nag-issue ng share:
Cash xx
Share Capital xx

• Journal Entry Method


ENTRY
Unissued Share Capital xx
Authorized Share Capital xx
If nag-issue ng share:
Cash xx
Unissued Share Capital xx

COMPUTATION
Authorized Share Capital xx
Unissued Share Capital (xx)

Issued Share Capital xx

Organization Cost Vs. Cost of Initial Public Offering Vs. Share Issuance Cost
Organization Cost
- Cost incurred in organizing a business.
- Expensed outright.

Cost Of IPO
- Cost incurred in initially offering the shares to the public.
- Expensed outright.

Share Issuance Cost


- Not expensed outright.
- Treated as contra-equity account.
- Debited to the following (in order of priority):
1. Share Premium Original Issuance
2. Share Premium Previous Issuance
3. Retained Earnings
TRUST FUND DOCTRINE
- It is illegal to return the legal capital to shareholders during the lifetime of the corporation
because a corporation have limited liability.
- The corporation is considered to be the trust fund.
- Legal Capital = ₱Money
• Par Value Shares; or
• No Par Value Shares

- Legal Capital = Issued (Share Capital) + Subscribed (Subscribed Share Capital)


- Legal Capital = Issued + Subscribed + Share Premium

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