Shareholders Equity Part 1

SHAREHOLDER’S EQUITY
MODULE 5:
PART 1
Intermediate Accounting Volume 3 by Robles & Empleo based
CORPORATION
- Is an artificial being created by operation of law having the right of succession, and the powers attributes and
properties expressly authorized by law or incident to its existence.
(Section 2 of Revised Corporation Code, R.A 11232)
Characteristics:
 Limited liability
 Right of succession
 Taxed as separate entity
 Absentee ownership
SHAREHOLDER’S EQUITY
• It is the residual interest of the owners/ shareholders in the assets of the corporation after deducting all its liabilities.
• It is comprised of all funds contributed by shareholders, retained earnings, reserves representing appropriations of
retained earnings and reserves representing capital maintenance adjustments.
• The shareholder’s equity is composed of:
a.) SHARE CAPITAL (Preference Share Capital and Ordinary Share Capital)
b.) SHARE PREMIUM/ ADDITIONAL PAID-IN CAPITAL
 paid-in capital in excess of stated value
 paid-in capital from sale of treasury shares
 paid-in capital from retirement of shares
 paid-in capital from donated shares
 paid-in capital arising from bond conversion privilege
 share options outstanding
 share warrants outstanding
c.) RETAINED EARNINGS (Accumulate profits)
d.) ACCUMULATED OTHER COMPREHENSIVE INCOME ( such as unrealized gains/losses on financial

assets at fair value through other comprehensive income, revaluation surplus, actuarial gains and losses and foreign
currency translation adjustment gains and losses.
e.) CONTRA-SHAREHOLDER’S EQUITY ACCOUNTS ( such as subscriptions receivable and treasury shares)
CONTRIBUTED CAPITAL
• Amount invested and contributed by owners.

• Composed of share capital and share premium accounts.
SHARE CAPITAL
• Contribution of owners equal to par or stated value of the shares issued or in the case of no par, no stated
value shares, the total consideration given by the owners.
SHARE PREMIUM
• Contribution of owners in excess of the par or stated value of the share.
• May also arise from resale or retirement of treasury shares, distribution of share dividends ( bonus issue),
issuance of detachable share warrants, changes in par value, donation of assets to the corporation and
transactions resulting to corporate readjustment or quasi-reorganization.
LEGAL CAPITAL
The Legal capital of a corporation is the portion of the contributed capital not allowed to be distributed or impaired to
protect the interest of the corporate creditors because of the limited liability characteristic of a corporation.
The LEGAL CAPITAL OF A CORPORATION is composed of :
1. If the corporation issues shares with par value—the legal capital is composed of the total par value of share
issued and subscribed.
(ORDINARY SHARE CAPITAL + PREFERENCE SHARE CAPITAL + SUBSCRIBED ORDINARY SHARES +
SUBSCRIBED PREFERENCE SHARE )
2. If the corporation issues shares with no par value—regardless there is a stated value or no stated value, the legal
capital is composed of the total consideration received or receivable from share issued and subscribed.
( ORDINARY SHARE CAPITAL + PREFERENCE SHARE CAPITAL + SUBSCRIBED ORDINARY SHARES +
SUBSCRIBED PREFERENCE SHARE + PAID IN CAPITAL IN EXCESS OF STATED VALUE – ORDINARY +
PAID IN CAPITAL IN EXCESS OF STATED VALUE – PREFERENCE)
*Share dividends distributable also form part of legal capital.

PAR VALUE AND NO-PAR VALUE SHARE CAPITAL
PAR VALUE SHARE CAPITAL

• has a fixed per share amount printed on the stock certificate. Par value is the nominal value of the share and
is the minimum amount that must be paid by the shareholder.
NO PAR VALUE SHARE CAPITAL

• a share with no amount printed on the stock certificate. However, this type of shares may be given a stated
value.
PREFERENCE SHARE AND ORDINARY SHARE
PREFERENCE SHARE
• is a share that has certain preferential rights over ordinary shares on the company’s assets and earnings.
Generally, preference shareholders does not have voting rights.
• Usually issued with a par value and dividends to be given are expressed as percentage of the par value.
• Preference shares can be:
 Cumulative – one that entitles the holder to any dividends not declared in the prior years.
 Participating – one that entitles the holder to additional dividends proportionate to ordinary shares on
the basis of total par value in excess of a fixed amount or rate.
 Convertible – one that entitles the holder to convert it to ordinary shares.
 Callable – one that gives the issuing corporation the right but not the obligation to reacquire and retire
the share at a fixed or determinable call price.
 Redeemable – one that provides mandatory redemption by the issuing corporation for a fixed or
determinable amount at a fixed determinable future date. This type of preference share is in the form of
equity instrument but a financial liability in substance.
ORDINARY SHARE
• represents residual ownership interest in the corporation.
• Holders of this type of share bears the ultimate risk of loss and exercises their voting rights to influence and
control the management of the corporation.
Other terms:
Authorized shares – maximum number of shares a corporation may issue as indicated in the articles of
incorporation.
Issued shares – number of shares ( fully paid) that the corporation has issued to its shareholders as of a given
date.
Outstanding shares – shares that have been issued and are in the hands of the shareholders as of a given date.
Treasury shares- shares that have been issued to shareholders and have been subsequently reacquired but
not retired by either purchase or thru donation.
Subscribed shares - shares that will be issued upon completion of payment on a deferred payment purchase
contract.
ACCOUNTING FOR SHARE CAPITAL TRANSACTIONS
ABC Corporation was organized on January 1,2019 and is authorized to issue 100,000 ordinary shares with a par
value of P 10 and 50,000 preference shares with no par value. The stated value of the preference shares is at P 50.
The following transactions happened during the year:
a. Issued 10,000 ordinary shares for cash at par value.
b. Issued 5,000 ordinary shares for cash at P15 per share.
c. An equipment was received from an investor in exchange for a 5,000 ordinary shares. The fair value of the equipment is
at P 75,000 and the fair value of each share is at P 20.
d. Issued 500 ordinary shares for the legal services rendered by a lawyer. The fair market value of the legal services is P
10,000. Fair market value of each share is P 13.
e. Issued 5,000 preference shares and 2,000 ordinary shares for a lumpsum price of P 300,000. The ordinary shares and
preference shares of ABC Corporation has a fair value market value of P 55 and 20 each,respectively.
f. Received subscriptions from various subscribers for 5,000 ordinary shares at P 17 each. The subscribers paid 50% of the
subscription price and the remaining is payable within 60 days from the subscription date.
g. Received subscriptions from various subscribers for 2,000 preference shares at P 60 each. The subscribers paid 30% of
the subscription price and the remaining is payable within 60 days from the subscription date.
h. Receive the balance due from the subscribers of ordinary shares in letter (f) and corresponding share certificates were
issued.
i. After 60 days, the subscribers of preference shares in letter (g) failed to pay the balance of his subscription. Thirty
days after the due date. The shares were declared delinquent and were advertised for sale at a public auction.
j. Expenses for advertising the sale amounted to P 5,000, which were paid by the corporation.
k. Received bids from the following:
X- 500 shares
Y – 400 shares
Z – 600 shares
l. The amount from the highest bidder is collected and certificates of share capital were issued.
m. Received subscriptions from various subscribers for 3,000 ordinary shares at P 17 each. The subscribers paid 20% of
the subscription price and the remaining is payable within 60 days from the subscription date.
n. Issued 1,000 ordinary shares at P 15 each. Transaction cost related to the issuance of shares were also paid at the
amount of P 5,000.
a.) Issuance of shares for cash at par value Issued 10,000 ordinary shares for cash at par value.
Cash 100,000
Ordinary Share Capital 100,000
b.) Issuance of shares for cash more than par value Issued 5,000 ordinary shares for cash at P15 per share.
Cash 75,000
Ordinary Share Premium 25,000
ENTRIES:
c.) Issuance of shares in exchange of non-cash assets – If a share is issued in exchange of the non-cash asset, the asset is recorded
at its fair market value. If the fair market value of the asset is not determinable then the asset is recorded at the fair market value of
the shares.
An equipment was received from an investor in exchange for a 5,000 ordinary shares. The fair value of the equipment is at P 75,000
and the fair value of each share is at P 20.
Equipment 75,000
Ordinary Share Capital* 50,000
Ordinary Share Premium** 25,000
Assuming the fair market value of the asset is not determinable, the asset is going to be recorded at the fair value of the shares.
Equipment 100,000
Assuming the fair market value of the asset and shares are not determinable, the asset is going to be recorded at the par value of the shares.
Equipment 50,000
ENTRIES:
d.) Issuance of shares in exchange for services rendered – If a share is issued in exchange of services, an expense account is
debited at its fair market value. If the fair market value of the services is not determinable then the expenses is recorded at the fair
market value of the shares.
Issued 500 ordinary shares for the legal services rendered by a lawyer. The fair market value of the legal services is P 10,000.
Fair value of each share is P 13.
Legal Expenses 10,000

Because the fair value of the services is given, the expense is going to be recorded at its fair market value.
Assuming the fair market value of the services is not determinable, the expense is going to be recorded at the fair value of the shares.
Legal Expenses 6,500

ENTRIES:
e.) Issuance of ordinary and preference share for a lump sum price – When two classes of shares are issued for a lumpsum
amount, the lump sum price must be allocated based on the total fair market values of each classes.
Issued 5,000 preference shares and 2,000 ordinary shares for a lumpsum price of P 300,000. The preference shares and ordinary
shares of ABC Corporation has a fair value market value of P 55 and 20 each, respectively.
No. of shares Fair market value Allocation Share in Lumpsum

price
Preference 5,000 shares 275,000 (275,000/315,000) x 261,904.76
(5,000 x 55) 300,000
Ordinary 2,000 shares 40,000 (40,000/315,000) x 38,095.24

(2,000 x 20) 300,000
Total 315,000 300,000
Cash 300,000
Preference Share Capital 250,000
Ordinary Share Premium 18,095.24
Paid in Capital in excess of Stated value- Preference 11,904.76
What if not all of the fair values of the classes of shares are determinable?
- If not all of the fair values of the classes of shares are determinable, the RESIDUAL METHOD may be used.
Using the same information from letter e) except that there is no fair value for the preference shares, the lumpsum
price is allocated as follows :
Lumpsum price = P 300,000

Less: Fair value of ordinary share (2,000 x 20) = 40,000
Issue price allocated to preference shares P 260,000
Cash 300,000
Paid in Capital in excess of Stated value- Preference 10,000
f.) Issuance of shares in subscription basis
- the shareholders signs a contract to purchase a specified number of shares on credit with payment due at one or more specified
future dates.
Accounting Treatment of Subscription

1. The share premium account is recorded at the time of subscription rather when cash is collected.
2. A subscription receivable account is recognized for the balance not yet paid
- If silent, the subscription receivable is treated as contra equity account
- If the problem is not silent
• If it is expected to be collected for more than 12 months from the date of reporting period it is treated as contra equity
account
• If it is expected to be collected within 12 months from the date of reporting period it is treated as current assets
3. If the subscription is now fully paid, share certificates will be issued and the subscribed share capital account will be
reclassified.
Received subscriptions from various subscribers for 5,000 ordinary shares at P 17 each. The subscribers paid 50% of the
Cash 42,500
Subscription Receivable- Ordinary 42,500
Subscribed Ordinary Share Capital 50,000
g. ) Received subscriptions from various subscribers for 2,000 preference shares at P 60 each. The subscribers paid 30% of the
Cash 36,000
Subscription Receivable- Preference 84,000
Subscribed Preference Share Capital 100,000
Paid in Capital in excess of Stated value- Preference 20,000
h.) Receive the balance due from the subscribers of ordinary shares in letter (f) and corresponding share certificates were issued.
Cash 42,500

i.) Delinquent Subscription – If share who is under subscription is not paid on the date fixed in the contract or upon call of the
Board of Directors and after 30 days from the call date, the subscriber still failed to pay the balance on the subscription price, said
subscription is deemed delinquent and shall be advertised for sale at a public auction, unless the BOD decided otherwise.
In a public auction, interested buyers of the delinquent shares shall make a bid for the number of shares they are willing to accept in
exchange of the unpaid subscription price and any additional expenses incurred relating to the delinquent shares. The highest bidder
is the one who is willing to accept the lowest number of shares in exchange for the unpaid subscriptions plus all costs related
to the delinquent shares.
In the case when there is no bidder for the delinquent shares, the shares will be issued in the name of the corporation and will
be placed in treasury.
After 60 days, the subscribers of preference shares in letter (g) failed to pay the balance of his subscription. Thirty days after the due
date, the shares were declared delinquent and were advertised for sale at a public auction.
Receivable from highest bidder 84,000
Subscription Receivable- Preference 84,000
j. Expenses for advertising the sale amounted to P 5,000, which were paid by the corporation.

Cash 5,000
k.) Received bids from the following:
X- 500 shares
Y – 400 shares
Z – 600 shares
Cash 89,000
Because Y bid the lowest number of shares in exchange of the amount due, Y is the highest bidder
l.) The amount from the highest bidder is collected and certificates of share capital were issued.
Subscribed Preference Share 100,000

m. ) Received subscriptions from various subscribers for 3,000 ordinary shares at P 17 each. The subscribers paid 20% of the
Cash 10,200
n.) Issuance of shares with transaction costs – transaction costs incurred related to issuance of shares are charged to the related
share premium account. When the issuance does not result to a share premium account, the transaction cost is charged to
expenses.
Examples of transaction costs related to the issuance of shares that may be charged against the related share premium account are as
follows:
• Documentary stamp tax and other percentage tax imposes in public offerings of shares;
• Underwriting costs
• Newspaper publication fees relating directly to the share issue
• SEC registration fees for new shares
The amount of transaction costs deducted from the related share premium in the period is disclosed separately in the statement of
changes in equity.
Issued 1,000 ordinary shares at P 15 each for cash. Transaction cost related to the issuance of shares were also paid at the amount of P
5,000.
Cash 15,000

Cash 5,000
REACQUISITION OF SHARE CAPITAL
• Corporations may reacquire its own issued shares for a variety of reasons:
 to improve earnings per share
 to support the market price of the shares
 to increase ratio of debt to equity
 to obtain shares for share option plans and conversion of other securities
SHARES REACQUIRED FOR IMMEDIATE RETIREMENT

• If shares are reacquired and retired at the same time :
1. ) Share capital account is debited equal to the par value of the shares retired;
2. ) Share premium account is debited equivalent to the amount at the date when the shares are originally
issued and
3.) Cash is credited to the total retirement price.
REACQUISITION OF SHARE CAPITAL
• If RETIREMENT PRICE < ORIGINAL ISSUE PRICE = the difference is credited to SHARE PREMIUM –
RETIREMENT OF SHARES
• If RETIREMENT PRICE > ORIGINAL ISSUE PRICE = the difference is credited to in the order:
a.) SHARE PREMIUM from previous retirement/ treasury share transactions of the same class of stocks; and
b.) RETAINED EARNINGS
Example:
Assuming ABC Corporation reacquired and immediately retired 5,000 of its own ordinary shares with par value P 100.
These shares were originally issued for P 130.
IF RETIREMENT PRICE IS P 125 , the entry would be:
Cash 625,000
Share premium-Retirement of Ordinary shares 25,000
IF RETIREMENT PRICE IS P 135 , the entry would be:

Retained Earnings 25,000
Cash 675,000
TREASURY SHARES
• Treasury shares are corporation’s own share which have been issued , then subsequently reacquired but not yet reissued
or retired.
• The purchase of treasury shares does not change the number of shares issued but decreases the number of shares
outstanding. It also decreases the amount of shareholder’s equity.
• Treasury shares may be acquired through purchase or donation. If acquired by purchase, treasury share is accounted for
using the COST METHOD.
• Generally, treasury shares are not entitled to dividends.
• The Corporation Code of the Philippines requires an appropriation of Retained Earnings of an amount equal to the cost
of the treasury shares. The appropriation may be made by a formal entry transferring the amount to an appropriation
account or by a parenthetical notation or disclosure in the financial statements.
I L L U S T R AT I V E P R O B L E M :
T R E A S U RY S H A R E S A C Q U I R E D B Y P U R C H A S E
Assume ABC Corporation reacquires 1,000 shares of its 30,000 issued and outstanding ordinary shares with par value of P
30, at P35 per share. Subsequently , 400 shares were reissued at P 40 per share and another 200 shares were sold for P 32
per share.
The entries to record the reacquisition and subsequent reissue are as follows:
Treasury shares 35,000
Cash 35,000
• When the reissuance of treasury shares
is made at less than its cost, the
Cash 16,000 difference is charged to:
1. Share premium account related to
Treasury shares14,000
treasury shares up to the extent to its
Share premium- Treasury2,000 balance
2. any excess is charged to retained
earnings.
Cash 6,400
Share premium- Treasury 600
Treasury share 7,000
T R E A S U RY S H A R E S A C Q U I R E D B Y D O N AT I O N
Assume Some ABC Corporation shareholders donated 1,000 shares of its 30,000 issued and outstanding ordinary shares
with par value of P 30. The market value of the share at the time of donation was at P35 per share. Subsequently , 400
shares were reissued at P 40 per share and another 200 shares were sold for P 32 per share.
The entries to record the receipt of donated shares and subsequent reissue are as follows:
Treasury shares 35,000
Share Premium- Donated capital 35,000
Cash 16,000
Treasury shares14,000
Share premium- Donated capital 2,000
Cash 6,400
Share premium- Donated capital 600
Treasury share 7,000
When there is no available market value for the ordinary shares at the time of donation, the journal entries
would be as follows:
MEMO: Received 1,000 treasury shares of P 30 par ordinary shares as donation from shareholders.
Cash 16,000
Cash 6,400
SHARE SPLIT
• Is the action by the entity by a desire to increase the number of shares to effect a reduction in the unit market
price and improve marketability of the shares.
• When a corporation issues a share split, the transaction is recorded only by a memorandum entry.
• The entity issues its own ordinary shares to ordinary shareholders without consideration. Upon issuance, it
will increase the number of issued shares accompanied by a reduction in the par value of the share capital.
• Also, share split does not affect the total amount of share capital, share premium, retained earnings and the
shareholder’s equity.
• A reverse share split decreases the number of shares with a corresponding increase in the value of the
ordinary shares. This action would raise the unit market price of the ordinary share.
ILLUSTRATIVE PROBLEM: SHARE
SPLIT
Assume ABC Corporation have the following balances in its shareholder’s equity before it effected its share split:
Ordinary Share Capital, P 100 par, 50,000 shares issued and outstanding P 5,000,000
Share Premium 500,000
Retained Earnings 1,000,000
Total Shareholder’s Equity P 6,500,000
On June 30, 2020, ABC Corporation effected a 2-for-1 share split.
The issuance of share split is recorded as:
MEMO : Effected a 2-for-1 share split, decreasing the par value to P 50 and increasing the number of shares issued
to 100,000.
Assuming a reverse share split of 1-for-2 was effected by ABC Corporation, to record:
MEMO : Effected a 1-for-2 share split, increasing the par value to P 200 and decreasing the number of shares issued
to 25,000.
Note : IN a share split there is no journal entry but you must take note the changes in the number of shares because it is crucial
in the computation of dividends, computation of number outstanding shares and number issued shares
SHARE RIGHTS
• These are issued to existing shareholders to permit them to maintain a proportionate interest in the ownership
of the corporation in the event of new issue of share capital.
• The issue of share rights would prevent the dilution of voting rights without the consent of the existing
shareholders.
• Upon issuance of share rights, the issuing corporation records the transaction by a memorandum entry.
• Upon exercise of share rights, the transaction is recorded as an ordinary issuance of share capital for cash as
Cash xx
Ordinary share capital xx
Share premium- Ordinary xx
• The expiry of share rights is recorded by a memorandum entry.
ILLUSTRATIVE PROBLEM: SHARE
RIGHTS
Assume ABC Corporation have 50,000 outstanding shares of P 50 par value and have decided to issue additional 25,000
shares. ABC Corporation issued 50,000 share rights granting the shareholders thereof the right to purchase one share for
every 2 share rights submitted at P 60. The fair market value of the ordinary shares at the date of issuance of share rights
was P 65. Out of the 50,000 share rights issued, only 30,000 rights were exercised and the remaining rights have expired.
The issuance of share rights is recorded as:
MEMO : Issued 50,000 share rights to shareholders granting them to purchase one share of 50 par ordinary share at
P 60 for every 2 share rights submitted.
The exercise of 30,000 share right is recorded as:

Cash 900,000
Ordinary share capital 750,000
Share Premium- Ordinary 150,000
To record the expiration of share rights:

MEMO : 20,000 of the share rights issued to shareholders have expired.
SHARE WARRANTS
• Issued by corporation for cash in conjunction with the issue of another security, either preference shares or bonds.
ISSUE OF PREFERENCE SHARES WITH DETACHABLE WARRANTS
• The issue price of preference shares with warrants attached is allocated to both preference shares and warrants based
on their fair market values.
Example:
Assume that ABC Corporation issued 2,000 preference shares of P 100 par value at P 130 per share. Each preference
share includes one detachable warrant that entitles the holder to buy one P 20 par value ordinary share at P 30. At that
time, the market value of each preference share without warrants attached is P 120 and the market value per warrant is P
10. Each ordinary share sells at P 25. Subsequently, 1,500 share warrants were exercised and the remaining warrants
have expired.
Preference shares – 260,000 x 120/130 = 240,000
Allocation of issue price
260,000
Warrants – 260,000 x 10/130= 20,000
To record the above transactions:
Cash 260,000
Preference share capital 200,000
Share premium- Preference 40,000
Share premium- Ordinary share warrants 20,000
Cash 45,000
Share Premium- Ordinary share warrants 15,000
Share premium- Ordinary 30,000
Share Premium- Ordinary share warrants 5,000

Share Premium- Expired warrants 5,000
RETAINED EARNINGS
• Also termed as accumulated profits, represent the accumulated amount of earnings in the corporation from
the date of inception less the cumulative amount of distributions made to shareholders and other charges to
retained earnings.
• A debit balance in the retained earnings ( deficit) would arise if the accumulated losses and distributions
exceed the accumulated earnings.
RETAINED EARNINGS
Loss for the period Profit for the period

Dividends Adjustments for correction of prior period
Conversion of share capital errors
Treasury share transactions Cumulative effect of change in
Retirement of share capital accounting policy
Effects of recapitalization Quasi reorganization
Adjustments for correction of prior period Revaluation surplus realized
errors
Cumulative effect of change in
accounting policy
APPROPRIATION OF RETAINED
EARNINGS
• A corporation may appropriate or restrict a portion from its retained earnings that is unavailable for dividends
distribution.
• Appropriation of retained earnings may be done for the following reasons:
 Legal requirements
 Contractual agreements
 Discretionary actions
• Appropriations may be done either of the following:
 a formal journal entry for the appropriation
 disclose the restrictions in a note accompanying the financial statements or a parenthetical note in shareholder’s equity
section of the statement of financial position.
DIVIDENDS
• Are distribution of a portion of the corporate earnings to the shareholders proportionate to the number of shares held.
• Normally, shareholders invest in corporations because they are interested with their dividend policies and practices.
• Dividends are distributed out of the retained earnings of the corporation, except for a liquidating dividend that
represents a return of the investment of the shareholders.
• When it comes to the distribution of dividends, it involves three important dates:
a.) DATE OF DECLARATION – This is the date when the Board of Directors of a corporation approves for the
distribution of dividends.
b.) DATE OF RECORD – This is the date wherein the corporation finalizes the list of shareholders who are entitled to
dividends.
c.) DATE OF PAYMENT – This is the date when the dividends are distributed to the shareholders.
• Dividends are distributed in different forms.
FORMS OF DIVIDENDS:
1.) Cash dividends
- Dividends to be distributed in the form of cash.
- This form of dividend is distributed when the corporation has sufficient amount of retained earnings and cash.
DATE OF Retained Earnings XX

DECLARATION Cash dividends payable XX
Cash dividends payable XX

DATE OF PAYMENT Cash XX
ILLUSTRATIVE PROBLEM:
CASH DIVIDENDS
Assume on October 1,2019, ABC Corporation declared a P 3 cash dividend on its ordinary shares payable on October
31,2019 to shareholders of record as of October 15,2019. At the time of declaration, ABC Corporation has 100,000
ordinary shares outstanding.
Oct. 1,2019 Retained Earnings 300,000

Cash dividends payable 300,000
Oct. 31,2019 Cash dividends payable 300,000

Cash 300,000
FORMS OF DIVIDENDS:
2.) Property dividends
- Dividends to be distributed in the form of non-cash assets.
- Examples : equity investments, PPE, debt investments, special bonus issue ( distribution of different class of share ),
etc.
- The property dividends payable is recognized at the fair value of the non-cash asset to be distributed. Any change
in the fair value of the asset will also be reflected to property dividends payable. Any non-current assets to be
distributed as dividends are carried at the lower of carrying value and fair value less cost to distribute.(IFRIC
17& IFRS 5)
DATE OF
DECLARATION Retained Earnings XX
Property dividends payable XX
DATE OF
PAYMENT
Property dividends payable XX
Non- cash assets XX
Gain or loss on asset disposal XX
P R O P E RT Y D I V I D E N D S ( E Q U I T Y I N V E S T M E N T S )
Assume on October 1,2019, ABC Corporation declared a property dividend of one share of XYZ Company ordinary shares for every 10 ABC
Corporation shares held distributable on October 31,2019 . ABC Corporation classified XYZ Company ordinary shares held as Financial
assets at fair value through profit or loss and have a carrying value per share of P 18. The market value at the date of declaration of each XYZ
share is P 20 and P 23 at the date of payment . At the time of declaration, ABC Corporation has 100,000 ordinary shares outstanding.
Oct. 1,2019 Equity investments at FVPL – XYZ shares 20,000

Unrealized gains on investments at FVPL 20,000
# of XYZ shares declared as dividend – 100,000/10 = 10,000
Increase in market value of XYZ shares ( 20-18) = x 2
Unrealized gains on investments at FVPL 20,000

Property dividends payable 200,000

Equity investment – XYZ shares 200,000
Gain on asset disposal 30,000
P R O P E RT Y D I V I D E N D S ( N O N - C U R R E N T A S S E T )
Assume on October 1,2019, ABC Corporation declared property dividends in the form of pieces of machineries at a cost of P
800,000, accumulated depreciation of P 500,000 and fair value of P 400,000 distributable on October 31,2019 . On October 31, 2019,
the machines fair value has dropped to P 350,000.

Assets held for distribution 300,000

Accumulated Depreciation- Machine 500,000
Machines 800,000
Oct. 31,2019 Property dividends payable 50,000


Assets held for distribution 300,000
Gain on asset disposal 50,000
FORMS OF DIVIDENDS:
3.) Share dividends/ Bonus issue
- Dividends distributed in the form of the same class of shares. Meaning if the investor holds ordinary shares
,dividends to be distributed will also be ordinary shares. If preference share is held, preference shares will also be
distributed as dividends.
- If another class of share is distributed (special bonus issue) , it will be treated as property dividends.
- The effect of bonus issue is it increases the number of shares held by the shareholder but it does not change the
total shareholder’s equity balance at the time of the bonus issue. By effecting a bonus issue, there will be no
change in the percentage of ownership of the shareholders because a bonus issue is proportionate to the number of
shares held. Normally, a bonus issue does not affect the total assets and total shareholder’s equity because it simply
represents a transfer of capital from retained earnings to contributed capital.
- When the company declares a bonus issue , it can be a small bonus issue or a large bonus issue. If the bonus issue
is less than 20% , it is a small bonus issue. The shares to be distributed are charged to retained earnings to an equity
account called share dividends distributable at its current market value.
- If the bonus issue is 20% or more , it is a large bonus issue. The shares to be distributed are charged to retained
earnings to an equity account called share dividends distributable at its par value or stated value.
SMALL BONUS ISSUE

DECLARATION Share dividends distributable XX
Ordinary share premium XX
DATE OF Share dividends distributable XX

DISTRIBUTION Ordinary share capital XX
LARGE BONUS ISSUE
Retained Earnings XX
DATE OF
Share dividends distributable XX
DECLARATION
DATE OF Share dividends distributable XX

PAYMENT Ordinary share capital XX
BONUS ISSUE
Assume on October 1,2019, ABC Corporation declared a 15% bonus issue from its 100,000 outstanding ordinary
shares with a par value of P 35. ABC Corporation shares have a market value at the date of declaration of P 38 and
P40 at the date of distribution.

Share dividends distributable 525,000
Ordinary share premium 45,000
Oct. 31,2019 Share dividends distributable 525,000

Ordinary share capital ` 525,000
WHAT IF 25% BONUS ISSUE WAS GIVEN?

Oct. 31,2019 Share dividends distributable 875,000

FRACTIONAL SHARE WARRANTS
• There are instances wherein a share dividend issued results to a shareholder being entitled to a fraction of a share. Cases
like this may take a corporation to either:
 Issue fractional share warrants;
 pay the shareholder an amount equal to market price of the fractional shares;
 require the shareholder to pay sufficient amount to receive a full share.
FRACTIONAL SHARE WARRANTS
Assume that ABC Corporation declared 25% bonus issue out of its 100,000 outstanding shares. From the issued share dividends, it includes
20,000 full shares and 5,000 fractional shares. Par value of the shares is P 35. Out of t
To record the declaration and issuance of full and fractional share warrants:

Share premium- fractional share warrants outstanding 175,000
Assuming 2,500 shares full shares were issued and the remaining have expired, the entry to record:
Share premium- fractional share warrants outstanding 175,000
Paid in capital from expired warrants 87,500
FORMS OF DIVIDENDS:
4.) Scrip Dividends
- Dividends that are in the form of promissory note in which it requires the corporation to pay dividend at some future
date. Because of the waiting period this form of dividend bears an interest.
- This form of dividend is normally distributed when the company has an adequate amount of retained earnings but has
insufficient fund to support a current cash dividend.

DECLARATION Scrip dividends payable XX
DATE OF PAYMENT Scrip dividends payable XX

Interest Expense XX
Cash XX
ILLUSTRATIVE PROBLEM: SCRIP
DIVIDENDS
Assume on October 1,2019, ABC Corporation declared a 15% scrip dividend on its 100, 000 outstanding ordinary
shares with par value of P 35 payable on October 1, 2020 with interest at 12%. Assume ABC Corporation is using a
calendar year for their reporting.

Scrip dividends payable 525,000
Dec. 31,2019 Interest Expense 15,750

Interest payable 15,750
Scrip dividends payable 525,000

Oct. 1,2020 Interest payable 15,750
Interest Expense 47,250
Cash 588,000
FORMS OF DIVIDENDS:
5.) Liquidating dividends
- Represent a return of contributed capital rather than a distribution of earnings. Meaning some dividends distributed
do not come from the Retained Earnings ( return on investment ) but are charged to the contributed capital accounts
( return of investment) like the additional paid in capital accounts ( ordinary share premium, preference share
premium and etc.)

DECLARATION Additional paid in capital XX
Cash dividends payable XX
DATE OF PAYMENT Cash dividends payable XX

Cash XX
SCRIP DIVIDENDS
Assume on October 1,2019, ABC Corporation declared a P 3 cash dividend on its 100,000 outstanding ordinary shares
payable on October 31,2019 to shareholders of record as of October 15,2019 where in P 2 per share can only be supported by
the earnings of ABC Corporation and the P 1 per share is charged to the ordinary share premium ABC Corporation.

Oct. 1,2019 Ordinary share premium 100,000
Cash dividends payable 300,000
Oct. 31,2019 Cash dividends payable 300,000

Cash 300,000
ALLOCATION OF CASH DIVIDENDS BETWEEN
• When a total amount of cash is declared and paid, such amount is distributed to preference and ordinary shares in the
following order:
 dividend in arrears
 current dividends on preference shares
 ordinary shares
• The payment to preference shareholders depends on the preferential rights attached to them, which could be
cumulative or non-cumulative and participating or non-participating.
• When a preference share is cumulative, dividends not declared in a given year accumulate. This accumulated amount
must be paid in full when dividends are declared in the succeeding periods before any dividend can be paid on the
ordinary share.
• Non-cumulative preference share is not entitled to any accumulated dividends. Hence, dividend not declared or paid
in the current period is considered lost permanently.
• Participating preference share provides for additional dividends to be paid to its holder after dividends of a
specified amount or rate are paid to ordinary shareholders. A partially participating preference allows the holder
to receive dividends above the specified dividend rate on a pro rata basis with the ordinary share share, but is
limited to an additional rate specified in the certificate.
• Non- participating preference limits the dividends for any year to the specified dividend rate.
ILLUSTRATIVE PROBLEM: PREFERENCE SHARE IS NON-
CUMULATIVE AND NON-PARTICIPATING
Assuming ABC Corporation has the following balances in its equity section:
Preference Share Capital, 10%, P100 par, 50,000 shares P 500,000
Ordinary share capital, P 10 par, 80,000 shares 800,000
Dividends declared for:
2018- P 40,000 2019- P 900,000
2018 Preference Ordinary

Current dividends 40,000 None
2019
Current dividends 50,000
Balance to ordinary 850,000
Total 50,000 850,000
ILLUSTRATIVE PROBLEM: PREFERENCE SHARE IS
CUMULATIVE AND NON-PARTICIPATING
2018- P 40,000 2019- P 900,000

2019
Dividends in arrears 10,000
Total 60,000 840,000
ILLUSTRATIVE PROBLEM: PREFERENCE SHARE IS NON-
CUMULATIVE AND FULLY PARTICIPATING
2018- P 40,000 2019- P 900,000
2019
Ordinary shares dividends 80,000
Balance allocated based on total 296,153.85 473,846.15
par
Total 346,153.85 553,846.15
ILLUSTRATIVE PROBLEM: PREFERENCE SHARE IS CUMULATIVE
AND PARTICIPATING UP TO AN ADDITIONAL 4%

2018- P 40,000 2019- P 900,000
2019
Dividends in arrears 10,000
Ordinary shares dividends 80,000
Allocation up to limit of 20,000
participation
Total 80,000 820,000

Shareholders Equity Part 1

Uploaded by

Copyright:

Available Formats

Shareholders Equity Part 1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Shareholders Equity Part 1

Uploaded by

Copyright:

Available Formats

SHAREHOLDER’S EQUITY

d.) ACCUMULATED OTHER COMPREHENSIVE INCOME ( such as unrealized gains/losses on financial

• Amount invested and contributed by owners.

*Share dividends distributable also form part of legal capital.

PAR VALUE SHARE CAPITAL

NO PAR VALUE SHARE CAPITAL

Legal Expenses 10,000

Legal Expenses 6,500

No. of shares Fair market value Allocation Share in Lumpsum

Ordinary 2,000 shares 40,000 (40,000/315,000) x 38,095.24

Total 315,000 300,000

Lumpsum price = P 300,000

Accounting Treatment of Subscription

Subscribed Ordinary Share Capital 50,000

Receivable from highest bidder 5,000

Subscribed Preference Share 100,000

Ordinary Share Premium 5,000

SHARES REACQUIRED FOR IMMEDIATE RETIREMENT

Ordinary Share Capital 500,000

The exercise of 30,000 share right is recorded as:

To record the expiration of share rights:

Share Premium- Ordinary share warrants 5,000

Loss for the period Profit for the period

DATE OF Retained Earnings XX

Cash dividends payable XX

Oct. 1,2019 Retained Earnings 300,000

Oct. 31,2019 Cash dividends payable 300,000

Oct. 1,2019 Equity investments at FVPL – XYZ shares 20,000

Retained Earnings 200,000

Oct. 31,2019 Retained Earnings 30,000

Oct. 1,2019 Retained Earnings 400,000

Assets held for distribution 300,000

Oct. 31,2019 Property dividends payable 50,000

Property dividends payable 350,000

DATE OF Retained Earnings XX

DATE OF Share dividends distributable XX

LARGE BONUS ISSUE

DATE OF Share dividends distributable XX

Oct. 1,2019 Retained Earnings 570,000

Oct. 31,2019 Share dividends distributable 525,000

Oct. 1,2019 Retained Earnings 875,000

Oct. 31,2019 Share dividends distributable 875,000

FRACTIONAL SHARE WARRANTS

Share dividends distributable 875,000

DATE OF Retained Earnings XX

DATE OF PAYMENT Scrip dividends payable XX

Oct. 1,2019 Retained Earnings 525,000

Dec. 31,2019 Interest Expense 15,750

Scrip dividends payable 525,000

DATE OF Retained Earnings XX

DATE OF PAYMENT Cash dividends payable XX

Retained Earnings 200,000

Oct. 31,2019 Cash dividends payable 300,000

2018 Preference Ordinary

2018 Preference Ordinary

Dividends declared for:

You might also like