SHAREHOLDER’S EQUITY

Lecture/Discussion:
Shareholders’ equity ➔ represents the residual interest of the owners in the assets of the corporation after
deducting all its liabilities.

COMPONENTS OF SHAREHOLDERS’ EQUITY:

1. SHARE CAPITAL – represents the portion of the authorized share capital that is already issued.
a. Subscribed share capital – represents the portion of the authorized share capital that is subscribed but
not yet issued. It is always recorded at par value.
b. Subscription receivable – represents the unpaid portion of the subscription price.
c. Share dividends distributable (stock dividends payable) – results when the BOD with approval of
shareholders declares shares dividend. There is only transfer from retained earnings to share capital.
d. Discount on share capital – when the shares issued is below par value. It is presented as deduction from
shareholders’ equity.
e. Capital liquidated – dividends declared out of capital. It is presented as deduction from shareholders’
equity.
f. Share premium– excess of issue price over the par value or stated value of shares.
2. RETAINED EARNINGS (DEFICIT) – represent the cumulative profits (net of losses, distribution to owners, and
other adjustments) which are retained in the business and not yet distributed to the shareholders. It is
classified into:
✓ Unrestricted – portion of retained earnings that is available for future distribution to the shareholders.
✓ Restricted – portion of retained earnings that is not available for distribution unless the restriction is
subsequently reversed.
3. OTHER COMPONENTS OF EQUITY (OCI/L)
a. Revaluation surplus – excess of fair value or depreciated replacement cost over the carrying amount of
revalued asset.
b. Cumulative unrealized fair value gains/losses on FVOCI – debt securities (hold to collect and sell -
mandatory) and equity securities (irrevocable election)
c. Translation differences of foreign operations – occurs when the financial statements of a foreign
operation (branch, subsidiary etc.) is translated to their presentation currency. The items in the financial
statements (assets & liabilities – closing rate; Income and expenses – spot exchange rates at transaction
date or for practical reasons at average rates. (see PAS 21)
d. Effective portion of cash flow hedge – is a hedge of the exposure to variability in the cash flows of a
specific asset or liability, or a forecasted transaction that is attributable to a particular risk. The effective
portion is recognized in OCI.
e. Remeasurement gain or loss under PAS 19-R
4. TREASURY SHARES – are entity’s own shares that were previously issued but are subsequently reacquired
but not retired. It is presented as deduction from shareholder’s equity.

CLASSES OF SHARE CAPITAL

1. Preference share capital – shares that give the holders thereof certain preferences over other shareholders.
2. Ordinary share capital – represent the residual corporate interest that bears the ultimate risk of loss and
receives the benefits of success. It is always recorded at par value.

Note: If an entity has only one class of share capital, it necessarily is an ordinary share capital. The Corporation
Code prohibits issuance of preference shares without ordinary shares.
GENERAL RULE: A share certificate is issued only when the subscription is fully paid.

CONCEPT OF LEGAL AND CONTRIBUTED CAPITAL

➢ Legal capital – is the portion of the contributed capital that cannot be distributed to the owners during the
lifetime of the corporation unless the corporation is dissolved and all of its liabilities are settled first. It is
computed as follows:
a. For par value shares – equal to the total par value of shares issued and subscribed.
 b. For no-par value shares – equal to the total consideration received or receivable from shares issued or
subscribed. Total consideration refers to the subscription price inclusive of any amount in excess of stated
value.
➢ Legal capital is based on the concept of trust fund doctrine which states that the share capital of a corporation
is a trust fund held for the protection of its creditors.
➢ Contributed capital represents the total consideration received from the shareholders in exchange for the
issuance of shares. It is computed as follows:
Share capital issued xxx
Subscribed share capital, net of subscription receivable xxx
Share premium xxx
Total paid in capital xxx

The corporation can pay dividends to shareholders but limited only to the retained earnings balance.

TREASURY SHARES
Treasury shares are an entity's own shares that have been issued and then reacquired but not canceled.

SHARE SPLIT
Share split may be in the form of:
1. Split up - occurs when old shares are cancelled and replaced by a larger number of new shares but with a
reduced par value per share.
2. Split down or reverse share split - occurs when old shares are cancelled and replaced by a smaller number of
shares but with an increased par value per share.
Note: before and after the share split, the share capital remains the same. There is only a change in the number of
shares and the par value or stated value.

DIVIDENDS
1. Dividends out of earnings
2. Dividends out of capital

Dividends out of earnings

- These dividends are declared from RE.

Dates relevant to the accounting for dividends:

1. Date of declaration - the date when the BOD formally announces the distribution of dividends.
2. Date of record - the date on which the stock and transfer book of the corporation is closed for registration. Only
those who are listed as of this date shall be entitled to receive dividends. No entry is made on this date.
3. Date of payment - the date when the dividends declared are distributed to the shareholders who are entitled
to receive the dividends.

Dividends out of earnings

1. Cash dividends
2. Property dividends
3. Share dividends or bonus issue
4. Scrip dividends
Only the outstanding shares are entitled to dividends.

RETAINED EARNINGS
➢ Represent the cumulative profits (net of losses, distribution to owners, and other adjustments) which are
retained in the business and not yet distributed to the shareholders.

Appropriation may be a result of:

1. Legal requirement/appropriation
2. Contractual requirement/appropriation
3. Voluntary or discretionary appropriation
Appropriations are disclosed in the notes. In the absence of such disclosure, the retained earnings are deemed
unrestricted. Appropriations do not affect total retained earnings. It also do not mean that a corresponding cash
fund has been set aside. Appropriations only indicate amounts that are not available for distribution to the owners.

Negative Balances in Equity

➢ When the retained earnings has a negative balance (i.e., a debit balance), it is described as deficit.
➢ When total shareholders' equity has a negative balance, it is described as capital deficiency.

QUASI-REORGANIZATION
➢ A permissive but not a mandatory procedure under which a financially troubled entity restates its accounts
and establishes a "fresh start" in accounting sense.
➢ Also called corporate readjustment and may be accomplished thru:
1. Recapitalization
2. Revaluation of property, plant, and equipment

Circumstances that may justify quasi-reorganization

1. When a large deficit exists
2. When approved by the shareholders and creditors
3. When the cost basis of accounting for PPE becomes unrealistic.
4. When a fresh start appears to be desirable or advantageous to all parties concerned.

A quasi-reorganization must be approved by the SEC.

Procedure:
1. Assets and liabilities are revalued upwards or downwards.
2. Any resulting credit balance in revaluation surplus is used to wipe out any deficit.
3. If a recapitalization is made, any resulting share premium shall be used to wipe out any deficit.
SEC requirements
1. If the quasi-reorganization is the result of revaluation of PPE, the appraisal must be made by an independent
expert or specialist.
2. Retained earnings subsequent to the quasi-reorganization shall be restricted to the extent of the deficit wiped
out during the reorganization and therefore cannot be declared as dividend.
3. Losses subsequent to quasi-reorganization cannot be charged to the remaining revaluation surplus.
4. The quasi-reorganization shall be disclosed for at least 3 years.

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PRACTICE EXERCISES:
STRAIGH PROBLEM
1. At the beginning of 2024, ABC Co. was organized with authorized capital of P100,000, P100 par value shares.
January 15 Issued 10,000 shares at P140 per share
May 1 Issued 5,000 shares in exchange for land with a fair value of P600,000. On this date, fair value of
the shares were P125 per share.
Nov. 23 Issued 2,000 shares for legal services when the fair value was P130 per share.

Required:
a. What amount should be reported as share capital on December 31, 2024?
b. What amount should be reported as share premium on December 31, 2024?

2. DEF Co. was incorporated on January 1, 2024 with the following authorized capitalization:
Ordinary share capital, 500,000 shares, P10 par value P5,000,000
Preference share capital, 100,000 shares, P100 par value 10,000,000

During 2024, the company issued 100,000 ordinary shares for a total of P1,200,000 and 20,000 preference
shares at P150 per share. In addition, on December 20, 2024, subscriptions for 10,000 preference shares were
taken at a total purchase price of P1,750,000. These subscribed shares were paid for on January 15, 2025.
What amount should be reported as total contributed capital on December 31, 2024?
3. At the beginning of 2024, XYZ Co. issued 40,000 preference shares of P20 par value and 20,000 ordinary shares
of P20 par value for a total of P1,600,000. At this date, the preference share was selling for P27 and the ordinary
share was selling for P36.

Required:
a. What amount of the proceeds should be allocated to the preference shares?
b. What amount of the proceeds should be allocated to the ordinary shares?
c. What is the share premium from the issuance of preference shares?
d. What is the share premium from the issuance of ordinary shares?
e. Assuming the ordinary shares has no available market value, what is the share premium arising from the
issuance of ordinary shares?

4. RST Co. provided the following information at year-end:

Preference share, P100 par P4,600,000
Share premium – preference 1,610,000
Ordinary share, P10 par 10,500,000
Share premium – ordinary 5,500,000
Subscribed ordinary share capital 100,000
Retained earnings 3,800,000
Subscription receivable – ordinary share 80,000
Treasury shares- ordinary 120,000

Required:
a. What is the amount of legal capital?
b. Assume the same information except that the ordinary share has a P10 stated value, what is the amount
of legal capital?

5. During the current year, GHI Co. issued for P220 per share, 15,000 preference shares of P200 par value. One
preference share may be converted into three ordinary shares of P50 par value at the option of the preference
shareholder. At year-end, all of the preference shares were converted into ordinary shares. The market value
of the ordinary share at the conversion date was P80.

Required:
a. What amount should be credited to ordinary share capital as a result of conversion?
b. What amount should be credited to share premium as a result of conversion?

6. Warren Corp. was authorized to issue 500,000 ordinary shares with a par value of P20. The following
transactions relative to the share capital took place:
a. Received subscription for 125,000 shares at P25 receiving a down payment of 60%.
b. The subscriber failed to pay his obligation, so his subscription was declared delinquent.
c. Paid delinquency sale expenses totaling P50,000.
d. Received bids from the following:
Person 1 - 75,000
Person 2 - 80,000
Person 3 - 70,000
e. Received payment from the highest bidder and shares were issued accordingly.

Required:
1. How much is the receivable from the highest bidder?
2. Who is the highest bidder?
3. Assuming there were no bidders, how to account for the delinquent shares?

7. At the beginning of 2024, Ginger Company reported the following:

Share capital, P10 par P3,000,000
Share premium 600,000
Retained earnings 2,200,000
 During 2024, the company had the following share transactions:
• Acquired 50,000 treasury shares for P1,000,000.
• Sold 20,000 treasury shares at P30 each.
• Sold the remaining treasury shares at P16 per share.

Required: What is the total amount of share premium at December 31, 2024?

8. The Warren Corporation showed the following balances related to an issuance of ordinary share capital:
Ordinary share capital, P50 par, 200,000 shares P10,000,000
Ordinary share premium 4,000,000

The company retired 2,000 shares of ordinary share capital.

Case 1: These shares were originally issued at P65 per share. Record the retirement of the 2,000 ordinary
shares under each of the following independent assumptions:
1. The retirement price is P55.
2. The retirement price is P80.

Case 2: Assuming the original issuance price of the 2,000 shares is not available, record the retirement of the
2,000 ordinary shares under each of the following independent assumptions:
1. The retirement price is P55.
2. The retirement price is P80.

9. At the beginning of the year 2024, JJ Company had 100,000, P10 par value ordinary shares outstanding.

Case 1: JJ Company effected 2-for-1 share split.

1. How much is the ordinary share capital balance as of December 31, 2024?
2. How many ordinary shares are outstanding as of December 31, 2024?
3. What is the par value per ordinary share after the split?

Case 2: JJ Company effected 1-for-2 share split.

1. How much is the ordinary share capital balance as of December 31, 2024?
2. How many ordinary shares are outstanding as of December 31, 2024?
3. What is the par value per ordinary share after the split?

10. At the beginning of the year 2024, Baby Company had 100,000 ordinary shares authorized and 40,000 shares
issued and outstanding. The company had the following equity transactions during 2024:
January 31 Declared and issued 20% stock dividends
May 1 Purchased 5,000 of shares issued
September 30 Reissued 2, 000 treasury shares
November 30 Declared 3-for-1 share split. The additional shares were issued immediately.

Required:
1. How many shares are issued at year-end?
2. How many shares are outstanding at year-end?

11. XYZ Co. has 1,000,000 shares of P150 par ordinary share capital outstanding as of December 31, 2024. On
this date, the board of directors declared P5.00 per share cash dividends payable on January 31, 2025 to
shareholders of record January 15, 2025. How much is the cash dividends declared?

12. On December 1, 2024, Mars Co. declared a property dividend of equipment payable on February 28, 2025. The
carrying amount of the equipment on December 1, 2024 is P800,000. Estimated cost to distribute and fair
value less cost to distribute on different dates are as follows:
Fair value Estimated cost to distribute Fair value less cost to distribute
December 1, 2024 P750,000 P50,000 P700,000
December 31, 2024 730,000 50,000 680,000
 February 28, 2025 745,000 55,000 690,000

Required:
1. What amount of impairment loss is recognized on December 1, 2024?
2. What is the dividend payable on December 31, 2024?
3. What is the measurement of the equipment held for distribution on December 31, 2024?
4. What amount of gain or loss on distribution of property dividend is recognized on February 28, 2025?

13. James Company declared and distributed 10% share dividend with fair value of P1,000,000 and par value of
P700,000, and 30% share dividend with fair value of 2,500,000 and par value of P2,000,000. What aggregate
amount should be debited to retained earnings for the share dividends?

14. Bond Company declared and distributed 10% share dividend with fair value of P1,000,000 and par value of
P1,200,000, and 30% share dividend with fair value of 2,500,000 and par value of P2,000,000. What aggregate
amount should be debited to retained earnings for the share dividends?

15. Sardines Company provided the following information:

• Dividends on 1,000 cumulative preference shares of 6%, P1,000 par value have not been declared or paid
for 2 years.
• Treasury shares were acquired at a cost of P700,000. The treasury shares had not been reissued at year
end.

What amount of retained earnings should be appropriated?

16. On January 1, 2024, Can Company reported P2,000,000 of appropriated retained earnings for the construction
of a new office building, which was completed in 2024 at a total cost of P1,500,000.

In 2024, the company appropriated P1,700,000 of retained earnings for the acquisition of a heavy machine.
Also, P500,000 of cash was restricted for the retirement of bonds due in 2025. On December 31, 2024, what
amount should be reported as appropriated retained earnings?

17. Barry Company had sustained heavy losses over a period of time and conditions warrant that the company
should undergo a quasi-reorganization on December 31, 2024:
• Inventory was recorded on December 31, 2024 at P2,000,000. The market value was P1,600,000.
• Property, plant, and equipment were recorded on December 31, 2024 at P3,000,000, net of accumulated
depreciation. The fair value was P2,400,000.
• On December 31, 2024, the share capital is P10,000,000 consisting of 20,000 shares with par value of
P500, the share premium is P3,300,000, and the deficit is P4,700,000.
• The par value of the share is to be reduced to P350.

Required:
1. How much is the deficit to be wiped out?
2. Immediately after the quasi-reorganization, what is the balance of the share premium account?
3. Immediately after the quasi-reorganization, what is the balance of retained earnings account?
4. Immediately after the quasi-reorganization, what is the total shareholders' equity?

18. Iris Co. has been incurring losses for several years. on December 31, 2024, the SEC permitted Iris to implement
a quasi-reorganization after due approval of Iris' shareholders and creditors. Iris' statement of financial position
immediately before quasi-reorganization is shown below:
Assets
Cash 1,500,000
Receivables 2,000,000
Inventory 1,550,000
Building – net 800,000
Goodwill 50,000
Total assets 5,900,000
 Liabilities 1,470,000
Share capital, P100, 50,000 shares 5,000,000
Share premium 500,000
Retained earnings (deficit) (1,070,000)
Total liabilities and equity P5,900,000

The quasi-reorganization plan provides the following:

• The building shall be revalued at an appraised value of P2,800,000.
• 10% of the receivables shall be written off.
• Inventory shall be written down to its net realizable value of P1,200,000.
• Goodwill shall be written off in full.
• A P30,000 probable loss on a pending lawsuit shall be recognized.
• Any resulting balance in revaluation surplus shall be used to wipe out the deficit.

Required:
1. How much is the deficit to be wiped out?
2. Immediately after the quasi-reorganization, what is the balance of the revaluation surplus account?
3. Immediately after the quasi-reorganization, what is the balance of the retained earnings account?

MULTIPLE CHOICE - THEORIES

1. When par value shares are sold, the entire proceeds shall be credited to...
a. The share capital account
b. The share premium account
c. An income account
d. The share capital account to the extent of the par value of the shares issued with any excess being credited
to the share premium account.
2. Subscription receivable from sale of shares which are not collectible within 12 months from the balance sheet
date shall be presented as a...
a. Current asset
b. Non-current asset
c. Deduction from the related subscribed share capital under shareholders' equity section of the statement
of financial position
d. Trade receivable
3. Subscription receivable from sale of shares which are collectible within 12 months from the balance sheet
date shall be presented as a...
a. Current asset
b. Non-current asset
c. Deduction from the related subscribed share capital under shareholders' equity section of the statement
of financial position
d. Trade receivable
4. During the current year, ordinary shares were subscribed for a price in excess of par, the excess of the
subscription price over par shall be recorded...
a. When the subscription is recorded.
b. When the subscription is collected in full.
c. When the ordinary shares are issued.
d. In no case shall a share premium be recorded when shares are sold on a subscription basis.
5. The portion of capital which cannot be returned to stockholders in any form during the lifetime of the
corporation is called...
a. Paid-in capital
b. Restricted capital
c. Legal capital
d. Illegal capital
6. Which of the following best describes the legal capital of a corporation that issues par value share capital?
a. Par value of shares issued and subscribed
b. Market value of shares issued and subscribed
c. Par value of shares outstanding
 d. Entire consideration received or receivable
7. Which of the following best describes the legal capital of a corporation that issues no-par value share capital?
a. Stated value of shares issued and subscribed
b. Stated value of shares authorized
c. Stated value of shares outstanding
d. Entire consideration received or receivable
8. A person who has agreed to pay the full amount of the subscription balance together with accrued interest,
costs of advertisement and expenses of sale for the smallest number of shares is called...
a. Buyer
b. Smallest bidder
c. Delinquent subscriber
d. Highest bidder
9. Treasury shares are...
Issued Outstanding
a. Yes Yes
b. Yes No
c. No Yes
d. No No
10. Subscribed shares are...
Issued Outstanding
a. Yes Yes
b. Yes No
c. No Yes
d. No No
11. The total cost of treasury shares shall be reported as...
a. Deduction from total contributed capital.
b. Deduction from share premium.
c. Deduction from retained earnings.
d. Deduction from total shareholders' equity.
12. Stock split is recorded by a...
a. Memorandum entry
b. Journal entry
c. A and B
d. A or B, at the option of the entity.

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