SHAREHOLDER’S EQUITY  Capital liquidated (as a

deduction)
Corporation- an artificial being created  Share Premium (additional
by operation of law, having the right of paid-in capital)
succession and the powers, attributes
and properties expressly authorized by  Retained Earnings (appropriated
law or incident to its existence. and unappropriated)
- separate legal entity
distinguished from its owner  Other Components
 Revaluation surplus
Organization of a Corporation  Cumulative unrealized fair
 A corporation is formed by “any value gains/losses on FVOCI
person, partnership, association or securities
corporation, singly or jointly with  Translation differences of
others but not more than 15 in foreign operations
numbers  Effective portion of cash flow
 The entity’s articles of incorporation hedge
must be authorized by the SEC
 To amend the articles of  Treasury Shares
incorporation, a majority vote of
the board plus a vote by
shareholders representing at least Accounting for Share Capital
2/3 of the outstanding share capital 1. Memorandum Method- only a
 There is no minimum capital stock memorandum is made for the
required for a stock corporation, authorized capitalization.
except when a special law provides Subsequent issuances of shares are
otherwise credited to Share Capital Account
 A corporation has perpetual 2. Journal Entry Method- the
existence unless a fixed term is authorized capitalization is
stated in the articles of recorded by crediting “authorized
incorporation share capital” and debiting
“unissued share capital” .
Shareholder’s Equity- residual interest in Subsequent issuance of share are
the asset of a corporation after credited to “unissued share capital”
deducting all its liabilities. . The difference between the two
represent the issued share capital.
Component of Shareholder’s Equity
 Share Capital (Capital Stock)
 Preference Share Capital Subscription- a contract between the
 Ordinary Share Capital purchaser and the issuer in which the
 Subscribed Share Capital purchaser promises to buy shares of the
 Subscription Receivable (as a issuing company’s stock
deduction)
 Share Dividends distributable Subscription Receivable- represent the
 Discount on Share Capital ( as a unpaid portion of the subscription price.
deduction) Represent as a deduction from the
related subscribed share capital
 thereby increasing the
Subscribed Share Capital- represent the corporation’s opportunity to
portion of the authorized share capital generate equity financing
that is subscribed but nit yet issued

Share Capital- represent the portion of Share Premium

the authorized share capital that is a. Excess of subcription price over par
already issued value or stated value
b. Excess of reissuance price over cost
Share Certificate- a document that of treasury shares issued.
evidences the ownership of a share c. Distribution of “small” stock
dividends

Classes of Share Capital

1. Ordinary Share Capital (Common Share Capital xx
Stock) Subscribed Share Capital xx
 Represent the residual Subscription Receivable (xx)
corporate interest that bears Share Premium xx
the ultimate risk of loss and Total Contributed Capital xx
receives the benefits of success

Rights: Par value share

 Right to attend and vote in  one with peso value fixed in the
shareholder’s meetings articles of incorporation
 Right to purchase additional shares  the purpose of which is to fix the
 Right to share in the corporate amount of issuance price
profits  cannot be issued below its par
 Right to share in the net asset of value
the corporation upon liquidation
No-par value share
2. Preference Shares (Preferred Stock)  One without peso value fixed in the
 Shares that give the holders article of incorporation but not on
thereof certain preferences the share certificate issued
over other shareholders. Such  Should not be issued for a
preferences may include consideration less than five (5)
priority claims over (a) pesos per share
dividends and/or (b) net assets  The excess of subscription price
of a corporation in the event of over the stated value is credited to
liquidation. In exchange for Share Premium
such preference(s), preference
shareholders sacrifice certain *Under the Corporation Code, ordinary
inherent rights of ordinary shares may be issued as either par or
shareholders (e.g., voting rights no-par value shares. However,
over election of directors and preference shares should only be issued
officers). One purpose of as par value shares
issuing prefernce share is to
broaden investor appeal,
Legal Capital
 portion of contributed capital that
cannot be distributed to owners Watered Stock
during the lifetime of the  shares issued for noncash
corporation unless the corporation consideration with fair value that is
is dissolved and all of its liabilities below par or stated value.
are settled first.  The “water” (discount) is the
 Based on the concept of trust fund difference between the fair value of
doctrine which states that the the non-cash consideration
share capital of a corporation is a received and the par or stated
trust fund held for the protection of value of the shares issued
its creditor  If discount is not recorded, asset
and equity will be overstated
Computed as:
a. For par value shares, legal capital is Secret Reserve
aggregate par value of shares  Arises when shares are issued for
issued and subscribed. noncash consideration with fair
b. For no-par value shares, legal value that is above par or stated
capital is the total consideration value but the consideration
received or receivable from shares received is recorded at par or
issued or subscribed . Total stated value
consideration refers to the  It understates the asset and equity
subscription price inclusive of any  May also arise from transactions
amount in excess of stated value other than issuances of share
capital, such as when provision for
Par No losses are made excessively or
Par when income earned is not
% Preference Share Capital xx xx recognized.
Ordinary Share Capital xx xx
Share Premium- OS - xx
Subscribed Share Capital- OS xx xx Treasury Shares
Legal Capital xx xx  Entity’s own share that were
previously issued but are
subsequently reacquired but not
Share Issuance Cost retired.
 Entails expenditures, such as  An entity may reacquire its
regulatory fees, legal accounting, previously issued shares only if it
and other professional fees, has sufficient unrestricted retained
commissions and underwriter’s earnings.
fees, printing cost of certificates,  Are accounted for using the cost
and documentary stamp tax and method.
other transaction taxes.  The reacquisition and subsequent
 Deducted from any resulting share reissuance of treasury shares are
premium from the issuance. If recorded at cost.
share premium is insufficient, the
excess is charged to retained Retirement of Shares
earnings.
 When shares are retired, the total
par value and the related share
premium of the retired shares are
derecognized. Any difference
between the total amount
derecognized and the retirement
cost is accounted for as follows:
a. If the par value and the related
share premium of the retired
shares exceed the retirement
cost, the difference is credited
to “Share Premium-retirement”
b. If the par valueand the related
share premium of the retired
shares are less than the Delinquent Subscription
retirement cost, the difference CaseA 2: Retirement
subscriber Cost > Original
is declared Issuance
delinquent
is debited to the following in Price
if his/her share subscription
the order of priority: remains unpaid at due date.
ABCThereacquires 1,000
delinquent shares
Shares areatsold
P140atand
a
- Share Premium- Treasury immediately retires
public auction tothem
the highest bidder
Shares .
- Retained Earnings Share Capital
Highest (1,000 the
Bidder- x 100)
person100,000
who is
Share Premium
willing to pay- the
OG Issuance 20,000
“offer price” for
(a) SP- Treasury Shares
the smallest number of shares 5,000
(b) Retained Earnings
Offer Price- includes the unpaid15,000
Case 1: Retirement cost < Original Issuance Cashon the subscription,
balance 140,000
Cost interest accrued on the
subscription, and expenses in the
ABC reacquires 1,000 shares at P80 per share public auction
and retires them. (par value = P100)

Reacquisition:
Treasury Shares (1,000 x 80) 80,000
Cash 80,000

Retirement:
Share Capital (1,000 x 100) 100,000
SP- original issuance (@20) 20,000
Treasury Shares (1,000 x 80) 80,000
Share Premium- Retirement 40,000
Redeemable Callable
Prefence Share Preference Share
 Preferred  Preferred
stock which stock which
the holder has the issuer has
the right to the right to
redeem at a call at a set
set date date
 Classified as  Classified as
financial equity
liability instrument
because when because the
the holder right to call is
exercises its at the
right to discretion of
redeem, the the issuer and
issuer is therefore has
mandatorily no obligation
obligated to to pay unless
pay for the it chooses too
redemption call on the
price shares
 The related  The related
dividends are dividend are
recognized as recognized as
interest direct
expense in deduction
profit or loss from retained
earnings

Callable preference share are accounted

for similar to regular preference shares.
On redemption, the accounting is
similar to the retirement of shares.

Redeemable preference shares are

accounted for as financial liabilities.