Summer AQE Review: Accounting for Share Capital J.L.A.

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Part 1: Basic Concepts of Corporation Accounting IV. Other key-Terms related to Accounting for
Share Capital
Corporation
1. Authorized Share capital - indicates the
 Refers to a legal entity with the right of succession
maximum number of shares the corporation can
and the powers, attributes, and properties expressly
issue as specified in the article of incorporation.
granted by law or as a result of its existence.
2. Issued Share Capital- shares which have been
Par vs. No-Par
sold and paid in full.
Par Value Share- A form of share capital whose value
3. Subscribed Share capital- the portion of share
is specified in the articles of incorporation and reflected
capital that has been subscribed but not
on a stock certificate.
completely paid and hence remains unissued.
The par value is used to determine the shares minimum
4. Outstanding Share capital- issued shares
issue price
which are in hands of the shareholders. It is the
No-Par Share- A form of share capital without any difference b/w the issued shares and treasury
value appearing on the face of the stock certificate. A shares.
no-par share is usually the issuance price or stated value
5. Treasury Shares- issued shares acquired by the
based on the consideration it is issue.
corporation but not yet retired and therefore,
***Based on the Corporation Code, the minimum par awaiting to be reissued. Treated as deduction to
value or consideration for no-par value share is P 5. the share capital.

Shareholders’ Equity Part 2: Accounting for Share Issuances

 Refers to the equity portion/net assets of the A. Cash Issuances of Shares

corporation 1. Issuing Share Capital at par value
General Components of Shareholders Equity Cash xxx
I. Share Capital Ordinary Shares xxx
 Pertains to the portion of the paid-in-capital that
represents the total par or stated value of the shares 2. Issuing Share Capital above par value
issued. Cash xxx
 Contains ordinary and preference shares
Ordinary Shares xxx
General Classes of Share Capital
Share Premium xxx
Ordinary Shares- basic ownership class of a
corporation and is considered subordinate to all other 3. Issuing no-par Share Capital
classes of equity instrument.
Cash xxx
Preference Shares- An equity instruments that gives the
Ordinary Share xxx
holder certain advantages over ordinary shareholders.
4. Issuing no-par Share capital with Stated
II. Share premium
Value
 The portion of the paid-in-capital that
represents excess over the par or stated value. Cash xxx

Share premium arises due to; Ordinary Shares xxx

a) Excess of issuance price over its par or stated Share Premium xxx
value.
b) Resale of treasury shares at more than its cost
c) Donated Capital ***Generally, issuance of shares below par value
d) Distribution of Share Dividends (Discounting) is prohibited.
III. Retained Earnings
 The accumulated balance of periodic earnings,
dividend distributions, prior period errors and
other capital adjustments
Summer AQE Review: Accounting for Share Capital J.L.A.G
How to determine the amount to be credited to share
premium upon issuance?
D. Subscription of Shares
Amount of Share Premium 1. To record subscription
If PAR Value Shares excess of issue price over the Subscription Receivable xxx
par value Subscribed Ordinary Shares xxx 
If NO-PAR Value the excess of issue price over
with Stated Value the stated value. 2. To record initial/final installment
If NO-Stated Value No Share Premium Cash xxx
Shares Subscription Receivable xxx

B. Issuance for Non-Cash Consideration 3. To record issuance of Stock Certificate

If the share capital is issued for non-cash Subscribed Ordinary Shares xxx
consideration such as tangible property Ordinary Shares xxx
(Machinery, Equipment etc) or Intangible
property (i.e Patent), the share capital is Note: Issuance of shares is only made when the
recorded according to the following order of subscription is fully paid.
priority;
1. Fair Value of the non-cash consideration
received. E. Delinquent Share
2. Fair Value of the shares issued.  If shareholder fails to make payment on a
3. Par Value of the shares issued specified date, the shareholder is declared
delinquent and the delinquent share is sold at
C. Issuance for Services public auction.
If shares are issued in exchange for services, the  At the public auction, the account of the
account “organization expense” is debited at the delinquent subscriber, shall be given to the
fair value of the services or the fair value of the person (highest bidder) who are willing to pay
shares issued, whichever is more reliably the offer price (subscription balance + accrued
determined. (PFRS 2) interest + advertising & auction sale expenses)
in exchange for smallest number of shares.

PRO-FORMA ENTRIES:
Illustrative Problem 1: (FOR DISCUSSION)
1. To record subscription
Macky Company was organized on Jan 1, 2021. It is
authorized to issue 20,000 shares of 6%, P 50 par value Subscription Receivable xxx
preference shares, and 50,000 ordinary shares with 10 Subscribed Ordinary Shares xxx
par value. The following stock transactions were
completed during the year: 2. To record initial installment

Jan. 15 Issued 10,000 ordinary shares for cash at Cash xxx

35 per share Subscription Receivable xxx
March 1 Issued 10,000 Preference Shares for cash
at 55 per share 3. To record accrued interest on delinquent
May 1 Acquired Machinery for 130,000 in return shares.
for 10,000 shares with fair value of 15 per Receivable from highest bidder xxx
share.
Aug. 1 Issued 5,000 ordinary shares for 10 per Interest Income xxx
share to lawyers in exchange for their
4. To record auction expense
legal services in organizing the
corporation. The fair value of the services Receivable from highest bidder xxx
is assessed to be 60,000 with reasonable
Cash xxx
certainty.
Nov. 1 Issued 2,000 preference shares for cash at 5. To record sale at public auction
P 50 per share
Cash xxx

Receivable from highest bidder xxx

Requirement:
Subscription Receivable xxx
Prepare the necessary journal entries
Summer AQE Review: Accounting for Share Capital J.L.A.G
using the carrying value of the non-cash asset
surrendered.
6. To record issuance of Stock Certificate
Acquisition of treasury shares (@cost)
Subscribed Ordinary Shares xxx
Treasury stock xxx
Ordinary Shares xxx
Cash xxx
Note: If there is no bidder, the corporation may
bid for delinquent shares and the total amount due REISSUANCE AT COST
shall be credited as paid in full in the books of the
Cash xxx
corporation. This share shall be considered as
Treasury Shares. Treasury Stock xxx
Journal Entry:  REISSUANCE ABOVE COST
Treasury shares xxx Cash xxx
Receivable from highest bidder xxx Treasury Stock xxx
Subscription Receivable xxx Share Premium-TS xxx
To record purchase of own share

REISSUANCE BELOW COST 

Illustrative Problem 2: (For Discussion) Cash xxx
Willwin Corporation is authorized to issue 100,000 Share Premium-TS* xxx
ordinary shares at 10 pesos par value. On June 3, 2023
Mack subscribed 10,000 shares @ 13 pesos per share Treasury Stock xxx
paying an initial payment of 50,000 and the balance to *If treasury shares are reissued below cost, the
be paid next month. However, Mack subscription excess of cost over reissue price should be debited in
balance was called and he failed to pay. As a result, the the order given:
subscription became delinquent. The offer price was
120,000 inclusive of the subscription balances, 30,000 1. Share premium from treasury shares of the same
for interest and 10,000 for related auction expenses. class.
Three bidders are prepared to pay the offer price namely 2. Retained earnings
Mika- 4,000 shares RETIREMENT OF TREASURY STOCK
Miki- 5,000 shares 1. With gain on retirement
Miko- 6,000 shares Ordinary shares xxx
Requirement: Share Premium xxx
1. Prepare the necessary journal entries for the Treasury Stock xxx
above transactions.
2. Who is considered the highest bidder? 2. With loss on retirement
3. What will be the entry if the entity purchase the
Ordinary shares xxx
delinquent shares for itself?
Share Premium* xxx

Part 3: Accounting for Treasury Shares Treasury Stock xxx

 Treasury Shares are accounted for using the cost *If treasury shares are retired with loss should be
method. The reason for this is the legal debited in the order given:
limitation on acquisition of treasury shares.
1. Share premium when shares are originally
 Treasury Shares must be valued at cost,
issued.
regardless of whether they are acquired at an
amount below or above its par or stated value. 2. Share premium from treasury shares of the same
 If cash is used to acquire treasury shares, the class.
cost is equivalent to the cash paid.
3. Retained earnings
 If treasury shares are acquired for noncash
consideration, the cost is commonly measured
Summer AQE Review: Accounting for Share Capital J.L.A.G

Illustrative Problem 3: FOR DISCUSSION

The Dec. 31, 2018 shareholders equity section of Sharmaine Corporations statement of financial position is as
follows:

Shareholders Equity

Share Capital
Ordinary Shares, P 3 par, 200,000 shares 450,000
authorized, 150,000 shares issued and
outstanding
Share Premium 225,000
Total Share Capital 675,000
Retained Earnings 300,000
Total Shareholders Equity 975,000

Required: Prepare the journal entries for the following transactions during January 2019;

Jan. 4 Purchased 25,000 shares of its own

stock for 192,000
10 Sold 4,000 shares of the treasury stock
for 11 pesos
29 Sold 15,000 shares of treasury stock
for 7 pesos
31 Retired the remaining treasury shares

Part 4: Accounting for Capital Donations

Who made the Accounting Treatment

donations
Shareholders A. If shares have been donated;

Upon receipt- Memo Entry on the number of shares received.

Upon reissuance- measured @ reissuance cost

Journal Entry:
Cash xxx
Donated Capital xxx

B. If Non-Cash donation other than shares

Journal Entry:
Non-Cash Asset received** xxx
Donated Capital xxx

* Non-Cash donation from shareholders is recorded at fair

value with a credit to donated capital
** Non-Cash asset may vary like for example Land,
Machinery, Equipment etc.
Non-Shareholders Non-Cash Donations

Journal Entry:
Non-Cash Asset received xxx
Retained Earnings xxx

* Non-Cash donation from non-shareholders is generally

considered as subsidies and is recorded at fair value with a
credit to income (Retained Earnings)

Key Notes on Donated Shares

Summer AQE Review: Accounting for Share Capital J.L.A.G
 Donated Shares are those that an entity received as donation from its shareholders
 Donated shares are actually treasury shares, they may be reissued at any price without incurring any discount
liability.
 Donated shares received has no effect on the entity’s assets, liabilities and equity, but it reduces the number of
outstanding shares
 Reissuance of donated shares increases assets and donated capital (share premium)

MIND EXERCISE
Comprehensive Problem for Basic Corporation
The shareholders equity section of FLORES Corporation is presented as follows;

Flores Corporation
Shareholders Equity
December 31,2022

8% Preference Shares, par 50 authorized 60,000 shares, issued and P 1,750,000

outstanding 35,000 shares
Ordinary Shares, par 30, 100,000 shares authorized, issued and 2,400,000
outstanding 80,000 shares
Share Premium
Preference Shares P 250,000
Ordinary Shares 350,000
Donated Capital 400,000 1,000,000
Total Share Capital P 5,150,000
Retained Earnings 2,000,000
Total Shareholders Equity P 7,150,000

The following transactions occurred during the calendar year 2023:

March 2 Issued the remaining unissued ordinary shares at 40 per share
April 1 Issued 5,000 Preference Shares in exchange of land with Fair Market Value of 350,000
June 10 Increased the authorized ordinary shares by 50,000 shares as per board approval
22 Issued 10,000 Ordinary Shares for an aggregate amount of 400,000
July 20 Received subscription on 5,000 ordinary shares at 32 per share
30 Received subscription on 10,000 ordinary shares at 35 per share
Aug 5 The Corporation received 3,000 Ordinary Shares as donation from a shareholder. The FMV of the said share
at that time is P 35/share
25 Sold 7,000 ordinary shares for P 35 per share (3,000 coming from donated share and 4,000 coming from
ordinary shares)
Sept. 11 Received full payment from subscription last July 20
20 Reacquired 25,000 ordinary shares from March 2 in exchanged of machinery w/ carrying amount 250,000
and fair market value of 300,000
29 Received 50% of subscription last July 30
Oct 10 Issued 6,000 shares at P30 per share (4,000 from treasury shares and 2,000 from ordinary shares)
20 Received the final balance from subscription last July 30
Nov. 5 Retired 1,000 ordinary shares from Sept 20
Nov. 30 Received Equipment worth 400,000 from Non-Shareholders
Dec. 30 Closed profit of 2,000,000 to the Retained Earnings account

Required:
1. Prepare the necessary entries for the above transactions
2. Prepare the shareholders equity section for December 31,2023