SHAREHOLDERS’ EQUITY (PART 1) Subscribed SC Subscribed SC

Subscription – contract between purchaser of

Shareholders’ Equity – residual interest in the
shares and issuer in which the former promises to
assets of a corporation after deducting all its buy shares from the latter.
liabilities.
Subscription Receivable – unpaid portion of the
Transactions affecting corporation’s equity:
subscription price. (Deduction from the related
a. Authorization, subscription, issuance, subscribed share capital).
acquisition, reissuance, and retirement of
Subscribed Share Capital – authorized share
shares capital that is subscribed but not yet issued.
b. Origination of other equity instruments, such
as share options, detachable warrants, and Collection of subscription receivable & Issuance of
equity component of compound financial Shares
instruments.
c. Distribution to owners (dividends) Memorandum Journal Entry
Cash Cash
d. Transactions giving rise to “other
Subscription Rec. Subscription Rec.
components of equity”
Subscribed SC Subscribed SC
e. Recapitalization and Quasi-reorganization
Share Capital Unissued SC
Accounting for Share Capital
1. Memorandum Method -made only for Share Capital – portion of the authorized share
authorized capitalization. Subsequent capital that is already issued.
issuances of shares are credited to the Share Certificate – document that evidences the
share capital account. ownership of a share.
2. Journal Entry Method – authorized
capitalization is recorded by crediting Note: Under Corporation Code, shares are issued
“authorized share capital” and debiting to subscribers only upon full payment of the
“unissued share capital”. Subsequent subscription price. Issuance of shares in exchange
issuances of shares are credited to of promissory notes or future services are
“unissued share capital”. (difference prohibited.
between the two – issued share capital).
Cash Subscription
Authorized Capitalization
Memorandum Journal Entry
Memorandum Journal Entry Cash Cash
The authorized Unissued SC Share Capital Unissued Share Capital
capitalization is ____ Authorized SC
divided into ____
shares with par value Memorandum Journal Entry
per share of ___. Share Capital xx Authorized SC xx
Subscribed SC Unissued SC
xx (xx)
Authorized Share Capital – maximum number of Subscribed Rec. Issued Share Capita
shares that can be subscribed and issued to xx lxx
shareholders Total Share Capital xx Subscribed SC
xx
Unissued Share Capital – authorized share capital Subscription Rec.
not yet issued and is still available for subscription (xx)
and issuance. Total Share Capital xx

Subscription
Classes of Shares
Memorandum Journal Entry
Cash Cash a. Ordinary Share Capital (Common Stock)
Subscription Rec. Subscription Rec.

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 - Residual corporate interest that bears - Should not be issued for a consideration
ultimate risk of lost and receives benefit of less than five (P5) pesos per share.
success
- Guaranteed neither dividends nor assets Note: Preference shares should only be issued as
upon dissolution par value shares.
Four basic rights of ordinary shareholders:
1. Right to attend and vote in shareholders’ Legal Capital
meetings - Cannot be distributed to the owners during
2. Right to purchase additional shares the lifetime of the corporation unless it is
(preemptive right or stock right) dissolved and all liabilities are settled first.
3. Right to share in the corporates profits - Based on the trust fund doctrine
(dividends) - Computation:
4. Right to share in the net assets upon a. Par value shares
liquidation Aggregate par value of shares
b. Preference Share Capital (Preferred Stock) issued and subscribed.
- Give holders certain preferences over other b. No-par value shares
shareholders. Total consideration (inclusive of any
- Include priority claims over (a) Dividends amount excess of stated value)
and/or (b) net assets in the event of received or receivable from shares
liquidation issued or subscribed.

Share Issuance Cost

Share Premium (additional paid-in-capital) - Deducted from any resulting share
premium from the issuance. If share
a. Excess of subscription price over par value premium is insufficient, the excess is
or stated value charged to retained earnings.
b. Excess of reissuance price over cost of
treasury shares issued Shares issued at discount
c. Distribution of “small” stock dividends - Shares issued below par or stated value
Note: ‘Share Capital’ and ‘Subscribed Share - Shareholder concerned it held liable
Capital’ are credited at par value regardless of the (discount liability) to the corporation for the
subscription price. discount; otherwise, deemed illegal.
- Discount on share capital is a receivable
from the shareholder concerned but
presented in the fs as contra-equity account
Share Capital xx
(deduction from shareholders’ equity).
Subscribed Share Capital xx
- Prohibited only on original issuance. Thus,
Subscription Receivable (xx)
treasury shares may be reissued below par
Share Premium xx
or stated value.
Total Contributed Capital xx
Cash xx
Discount on share capital xx
Par value and No-par value shares
Share Capital xx
Par value
- share with a peso value fixed in the articles
Watered Stocks
of incorporation.
- Shares issued for non-cash consideration
- Cannot be issued below its par value
with fair value that is below par or stated
(appears on each share certificate issued)
value.
No-par value
- Both shareholders concerned and the
- Share without a peso value fixed in the
director or officer consenting the issuance
articles of incorporation
are held liable for the discount liability.
- It has stated value (indicated in the articles
Land xx
of incorporation but not on the share cert
Discount on share capital xx
issued).

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 Share Capital xx (a) Share Premium–Treasury Shares xx
(b) Retained Earnings xx
Treasury Shares xx

Retained Earnings - unrestricted xx

Retained Earnings – appropriated xx
Secret Reserve Note: Treasury Shares subsequently reissued at
- Arises when shares are issued for non- below the reacquisition cost, the excess of the cost
cash consideration with fair value that is over the issuance price is debited to the following
above par or stated value. It understates order of priority:
assets and equity. a. Share premium – treasury shares
Treasury Shares b. Retained Earnings
- Entity’s own shares that were previously
issued but are subsequently reacquired but Effects:
not retired. (Allowed only if it has sufficient  Reacquisition of treasury shares is a
unrestricted retained earnings). decrease in total shareholders’ equity equal
Accounting for Treasury Shares to the cost of the reacquired treasury
- Accounted using the cost method (the shares.
reacquisition and subsequent reissuance of  Reissuance of treasury shares is an
treasury shares are recorded at cost) increase in total shareholders’ equity equal
- Presented as deduction in the to the reissuance price.
shareholders’ equity
Retirement of Shares
Reacquisition - Retired if they have been reacquired and
Treasury Shares xx cancelled in accordance with SEC
Cash xx regulations.
- Retired shares cannot be reissued anymore
Retained Earnings - unrestricted xx unlike treasury shares.
Retained Earnings – appropriated xx - Total par value and the related share
Reissuance at cost premium of the retired shares are removed
Cash xx from the books of accounts. Difference is
Treasury Shares xx accounted for as follows:
1. Par value and related share premium of
Retained Earnings - appropriated xx the retired shares exceed the retirement
Retained Earnings – unrestricted xx cost, the difference is credited to
“Share Premium – Retirement”.
Reissuance at more than cost Share Capital xx
Cash xx Share Premium – Original Issuance xx
Treasury Shares xx Treasury Shares xx
Share Premium-Treasury Shares xx Share Premium – retirement xx

Retained Earnings - unrestricted xx

Retained Earnings – appropriated xx 2. Par value and related share premium of
the retired shares are less than the
General Rule: Transactions with owners do not retirement cost, the difference is
give rise to income or expense. “No gain or loss debited to the following in the order of
shall be recognized in profit or loss on the priority:
purchase, sale, issue or cancellation of an entity’s a. Share Premium – Treasury Shares
own equity instruments.” b. Retained Earnings
Share Capital xx
Reissuance at below cost Share Premium – Original Issuance xx
Cash xx (a)Share Premium -Treasury Sh. xx

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 (b)Retained Earnings (bal. figure) xx
Cash xx No Bidders at the Public Auction
- Corporation may, subject to the provisions
Note: When shares are reacquired and of the Code, bid for the delinquent shares
immediately retired, there is no need to set up a and shall be credited as paid in full in the
treasury account. Par value and related share books of the corporation. Title to all the
premium of the retired shares are immediately shares shall be vested in the corporation as
debited, with a corresponding credit to “Cash”. treasury shares.
Par value method of accounting for Treasury - If there are no bidders, the corporation may,
Shares (not acceptable for financial reporting) if it has sufficient unrestricted retained
- Reacquired Treasury Shares are accounted earnings, bid for the shares and hold them
for as if they are retired. as treasury shares. The subscriber
(delinquent) shall be released from its
Delinquent Subscription liability regarding the unpaid subscription
- Subscription remains unpaid at a due date but will not be entitled for any shares in his
set by the entity’s board of directors; the subscription.
subscriber is declared delinquent. After 30
days but not exceeding 60 days from the Record the Expenditures in public auction
date of shares are declared delinquent, the Due from the highest bidder xx
delinquent shares are sold at a public Cash xx
auction to the highest bidder (person who
is willing to pay the “offer price” for the Record the acquisition of delinquent subscription
smallest number of shares. as treasury shares
- Offer Price: Treasury Shares xx
a. Unpaid balance on the subscription Subscription Receivable xx
b. Interest accrued on the subscription Due from the highest bidder xx
c. Expenses in public auction, such as
advertising and other selling cost. Record the appropriation of retained earnings for
the treasury shares acquired
Receipt of Subscription Retained Earnings – unrestricted xx
Subscription Receivable xx Retained Earnings – appropriated xx
Subscribed Share Capital xx
Share Premium xx Record the Delinquent subscription as deemed full
paid
Collection of Subscription Subscribed Share Capital xx
Cash xx Share Capital xx
Subscription Receivable xx

Expenditures on the public auction No Bidders and the corporation has insufficient
Due from the highest bidder xx Retained Earnings
Cash xx - Subscription is cancelled in its entirety.

Receipt of payment for the offer price Record the expenditures on public auction
Cash xx Due from the highest bidder xx
Subscription Receivable xx Cash xx
Due from the highest bidder xx
Interest Income xx Recognized the expenditures made on abandoned
equity transaction as expense
Issuance of Shares Expenses on delinquent sale xx
Subscribed Share Capital xx Due from the highest bidder xx
Share Capital xx

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Derecognized the equity accounts on the Share Premium – Preference Share xx
abandoned equity transaction Retained Earnings xx
Share Premium xx Cash xx
Subscribed Share Capital xx
Subscription Receivable xx Preference Shares subsequently called in for
Share Premium – Delinquent Subscription redemption below par
xx Preference Share Capital xx
Share Premium – Preference Share xx
Note: Cost of an equity transaction that is Cash xx
abandoned are recognized as an expense. Share Premium – redemption xx

Sale of different classes of share capital

1. Proportional Method – fair value of all classes Origination of other equity instruments
of share capital issued are determinable, the 1. Stock Rights
lump sum price is allocated to the classes of 2. Conversion options included in convertible
share capital issued based on their relative fair bonds and convertible preference shares
values. 3. Detachable warrants issued with bonds and
2. Incremental Method – only one class of shares preference shares
has a determinable fair value, such class is 4. Stock Options
assigned its fair value and the excess of the
lump sum price is assigned to the other class of Stock Rights
shares that does not have a determinable fair - Issued to existing ordinary shareholders in
value. relation to their pre-emptive rights.
- Enable existing shareholders to protect their
Redeemable Callable Preference current ownership interest by acquiring new
Preference Shares Shares shares (at a price lower than the shares’
- Preferred - Preferred market value) issued by the corporation
stocks which stocks which before such offers are offered to new
the holder has the issuer has investors.
the right to the right to call - Evidenced by share warrants (certificates
redeem at a set at a set date. that entitle the holder thereof to acquire
date - Classified as
shares at a certain price within a stated
- Classified as equity
period). Issued in conjunction with the ff:
financial instrument
liability because the a. Issuance of stock rights in relation to
because when right to call is at shareholders’ right of preemption.
the holder the description b. Issuance of detachable warrants with
exercises its of the issuer other securities as “sweetener” or
right to redeem, and therefore “equity kicker” to make the principal
the issuer is has no instrument more attractive to investors.
mandatorily obligation to c. Issuance of share options to
obligated to pay unless it employees as additional compensation.
pay for the chooses to call Note: Share warrants are exercisable only within a
redemption on the shares. definite period of time and shall expire thereafter.
price. Share warrants issued for stock rights normally
have a shorter duration compared to share
Callable Preference Shares
warrants issued with other securities.
Cash xx
Preference Share Capital xx
Accounting for Stock Rights
Share Premium – Preference Share xx - Recorded through memo entry only
because stock rights are issued to existing
Preference Shares subsequently called in for
shareholders without consideration.
redemption above par
Preference Share Capital xx

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 - Entry is made only when the rights are based on the intrinsic value of the
exercised or recalled. If the stock rights are warrants computed as the difference
subsequently recalled, any consideration between the fair value of the ordinary
paid is debited to share premium. No entry shares and the subscription price.
is made if the stock rights expire but not
recalled. Donated Capital
- Gifts received by the corporation from
Stock Rights are issued nonreciprocal transactions.
Cash xx
Ordinary Share Capital xx (1) Donations from shareholders – credited to
Share Premium – Ordinary Share xx share premium
(2) Donations from the government –
recognized as government grants.
Stock Rights were recalled (3) Donations from other sources –
Share Premium – Ordinary Share xx recognized as income when (a) conditions
Cash xx attached to the donation are fulfilled or are
reasonably expected to be fulfilled, (b)
Stock Rights expires but not recalled donation becomes receivable, and (c)
Memo Entry criteria for asset recognition are met.

Convertible Bonds and Convertible Preference Cash – amount of cash

Shares Noncash Assets – fair value
Entity’s own shares – initially recorded through
Convertible Bonds (components are segregated memo entry. Donated capital is recognized only
and accounted separately) when the donated shares are subsequently
(1) Financial Liability for the bonds reissued.
(2) Equity instrument for the conversion feature
Assessment on shareholders
Preference Shares convertible to ordinary shares - Shareholders of financially troubled
(no separate accounting is required upon issuance corporation may vote to provide additional
because both the principal instrument (PS) and the capital based on their respective
conversion option is presented in SHE. shareholdings. The assessment or
(1) Equity instrument, but of different classes additional capital provided is credited to
share premium.
Bonds with detachable warrants Cash or Assessment Rec. xx
- The entity has in effect issued a compound Share Premium – Assessment xx
instrument having two components
(segregated and accounted for separately)
(1) Financial liability for bonds
(2) Equity instrument for the detachable
warrants.

Preference Shares with detachable warrants

- Detachable warrants are capable of being
transferred or sold separately.
- Issue price should be allocated to the
preference shares and the detachable
warrants based on their relative fair
values on issuance date.
- When both preference shares and the
warrants do not have available fair
values, the allocation of the issue price is

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 (a) Date of declaration – BOD formally
announces the distribution of dividends
(b) Date of record – only those who are listed
as of this date shall be entitled to receive
dividends. No entry is made on this date,
except when there are adjustments to the
initially recognized amount of dividends on
the date of declaration.
(c) Date of distribution

Recognition of liability for dividends

- When the dividend is appropriately
authorized and is no longer at the discretion
SHAREHOLDERS’ EQUITY (PART 2) of the entity, which is:
a. Date when the dividend declared by
Retained Earnings – cumulative profits (net of management is approved by a
losses, distribution to owners, and other relevant authority, if further approval is
adjustments) which are retained in the business required, or
and not yet distributed to shareholders. b. Date when management declared
(a) Unrestricted – available for future dividends, further approval is not
distribution to the shareholders required.
(b) Appropriated (Restricted) – not available for
distribution unless the restriction is Accounting for cash dividends
subsequently reversed. - Only outstanding shares are entitled to
dividends.
Appropriation may be a result of:
1. Legal Requirement – for the cost of treasury Shares issued xx
shares reacquired and those transferred to Shares subscribed xx
statutory reserves. Treasury Shares (xx)
2. Contractual Requirement – in compliance Outstanding Shares xx
with loan agreements or bond indentures for
the protection of creditors. Date of declaration
3. Voluntary – for probable contingencies, Retained Earnings (dividends) xx
business expansion, and the like. Cash Dividends Payable xx

Negative Balances in Equity Date of Record (no entry)

(1) RE account has Negative Balance (dr) –
deficit Date of Distribution
(2) Total SHE has a negative balance Cash Dividends Payable xx
(Liabilities exceed assets) – capital Cash xx
deficiency
Accounting for property dividends
Dividends a. Property dividends payable is initially
(1) Cash Dividends – form of cash measured at the fair value of the non-cash
(2) Property Dividends – noncash assets assets at date of declaration.
(3) Share Dividends – entity’s own shares b. At the end of each reporting period and
May be declared : also on the settlement date, the property
a. Out of unrestricted retained earnings (return dividends payable is adjusted for changes
on capital); or in fair value. (gain or loss, directly in
b. Out of capital (return of capital) retained earnings).
c. On settlement (distribution) date, difference
Dates relevant to the accounting for dividends between the CA of the dividends payable

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 and the asset distributed is recognized in 2. Preference in the distribution of dividends
profit or loss. (preferred as to dividends).

Accounting for non-cash assets declared as Preference over dividends

property dividends 1. Noncumulative – dividend entitlement for a year
Non current - lower of its carrying amount and fair is forfeited when dividends are not declared in
value less cost to distribute that year.
FVLCD > CA – loss 2. Cumulative – dividend entitlement accumulates
Subsequent increase of FVLCD recognized each year until paid. Accumulated unpaid
as gain but only to the extent of the cumulative dividends are disclosed as dividends in arrears
losses recognized in previous periods. but not accrued as liability unless the
dividends are declared.
3. Nonparticipating – entitled only to fixed
amount of dividends.
Accounting for Share Dividends 4. Participating – entitled to an amount in excess
a. Small – less than 20% of the outstanding of the fixed amount of dividends.
shares, share dividends are accounted for
at fair value. Amount of participation is computed after
Retained earnings is debited for the fair both the preference and ordinary shares
value of the share dividends on declaration are allocated their basic dividends.
date. Difference between FV and par value
is credited to share premium. Basic dividends of ordinary shareholders is
b. Large – 20% or more of the outstanding equal to the aggregate par value of the
shares, shares are accounted for at par outstanding ordinary shares multiplied by
value. the preference shares. If there is more than
Retained earnings is debited for the par one class of preference shares with different
value. No share premium arises. preference shares, the lowest preference
rate is used to compute for the basic
Treasury Shares declared as dividends dividends of ordinary shareholders.
- Cost method is used. Retained earnings is
debited for the cost of the treasury shares a. Fully Participating – pro rata basis
declared. No share premium arises. b. Partially Participating – certain amount
- Accounting for “small” or “large” share or percentage.
dividends do not apply.
Dividend entitlement of preference shares
Fractional Shares may be expressed as:
Corporations may: a. Percentage of par value
1. Issue fractional share rights (evidenced b. Specific monetary amount per share.
by share warrants) and give the holders
thereof ample time to accumulate sufficient Dividends recognized as expense
warrants for a full share. Dividends declared on equity instruments are
2. Pay cash in lieu of fractional share rights but charged to retained earnings. However, dividends
only if the share dividends were declared declared on financial liabilities such as
out of retained earnings. redeemable preference shares, are charged to
profit or loss as interest expense.
Share dividends of different class
- Accounted for at fair value. Liquidating Dividends
Dividends declared out of capital. The wasting
Preference Shares asset doctrine permits wasting asset corporations
1. Preference in the distribution of assets in to declare dividends out of capital during their
case of corporate liquidation (preferred as existence.
to assets)

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Disclosure of dividends
Disclose either in the statement of changes in
equity or in the notes.

Events after the reporting period

Not recognized as a liability at the end of the
reporting period because no obligation exists at
that time. The dividends are disclosed only in the
notes.

Recapitalization
Change in the capital structure of an entity brought
about by the cancellation of old shares and
issuance of new shares as replacement.
Accomplished through any of the ff:
a. Change from par to no-par, or vice versa
b. Reduction of par value or stated value
c. Share splits or reverse splits

Note: Recapitalization does not affect assets,

liabilities, or total SHE.

Share Split (recorded only through memo entry)

1. Split up or share split
Old shares are cancelled and replaced by a
larger number of new shares but with a
reduced par value (stated value) per share.
2. Spilt down or reverse share split
Old shares are cancelled and replaced by a
smaller number of new shares but with an
increased par value (stated value) per
share.

Quasi-reorganization
Accounting procedure whereby a financially
troubled organization, but with favorable future
prospects, is permitted, but not required, to revalue
its assets and liabilities, and realign its equity,
subject to the provisions of relevant regulations, in
order to establish a “fresh start” in accounting
sense.
(1) Revaluation of PPE; and/or
(2) Recapitalization

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