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Shareholders’ equity represents the initial interest in the assets of a corporation before deducting liabilities.
False
The Journal Entry Method records authorized capitalization by debiting 'authorized share capital'.
False
Ordinary shareholders have the right to share in a corporation's profits and net assets upon liquidation.
True
Preference shares guarantee shareholders a fixed dividend regardless of the corporation's performance.
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No-par value shares cannot be issued for a consideration less than three pesos.
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Share premium refers to the amount by which the subscription price exceeds the par value of shares.
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The authorization and issuance of shares are both considered transactions affecting a corporation's equity.
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A subscription is a contract where the issuer promises to buy shares from the purchaser.
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Legal capital can be distributed to the owners during the lifetime of the corporation as long as liabilities are settled first.
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The aggregate par value of shares issued is relevant for the computation of par value shares.
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Shares issued at a discount can only be reissued at par value or higher.
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Watered stocks refer to shares issued for non-cash consideration with fair value above par or stated value.
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A secret reserve arises when shares are issued for non-cash consideration at a value that is below par or stated value.
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Treasury shares are shares that were never issued by the corporation.
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When shares are retired, the total par value and related share premium are removed from the books of accounts.
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A delinquent subscription occurs when a subscription remains unpaid after the due date set by the board of directors.
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If there are no bidders at a public auction and the corporation has sufficient Retained Earnings, the subscription is cancelled in its entirety.
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The Proportional Method is used for sale of share capital when fair value of all issued classes is determinable.
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Stock rights are recorded as a separate journal entry immediately upon issuance.
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Preference Shares convertible to ordinary shares require separate accounting upon issuance.
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Bonds with detachable warrants must be accounted for separately, with the financial liability of the bonds and the equity instrument of the warrants recorded independently.
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If stock rights expire without being recalled, an entry is made to reflect this in the financial statements.
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The Incremental Method is appropriate to use when only one class of shares has a determinable fair value.
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When bonds with detachable warrants are issued, the entire issue price is allocated only to the financial liability of the bonds.
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Donated Treasury Shares are considered a form of Share Appreciation Rights.
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A Share Split increases the total number of shares outstanding while reducing the nominal value of each share.
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Nonparticipating shareholders are entitled to a fixed amount of dividends without any additional claims.
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Cash Dividends are a type of Share-based Transaction with Cash Alternatives.
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Fully participating dividends are distributed based solely on a predetermined schedule, without consideration for pro rata calculations.
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Liquidating dividends are declared solely from the corporation's retained earnings.
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Liquidating Dividends represent a return of capital to shareholders and typically occur when a company is dissolving or liquidating.
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Quasi-reorganization allows a company to eliminate its accumulated deficits through a stock split.
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A share split increases the number of shares while decreasing the par value per share.
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Recapitalization affects the total shareholder's equity of a corporation.
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Quasi-reorganization allows a financially stable organization to revalue its assets and liabilities freely without any regulations.
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Dividends declared on redeemable preference shares are recognized as an expense in profit or loss.
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In a reverse share split, the number of old shares remains the same while the par value decreases.
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Study Notes
Shareholders' Equity
- Represents the residual interest in a corporation's assets after deducting liabilities.
- Affected by share issuances, acquisitions, retirements, other equity instruments, distributions (dividends), and recapitalizations.
Accounting for Share Capital
- Memorandum Method: Authorized capitalization is noted, subsequent issuances credited directly to share capital.
- Journal Entry Method: Authorized capitalization is recorded with a credit to "authorized share capital" and a debit to "unissued share capital"; subsequent issuances credit "unissued share capital".
Subscription
- A contract between a share purchaser and issuer, where the purchaser promises to buy shares.
Classes of Shares
- Ordinary Share Capital (Common Stock): Bears ultimate risk and receives benefits of corporate success. Holders have rights to vote, purchase additional shares, share in profits, and share in net assets upon liquidation.
- Preference Share Capital (Preferred Stock): Holders have preferences over ordinary shareholders regarding dividends and net assets during liquidation.
Share Premium (Additional Paid-in Capital)
- Excess of subscription price over par/stated value.
- Excess of reissuance price over treasury share cost.
- From distribution of small stock dividends.
Par Value and No-Par Value Shares
- Par Value: Shares with a fixed value stated in the articles of incorporation; cannot be issued below par value.
- No-Par Value: Shares without a fixed value; have a stated value (minimum issuance price). Cannot be issued for less than P5 per share.
Legal Capital
- Cannot be distributed to owners unless the corporation is dissolved and liabilities are settled.
- Calculated differently for par and no-par value shares (aggregate par value vs. total consideration received).
Share Issuance Costs
- Deducted from share premium; if insufficient, the excess is charged to retained earnings.
- Shares issued at a discount (below par or stated value) result in a liability for the shareholder. Discount is considered a contra-equity account. Prohibited only on initial issuance.
Watered Stocks and Secret Reserves
- Watered Stocks: Shares issued for non-cash consideration with a fair value below par or stated value and is treated as a discount on share capital, recorded as a contra-equity account.
- Secret Reserve: Arises when shares are issued for non-cash consideration with a fair value above par or stated value.
Treasury Shares
- A company's own shares reacquired but not retired; presented as a deduction in shareholders' equity. Usually accounted for using the cost method.
Retirement of Shares
- Reacquired and cancelled shares; their par value and related share premium are removed from the accounts.
Delinquent Subscriptions
- Unpaid subscriptions at their due date; the corporation may offer the shares for sale (including unpaid balance, interest, and auction expenses).
No Bidders at Public Auction/Insufficient Retained Earnings
- If no bidders exist and retained earnings are insufficient, the subscription may be cancelled.
Sale of Different Classes of Share Capital
- Proportional Method: Used when the fair value of all classes is determinable.
- Incremental Method: Used when only one class has a determinable fair value.
Origination of Other Equity Instruments
- Stock rights, conversion options (convertible bonds/preference shares), detachable warrants, and stock options.
Stock Rights
- Recorded via memo entry; entries made only upon exercise or recall; expiration without recall does not necessitate an entry.
Convertible Bonds and Preference Shares
- Convertible bonds are accounted for separately as a financial liability and an equity instrument. Convertible preference shares do not require separate accounting upon issuance.
Bonds and Preference Shares with Detachable Warrants
- Accounted for separately as a financial liability (bonds) and an equity instrument (warrants or preference shares).
Preference Shares
- Nonparticipating: Entitled only to a fixed dividend amount.
- Participating: Entitled to dividends exceeding the fixed amount (fully participating or partially participating).
Dividends
- Dividends declared on financial liabilities (like redeemable preference shares) are expensed as interest.
- Liquidating Dividends: Paid out of capital; permissible for wasting asset corporations.
Recapitalization
- Changes the capital structure; can involve alteration of par/no-par value, share splits, or reverse splits; does not affect assets, liabilities, or total shareholders' equity.
Share Splits
- Split-up (Share Split): Existing shares are replaced with a greater number of shares at a reduced par (stated) value.
- Split-down (Reverse Share Split): Existing shares are replaced with fewer shares at a higher par (stated) value. Both are recorded via memo entry.
Quasi-reorganization
- Used to provide a fresh start for financially troubled entities; involves revaluation of assets/liabilities and equity realignment.
Donated Treasury Shares
- Need to be accounted for according to the appropriate accounting standards and regulations.
Share-Based Transactions with Cash Alternatives
- This category could involve different methods and arrangements, and the accounting will vary depending on the specific details of the transaction.
Cash, Property, and Share Dividends
- Cash Dividends: Dividends paid in cash.
- Property Dividends: Dividends paid in assets other than cash.
- Share Dividends (Bonus Issue): Dividends paid by issuing additional shares.
Fractional Share Warrants and Scrip Dividends
- Fractional Share Warrants: Issued to handle fractional shares resulting from share splits or dividends.
- Scrip Dividends: A written promise to pay dividends at a future date.
Book Value (BV) per Share
- Indicates the net asset value attributable to each share of stock.
More Than One Class of Share Capital
- Requires careful allocation of share capital based on relevant regulations and the accounting methods used.
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