Sharehold

ers Equity
Shareholders’ Equity
Shareholders’ Equity (aka Stockholders’ Equity) is the equity of a corporation.

Components of SHE:
1. Contributed Capital
2. Other Comprehensive Income

3. Retained Earnings (Deficit)/Accumulated profits (losses)

4. Treasury Shares
Share System

In the absence of restrictive provisions, each share carries the following

rights:
1.To share proportionately in profits and losses.

2.To share proportionately in management (the right to vote for

directors).

3.To share proportionately in assets upon liquidation.

4.To share proportionately in any new issues of shares of the same

class—called the preemptive right.
Share System

Par Value – designated peso amount per share that is established in the
articles of incorporation and is printed on each share certificate.

No Par Share – this share does not carry a par value. The entire
consideration received shall be treated as legal capital and shall not be
available as dividends. Under the Revised Corporation Code (R. A. No.
11232), no-par value shares must be issued for a consideration of at least
five pesos (P5.00) per share.
Trust fund Doctrine
The trust fund doctrine holds that the share capital of a corporation is considered as
trust fund for the protection of creditors.

It is illegal to return legal capital shareholders during the lifetime of the corporation.

Legal Capital

Par Value shares

Par value of issued and subscribed shares.

No-Par Value shares

Stated value of issued and subscribed plus share premium
Variety of Ownership
Ordinary shares represent the residual corporate interest.
uBears ultimate risks of loss.

uReceives the benefits of success.

uNot guaranteed dividends nor assets upon dissolution.

Preference shares are created by contract, when shareholders’ sacrifice

certain rights in return for other rights or privileges, such as dividend
preference and preference in terms of claims to net assets in the event of
liquidation.
Contributed Capital
Contributed capital (also kwon as paid-in capital) is the cash and other assets that
shareholders have given a company in exchange for stock
Components of Contributed Capital
1. Share Capital (par value of Ordinary and Preferred Share)

2. Share Premium
§ Excess over par or stated value
§ Resale of Treasury Shares at more than cost
§ Donated Capital
§ Issuance of share warrants
§ Distribution of share dividends
§ Quasi-reorganization and recapitalization
Issuance of Shares
1. Shares issued for cash.

2. Shares in exchanged for No-cash Consideration

Value of shares is equal to:
1. FV of noncash consideration received.
2. FV of shares issued.
3. Par value or stated value.
Accounting for Share Capital
Two methods
a. Memorandum method – no entry is made to
record the authorized share capital.
b. Journal entry method – the authorization to issue
share capital is recorded by debiting unissued share
capital and crediting authorized share capital.

For discussion purposes, memorandum method will be used.

Issuance of Shares
Journal Entry at the Date of Issuance:
Cash XX
Share Capital XX
Share Premium XX

Illustrative Example: Video Electronics Corporation is organized with 10,000 ordinary shares
authorized P2 par value. If Video Electronics issues 500 shares for cash at P10 per share, it
makes the following entry.
Cash 5,000
Share Capital 1,000
Share Premium 4,000
Issuance of Shares
Illustrative Example: Video Electronics Corporation is organized with 10,000 ordinary shares
authorized no par value shares. If Video Electronics issues 500 shares for cash at P10 per share,
it makes the following entry.
Cash 5,000
Share Capital 5,000

Illustrative Example: Video Electronics Corporation is organized with 10,000 ordinary shares
authorized no par value shares P2 stated value. If Video Electronics issues 500 shares for cash
at P10 per share, it makes the following entry.
Cash 5,000
Share Capital 1,000
Share Premium 4,000
Issuance of Shares
Illustration: The following series of transactions illustrates the procedure
for recording the issuance of 10,000 shares of €10 par value ordinary
shares for a patent for Marlowe Company, in various circumstances.

1. Marlowe cannot readily determine the fair value of the shares, but it
determines the fair value of the patent is €150,000.

Patent 150,000
Share Capital—Ordinary 100,000
Share Premium—Ordinary 50,000
Issuance of Shares
Illustration: The following series of transactions illustrates the procedure
for recording the issuance of 10,000 shares of €10 par value ordinary
shares for a patent for Marlowe Company, in various circumstances.

2. Marlowe cannot readily determine the fair value of the patent, but it
knows the fair value of the shares is €140,000.

Patent 140,000
Share Capital—Ordinary 100,000
Share Premium—Ordinary 40,000
Issuance of Shares
Costs of Issuing Stock

Direct costs incurred to sell shares, such as

u underwriting costs,
u accounting and legal fees,
u printing costs, and
u taxes,
should reduce the proceeds received from the sale of the shares.
Consequently, share premium arising from the share issuance will
decrease due to the cost of share issuance.
Reacquisition of Shares
Corporations purchase their outstanding shares to:
u Provide tax-efficient distributions of excess cash to shareholders.
u Increase earnings per share and return on equity.
u Provide shares for employee compensation contracts or to meet potential
merger needs.
u Prevent takeover attempts or to reduce the number of shareholders.
u Make a market in the shares.
51% and above mayroon ka ng control
Treasury Shares
Treasury shares are an entity’s own shares that were previously issued but are
subsequently reacquired but not cancelled.

An entity may acquire its previously issued shares only if it has sufficient unrestricted
retained earnings.
Treasury shares are presented as deduction in the shareholders equity.

*Walang paki ang PAR VALUE sa

Treasury shares are accounted using the cost method.
pagcompute ng TREASURY
SHARES
Journal Entry at the date of
purchase: *REACQUIRE can be below PAR
Treasury Shares XX VALUE
Cash XX
* BAWAL lang ang below par kapag
ISSUANCE
Treasury Shares

Illustration: Pacific Company issued 100,000 shares of $1 par value

ordinary shares at a price of $10 per share. In addition, it has retained
earnings of $300,000.
Treasury Shares

Illustration: Pacific Company issued 100,000 shares of $1 par value

ordinary shares at a price of $10 per share. In addition, it has retained
earnings of $300,000.
On January 20, 2015, Pacific acquires 10,000 of its shares at $11 per
share. Pacific records the reacquisition as follows.

Treasury Shares 110,000

Cash 110,000
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Treasury Shares

Illustration: The equity section for Pacific after purchase of the treasury
shares.
Treasury Shares
Sale/Reissuance of Treasury Shares
u Above Cost

u Below Cost or @Cost

Both increase total assets and equity.

Journal Entry at the date of reissuance Journal Entry at the date of reissuance
above cost: below cost:
Cash XX Cash XX
Treasury Shares XX (1)Share Premium – TS XX
Share Premium – TS XX (2)Retained Earnings XX
Treasury Shares XX
Treasury Shares Cost = Reaquisition Price/Reissuance Price

Sale of Treasury Shares above Cost. Pacific acquired 10,000 treasury shares
at P11 per share. It now sells 1,000 shares at P15 per share on March 10.
Pacific records the entry as follows.
Cash 15,000
Treasury Shares 11,000
Share Premium—Treasury 4,000
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TOTAL INCREASE IN EQUITY IS 15K

*Nabawasan si TREASURY SHARE (which has normal debit balance)

kaya INCREASE in EQUITY

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Treasury Shares
Sale of Treasury Shares below Cost. Pacific sells an additional 1,000
treasury shares on March 21 at P8 per share, it records the sale as follows.

Cash 8,000
Share Premium—Treasury 3,000
Treasury Shares 11,000
*If SUFFICIENT ang share premium-treasury NO NEED for retained earnings account

*If INSUFFICIENT ang share premium-treasury there is a NEED for RE account

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*If una palang WALA NG SHARE
PREMIUM, RE na ang debit

*Total Equity BELOW COST will

INCREASE

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Treasury Shares

Illustration: Assume that Pacific sells an additional 1,000 shares at P8

per share on April 10.
Cash 8,000
Share Premium—Treasury 1,000
Retained Earnings 2,000
Treasury Shares 11,000
Treasury Shares *Retirement of TS will NOT AFFECT the TOTAL EQUITY

Retirement of treasury shares - TOTAL EQUITY IS UNCHANGE

• If TS are subsequently retired, the share capital account is debited at par
value or stated value
and TS account is credited at cost.
• Retirement may either result in a “gain” or “loss”
• There is a “gain” if par value exceeds cost of treasury shares, otherwise there
is a “loss”.
• In case of a “gain”, share premium – TS is credited.
• In case of a “loss”, the “loss” is debited in the following order of priority:
-SP from original issuance
-SP from TS
-Retained Earnings
Treasury Shares
Illustrative example:
If 1,000 OS with par of P100 are held as treasury at a cost of P80,000,
and subsequently retired, how much is share premium – TS from this
transaction, if there’s any? Prepare journal entry.

Solution:
Par value of shares = 100,000
Cost of TS = 80,000
SP-TS = excess of par over cost = 100,000 – 80,000 = 20,000

Dr. Ordinary share capital 100,000

Cr. Treasury shares 80,000
Cr. Share premium – TS 20,000
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 Treasury Shares
Illustrative example:
Ordinary share capital, 50,000 shares, P100 par 5,000,000
SP – original issuance 500,000
SP – treasury shares 100,000
RE 1,000,000
TS, 5,000 shares at cost 750,000
Assuming the treasury shares are retired, what is the journal entry for this
transaction?
Dr. OSC 500,000
Dr.SP – issuance 50,000
Dr. SP – treasury shares 100,000
Dr.RE 100,000
Cr. Treasury shares 750,000
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 SP - OI
DEBIT

SP - TS

10% ang ireretire

RE

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 Treasury Shares
Illustrative example:
Ordinary share capital, 50,000 shares, P100 par 5,000,000
SP – original issuance 500,000
SP – treasury shares 100,000
RE 1,000,000
TS, 5,000 shares at cost 750,000
Assuming the treasury shares are retired, what is the journal entry for this
transaction?
Dr. OSC 500,000
Dr.SP – issuance 50,000
Dr. SP – treasury shares 100,000
Dr.RE 100,000
Cr. Treasury shares 750,000
 *CHANGE IN ACCOUNTING ESTIMATE
Retained Earnings -hindi directly maapektuhan ang RE
DIVIDENDS
*CHANGE IN ACCOUNTING POLICY
- sa RE inaacount (+/-)
Retained earnings represent the cumulative profits (net of losses, distribution to
owners, and other adjustments) which are not yet distributed as dividends but
rather retained to be reinvested in the business or to settle debt.

Total retained earnings may consist of:

1. Unrestricted – available for future distribution as dividends
2. Appropriated (Restricted) – not available for distribution unless the restriction is subsequently
reversed. May be legal, contractual or voluntary/discretionary appropriation.
TS
NOTE: Total retained earnings will still include appropriated RE to the total stockholder’s equity.
 TOTAL RE = UNRESTRICTED + RESTRICTED RE
(Plus parin ang RRE sa total SHE)

*We cannot distribute dividends na kasama ang TS

Maximum Dividend to be distributed/declared is 95k because TS is one kind of legal appropriation
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DIVIDENDS
Dividends are distributions of earnings to the shareholders in proportion to their
shareholdings.
Maximum amount of dividends is equal to the Unappropriated Retained Earnings.

Types of Dividends

▸ Cash Dividend

▸ Property Dividend
▸ Share Dividend

▸ Scrip Dividend

▸ Liquidating Dividend

Only Outstanding Shares are Entitled for Dividends (Issued Shares less Treasury Shares)
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DIVIDENDS
Dates relevant to the accounting for dividends
*Date of declaration
The date on which the directors authorize the payment of dividends to shareholders
Dividends/Retained Earnings xx
Dividends Payable xx
*Date of Record
The date on which the stock and transfer book of the corporation will be closed
for registration
*Date of Payment
The date on which dividend liability is to be paid.
Dividends Payable xx
Cash xx
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DIVIDENDS

Outstanding shares pertain to shares issued and held by shareholders and those that
are subscribed. Outstanding shares exclude unissued shares and treasury shares.
 Cash Dividends
Preference Share Dividends
Non- Not entitled to any accumulated Dividends. Dividend not declared in the current
Cumulative period is considered lost permanently.

Cumulative Dividends not declared in a given year accumulates. Accumulated dividends must
be paid in full when dividends are declared in succeeding periods before any
dividend can be paid on the ordinary shares.

Participating Provides for additional dividends to be paid to its holders after dividends of a
specified amount or rate are paid to the ordinary shareholders.

Non- Limits the dividends for any year to the dividend rate.
Participating
If the problem is silent, Preference is non-cumulative and non-participating.
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Cash Dividends
Dividends is distributed to the preference and ordinary shares in the following order:

§ Dividends in arrears on non-cumulative preference shares, if any

§ Current Dividends on Preference Shares
§ Ordinary Share
Illustrative Example
The capital structure of BTS company as of December 31, 2021 is as follows:

Preference Share Capital, 10%, P100 par, 10,000 share P1,000,000

Ordinary Share Capital, P10, 300,000 shares 3,000,000

The company declared P90,000 dividends in 2021 and P600,000 in year 2022.
Required.
1. Compute the 2022 dividends of PS and OS assuming PS is non-cumulative.
Answer:
Ordinary Shares 500,000
Preferred Shares 100,000
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Illustrative Example
The capital structure of BTS company as of December 31, 2021 is as follows:

Preference Share Capital, 10%, P100 par, 10,000 share P1,000,000

Ordinary Share Capital, P10, 300,000 shares 3,000,000

The company declared P90,000 dividends in 2021 and P600,000 in year 2022.
Required.
1. Compute the 2022 dividends of PS and OS assuming PS is cumulative.
Answer:
Ordinary Shares 490,000
Preferred Shares 110,000
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Share Dividends
Share dividends are accounted as follows:
§ Small Share Dividends – if the share dividends declared is less than 20% of the
outstanding shares, the share dividends are accounted for at fair value.

§ Large Share Dividends – if the share dividends declared is 20% or more of the
outstanding shares, the share dividends are accounted for at par value.
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Illustrative Example
At the current year end, Yusuke Company issued 4,000 ordinary shares of P100
par value in connection with a stock dividend. Fair value of shares at the date of
declaration is P120
The shareholders’ equity accounts immediately before issuance of the stock dividend
shares were as follows:

Ordinary share capital P100 par 50,000 shares authorized, 20,000 shares P2,000,000
outstanding
Share Premium 3,000,000
Retained Earnings 1,500,000

Required: What amount should be debited to Retained Earnings immediately after the
stock dividend?
Answer: 400,000
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Illustrative Example
At the current year end, Yusuke Company issued 2,000 ordinary shares of P100
par value in connection with a stock dividend. Fair value of shares at the date of
declaration is P120
The shareholders’ equity accounts immediately before issuance of the stock dividend
shares were as follows:
Ordinary share capital P100 par 50,000 shares authorized, 20,000 shares P2,000,000
outstanding
Share Premium 3,000,000
Retained Earnings 1,500,000

Required: What amount should be debited to Retained Earnings immediately after the
stock dividend?
Answer: 240,000
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Share Split

u To reduce the market value of shares.

u No entry recorded for a share split.

u Decrease par value and increased number of

shares.
Share Split

u To reduce the market value of shares.

u No entry recorded for a share split.

u Decrease par value and increased number of

shares.
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Share Split and Share Dividend Differentiated

u A share split increases the number of shares outstanding and decreases

the par or stated value per share.

u A share dividend,
► increases the number of shares outstanding.
► does not decrease the par value.
► increases the total par value of outstanding shares.