FINANCIAL

ACCOUNTING AND REPORTING

FAR16 Share Capital Transactions

16.1. Key Concepts and Definitions ............................................................................... 1

16.2. Issuance of Shares ...................................................................................................... 2

16.3. Share Subscriptions and Delinquencies ........................................................... 3

16.4. Treasury Shares .......................................................................................................... 4

16.5. Recapitalization and Quasi-reorganization .................................................... 4




FAR16 Share Capital Transactions

16.1. Key Concepts and Definitions
1. Authorized share capital – the maximum aggregate par value or stated value of shares that may be issued
by the corporation as stated in its articles of incorporation (i.e. maximum number of shares x par value or
stated value). For shares without par and without stated value, this simply pertains to the maximum
number of shares that may be issued.

2. Share capital (a.k.a. capital stock) – this pertains to the capital issued and/or outstanding. Share capital
may be ordinary or preferred/preference.

3. Ordinary share capital – share capital that gives the shareholders the same rights and privileges. The
basic rights of a shareholder, as determined by the corporation code are:
a. Right to the share of the income of the corporation.
b. Right to vote
c. Right to subscribe for additional share issuance (i.e. preemptive right or stock right)
d. Right to the share in the net assets of the corporation upon liquidation.
However, ordinary shares have no fixed return on investment since their return is entirely dependent on
how well the corporation performs.

4. Preference share capital – share capital that gives the shareholders the right to a fixed amount of
dividends and/or a specified claim on the net assets of the corporation upon liquidation. Preference shares
may be a combination of any of the following characteristics:
a. Cumulative – entitles the shareholder to dividends in arrears
b. Participating – entitles the shareholder to participate in any excess dividends
c. Callable – shares that may be redeemed at a specified price at the option of the issuing corporation.
d. Redeemable – shares that may be redeemed at a specified price at the option of the shareholder or
that has a mandatory redemption date on the part of the issuing corporation. Because of its nature,
redeemable preference shares are classified as a liability and any dividends paid to shareholders are
accounted for as interest expense.
e. Convertible – shares that may converted, at the option of the shareholder, to other securities (e.g.
bonds, ordinary shares) of the issuing corporation.

5. Share premium (a.k.a. additional paid-in capital) – the portion of paid-up capital representing the
excess over the par or stated value of the shares. This can come from:
a. Any excess over par or stated value
b. Resale of treasury shares at more than acquisition cost
c. Distribution of stock dividends (i.e. bonus issue)
d. Issuance of share warrants
e. Donated capital
f. Quasi-reorganization and recapitalization

6. Subscribed share capital – the portion of the authorized share capital that has been subscribed but not
yet paid in full. Subscribed share capital is considered unissued until they are fully paid. Subscribed share
capital is presented net of any subscription receivable not currently due (i.e. due more than 12 months
from the balance sheet date).

7. Par value – the specific value fixed in the articles of incorporation and imprinted on the stock certificates.
There is no minimum amount for par value.

8. Stated value – the value of a share that may be fixed in the articles of incorporation or the board of
directors but is not imprinted on the stock certificates. Stated value should not be lower than P5.

9. No-par, no-stated value shares – shares that have no par value or stated value either on the stock
certificate or in the articles of incorporation. Likewise, this type of shares should not be issued at lower
than P5 per share.

10. Legal capital – pertains to the sum of the:
a. par value of all issued and subscribed shares with par value, and
b. the total value of all issued and subscribed shares without par value.

11. Treasury shares – shares of the corporation that are issued originally to shareholders but are reacquired
(but not retired or cancelled) by the corporation. Treasury shares are considered to be issued but not
outstanding.

12. Recapitalization – an event that changes the capital structure of the entity, such as a stock split or a change
in the par value of the share.

FAR16 SHARE CAPITAL TRANSACTIONS 1


16.2. Issuance of Shares

Fair value of consideration xxx
Pro-forma journal
Share capital (@ par/stated value) xxx
entry
Share premium (excess over par or stated) xxx


When the shares have no par or stated value, then the entire fair value of the
No-par, no-stated
consideration is credited to the appropriate share capital account. No share
value shares
premium is recognized.


When shares are issued for noncash consideration, the shares are measured using
the following hierarchy:
Issuance for non-cash
a. Fair value of the noncash asset/s received
assets
b. Fair value of the shares issued on the date of issuance (or on the closest date)
c. Par value or stated value of the shares issued


When shares are issued for services rendered, the expense account is debited, and
the appropriate equity accounts are credited. The shares are measured using the
following hierarchy:
Issuance for services
a. Fair value of the services rendered to the corporation
b. Fair value of the shares issued on the date of issuance (or on the closest date)
c. Par value or stated value of the shares issued


When shares are issued to extinguish a liability, the shares are measured initially
using the following hierarchy:
Issuance to extinguish
a. Fair value of shares issued
a liability
b. Fair value of liability extinguished
c. Carrying amount of liability extinguished


• For their original issuance, shares may not be issued for a consideration lower
Issuance at below par than their par value or stated value.
or stated value • For subsequent issuance, a consideration at below par value or stated value
is allowed, such as in the case of the reissuance of treasury shares.


Share issuance costs are costs directly attributable to the issuance of shares.
Examples are underwriting costs, commission to broker, accounting and legal
fees, printing costs of stock certificates, and SEC filing fees. These costs are treated
in the following hierarchy:
Share issuance costs
a. Deduction to share premium from the specific share issuance
and cost of listing
b. Deduction to share premium from previous share issuance
shares
c. Deduction to retained earnings

Cost of listing shares in the stock market are recognized immediately as expense
when incurred.


Stock rights (i.e. preemptive right) is given to existing shareholders in the
instance that the corporation increases its authorized share capital and new
shares are initially issued to the public. Stock rights give the existing shareholders
the right to be offered first with the new shares in proportion to their interest
before such shares are issued to or subscribed by others. This is for the purpose
Stock rights and share of protecting their ownership interest. The instrument evidencing such right is
warrants called a share warrant.

No entry is made when share warrants are issued for the reason that no
consideration was received for their issuance. Only a memorandum entry is made
to indicate the number of shares the existing shareholders can purchase through
the exercise of the warrants.




FAR16 SHARE CAPITAL TRANSACTIONS 2

16.3. Share Subscriptions and Delinquencies

Subscription receivable xxx
Pro-formal journal
Subscribed share capital (@ par/stated value) xxx
entry
Share premium (excess over par or stated) xxx


When the shares have no par or stated value, then the entire receivable balance is
No-par, no-stated
credited to the appropriate share capital account. No share premium is
value shares
recognized.


Subscribed share capital is presented in the equity section net of any subscription
receivable not currently due. It is possible that a down payment is made on the day
Presentation in the
the share capital is subscribed.
statement of financial

position
Subscription receivable that are currently due are presented in the current assets
section.


Subsequent payments are recorded as:
Cash xxx
Subscription receivable xxx

When the problem is silent, it is assumed that payments of subscriptions are
allocated proportionately to the shares subscribed. This simply means that unless
Subsequent the entire subscription receivable is paid, no shares are considered to be fully paid.
payments and full Issuance of stock certificates may only be made upon full payment. This rule may
payment be overridden if the problem specifically states that a certain number of the initially
subscribed shares have been fully paid.

Once the shares are fully paid, the entry to record the issuance of stock certificates
is:
Subscribed share capital (@ par/stated value) xxx
Share capital (@ par/stated value) xxx


When subscriptions are determined to be delinquent (i.e. the subscriber can no
longer pay his or her balance), the initial entry to record the delinquency is:
Receivable from highest bidder xxx
Subscription receivable xxx

All expenses paid or incurred in relation to the delinquency sale is debited to the
“Receivable from highest bidder” account. The highest bidder pertains to the bidder
who is willing to pay the entire receivable balance (including the expenses related
to the delinquency sale) for the least number of shares. Upon receipt of payment
from the highest bidder, the entry to record the issuance of the shares is:
Delinquent Subscribed share capital (@ par/stated value) xxx
subscriptions Share capital (@ par/stated value) xxx

In the instance that there is no bidder for the delinquent shares, the corporation
may bid for its own shares. The entries to record such scenario are:
Treasury share xxx
Receivable from highest bidder xxx

Subscribed share capital (@ par/stated value) xxx
Share capital (@ par/stated value) xxx

Subsequently, the treasury shares may be re-issued to the public. The accounting
for which is discussed in the next section.

FAR16 SHARE CAPITAL TRANSACTIONS 3

16.4. Treasury shares

Under the cost method, the entry to record the acquisition of treasury shares is:
Treasury shares xxx
Pro-forma journal Cash (or carrying amount of noncash asset given) xxx
entry
Retained earnings – unappropriated xxx
Retained earnings – appropriated xxx


The Corporation Code states that a corporation can only have an amount for
Limitation on
treasury shares to the extent of its unrestricted or unappropriated retained
retained earnings
earnings, hence the second entry above.


Presentation in the Treasury shares are deducted from the total equity balance. The number of
statement of financial shares held in the treasury and the restriction on the retained earnings pertaining
position to the treasury shares should be disclosed.


The entry to record the reissuance of treasury shares, assuming no difference
between the acquisition cost and the reissuance price, is:
Fair value of consideration xxx
Treasury shares xxx

Retained earnings – appropriated xxx
Retained earnings – unappropriated xxx
Reissuance of

treasury shares
When the reissuance price exceeds the cost of the treasury shares, the excess is
credited to share premium.

When the reissuance price is lower than the cost of the treasury shares, the excess
is debited using the following hierarchy:
a. Share premium from treasury shares of the class of shares
b. Retained earnings


When shares are donated back to the Corporation by its shareholders, such shares
are also considered to be treasury shares. Only a memorandum entry is made for
such transaction since it does not involve any consideration. However, outstanding
Donated shares shares are reduced by the number of donated shares. When donated shares are
subsequently reissued, the entry is:
Fair value of consideration xxx
Donated capital (part of share premium) xxx


16.5. Recapitalization and Quasi-reorganization
• Recapitalization is effected through any of the following means:
a. A change in from par to no-par value shares (and vice versa)
b. A reduction in the stated value or par value of the shares
c. Share splits – which can be split-ups (increase in number of shares, decrease in value per share) or
split-downs (decrease in number of shares, increase in value per share).
• Recapitalization does not affect assets, liabilities or total shareholders’ equity.
• For changes from par to no-par (and vice versa) and reductions in the stated or par value of the shares, the
balancing figure is either retained earnings (if debit) or share premium (if credit).
• For share splits, they affect only the number of outstanding shares and par value per share. Thus, they are
recorded only through a memorandum entry.
• Quasi-reorganization is an accounting procedure whereby a financially troubled corporation, but with
favorable future prospects, is permitted, but not required, to revalue its assets and liabilities, and realign
its equity, subject to the provisions and relevant regulations, in order to establish a ‘fresh start’.
• Quasi-reorganization may be effected through:
a. Revaluation of property, plant and equipment
b. Recapitalization
• The basic approach to quasi-reorganization is as follows:
a. Assets (and liabilities) are revalued upwards or downwards
b. Any resulting credit balance in revaluation surplus is used to wipe out any deficit
c. If a recapitalization is made, any resulting share premium shall also be used to wipe out any deficit
d. Disclosures required by relevant regulations are provided in the financial statements for a minimum
period of three years

FAR16 SHARE CAPITAL TRANSACTIONS 4

 Case Study 1
The following transactions occurred during the first quarter of operations of No-to-Retake Corporation:

January 1 Authorized by the SEC to issue 500,000 Ordinary Shares (P10 par); 100,000 Preference Shares (P50
par); 50,000 Ordinary Shares (no par, no stated value); and 25,000 Preference Shares (P100 stated
value).

January 5 Received subscriptions for 100,000 ordinary shares (P10 par) at P15 per share and for 10,000
preference shares (P100 stated value) at P120 per share. A down-payment of 40% was received from
the ordinary share subscribers and 60% from the preference share subscribers.

January 6 Issued 5,000 ordinary shares (no par, no stated value) in exchange for the services of the lawyer and
1,000 preference shares (P50 par) in exchange for supplies valued at P53,000. The fair value of the
ordinary shares and preference shares on this date is P12 and P55, respectively.

February 5 Issued 12,000 ordinary shares (P10 par) for the following: Inventory valued at P150,000; Equipment
with no known fair value; and office supplies valued at P53,000. On this date, the shares were valued at
P20 per share.

February 10 Received 30% of the balance from ordinary share subscribers on the January 5 subscriptions. Also,
received the balance due from the preference share subscribers of 4,000 shares on the January 5
subscriptions. Shares of stock were issued to the fully paid subscribers.

February 14 Issued 15,000 ordinary shares (no par, no stated) for P183,000 cash. On the same date, the corporation
received subscriptions for preference share (P50 par) from the following persons: Anna – 8,000 shares;
Becca – 13,000 shares; Cassandra – 9,000 shares. The preference share premium was credited for a total
of P390,000 for these subscriptions and a down-payment of 25% was received from each subscriber.

February 20 Received subscription for 20,000 ordinary shares (P10 par) at P18 per share. A down-payment of 50%
was received. The balance is due in three equal instalments on February 28, March 15 and March 31.
The subscribers were able to pay the instalments on their due dates.

March 1 Received the remaining amount from the ordinary share subscribers on the January 5 subscriptions and
shares of stock were subsequently issued to them. Of the remaining subscriptions for preference shares
on January 5, subscribers for 5,000 shares were able to pay their balance and shares of stock were
issued to them. The other preference share subscribers were declared delinquent. Expenses related to
delinquency sale amounts to P15,000.

March 5 Received payment from the highest bidder on the delinquent shares and shares of stock were issued to
him. On the same day, Becca and Cassandra paid their remaining balance and shares of stock were
issued to them. Anna, on the other hand, paid 50% of her subscription.

March 20 Issued 6,700 preference shares (P100 stated value), half of which was issued for cash at P120 per share
and the other half for inventory with a fair value of P385,000. On the same day, Anna informed the
corporation that she can no longer pay her remaining balance. Her shares were declared delinquent and
was sold to the highest bidder on the following day (March 21). All of the shares were issued to the said
bidder.

March 22 Reacquired 5,000 of its own par-value ordinary shares at P20 per share.

March 24 Reissued 2,000 of the treasury shares at P25 per share.

March 26 Reissued 2,500 of the treasury shares at P15 per share.

March 27 Retired the remaining treasury shares.

March 28 Conducted a 2:1 stock split for its par-value ordinary shares.

March 29 Reduced the par value of its par-value preference shares by P20 and changed its stated-value preference
shares to no-par, no-stated.

March 31 Issued 50,000 par-value ordinary shares for P600,000 cash.


Required
Prepare the journal entries to record the transactions and compute for the t-account balances of the affected accounts
at the end of the first quarter of operations.

FAR16 SHARE CAPITAL TRANSACTIONS 5

Quizzer – Problem 1
1. On March 1, 2019, Abeyance Company issued 10,000 ordinary shares with P200 par value and 20,000 convertible
preference shares with P2.00 par value for a total of P8,000,000. On this date, the ordinary share is selling at P360
and the preference share is selling at P270. What amount of the proceeds should be allocated to the convertible
preference shares?
A. P6,000,000
B. P5,400,000
C. P4,800,000
D. P4,400,000

2. On July 1, 2019, Abysmal Company issued 6% bonds with a maturity value of P6,000,000, together with 10,000
ordinary shares with P50 par value for a combined cash amount of P11,000,000. The market value of the ordinary
share cannot be determined. If the bonds were issued separately, the bonds would have sold for P4,000,000 on an
8% yield to maturity basis. What amount should be reported for share premium on the issuance of the ordinary
shares?
A. 7,500,000
B. 6,500,000
C. 5,500,000
D. 4,500,000

3. During 2019, Abysmal Company issued 50,000 convertible preference shares with P100 par value for P110 per
share. One preference share can be converted into three ordinary shares with P25 par value at the option of the
preference shareholder. On December 31, 2019, when the market value of the ordinary share was P40 per share,
all of the preference shares were converted. What amount should be credited respectively to ordinary share capital
and share premium as a result of the conversion?
A. P3,750,000 and P1,750,000
B. P3,750,000 and P2,250,000
C. P5,000,000 and P500,000
D. P6,000,000 and P0

4. Bizarre Company acquired 6,000 shares with P1 par value at P36 per share. During 2019, the entity issued 3,000 of
these shares at P50 per share. The cost method is used in accounting for treasury shares. What accounts and
amounts should be credited to record the issuance of the 3,000 shares?
A. Share capital for P6,000, share premium for P102,000, and retained earnings for P42,000.
B. Share capital for P6,000 and share premium for P144,000.
C. Treasury shares for P108,000 and share premium for P42,000.
D. Treasury shares for P108,000 and retained earnings for P42,000

5. Callous Company was organized on January 1, 2019 with 100,000 shares authorized with P100 par value. On same
date, the entity issued 75,000 shares at P140 per share and on December 31, 2019, it purchased 5,000 shares at
P110 per share to be held as treasury. The entity used the par value method of recording treasury shares. What is
the balance in the share premium account arising from treasury share transaction on December 31, 2019?
A. P200,000
B. P150,000
C. P50,000
D. None

6. On December 31, 2019, Candid Company's board of directors canceled 5,000 shares of P50 par value held in
treasury at an average cost of P120 per share. Before recording the cancelation of the treasury shares, the entity
had the following balances in its shareholders' equity:
Share capital (50,000 shares originally issued at P75) P2,500,000
Share premium 1,250,000
Retained earnings '1,000,000
Treasury shares, at cost 600,000

On December 31, 2019, what amount should be reported as share capital outstanding?
A. 2,500,000
B. 1,900,000
C. 2,250,000
D. 2,125,000

FAR16 SHARE CAPITAL TRANSACTIONS 6

7. Dearth Company issued 100,000 ordinary shares. Of these, 5,000 shares were held as treasury on December 31,
2019. During 2020, transactions involving ordinary shares were as follows:
May 1 1,000 shares of treasury were sold.
Aug 1 10,000 previously unissued shares were sold.
Nov 1 A 2-for-l share split took effect.

At December 31, 2020, how many ordinary shares were issued and outstanding, respectively?
A. 220,000 and 212,000
B. 220,000 and 216,000
C. 222,000 and 214,000
D. 222,000 and 218,000

8. Debacle Company was organized on January 1, 2019. On that date, it issued 200,000 shares with P10 par value at
P15 per share. During the period January 1, 2019 through December 31, 2020, the entity reported net income of
P2,000,000 and paid cash dividends of P500,000. On January 5, 2020, the entity purchased 10,000 shares at P20
per share to be held as treasury. On December 31, 2020, 5,000 treasury shares were sold at P30 per share and the
remaining treasury shares were retired. What is the total shareholders' equity on December 31, 2020?
A. P4,450,000
B. P4,350,000
C. P4,400,000
D. P4,950,000

Quizzer – Theory 1
1. When the shares with par value are sold, the proceeds shall be credited to the
A. Share capital account.
B. Share premium.
C. Retained earnings.
D. Share capital account to the extent of the par of the shares issued with any excess being reflected in share
premium.

2. If shares are issued for noncash consideration, the proceeds shall be measured by
A. Fair value of the noncash consideration received
B. Fair value of the shares issued
C. Par value of the shares issued
D. Carrying amount of the noncash consideration received

3. Which of the following statements is incorrect concerning treasury shares?
A. Treasury shares shall be recorded at cost irrespective of whether acquired below or above par value.
B. The total cost of treasury shares shall be deducted from equity.
C. Treasury shares may be recognized as financial asset.
D. Gain or loss on sale of treasury shares shall not be included in profit or loss.

4. The cost of treasury shares acquired for noncash consideration is usually measured by
A. Fair value of the noncash consideration given
B. Carrying amount of the noncash asset surrendered
C. Par value of the shares
D. Book value of the shares

5. If treasury shares are reissued for noncash consideration, the proceeds shall be measured by
A. Fair value of the treasury shares
B. Fair value of the noncash consideration received.
C. Carrying amount of the noncash consideration received.
D. Book value of the treasury shares.

6. Loss from sale of treasury shares shall be charged to
A. Loss on sale of treasury shares reported as other expense.
B. Retained earnings and then share premium from treasury shares.
C. Share premium from treasury shares and then retained earnings.
D. Share premium from original issuance, share premium from treasury shares and then retained earnings.

7. Loss on retirement of treasury shares shall be charged to
A. Retained earnings.
B. Share premium from treasury shares and then retained earnings.
C. Share premium from treasury shares, share premium from original issuance and then retained earnings.
D. Share premium from original issuance, share premium from treasury shares and then retained earnings.

FAR16 SHARE CAPITAL TRANSACTIONS 7

8. When collectibility is reasonably assured, the excess of the subscription price over the stated value of the no par
share capital subscribed should be recorded as
A. No par share capital
B. Share premium when the subscription is recorded
C. Share premium when the subscription is collected.
D. Share premium when the shares are issued.

9. Which is incorrect concerning share capital transactions?
A. Deposits on subscription to a proposed increase in share capital shall be classified as noncurrent liability.
B. Subscriptions receivable and other receivables from sale of share capital which are not currently collectible
shall be reflected as deduction from the related subscribed share capital.
C. Discount on share capital shall be shown as deduction from total shareholders' equity.
D. When the total shareholders' equity is smaller than the amount of contributed capital, this deficiency is called
a deficit.

10. It is the issuance by an entity of its own ordinary shares to ordinary shareholders without consideration and under
conditions indicating that such action is prompted mainly by a desire to increase the number of shares outstanding
for the purpose of effecting a reduction in unit market price.
A. Stock dividend C. Share option
B. Share warrant D. Share split

11. An entity may effect a reverse share split in order to
A. Increase the number of shares outstanding C. Reduce the market price per share
B. Raise the unit market price of its shares D. Obtain a wider distribution of shares

12. How would share split affect each of the following?
Asset Shareholders' Equity
A. Increase Increase
B. No effect No effect
C. No effect Increase
D. Increase No effect

13. Which of the following is issued to its existing shareholders to acquire its unissued or treasury shares within a
specified time at a specified price?
A. Share option C. Stock dividend
B. Share warrant D. Share subscription

14. What is the amount charged to retained earnings when treasury shares are reissued as dividends?
A. Cost of the treasury shares C. Par value of the treasury shares
B. Fair value of the treasury shares D. Book value of the treasury shares

15. Share capital is said to be "watered" when
A. It is sold at a price in excess of book value C. Assets are overstated
B. Liabilities are overstated D. It is issued for assets other than cash

16. An entity shall initially measure equity instruments issued to a creditor to extinguish all or part of a financial liability
at the
A. Fair value of the equity instruments issued C. Par value of the equity instruments issued
B. Fair value of the liability extinguished D. Carrying amount of the liability extinguished

17. The difference between the carrying amount of the financial liability extinguished and the fair value of equity
instruments issued shall be recognized in
A. Profit or loss C. Retained earnings
B. Other comprehensive income D. General reserve

18. The gain or loss from extinguishment of a financial liability by issuing equity instrument shall be presented in the
statement of comprehensive income as
A. Other income or other expense C. Component of other comprehensive income
B. Separate line item in profit or loss D. Component of finance cost

FAR16 SHARE CAPITAL TRANSACTIONS 8