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FINANCIAL ACCOUNTING AND REPORTING

SHAREHOLDERS’ EQUITY

I. CONTRIBUTED (PAID-IN / INVESTED CAPITAL) CAPITAL

A. Definition: Represent the amount invested or contributed by owners. This is divided into the
following sections in shareholders’ equity:

1. Capital Share – the contributions equal to the par or stated value of the shares purchased
by owners; or the total contribution by owners in case of no-par share.

2. Share Premium – (1) contribution more than the par or stated value, (2) gains from share
transactions and (3) “other” equity items that are not included in earnings or other
comprehensive income.

B. Issuance of Share Capital

1. Issuance for Cash - the face amount of the cash received is credited to equity

a. The issuance is recorded as follows:

Cash xxx
Share Capital (par or stated value) xxx
Share premium (excess over par or stated value) xxx

b. In case of no-par share, the entire amount of cash received is credited to Share Capital

2. Shares issued with other securities

a. The lump sum issue price is allocated among the securities issued based on their relative
market value (proportional basis).

b. In cases where market value of all classes of securities is not determinable, the market value
of the securities is used as a basis for those classes that are known and remainder of the
lump sum is allocated to the class for which the market value is not known.

3. Share issued for noncash consideration shall be credited/recognized in equity based on the
following order of priority:

a. The basis for recording is the fair market value of the property or services received.
b. If fair market value of the property or services is not available, the fair market value of the
share issued is used.
c. If the fair market value of the share cannot also be determinable, the par value of the share
issued is used

4. Share sold on subscription basis

a. The subscription contract provides that the subscriber will buy a certain number of shares at
an agreed-upon price with payment spread over a specified time period.

b. The shares of share are not issued until the full subscription price is received, the entry to
record the subscription.

Cash xx
Share Subscription Receivable xx
Subscribed Capital Share (par or stated value) xx
Share Premium (excess over par or stated value) xx

To record collection and issuance of certificate:

Cash xx
Share Subscription Receivable xx

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Subscribed Capital Share xx

Capital Share xx

c. Any balance in the Capital Share Subscribed account is presented in the shareholders’ equity
section below ordinary or preference share (issued). The Subscription Receivable is reported
as deduction from shareholders’ equity or shown as current asset if collectible within one
year.

5. Other issues related to share issuance

a. Assessments on shareholders – additional contribution by shareholder’s and treated as

Additional paid-in capital.

b. Share issue cost – treated as reduction of additional paid-in capital resulting from issuance.
If additional paid-in capital is not sufficient, excess cost is charged to the original share
premium from previous share transaction OR retained earnings with the appropriate
disclosure as mandated by the Philippines Interpretation Committee.

c. Deposit on subscriptions to a proposed increase in capital share may be shown as part of

shareholders’ equity as a separate item in the capital section.

C. Acquisition of the Entity’s Own Shares (Treasury Shares)

1. Guidelines on Treasury Share transactions

a. Treasury share is always recorded at cost and it is the cash paid to reacquire such shares or
the book value of the noncash asset exchanged.
b. No gain or loss (in profit or loss) is recognized from the acquisition, reissuance or retirement
of treasury shares.
c. Retained earnings may decrease but will never increase from the reissuance or retirement
of treasury shares.
d. Treasury shares will always be a deduction from shareholders’ equity and never treated as an
asset.

2. Reasons for acquiring treasury share:

a. To use for share options, share dividends or share conversion.

b. To use in the acquisition of other companies.
c. To thwart take over attempts or to reduce the number of shareholders.
d. To increase equity per share by reducing the shares outstanding.
e. To use excess cash and help maintain the market price of the share

3. Characteristics of Treasury Share:

a. It is not an asset; essentially the same as unissued share

b. It is contra shareholders’ equity account.
c. It carries no voting or preemptive rights.
d. It cannot ordinarily participate on any type of dividends.
e. It has no rights at liquidation.
f. It participates in share splits.

4. If Treasury Share is reissued at a gain (proceeds greater than cost) or retired at a gain (par value
greater than cost) the difference is credited to share premium from treasury share transactions.

5. If the Treasury Share is reissued at a loss (proceeds less than cost) the difference is debited to
the following in the order of priority:

a. Share premium from treasury share transaction to the extent of previous gains on sale of
retirement of treasury share of same class of shares (ordinary or preference).
b. Retained earnings

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6. If the Treasury Share is retired at a loss (par value less than cost) the difference is debited to the
following in the order of priority:

a. Share premium from original issuance of the shares retired

b. Share premium from treasury share transaction of the same class of shares (ordinary or
preference).
c. Retained earnings

II. RETAINED EARNINGS – Accumulated profits and losses that have not been declared as
dividends. Classified into retained earnings that are prohibited from being declared as dividends
due to legal and contractual requirements or upon the decision of the Board of Directors,
“appropriated” and retained earnings available as dividends to shareholders, “unappropriated”.

Total retained earnings are both appropriated and unappropriated. Once an appropriation is
required, for example treasury shares are acquired or bonds payable are issued with a contractual
provision to appropriate retained earnings is necessary, a transfer from unappropriated retained
earnings to appropriated retained earnings is required. But as soon as the appropriation has served
its purpose, for example the treasury shares have been issued or the bonds payable have been
retired, the appropriation is cancelled by transferring the appropriated retained earnings to
unappropriated retained earnings.

The following transactions also affect retained earnings:

1. Increases – Effect of changes in accounting policy and correction of prior period errors, Net
Income , Quasi re-organization and the realization of OCI items specially “revaluation surplus”.

2. Decreases - Effect of changes in accounting policy and correction of prior period errors,
Dividends, Losses on share transactions like retirement and reissuance of treasury shares,
conversion of preference shares and recapitalization of par value other than share splits and the
realization of OCI items except revaluation surplus.

III. DIVIDENDS are the distribution of earnings of an entity. The dividends may be in the form of cash,
property or noncash assets and stocks. Dividends are only deducted from retained earnings and
recognized as a liability (except for stock dividends) at the date of declaration or when a formal
announcement is made by the corporation’s board of directors. The following measurement of
deduction from retained earnings is as follows:

a. Cash dividends is the most common type of dividends, if the cash dividends are to be paid over
a long-term period they are what is known as script dividends and a note payable or bonds
payable will be issued. The amount of dividends to be paid and deduction from retained earnings
is as follow:

• Ordinary shares – Number of outstanding ordinary shares multiplied by dividend per share.

• Preference share – Outstanding par value multiplied by dividend rate. All dividends in arrears
must be settled in order for ordinary shares to receive any dividends.

b. Property dividends are now covered by IFRIC 17 (Distributions of Non-Cash Assets to

Owners) where the liability to distribute non-cash assets as a dividend is measured at the fair
value of the non-cash assets to be distributed.

The liability for distributions in which the owner has a choice of taking cash in lieu of a non-cash
asset is estimated by considering both the fair value of each alternative and the associated
probability of selecting the alternative.

In both cases, the liability is remeasured at each reporting date and at settlement to fair value less
cost of distribution with changes recognized directly in equity by adjusting retained earnings.

When the property dividend declared is a non-current asset (ex. property, plant and equipment),
aside from the remeasurement of the liability with the corresponding adjustment to retained
earnings at balance sheet date. The assets shall also be written down to fair value less cost
to distribute since it is now an asset held for distribution.

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c. Stock dividends shall be debited from retained earnings following the guidelines below:

• Small stock dividends (less than 20%) – Fair value of the shares unless the fair value is
below the par or stated value. The transaction is recorded as follows:

Retained Earnings xxx

Share Dividends Distributable (at par value) xxx
Share premium (Excess of FV over PV) xxx

Take note that the account credited is share dividends distributable for the par value which is
also included in shareholders’ equity. The same will be done if the account credited is stock
dividends payable.

• Large stock dividends (20% or more) – Par or stated value of shares declared.

• Treasury shares as stock dividends are recorded at cost.

IV. SHARE SPLITS are applied by an entity in part to recapitalize or change the par value of each
share by recalling all issued shares then cancelling all the corporations’ authorized shares and
issuing either more (split up) or less (split down) shares. The main purpose of a share split is to
either increase (split down) or decrease (split up) the market value each share because after the
share split, each share will now have a higher ownership interest (split down) or lower ownership
interest (split up) in the corporation. No formal journal entry is needed for a share split because the
total par value of the issued shares will be the same before and after the share split.

V. Other Comprehensive Income - Comprises items of income and expense (including

reclassification adjustments) that are not recognized in profit or loss as required or permitted by
other IFRSs.

1. Unrealized gain or loss on financial assets at fair value through OCI (PFRS 9)
2. Unrealized gain or loss on derivatives as cash flow hedges (PFRS 9)
3. Revaluation surplus on Property, plant and equipment and Intangible Assets under the
Revaluation Model (PAS 16)
4. Remeasurement gains and losses on defined benefit plans (PAS 19)
5. Foreign currency translation gains and losses (PAS 21)
6. Gains and losses arising from credit risk on changes in Fair Value of Financial Liabilities At
FVPL (PFRS 9)

- - END - -

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MULTIPLE CHOICE PROBLEMS

1. The accounts below appear in the December 31, 2020 trial balance of Desire Company:

Authorized share capital 30,000,000

Unissued share capital 5,000,000
Subscribed share capital 3,000,000
Subscription receivable 1,000,000
Share premium 15,000,000
Accumulated profits-unappropriated 6,000,000
Appropriation reserve 2,000,000
Revaluation reserve 4,500,000
Treasury shares 1,500,000

What is the amount of total shareholders’ equity?

a. 48,000,000
b. 54,500,000
c. 53,000,000
d. 48,500,000

2. On July 1, 2020, Bernard Company was registered with SEC. Its authorized share capital consists of
ordinary shares capital, 100,000 shares with a par value of P20 per share.

On July 14, 2020, it issued 10,000 shares at P23 per share. On October 15, 2020, Bernard paid the
sum of P80,000 and issued 5,000 shares of ordinary shares for 5,000 square meters of land and a
building on the land. The land was appraised at P130,000. The building has a cost of P150,000 and
its depreciated value is P90,000. The building was fairly valued at P120,000.

On October 31, 2020, the company issued 5,000 shares of its own ordinary shares for the services
performed by the lawyer in the incorporation and other legal services. The lawyer usually bills clients
for the said services at P130,000 and the shares were selling at P25 on that date. No other share
transactions occurred by the end of the year. How much is the total share premium as of December
31, 2020?

a. 130,000
b. 125,000
c. 100,000
d. 150,000

3. On May 1, 2020, Crow Company issued 60,000 shares of its P50 par value ordinary shares and
20,000 shares of its P100 par value preference shares for a total consideration of P7,500,000. At this
date, the ordinary shares were selling for P100 per share and the preference shares were selling for
P150 per share. What amount of the proceeds should be allocated to the preference shares?

a. 3,000,000
b. 2,000,000
c. 2,500,000
d. 4,000,000

4. Hollow Company holds 10,000 shares of its P100 par value ordinary share capital as treasury shares
reacquired in 2012 for P1,500,000. On December 1, 2020, Hollow reissued all 10,000 shares for
P2,000,000. Under the cost method of accounting for treasury shares, the reissue would result in a
credit to

a. Gain of 500,000
b. Retained earnings of P500,000
c. Share premium from ordinary shares of P500,000
d. Share premium from treasury shares of P500,000

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5. On December 31, 2020, Kurt Company’s board of directors canceled 20,000 shares of P25 par value
ordinary shares held in treasury at an average cost of P130 per share. Before recording the
cancellation of the treasury shares, Kurt had the following balances in its shareholders’ equity:

Ordinary share capital (250,000 shares originally issued at P55) 6,250,000

Share premium 7,500,000
Retained earnings 5,000,000
Treasury shares, at cost 2,600,000

In its December 31, 2020 statement of financial position, what should Kurt report as ordinary share
capital outstanding?

a. 6,250,000
b. 6,750,000
c. 5,750,000
d. 3,650,000

6. Meekness Company issued 1,000,000 ordinary share capital. Of these, 150,000 shares were held as
treasury shares on December 31, 2019. During 2020, transactions involving Meekness’s ordinary
shares were as follows:

May 1 50,000 shares of treasury shares were sold.

Aug 1 500,000 shares of previously unissued shares were sold.
Nov 1 5-for-1 stock split took effect.

At December 31, 2020, how many shares of Meekness’ ordinary shares were issued and
outstanding?

Issued Outstanding
a. 7,500,000 7,000,000
b. 7,500,000 6,750,000
c. 7,750,000 7,250,000
d. 7,750,000 7,500,000

7. Salzburg Company began operation on January 1, 2020 by issuing at P15 per share one-half of the
800,000 ordinary shares of P1 par value that had been authorized for sale. In addition, Salzburg has
500,000 shares of P5 par value, 6% preference share capital authorized. During 2020, Salzburg had
net income of P2,000,000 and declared P300,000 of dividends.

During 2020, Salzburg had the following transactions:

* Issued an additional 100,000 ordinary share for P18 per share.

* Issued 150,000 preference shares for P8 per share.
* Authorized the purchase of a custom-made machine to be delivered in January 2020. Salzburg
restricted P300,000 of retained earnings for the purchase of the machine.
* Sold an additional 50,000 preference shares for P10 per share.
* Reported P2,500,000 of net income and declared a dividend of P800,000 to shareholders of
record on January 15, 2020, to be paid on February 1, 2020?

What is the total shareholders’ equity on December 31, 2020?

a. 12,000,000
b. 12,600,000
c. 12,900,000
d. 13,000,000

8. Frill Company’s shareholders’ equity comprised of 50,000 issued shares of P100 par ordinary shares,
P3,000,000 of share premium and retained earnings of P1,500,000. Share dividends of 10% were
declared when the shares were selling for P120 per share. What should be the total contributed
capital immediately after the declaration but before the issuance of the share dividend?
a. 8,000,000
b. 8,600,000
c. 9,000,000
d. 8,500,000

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9. Mason Company was organized on January 1, 2017. After 3 years of profitable operation the equity
section of the statement of financial position on December 31, 2019 was as follows:

Ordinary share capital, P5 par, 600,000 shares authorized, 200,000

shares issued and outstanding 1,000,000
Share premium 5,000,000
Retained earnings 4,000,000
Total shareholders’ equity 10,000,000

During 2020, the following chronological transaction affected shareholders’ equity:

* Reacquired 20,000 shares at P25 per share to be held as treasury.

* Declared and issued 100% stock dividend.
* Declared and paid cash dividend of P5 per share.
* Net income for 2020 amounted to P3,000,000.

What is the unappropriated balance of retained earnings on December 31, 2020?

a. 3,800,000
b. 4,300,000
c. 4,700,000
d. 3,500,000

10. Asiana Company showed the following shareholders’ equity on January 1, 2020:

Share capital 1,500,000

Share premium 3,000,000
Retained earnings 5,000,000

The entity had 400,000 authorized shares of P5 par value, of which 300,000 shares were issued and
outstanding.

On July 1, 2020, the entity declared a property dividend of inventory payable on March 1, 2020. The
inventory had a P1,200,000 carrying amount and a fair value less cost to distribute of P1,500,000 on
July 1, 2020.

The fair value less cost to distribute is P1,800,000 on December 31, 2020 and P2,000,000 on March
1, 2021.

The net income for 2020 was P3,000,000. What amount should be reported as retained earnings on
December 31, 2020?

a. 8,000,000
b. 6,200,000
c. 6,000,000
d. 6,500,000

11. Adele Company’s board of directors declared a property dividend to its incorporators in the form of
the company’s equipment and machinery that had a carrying amount on June 30, 2020, the date of
declaration of P2,000,000. The fair value less cost to distribute of these assets on the same date
amounted to P1,800,000. The date of distribution was scheduled on January 31, 2020. On
December 31, 2020, the fair value less cost to distribute of the machinery and equipment was
estimated at P1,500,000 and further declined on the date of distribution on January 31, 2020 at a fair
value less cost to distribute of P1,300,000. What is the carrying amount of the machinery and
equipment to be distributed as property dividends on December 31, 2020?

a. 2,000,000
b. 1,800,000
c. 1,500,000
d. 1,300,000

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12. On January 1, 2020, Hobble Company had ordinary and preference shares outstanding. The
incorporators own ten ordinary shares but no preference shares. On December 31, 2020, the entity
declared dividends on the ordinary shares that is payable on December 31, 2020. The entity decided
to give the ordinary shareholders a choice between receiving a cash dividend of P500,000 per share
or in the form of a noncash asset. The noncash asset is a standard model from the entity’s car fleet.
Each car has a fair value of P600,000 and a carrying amount of P450,000. The entity estimated that
80% of the ordinary shareholders will take the option of the cash dividend and 20% will elect for the
noncash asset. The fair value of the car on December 31, 2020 is P700,000 each.
1. What amount should be recognized as dividend payable on December 31, 2020?
a. 5,500,000
b. 5,200,000
c. 4,000,000
d. 6,000,000
2. What is the gain on distribution if all the shareholders’ select the property dividend on December
31, 2020?
a. 1,500,000
b. 2,500,000
c. 2,000,000
d. 3,000,000
13. The following information pertains to Enzo Company:
o Dividends on its 50,000 shares of 10%, P100 par value cumulative preference shares
have not been declared or paid for 3 years.
o Treasury shares was acquired at a cost of P1,000,000 during the year. The treasury
shares had not been reissued as of year-end.
o The board of directors appropriated P3,000,000 of the company’s retained earnings for
expected contingencies.
o Enzo restricted P4,000,000 of its cash as a bond sinking fund for future retirement of
bonds.
What amount of retained earnings should be appropriated as a result of these items?
a. 5,500,000
b. 8,500,000
c. 4,000,000
d. 8,000,000
14. On January 1, 2020, Alexandra Mining Company’s board of directors declared a cash dividend of
P6,000,000 to shareholders of record on January 15, 2020, payable on February 15, 2020. Selected
data from the December 31, 2020 balance sheet are as follows:
Accumulated depletion 5,000,000
Ordinary shares 20,000,000
Share premium 5,000,000
Retained earnings 4,000,000
What is the amount of liquidating dividends?
a. 6,000,000 c. 4,000,000
b. 2,000,000 d. 0

15. Asia Company reported the following in its statement of shareholders’ equity on December 31, 2020:
Share capital, P10 par value, authorized 5,000,000 shares,
issued 2,000,000 shares 20,000,000
Share premium 10,000,000
Retained earnings (total) 25,000,000
Total shareholders’ equity 50,000,000
On January 1, 2020, Asia acquired 200,000 ordinary shares at P25 each. During 2020, Asia
declared and paid a cash dividend of P5 per share and recapitalized the ordinary shares into no par
ordinary shares with a stated value of P20. No retirement or reissuance of the treasury shares
occurred during the year. Net income for the year ended December 31, 2020 was P8,000,000. What
is the balance of unappropriated retained earnings on December 31, 2020?
a. 7,000,000 c. 19,000,000
b. 9,000,000 d. 17,000,000

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