ACCOUNTING FOR SHARE CAPITAL TRANSACTIONS A share capital can be issued in exchange for cash, non-cash assets, services, or any form of securities, for any amount provided it should not be less than its par or stated value. When shares are issued at above par, they are said to be issued at a “premium”. When they are issued at below par, they are issued at a “discount”. D!"#"$"%#& '. A par value is the nominal or face value of a share stated on the face of the share certi(cate and the articles of incorporation. incorporation. ). A stated value is the nominal value of a share share stated in the articles of incorporation but not on the face of the share certi(cate. *. A watered share is a share capital which is issued at a consideration which is less than its par or stated value. +. A secret reserve is the reverse of watered share. "t arises when asset is understated or liability is overstated with a corresponding understatement understatement of capital. . A subscripti! is the amount that the subscriber contracted to pay. . A share certi"cate is the instrument or document that evidences the ownership of a share. As a general rule, a share certi(cate is issued only when the subscription is fully paid. $/%D& %! A00%1#$"#2 !%3 &/A3 0A4"$A5 $3A#&A0$"%#& A. emorandum ntry ethod 1nder this method, the authori6ation to issue share capital is recorded by means of a memorandum entry only. &ubscriptions are recorded by a debit to &ubscriptions 3eceivable account and a credit to &ubscribed &hare 0apital account. 1pon full payment of subscription, a share certi(cate is issued and recorded by a debit to &ubscribed &hare 0apital account and a credit to &hare 0apital account. $his method is used unless it is speci(ed speci(ed that the 7ournal entry entry method will will be used in recording. 8. 9ournal ntry ethod $his method records records the authori6ation by by means of a 7ournal entry debiting the 1nissued &hare 0apital account and crediting Authori6ed &hare 0apital account. &ubscriptions are also recorded by a debit to &ubscriptions 3eceivable account and a credit to &ubscribed &hare 0apital account. /owever, upon full payment of a subscription, a share certi(cate is issued and recorded by a debit to &ubscribed &hare 0apital account and a credit to 1nissued &hare 0apital account. "llustrative $ransactions: Assume the following transactions transpired transpired in the month of 9une, );': 9une ' Authori6ed to issue issue ';;,;;; ordinary ordinary shares shares with a par value of 4';; per share. share. %n this date, the (ve incorporators share capital and paid )< of their subscription subscribed )< of the authori6ed "ssued ;; ordinary shares at 4);; par. '; "ssu "ssued ed *,;; *,;;; ; ordi ordina nary ry shar shares es for for a piec piece e of land land valu valued ed at 4 + +;, ;,;; ;;;. ;. ' "ssu "ssued ed *; *; ordi ordina nary ry shar shares es to a lawy lawyer er for for lega legall serv servic ices es rende enderred in orga organi ni6i 6ing ng the the corporation. /is services were valued at 4 ;,;;;. ) $he $he inco incorp rpor orat ator ors s paid paid the the bala balanc nce e of thei theirr subs subscr crip ipti tion on and and corr corres espo pond ndin ing g shar share e certi(cates were issued. 3e=uired: 9ournal entries under both methods to record the above transactions. Date
emorandum ntry ethod
9ournal ntry ethod
Accounting for 4ar >alue &hares "ssued at 4ar, at a Discount, and at a 4remium "llustrative $ransactions: '. "ssued ',;;; shares for cash. ). 3eceived subscription for ),;;; shares. *. 3eceived the full payment of subscription one wee? after. 3e=uired: 4repare 7ournal entries assuming @A "ssuance is at par of 4 ';;Bshare, @8 "ssuance is at 4 ');Bshare, @0 "ssuance is at 4 C;Bshare 0ase A Debit
0redit
Debit
0redit
0ase 8
0ase 0 Debit
0redit
43&#$A$"%# %! A00%1#$ $"$5& "# $/ &$A$#$ %! !"#A#0"A5 4%&"$"%# '. &hare 0apital 4reference share capital is presented (rst under contributed capital section. %rdinary share capital follows the preference share capital. ). &ubscribed &hare 0apital addition to the issued share capital *. &ubscriptions 3eceivable "f currently collectible, current assetE if not currently collectible, as deduction from subscribed share capital +. &hare 4remium &hare premium for preference shares is presented (rst under the additional paid-in capital section, next to the contributed capital. &hare premium for ordinary shares comes next to share premium for preference shares. . $reasury &hares shown as deduction from the total shareholdersF e=uity. A00%1#$"#2 !%3 $3A&13G &/A3& $reasury shares are shares of stoc? which have been issued and fully paid for, but subse=uently reac=uired by the issuing corporation by purchase, redemption, donation, or through some other lawful means. $hese shares were reac=uired but not cancelled. "llustrative $ransactions: '. $he corporation ac=uired ',;; shares of its own stoc? at 4 , with a par value of 4 ;. ). !rom the reac=uired shares, ',;;; shares were subse=uently re-issued for 4H and the remaining ;; shares were sold for 4 ;. *. Assume instead that ',;;; treasury shares were subse=uently re-issued for 4 and the remaining ;; shares were sold for 4 ). 9ournal ntries Debit
0redit
&/A3 &45"$& When the corporation authori6es the replacement of outstanding shares either by a large number of shares or a smaller number of shares, the procedure is called a share split# "t is recorded by a memorandum entry, stating the new number of shares and the new par value of the shares. A share split will neither aIect the total share capital nor the total shareholdersF e=uity. "t simply changes the number of shares outstanding and the par value per share. $ypes of &hare &plit: @A &hare split up and @8 &hare split down or 3everse &hare &plit &le: '. %n 9une ', the corporation has ';,;;; ordinary shares outstanding, with a par value of 4 ';; per share. $he 8oard authori6ed a share split of -for-'. $his split means that (ve new shares will be issued for every share held. 4repare a memorandum entry to record this.
). Assume instead that the corporation authori6ed a '-for-+ share split on its ';;,;;; ordinary shares outstanding with a par value of 4. $his ?ind of split means that one new share will be issued for every four shares held. 4repare a memorandum entry to record this.
RETAINE$ EARNINGS r ACCU%ULATE$ PROFITS&LOSSES $wo ?inds of retained earnings: '. 1nappropriated represent that portion which is free and available for dividend declaration to shareholders. ). Appropriated represent that portion which has been restricted, therefore, not available for dividend declaration. A divide!d is that part or portion of the pro(ts of a corporation set aside, declared and ordered by the directors to be paid ratably to the shareholders on demand or at (xed time. "t is a payment to the shareholders of a corporation as a return on their investment. %nly outstanding share capital is entitled to receive dividends.
&igni(cant Dates 0oncerning Dividends: A. Date of Declaration $his is the date when the 8oard of Directors approved the resolution to distribute dividends. %n this date, the liability for the dividend is recogni6ed. 8. Date of 3ecord $his is the date when the list of shareholders who are entitled to receive dividends is prepared. #o 7ournal entry is made. 0. Date of 4ayment $his is the date when the dividend declared is paid to the shareholders. $he liability for dividend is extinguished on this date. "llustrative $ransactions: '. Diane 0orporation has ';,;;; shares of 4 ';; par value ordinary share capital outstanding as of December ', );'. %n this date, the 8oard of Directors declared a cash dividend of 4 ';.;; per share to shareholders of record of December *', );', payable on 9anuary *', );'. 4repare entries for this transaction. Debit
0redit
). 3oy 0orporation has ';;,;;; ordinary shares of 4 ); par value that were outstanding as of December ', );'. %n this date, the 8oard of Directors declared a share dividend of ';,;;; shares to shareholders of record of December *', );', payable on 9anuary *', );'. %n the date of declaration, the shares have fair mar?et value of 4 ) per share. Debit
*. Assume instead, that );,;;; shares were declared as dividends in problem ). Debit
0redit
0redit
+. $hree & !ood "ndustries based in 4ulilan, 8ulacan 7as ',;;; souvenir items in inventory ac=uired at a cost of 4 ;;,;;;. $he fair mar?et value of these items is 4 ;;,;;; and were declared as property dividends to be distributed to its outstanding par value shares. Debit 0redit
