Share Holders Equity

Definition of a Corporation

A corporation is an artificial being created by operation of law, having the right of succession, and the powers,
attributes and properties expressly authorized by law or incident to its existence.

RA 11232 otherwise known as the Revised Corporation Code of the Philippines (RCC) was signed into law by Pres.
Duterte on February 20, 2019 and took effect on February 23, 2019, updates the almost 39-year old Corporation
code of the Philippines to ease the burden of doing business in the Philippines.

Some of the salient features of the revised code that are applicable to the lesson at hand are as follows:
 Removal of the minimum of five individuals in corporate formation
 Creation of a One Person Corporation (OPC) reducing the 5 minimum incorporators to 1
 Stock Corporations can be formed without minimum capitalization requirement
 Removal of the 25-25 rule for paid up capital
 Perpetual existence of corporations

The Philippine Corporation Code defines a Corporation, creates a corporation and not in any way created by mere
agreement unlike the contract of partnership. >>>> a Corporation is created by operation of law

You may also want to visit this website for a better understanding of the Corporation Code of the Philippines:

https://lawphil.net/statutes/repacts/ra2019/ra_11232_2019.html

BOOKS and records of a Corporation

Minutes Book contains the minutes of the meetings of the directors and shareholders
Stocks and Transfer Book is a record of the names of shareholders, installments paid and unpaid by
the shareholders and dates of payment, transfer of share and dates thereof,
by whom and to whom made.
Books of Accounts represent the record of all business transactions, the journal and the ledger
Subscription Book is a book of printed blank subscriptions
Shareholders’ Ledger is a subsidiary for the share capital issued reporting the number of shares
issued to each shareholder
Subscriber’s ledger is a subsidiary for the subscriptions receivable account reporting the
individual subscription of the subscribers
Share certificate book is a book of blank share certificates

Treatment of ORGANIZATION COSTS

Organization Costs represent costs incurred in forming or organizing the corporation that includes the following:
 Legal fees
  Incorporation fees
 Share issuance costs >>> printing of share certificates, cost of stock transfer book, seal of the corporation,
underwriting and promotional fees, accounting and legal fees related to share issuance

PAS 38 provides that startup costs such as legal and secretarial costs shall be recognized as expense immediately
when incurred except for share issuance costs .

COMPOSITION OF THE SHAREHOLDERS’ EQUITY

Shareholder’s Equity – is the Composition of Shareholders’ Share capital may be :

residual interest of the owners In Equity  Par value share >> with value fixed in
the net assets of the measured  Share capital the Articles of Incorporation and
by the excess of assets over  Retained earnings appearing on the share certificate
liabilities (ASSETS – LIABILITIES =  Other components of  No par value share >> no amount
SHAREHOLDERS’S EQUITY) Equity appearing on its face but it has always
 Treasury Shares a stated value or issued value.
Minimum consideration for no par
value shares is P5

Definition of LEGAL CAPITAL

Legal Capital is that portion of paid-in capital which cannot be returned to the shareholders in any form during the
Lifetime of the corporation
a) In case of par value share, legal capital is computed b) In case of no par value shares, legal capital is the
as the aggregate par value of shares issued and total consideration received from the shareholders
subscribed including the excess over par or stated value

Trust Fund Doctrine >> share capital is considered as trust fund for the protection of shareholders
>> illegal to return legal capital
>> illegal to declare dividends if there is a deficit
CLASSES OF SHARES

1. Ordinary Share Capital (Common Stock) 2. Preference Share Capital (Preferred Stock)

ACCOUNTING FOR SHARE CAPITAL

Memorandum Method Journal Entry Method
 a memorandum entry is prepared to recognize the  authorized capitalization is recorded by a
capital authorization journal entry:
Example of memorandum entry: Debit: Unissued share capital P xx
The authorized capitalization of P XXX divided into _____ Credit: Authorized Share Capital P xx
shares of with par value of P____.

Note that the Memorandum Method is the preferred method and will be used for subsequent examples.

Illustrative Example 1: Computation of Legal Capital

Abacus Corporation provided the following information at year end:
Preference Share capital, P100 par 2,300,000
 Share Premium - preference share 805,000 Computation of Legal Capital:
Ordinary share capital, P10 par 5,250,000
Share premium ordinary share 2,750,000 Preference Share capital 2,300,000
Retained Earnings 1,900,000 Ordinary Share Capital 5,250,000
Notes Payable 4,000,000 Subscribed ordinary share capital 400,000.00
Subscription Receivable - ordinary share 400,000 Total Legal Capital 7,950,000

Note: In case of par value share, legal capital is the total amount of stated value issued and subscribed plus any excess
over the stated value is accordance with the Corporation code of the Philippines.

Illustrative Example 2: Computation of Shareholders’ Equity:

The following information were derived from the books of ACE Corporation:
Solution:
Authorized share capital 5,000,000
Unissued share capital (2,000,000)
Authorized share capital 5,000,000 Issued share capital 3,000,000
Unissued share capital 2,000,000 Subscribed share capital 1,000,000
Subscribed share capital 1,000,000 Subscription receivable (400,000) 600,000
Subscription receivable 400,000 Share premium 500,000
Share premium 500,000 Retained Earnings:
Retained Earnings Unappropriated 600,000 Unappropriated 600,000
Retained Earning Appropriated 300,000 Appropriated 300,000 900,000
Revaluation Surplus 200,000 Revaluation Surplus 200,000
Treasury Shares, at cost 100,000 Total 5,200,000
Treasury Shares (100,000)
Shareholders' Equity 5,100,000

Notes on Illustrative Example 2:

The subscription receivable was presented as a deduction from the related
subscribed share capital. Subscription receivable collectible within a period of
one year is presented as Current Asset.

Illustrative Example 3: Shares issued at a discount

If shares are issued at below par or below stated value, the shares are said to be issued at a discount. Take note
that this is not allowed under the Corporation Code. It is not considered as a loss but an investment deficiency
where the shareholder is held accountable for the said deficiency.

Assume that 10,000 shares of P100 par value are issued for P800,000 cash.

Journal Entry:
Cash 800,000
Discount on share capital 200,000
Share capital 1,000,000

SHARE issuances for Noncash considerations

In the order of priority, the share capital account is credited for noncash considerations like tangible property,
intangible property and services.
1. Fair value of the noncash consideration received
2. Fair value of the shares issued
3. Par value of the shares issued

Watered Share is the term used for share capital Secret Reserve arises when asset is understated or
issued for insufficient or inadequate consideration. liability is overstated. It is the reverse of Watered
An example is a parcel of land with far value of Share.
P800,000 was exchanged for 10,000 shares of P100 par  Excessive provision for depreciation, depletion,
value. To create a water in the share the transaction is amortization and doubtful accounts
recorded as:  Excessive write down of receivables, inventories and
Debit: Land P1,000,000 investments.
Credit: Share Capital P1,000.00  Capital expenditures are recorded as outright
expense
To correct the illegal entry, the discount should be  Fictitious liabilities are recorded
properly recorded.

Delinquent Subscription
Highest bidder >> the person willing to pay for the Offer price consist of the following:
amount of delinquent subscription for the smallest  Outstanding balance of the subscription
number of shares.  Accrued interest
 Incidental expenses like advertising and
cost of sale
Illustrative Example 04: Delinquent Subscriptions
Cyrus Cloud subscribed for 10,000 shares at par of P100 giving P600,000 as down payment. The balance
of P400,000 became due but Mr. Cloud failed to pay his balance and the subscription was declared as
delinquent. An auction was conducted to sell the shares. The offer price was P450,000 including the
outstanding balance of P400,000, Interest of P20,000, and Expenses on the delinquency sale of P30,000.
There are three qualified bidders who are willing to pay the offer price:

A = 4,500 shares B = 5,000 shares C = 6,000 shares

The bid was awarded to A, the highest bidder. The distribution of shares will be X (the original
subscriber) will get 5,500 shares and the winning bidder A will get 4,500 shares. The related journal
entries are:

The offer price consist of the

1 To record the subscription of X following:
Subscription Receivable 1,000,000 Subscription 400,000
Subscribed Share Capital 1,000,000 Interest 20,000
Expenses 30,000
2 To record the subscription of X Total Offer Price 450,000
Cash 600,000
To record the awarding of the
Subscription Receivable 600,000 5 bid to A:
 Cash 450,000
The subscription balance is called and X
3 defaults Subscription Receivable 400,000
no journal entry Interest Income 20,000
Advances on
Delinquency Sale 30,000
To record the expenses related to the delinquent
4 subscription:
Advances on delinquency sale 30,000 6 Subscribed Share Capital 1,000,000
Cash 30,000 Share Capital 1,000,000

Callable Preference Shares (equity) Redeemable Preference Convertible Preference Share

Shares(liability)
 Equity instrument  right to exchanges shares for
 No definite redemption date  mandatory redemption by the issuer other securities of the
 Dependent upon the call of the for a fixed or determinable amount issuing corporation
issuer at a future date  may convert PS to ordinary
Call amount > original issue price  right to require issuer to redeem shares
Excess of call price vs Par value: the instrument for a fixed amount  may convert preference
 Charged to Share Premium- at a future date shares into bonds
original issuance of PS  classified as current or noncurrent
 Retained Earnings (is liability depending on the
insufficient) redemption date

PAS 32 provides that the difference

between the redemption price vs the
financial liability is accounted for as
Gain or Loss on Redemption

Illustrative Example 05: Convertible Preference Share

Given Information Case 1 - PS converted to ordinary shares in the ration of 1:3
Preference Share Capital, 10,000 Entry Preference Share Capital 1,000,000
shares, P100 par 1,000,000
Share Premium- PS 200,000
Ordinary Share capital, 200,000
shares, authorized, 100,000 shares Ordinary Share (30,000x30) 900,000
issued, P30 par 3,000,000 Share Premium - Ordinary 300,000
Share Premium _PS 200,000 Case 2 - PS converted to Ordinary shares in the ratio of 1:5
Share Premium - Ordinary 100,000 Entry Preference Share Capital 1,000,000
Retained Earnings 2,000,000 Share Premium- PS 200,000
Retained Earning 300,000
Ordinary Share (50,000x30) 1,500,000