PARCOR – Partnership and Corporation Accounting
Share Capital Transactions
Share Capital (Capital Stock) Transactions
In recording the share capital transactions of a corporation, there are two (2) methods,
depending on the accounts, to be used. These are the journal entry method and the
memorandum entry method.
The following accounts are used under the journal entry method (Abeleda, 2012):
• Authorized Share Capital – This account is the total amount of capital stock that a
corporation is authorized to sell or issue as stated in the Articles of Incorporation.
• Unissued Share Capital – This account is the total amount of capital stock not yet sold
or issued by the corporation.
• Subscribed Share Capital – This account is the portion of the authorized share capital
which has been subscribed by the stockholders. This is recorded at par value or stated
value.
• Subscriptions Receivable – This account is the portion of the subscribed share capital
which remains uncollected.
• Share Premium (formerly called Paid-in Capital) – This account is the excess of the
subscription price over the par value of the share capital subscribed or issued.
• Share Capital in Excess of Stated Value – This account is the excess of the subscription
price over the stated value of a no par value share capital subscribed or issued.
Note: If the share capital has no par value or stated value, it is not possible to use the
journal entry method.
The same accounts mentioned earlier are used in memorandum methods except the
Authorized Share Capital and Unissued Share Capital. These will be replaced by a single
account called Share Capital.
• Share Capital – This account represents the total amount of share capital fully paid and
already issued by the corporation.
The comparative pro-forma journal entries relating to the formation of a corporation and
other subsequent transactions under the two (2) methods are summarized as follows:
1. Approval by the SEC of the Articles of Incorporation
2. Subscription to the share capital by the incorporators
3. Collection of subscription (partial or full)
4. Issuance of stock certificate upon full payment
5. Payment of expenses relating to the information of the corporation
Note that except for the entry to record the share capital authorization and the entry record
the issuance of stock certificate, the entries for all the other share capital transactions are
the same under both methods.
EXERCISE
ABC Corporation was authorized to issue the following: 5,000 preference share with a
par value of P15 per share and 20,000 ordinary shares with no par value but with stated
value of P10 per share.
JOURNAL ENTRY METHOD MEMO ENTRY METHOD
Share Capital Authorization
Share Capital Subscriptions by the Incorporators. The incorporators subscribed
a total of 2,000 preference shares and 5,000 ordinary shares.
Payment of Subscription
Issuance of Stock Certificates
Share Capital Subscription at Par Value or Stated Value with Down Payment.
500 preference shares at par value and 800 ordinary shares at stated value were
subscribed with 50%
down payment
Share Capital Subscriptions Higher than the Par Value and Stated Value. 100
preference shares at P16 per share and 300 ordinary shares at P12 per share were
subscribed.
Share Capital Issuance for Cash at Par Value or Stated Value. Received cash
subscriptions of 50 preference shares at par value and 100 ordinary shares at
stated value.
Share Capital Issuance for Cash at a Price Higher Than the Par or Stated
Value. Sold 100 preference shares for cash at P16 per share and 200 ordinary
shares at P11 per share.
Note: Subscriptions Receivable is a shareholders’ equity account. It is presented
in the statement of financial position as a deduction from the related subscribed
ordinary shares; however, when it is collectible within one year, this may be shown
as a current asset.
Share Capital issuance for Non-Cash Consideration
A share capital can be issued as a non-cash consideration. If so, the asset received in
exchange for the share capital must be valued using the order of priority as follows:
• The value of the asset received must be at fair market value if it is given.
• The value of the asset received will be based on the fair market value of the share
capital issued, if the market value of the asset is not given.
• An independent appraisal will be made if both market value of asset received and market
value of share capital issued are not present. The appraised value of the asset received
will be the basis for valuation.
Share Capital Issuance for Payment of Liability
In distinct situation, a capital stock or share capital is issued by a corporation to fulfill their
obligations or payment of loans. Unissued Share Capital or Share Capital will be credited,
and a liability account will be debited. If the liability is greater than the amount of share
capital issued, the excess will be credited to Share Premium or Share Capital in Excess
of Stated Value account.
Share Capital Issuance for Services Rendered Related to the Formation of the
Corporation
During the formation of a corporation, capital stock or share capital may be issued as
payment for services rendered (e.g. legal fees). Organization Expense account will be
debited and Unissued Share Capital or Share Capital account will be credited at par value
or stated value. A Share Premium or Share Capital in Excess of Stated Value account will
be credited if expense is more than the issued share capital. An adjustment to
organization expense account will be made if the expense is less than the issued share
to make it equal (par value) with the issued share capital.
Delinquent Share Capital Subscription (Defaulting Subscriber)
Sometimes subscribers are not able to accomplish to pay their subscription’s balance on
due date (call date). If they are still unable to pay after repeated demands and notices for
payment, the corporation is allowed by the law to sell the delinquent shares (shares
unpaid) at a public auction. An advertisement by the corporation will be announced in a
local newspaper for the sale of delinquent shares. The notice of bidding will specify the
date of opening of the accepted bid offers. At the opening of the sealed bids, the “highest
bidder” will be determined after which s/he would be required to pay the amount of his/her
bid for the delinquent shares. The shares of stock to be issued to the defaulting subscriber
will be the subscribed shares less the shares bid by the highest bidder.
The one who is willing to pay the uncollected balance of the subscription (plus accrued
interest, advertising cost, and other expenses relating to the sale of the delinquent shares)
is considered as the highest bidder for the least number of shares.
Illustration: LPUBroomBroom, Inc. is a quality car care center located in Batangas City.
Assume that 5,000 shares of P10 par value ordinary shares of the corporation were sold
on subscription at P12 per share on Sept. 1, 20x3 to A. Subscription installments of
P24,000 and P36,000 will be due on Sept. 16 and 30, respectively.
1. Prepare journal entries related to the above transactions.
2. Assuming the same facts as above except that the subscriber failed to settle part
of his subscriptions in the amount of P48,000. After complying with the legal
procedures pertaining to delinquency sale, a public auction was held. The offer
price is P56,000 including P3,000 accrued interest and P5,000 expenses of sale.
Three bidders are willing to pay the offer price, namely:
X 4,300 shares
Y 4,500 shares
Z 4,700 shares
X is the highest bidder. The 5,000 shares are deemed fully paid. A, the original
subscriber, gets 700 shares and A receives 4,300 shares.
If there is no bidder, the corporation may bid for the delinquent shares and the total
amount due shall be credited as paid in full in the books of the corporation. These
shares shall be considered as treasury shares.