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Questions and Answers
Revaluation of PPE is primarily focused on adjusting the value of tangible assets.
True
Fractional share warrants are typically issued to represent ownership in a company.
False
Liquidating dividends occur when a company distributes its remaining assets to shareholders during a winding-up process.
True
Share options give shareholders the right to sell their shares at a predetermined price.
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A property dividend involves distributing physical assets rather than cash or shares.
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Shareholders' Equity refers to the gross assets of a corporation without deducting its liabilities.
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Ordinary shareholders have priority claims over dividends in the event of liquidation.
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The Memorandum Method records authorized capitalization by crediting 'unissued share capital'.
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A subscription is a binding agreement where the purchaser promises to sell shares to the issuer.
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Preference shares can be issued with no stated value in their articles of incorporation.
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Par value shares can be issued at a price below their fixed peso value.
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Share Premium represents the difference between the cost of treasury shares issued and their reissuance price.
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No-par value shares must always be issued for a consideration of less than five pesos per share.
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Legal capital can be distributed to the owners at any time during the lifetime of the corporation.
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Shares can be issued at a discount only during their original issuance.
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Watered stocks are shares issued for cash consideration above their par value.
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Treasury shares are those shares that were previously issued and then reacquired by the entity.
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Retired shares remain on the books of accounts with their total par value and related share premium.
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Delinquent subscriptions imply that the subscription has been fully paid by the due date set by the board of directors.
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Cost method is the only method for accounting for treasury shares.
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Secret reserves arise when shares are issued for non-cash consideration with fair value below par or stated value.
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Nonparticipating shareholders are entitled to dividends beyond the fixed amount.
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Participating dividends can either fully participate on a pro rata basis or partially depending on certain amounts.
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Dividends declared on financial liabilities like redeemable preference shares are recognized as a capital expense.
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Liquidating dividends are declared out of a corporation's income.
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Recapitalization can occur without affecting the total assets or liabilities of the entity.
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A share split involves increasing the par value of old shares during the replacement process.
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Quasi-reorganization allows troubled organizations to revalue assets and liabilities as a mandatory procedure.
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A reverse share split results in a larger number of new shares issued compared to old shares.
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The intrinsic value of the warrants is calculated as the difference between the fair value of the preference shares and the subscription price.
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Donated capital is recognized immediately upon receiving donations from the government.
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Dividends are recognized as a liability when they are approved by management on the date of record.
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Cumulative dividends are forfeited if not declared in a year, while noncumulative dividends accumulate until paid.
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Cash donations from shareholders are credited to retained earnings.
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Events occurring after the reporting period are recognized as liabilities in financial statements.
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Preference shares may have a cumulative feature where unpaid dividends accumulate until payment is made.
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Assessment on shareholders for additional capital provided is debited to share premium.
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Study Notes
Shareholders' Equity
- Shareholders' equity represents the residual interest in a corporation's assets after deducting liabilities.
Transactions Affecting Corporation's Equity
- Includes authorization, issuance, acquisition, and retirement of shares.
- Covers origination of other equity instruments.
- Encompasses distributions to owners (dividends).
- Accounts for transactions leading to "other components of equity."
- Includes recapitalization and quasi-reorganization.
Accounting for Share Capital
- Uses either the memorandum method (authorized capitalization credited to share capital account) or the journal entry method (authorized capitalization recorded by crediting "authorized share capital" and debiting "unissued share capital").
Subscription
- A contract where a purchaser promises to buy shares from the issuer.
Classes of Shares
- Ordinary Share Capital (Common Stock): Carries ultimate risk and receives benefits of success. Ordinary shareholders have rights to attend and vote in meetings, purchase additional shares, share in profits, and share in net assets upon liquidation.
- Preference Share Capital (Preferred Stock): Offers holders preferences over other shareholders, including priority claims on dividends and/or net assets during liquidation.
Share Premium (Additional Paid-in Capital)
- Represents the excess of subscription price over par/stated value.
- Includes excess of reissuance price over the cost of treasury shares.
- Can result from the distribution of "small" stock dividends.
Par Value and No-Par Value Shares
- Par Value Shares: Have a fixed peso value in the articles of incorporation and cannot be issued below par value.
- No-Par Value Shares: Lack a fixed peso value but may have a stated value (indicated in the articles but not on the share certificate). Cannot be issued for less than ₱5 per share.
Legal Capital
- Cannot be distributed to owners unless the corporation is dissolved and liabilities are settled.
- Calculated differently for par value (aggregate par value of issued and subscribed shares) and no-par value shares (total consideration received or receivable from issued or subscribed shares).
Share Issuance Cost
- Deducted from share premium; if insufficient, the excess is charged to retained earnings.
- Shares issued below par or stated value are issued at a discount; the shareholder is liable for the discount. Discount on share capital is a contra-equity account. Discounts are prohibited only on original issuance.
Watered Stocks and Secret Reserves
- Watered Stocks: Shares issued for non-cash consideration with fair value below par or stated value.
- Secret Reserve: Arises when shares are issued for non-cash consideration with fair value above par or stated value.
Treasury Shares
- The entity's own shares that have been reacquired but not retired; presented as a deduction in shareholders' equity. The cost method is used for accounting.
Retirement of Shares
- Shares are retired when reacquired and canceled according to SEC regulations. Par value and related share premium are removed from the books.
Delinquent Subscription
- When a subscription remains unpaid after the due date set by the board of directors. The offer price includes unpaid balance, accrued interest and, when applicable, a portion allocated based on the warrant's intrinsic value.
Donated Capital
- Donations from shareholders are credited to share premium; government grants are treated as government grants; donations from other sources are recognized as income when conditions are met. Donated shares are initially recorded via memo entry, with donated capital recognized upon reissue.
Assessment on Shareholders
- For financially troubled corporations, assessments are credited to share premium.
Retained Earnings
- Can be unrestricted or appropriated (restricted) due to legal, contractual, or voluntary reasons.
Dividends
- Recorded on the date the dividend is declared (or approved, if further approval is required). No entry is made on the date of record. Disclosure is in the statement of changes in equity or notes. Events after the reporting period are not recognized.
Preference Over Dividends
- Noncumulative: Dividend entitlement is forfeited if not declared in a year.
- Cumulative: Entitlement accumulates until paid; unpaid dividends are disclosed but not accrued as liabilities unless declared.
- Nonparticipating: Entitled only to a fixed dividend amount.
- Participating: Entitled to an amount exceeding the fixed dividend amount (fully participating on a pro-rata basis, or partially participating to a certain amount or percentage).
Dividends Recognized as Expense
- Dividends declared on financial liabilities (like redeemable preference shares) are treated as interest expense.
Liquidating Dividends
- Dividends paid from capital. Permitted for wasting asset corporations.
Recapitalization
- Changes the capital structure without affecting assets, liabilities, or total shareholders' equity. Includes changes from par to no-par shares,par value reduction, and share splits or reverse splits.
Share Split
- Split up (share split): Old shares are cancelled and replaced by more new shares with a lower par/stated value.
- Split down (reverse share split): Old shares are cancelled and replaced by fewer new shares with a higher par/stated value. Recorded via memo entry.
Quasi-reorganization
- Allows financially troubled companies with favorable prospects to revalue assets and liabilities and realign equity to achieve a "fresh start" by revaluing PPE and/or recapitalizing the entity.
Donated Treasury Shares, Conversion (Preference to Ordinary), Share Rights, Share Warrants Attached to Other Securities, Share Options, Share Appreciation Rights, Share-Based Transactions with Cash Alternatives, Cash Dividend, Property Dividend, Share Dividend (Bonus Issue), Fractional Share Warrants, Scrip Dividend
- The notes contain placeholders for relevant information about these topics.
Liquidating Dividends and Quasi-reorganization
- The last two points reiterate earlier concepts.
BV per share, More Than 1 Class of Share Capital
- These are additional topics mentioned without details.
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Description
This quiz covers the essential concepts of shareholders' equity, including its definition and the various transactions that affect a corporation's equity. It explores share capital accounting methods and the types of shares involved in corporate finance. Test your understanding of these critical principles in corporate accounting.
