Chapter 6

SHARE CAPITAL
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 Shareholder’s equity

01 ● Share Capital- reflects the amount of

resources received by a corporation as a
result of investment by shareholders,
donations or other share capital transaction.
● Retained earnings- (or accumulated
profits/losses) is the amount of capital
accumulated and retained through the
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profitable operations of the business.

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 Share Capital
Legal Capital

Capital contributed by shareholders comes from the sale of shares of

stock. The shares of stock issued are generally referred to as share
capital. 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.
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 The amount of legal capital is
determined as follows:

In case of par value shares, legal capital is the aggregate par value of all issued and
subscribed shares.
In case of no-par shares, legal capital is the total consideration received by the corporation
for the issuance of its shares to the shareholders including the excess of issue price over the
stated value (Section 6, par. 3, Corporation Code of the Phils.).

Share Premium
(or Additional Paid-in Capital). It is the portion of the paid-in capital representing
amounts paid by shareholders in excess of par. It may also result from transactions
involving treasury stocks, retirement of shares, donated capital, shares dividends and any
other “gain” on the corporation’s own stock transactions.
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 Two basic types of shares

Ordinary Share Preference Share

This share represents the basic This share gives its owners certain
ownership class of the corporation. advantages over ordinary
When only one class of share is issued, shareholders. These special benefits
it must be ordinary share.. Ordinary relate either to the receipt of
Shares are the entity’s residual equity. dividends when declared before the
ordinary shareholders (preferred as
to dividends) or to priority claims on
assets in the event of corporate
liquidation (preferred as to assets)
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 Subscribed Share
Authorized Share Issued Share
Capital
It is the portion of the
The number of authorized
Capital Capital
authorized share capital
Terms
shares indicates the maximum These are shares which
number of shares the that has been subscribed
have been sold and paid for
corporation can issue as but not yet fully paid.
in full. Issued shares may
related specified in the article of
corporation.
include treasury shares.

to share
capital Outstanding Share
Capital
Treasury Stock
These are issued shares
acquired by the
These are issued shares,
corporation but not
which are in the hands of
retired and are therefore,
the shareholders.
awaiting to be reissued at
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a later date.
 Accounting for Issuance of
Share Capital

When shares with par value are sold, the proceeds should be credited to the
share capital account to the extent of the par value of the shares, with any excess
being reflected as share premium.

When shares without par value are sold, the proceeds should be credited to the
share capital account. If the no-par stock has a stated value, the excess proceeds
over stated value may alternatively be credited to share premium.
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 Share Issuances for Cash

With Par Value

Issuing Share Capital at Par

Illustration. Narsan Holdings is authorized to issue P1,000,000 ordinary shares divided into 10,000 shares, with a
par value of P100 per share. The diversified company issued on cash basis 2,000 shares at par. The share
issuance entry will be:

Issuing Share Capital Above Par

Illustration. Suppose the 2,000 shares were sold at P150 per share, the entry follows:
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 Without Par Value
Issuing No-Par Share Capital
Illustration. Morning star travel is a domestic corporation engaged in the business of organizing tour packages
for Asian and European visitors to the Philippines. The company which is located at J. Bacobo St., Manila, has
two classes of share preference shares and no-par ordinary shares. 5,000 ordinary shares were issued for
P85,000. The entry to record the issue of these no-par shares will be:

Issuing No-Par Share Capital with Stated Value

Illustration. Suppose that Morning Star Travel’s no-par ordinary shares have a stated value of P20. The
company issued 5,000 shares at P25 per share. The entry will be:
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No-Par Share with Stated Value

 Subscription of Shares
Illustration. Warranty Auto Shop, Inc. is a quality car care center located at St. Paul St., San Antonio Village,
Makati City. Assume that 5,000 shares of P10 par value ordinary shares of the company were sold on
subscription at P12 per share on Sept. 1, 2011 to Ashley Langga. Subscription installments of P24,000 and
P36,000 will be due on Sept. 16 and 30, respectively.

The subscribed
ordinary shares
account represents
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the par value of the

subscribed shares.
 Share Issuances for Non-Cash Considerations
Simply stated, if share capital is issued for a non-cash consideration such as tangible property, intangible
property, and services the proceeds is recorded at an amount equal to the following in the order of priority:

1. Fair value of the non-cash consideration received.

2. Fair value of the share capital issued.
3. Par or stated value of the share capital issued (in the absence of the 1st two).

A share-based payment transaction is one in which the entity receives goods or services as consideration for
equity instruments of the entity including shares and share options.
Issuing Shares for Assets

Illustration. APL Construction and Development Corporation is a medium-sized closely held company
based in Quezon City. A group of Taiwanese investors would like to acquire shares of the company
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because of its tremendous earnings potential. After much thought on the part of its president, Az
Penaflorida, the investors were allowed to make investments. One of the considerations given was a
tract of land in Iloilo City with a fair market value of P1,000,000.
 The entry to record the issue of 900 shares of P1,000 par ordinary shares in exchange for the land is as
follows:

Issuing Shares for Services or Outstanding Liabilities

Illustration. Dynasty Book Source Asia, Inc. engaged the services of a promoter during its formation and
organization. The corporation issued 800 shares of 100 par value ordinary shares for the services. The
fair market value of such services is P100,000. The entry will be:
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 Two Methods of Accounting for Share Capital
Illustration. Lucky Draw Corporation was authorized to issue P400,000 ordinary shares divided into
4,000 shares with a par value of P100 per share. On Aug. 13, 2011, the company received a
subscriptions for 1,000 shares at par from various individuals. As at Sept. 20, 2011, 600 of the
subscribed shares have been fully paid and the stock certificates issued correspondingly. Next day, the
company issued 400 shares at par
Journal Entry Method Memorandum Method
Authorization:
Memo entry: The company was authorized to
issue P400,000 ordinary shares, divided into
4,000 shares, with P100 par.
Shares subscriptions at par:

Subscription fully collected:

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 Issuance of stock certificates after full payment of subscriptions:

Cash subscriptions at par:

Journal Entry Method Memorandum Method

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 TREASURY STOCKS

Treasury stocks are shares of stock which Some of the reasons for the purchase
have been issued and fully paid for, but of treasury stock are as follows: (1) to
subsequently reacquired by the issuing support employee stock compensation
corporation either by purchase, plans; (2) to improve the stock market
redemption, donation or through other price by decreasing the supply of
lawful means. shares; (3) to avoid takeover by an
outsider party.
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 Purchase of Treasury Stock
Illustration. Sea Wind is a world class resort in Boracay Island. The operations have been successful. To
consolidate control over the enterprise and thus avoid a corporate takeover by outsiders, the board of
directors decided to minimize outstanding shares by purchasing 1,500 shares with a par value of P1,000 for
P2,000. The entry will be:

Reissuance of Treasury Stock

At Cost. Assume that the treasury shares were subsequently reissued at cost.

Above Cost. Assume that the treasury shares were reissued at P2,500 per share.
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 Below Cost. Assume that the 1,500 treasury shares were reissued at P1,500 per share.

Retirement of Treasury Stock

With Gain on Retirement. Assume that Sea Wind purchased the treasury shares for P750 per share. Observe
that there is a “gain” on retirement if the cost of treasury shares is less than par value.
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 With Loss on Retirement. Assume that a total of 10,000 shares have been issued at P1,500 per share prior to the
purchase of treasury shares. Sea Wind purchased 1,500 treasury shares for 2,000 per share; these were not
reissued and were ultimately retired.

Donated Capital
Illustration. Jocker’s food Industries received a new service van from its major shareholder as a gift.
The donated asset has a cash price of P350,000. The entry will be as follows:
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 Thank you!
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