Chapter 6 Share Capital 2022

12-1
CHAPTER 6
Share Capital
Transactions
12-2
Corporate Capital Structure
The capital is termed as shareholders’

equity or stockholders’ equity.
- It is the residual interest of owners in the

net assets of a corporation measured by
the excess of assets over liabilities.
12-3
Elements of shareholders’ equity
✓ Share capital
✓ Subscribed share
capital
✓ Share premium
✓ Retained earnings
✓ Revaluation surplus
✓ Treasury shares
12-4
Share Capital
➢ It is the shares to be
subscribed and paid in by
Ownership in the shareholders either in
money, property or
a corporation services, at the time of
organization or afterwards,
is divided into and upon which it is to
share capital conduct its operations.
100 Shares
Stock Certificate
VidTel, Inc.
Ordinary shares
12-5
Shares of Stock
Share capital divided into transferable shares
of stock
100 Shares Stock Certificate
VidTel, Inc.
Ordinary shares
A share represents the interest or right of

a shareholder in a corporation and is
evidenced by a certificate of stock.
12-6
Share Capital
Par value is an arbitrary amount
assigned to each share of stock
VidTel, Inc.
Ordinary shares
P5 par value
One with fixed value in the articles of incorporation

12-7
Share Capital
No-par, stated value stock
VidTel, Inc.
Ordinary shares
No-par,
P5 stated value
Stock without par value, but to which

a stated value has been assigned
by the board of directors.
12-8
Share Capital
VidTel, Inc.
Ordinary shares
No-par value
No-par value share, no stated value

12-9
Two Basic Type of Shares

Ordinary Share
Represents the basic ownership class of
the corporation
Preference Share
This share gives its owners certain
advantages over ordinary shareholders
12-10
Classes of Share Capital

Ordinary shares
Residual Equity – ordinary shareholders enjoy
no preference over each other.
1. Is not automatically entitled to dividends
2. Does not have asset preference
in liquidation
12-11
Classes of Share Capital

Preference shares
 Preferences include:
1. Dividends
2. Priority in case of liquidation
 A dividend rate is usually

expressed either as a percent
of par value or as a peso
amount per share
12-12
Terms Related to Share Capital
◆ Authorized Share Capital

◆ Issued Share Capital
◆ Outstanding Share Capital
◆ Treasury shares
12-13
Share Capital
Authorized
Share Capital
The maximum number

of shares the
corporation may issue
as designated in its
articles of
incorporation
multiplied by the par
value
12-14
Capital Stock
Authorized Subscribed
Shares Shares – not
fully paid
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
stock that stock that
have been have never
sold and been sold.
paid in full.
12-15
Capital Stock
Authorized
Shares
Outstanding shares
are shares that were
sold and issued and
are still held by
Outstanding stockholders.
Issued Shares Unissued
Shares Shares
Treasury Treasury shares are
issued shares that have
Shares
been reacquired by the
corporation.
12-16
Question
Ace Company’s articles of incorporation authorizes
100,000 shares of share capital. Ace issued 60,000
shares and later reacquired 10,000 shares. How
many shares are outstanding and how many are
unissued respectively?
a. 60,000 & 30,000

b. 50,000 & 50,000
c. 50,000 & 40,000
d. 40,000 & 50,000
12-17
Question
Ace Company’s corporate charter authorizes
100,000 shares of share capital. Ace issued
60,000 shares and later reacquired 10,000
shares. How many shares are outstanding and
how many are unissued respectively?
Issued 60,000
Reacquired 10,000
a. 60,000 & 30,000 Outstanding 50,000
b. 50,000 & 50,000
Authorized 100,000
c. 50,000 & 40,000 Issued 60,000
Unissued 40,000
d. 40,000 & 50,000
12-18
Share Premium
➢ the portion of the paid-in capital
representing amounts paid by shareholders
in excess of par
➢ may also result from transactions involving
treasury stocks, retirement of shares,
donated capital, share dividends and any
other “gain” on stock transactions
12-19
Legal Capital
➢ Is that portion of the contributed capital or
the minimum amount of paid-in capital,
which must remain in the corporation for
the protection of corporate creditors.
Par value shares:

 aggregate par value of all issued and
subscribed shares
No par value shares:

 total consideration received by the corporation
for the issuance of its shares including the
excess of issue price over stated value
ACCOUNTING FOR
12-20
SHARE CAPITAL
a. Memorandum method - no entry is made to record the
authorized share capital. Only a memorandum is made

for the total authorized share capital. When share capital
is issued, it is credited to the share capital account.
b. Journal entry method - the authorization to issue share
capital is recorded by debiting unissued share capital and
crediting authorized share capital. When share capital is
issued, it is credited to the unissued share capital
account.
12-21
Accounting for Share Capital

 Memorandum method – no entry only
memo is made for the total authorized.
 Journal entry method – authorization is

recorded:
Dr. Unissued Share Capital xx

Cr. Authorized Share Capital xx
ACCOUNTING FOR
12-22
SHARE CAPITAL
12-23
Accounting for Share Capital

12-24
Share Issuance for Cash

Let’s take a closer look at the journal
entries when share is sold for cash.
12-25
Share Issued for Cash

Guidelines for Journal Entry
 Debit cash for number of shares times
price per share.
 Credit ordinary (or preference) share
 If Par Value Share
number of shares × par value per share
 If Stated Value Share

number of shares × stated value per share
 If No-Par Share
amount of cash received
12-26
Stock Issued for Cash

Guidelines for Journal Entry
 If cash received differs from par or
stated value
 Credit Share Premium in excess of par for
difference between cash received and total
par value.
 Credit Share Premium in excess of stated
value for difference between cash received
and total stated value.
12-27

Par Value Example
On September 1, 10,000 shares of P20 par value
ordinary shares were sold for cash at P25 per share.
GENERAL JOURNAL Page: 1
Date Description PR Debit Credit

12-28

Par Value Example
On September 1st, 10,000 shares of P20 par value
ordinary shares were sold for cash of P25 per share.

9/1 Cash 250,000
Ordinary share capital 200,000
Share Premium - issuance 50,000
To record issuance of stock for cash

12-29

Par Value Example
On September 1st, 10,000 shares of P20 par value
common stock were sold Peso
for cash
per of $25 per share.
Shares share Total
Cash
GENERAL JOURNAL 10,000 × P 25 = P Page:
250,000 1
Common stock 10,000 × (Par) 20 = 200,000
Paid-inDescription
Date capital 10,000 × 5PR= Debit50,000 Credit
9/1 Cash 250,000
Share Premium in Excess of Par Value 50,000

12-30

Stated Value Example
On September 1, 10,000 shares of no-par, P20
stated value ordinary share were sold for cash of
P25 per share.

12-31

stated value ordinary shares were sold for cash of
P25 per share.

9/1 Cash 250,000
Ordinary Share capital 200,000
Share premium in
Excess of Stated Value 50,000

12-32

stated value ordinary shares were sold for cash of
P25 per share.
Stated value is treated just like
par value for accounting purposes.
9/1 Cash 250,000
Share Premium 50,000

12-33

No-Par Example
On September 1, 10,000 shares of no-par value
ordinary shares were sold for cash of P25 per share.

9/1 Cash 250,000
Share Capital 250,000

12-34
Shares Issued for Cash

No-Par Example
On September 1st, 10,000 shares of no-par value
common stock were sold for cash of P25 per share.
For true no-par stock, credit the
GENERAL JOURNALShare Capital account for the1
Page:
total cash received.
9/1 Cash 250,000

12-35
Shares Issued for

Property or Services
Record transaction at fair value of
property or services received or fair
value of stock issued, whichever is
more clearly evident.
Fair value
of property
Fair value
of shares
Par value
of shares
12-36
Shares Issued for

On May 1, 10,000 shares of P20 par, quoted at P25
value share were exchanged for land with fair
value at P350,000.
Land 350,000
Share capital 200,000
Share premium 150,000
12-37
Shares Issued for

On May 1, 10,000 shares of P20 par value share,
currently quoted at P25, were exchanged for a
land with no FV, a similar land valued at P300,000.
Land 250,000
12-38
Shares Issued for

On May 1, 10,000 shares of P20 par value share
were exchanged for a land, similar lot valued at
P300,000.
Land 200,000
12-39
Shares Issued for

On May 1, 1,000 shares of P20 par value share were
issued for a legal counsel services at P35,000.
Legal expenses 35,000

12-40
COSTS OF ISSUING SHARES
are debited to “Share Issuance costs” to be

reported as a contra account as deductions
from the following in order of priority:
1. Share premium from previous issuance
2. Retained earnings
However, the following are generally debited

to Listing Fees expense:
1. public relations consultant’s fees
2. Road show presentation
3. Stock exchange listing fees
12-41
SUBSCRIPTION OF SHARES
 There are times when a corporation
sells its shares directly to investors on
a subscription basis.
 The subscription contract is a legally
binding contract which provides for the
number of shares subscribed, the
subscription price, the terms of
payment and other conditions.
12-42
Illustration
On Sept 1, 2021, 5,000 shares of P20 par value
share were sold on subscription at P24 per share
to Sally. Subscription installments of P48,000
and 72,000 on Sept 16 and 30, respectively.
Subscription Receivable 120,000

Subscribed Share capital 100,000
to records subscription above par
12-43
Illustration
Cash 48,000
to record collection of 1st installment
Cash 72,000
to record collection of 2nd installment
Subscribed share capital 100,000

to record issuance of stock certificates
12-44
Illustration – Delinquent shares

On Sept 1, 2021, 5,000 shares of P20 par value
share were sold on subscription at P24 per share
to Sally. Subscription installments of P48,000 and
72,000 on Sept 16 and 30, respectively.

Subscribed Share capital 100,000
to record subscription above par
12-45
Illustration
Cash 48,000
to record collection of 1st installment
Receivable from the Highest Bidder 6,000

Interest Revenues 6,000
to record accrued interest on delinquent shares

Cash 5,000
to record auction expenses
12-46
Illustration
Cash 83,000
to record sale at public auction
Subscribed Share Capital 100,000

to record issuance of stock certificate
12-47
Treasury Shares...
❖ Shares of stock which have been
issued and fully paid for, but
subsequently reacquired by either the
issuing corporation by purchase,
redemption, donation or through other
lawful means.
❖ Provided it has unrestricted retained
earnings.
12-48
Treasury Shares may be acquired...

❖ To eliminate fractional shares;
❖ To improve stock market price by
decreasing the supply of shares;
❖ To pay dissenting shares or
withdrawing shareholders
12-49
Purchase of Treasury Shares

Example
 San Diego Company purchased 1,000 shares
of its own P10 par value ordinary at P20 per
share (500,000 shares are authorized, 10,000
are issued).
at Cost method:
1. Treasury Shares 20,000

Cash 20,000
Purchased 1,000 shares of treasury stock

12-50
Treasury Shares Example
Stockholders’ Equity
(Before purchase of treasury shares)
Ordinary Shares, P10 par, 10,000 issued 100,000

+ Share Premium in excess of par 80,000
= Total paid-in capital 180,000
+ Retained earnings 50,000
= Total stockholders’ equity 230,000
12-51
Treasury Stock Example

(After purchase)
Ordinary Shares, P10 par, 10,000 issued,

9,000 outstanding 100,000
+ Share Premium in excess of par 80,000
+ Retained earnings 50,000
= Subtotal 230,000
– Treasury stock, 1,000 shares 20,000
= Total stockholders’ equity 210,000
12-52
Reissuance of Treasury Shares

 No gain or loss is recognized on the
sale of treasury shares.
 Excess of sales price over cost is
credited to Share Premium -Treasury
Share transactions.
Example:
2. Assume that 100 shares of treasury
shares are sold at P22.
12-53
Sale of Treasury Shares (Example)
Cash 2,200
Treasury Shares 2,000
Share premium - treasury 200
Sold 100 shares of treasury stock
3. What if the 100 shares of treasury shares

are sold at P18?
12-54
Sale of Treasury Shares (Example)

If the resale price is less than cost?
 Debit Share Premium from Treasury

Stock Transactions.
 Debit Retained Earnings if the Paid-in

Capital from TS is too small.
12-55
Sale of Treasury Stock Example
Cash 1,800
Share Premium - TS 200
Sold 100 of treasury shares at P18

12-56
Retirement of Shares...
– decreases the outstanding shares of
the corporation
 Retired shares cannot be reissued.

 There is no gain or loss on retirement.
12-57
Retirement of Treasury shares
Gain is credited to Share Premium - TS
Loss is debited to (in order):

1. Share premium – original issuance
2. Share premium from TS
3. Retained earnings
12-58
Retirement of Treasury Share
Share Capital (100 x P10) 1,000

Share Premium – issuance 800
If 100 shares of treasury shares were

retired.
12-59
Retirement of Treasury Share
If 100 shares of treasury shares were

retired:

Share Premium – issuance 800
12-60
Retirement of Shares
If 100, P10 par shares which were
issued at P18 were reacquired and
canceled at P2400.

SP – issuance (100 x P8) 800
RE (2,400-2,000) 400
Cash 2,400
12-61
The firm purchases 10,000 shares of ordinary
shares (P10 par value) for P30/share. The
share was originally issued for P15 per share.
Acquisition of Treasury shares at Cost Method
Treasury shares 300,000

Cash 300,000
Resold 2,000 treasury shares at P32/share.
Cash 64,000
Share premium - TS 4,000
12-62
Retired 8,000 treasury shares.
Share Capital (8,000 x P10) 80,000

Share premium -TS 4,000
Retained Earnings 116,000
Treasury shares (8,000 x P30) 240,000
12-63
Incorporation of a Sole
Proprietorship or a Partnership
Joe and Marty’s JM Corporation
• Revaluation • Receipt of • Distribution • Distribution of

of the assets the share of the the cash l to
and capital from certificates the proprietor/
Liabilities, the new of share partners,
charged corporation capital to when
against or the necessary
credited to proprietor/
capital partner
account
12-64
Statement Presentation
On the Statement of Financial Position,
stockholders’ equity is divided into two parts.
Contributed Capital
Investment by owners in
exchange for shares of stock
Retained Earnings
Earnings that have been
retained and reinvested
in the business
12-65
Statement Presentation
Shareholders’ Equity:
Paid-in Capital Two
Parts
Preference Share Capital - P100 par, 7%,
Cumulative; 10,000 shares authorized,
issued, and outstanding P1,000,000
Ordinary Share Capital - P10 par, 300,000
shares authorized, 40,000 issued and
outstanding 400,000
Retained Earnings 300,000

Total Stockholders' Equity P1,700,000
12-66
Balance Sheet Presentation

Paid-in Capital in Excess of Par Value
The following slide illustrates a

typical Balance Sheet presentation
of Stockholders’ Equity. All
numbers are assumed and are not
taken from previous or text
examples.
12-67
Balance Sheet Presentation

Paid-in Capital in Excess of Par Value
Paid-in Capital
Preference share capital - P100 par, 7%,
Cumulative; 10,000 shares authorized,
issued, and outstanding P 1,000,000
Ordinary share capital – P10 par, 300,000
shares authorized, 40,000 issued and
outstanding 400,000
Share premium in excess of Par Value
Preference shares P 100,000
Ordinary shares 80,000 180,000
Retained earnings P 300,000
Treasury shares, at cost ( 50,000)
Total Stockholders' Equity P 1,830,000
12-68
Donated Capital
 Contributions to the corporation
received from shareholders as
donations should be recorded at fair
market value, with credit to share
premium (Donated Capital)
 In case of donated shares, the share
premium/donated capital is credited at
the time the shares are reissued.
12-69
Types of Preference Shares
Callable Redeemable Convertible
• With a right to • With • With rights to

purchase the mandatory exchange
shares at a redemption by preference
specified “call” the issuer for a shares for a
price fixed amount fixed number
at a fixed date of ordinary
or gives the shares.
holder the right
to require
issuer to
redeem
12-70
Recapitalization
Change in the
capital structure
of a firm
12-71
Recapitalization
Change Change
from par from no-
to no-par par to par
Reduction Reduction
of Par of Par
value value
12-72
End of Chapter 6

Chapter 6 Share Capital 2022

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12-1

Corporate Capital Structure

The capital is termed as shareholders’

- It is the residual interest of owners in the

Elements of shareholders’ equity

100 Shares Stock Certificate

A share represents the interest or right of

100 Shares Stock Certificate

One with fixed value in the articles of incorporation

100 Shares Stock Certificate

Stock without par value, but to which

100 Shares Stock Certificate

No-par value share, no stated value

Two Basic Type of Shares

Classes of Share Capital

Classes of Share Capital

 A dividend rate is usually

Terms Related to Share Capital

◆ Authorized Share Capital

The maximum number

a. 60,000 & 30,000

Par value shares:

No par value shares:

authorized share capital. Only a memorandum is made

Accounting for Share Capital

 Journal entry method – authorization is

Dr. Unissued Share Capital xx

Accounting for Share Capital

Share Issuance for Cash

Share Issued for Cash

 If Stated Value Share

Stock Issued for Cash

Stock Issued for Cash

GENERAL JOURNAL Page: 1

Date Description PR Debit Credit

Stock Issued for Cash

GENERAL JOURNAL Page: 1

Date Description PR Debit Credit

To record issuance of stock for cash

Stock Issued for Cash

To record issuance of stock for cash

Stock Issued for Cash

GENERAL JOURNAL Page: 1

Date Description PR Debit Credit

Stock Issued for Cash

GENERAL JOURNAL Page: 1

Date Description PR Debit Credit

To record issuance of stock for cash

Stock Issued for Cash

To record issuance of stock for cash

Stock Issued for Cash

GENERAL JOURNAL Page: 1

Date Description PR Debit Credit

To record issuance of stock for cash

Shares Issued for Cash

To record issuance of stock for cash

Shares Issued for

Shares Issued for

GENERAL JOURNAL Page: 1