Mrs. Paz CastroShare Capital
OverviewCorporations separately report contributed capital and accumulated profits in accordance with some legal provisions.The owners equity section of a corporations statement of financial position is called shareholders equity.Shareholders equity has two major components:Share capital (contributed or paid-in capital) reflects the amount of resources received by a corporation as a result of investment by shareholders, donations or other share capital transactions.
Retained earnings (accumulated profits or losses) is the amount of capital accumulated and retained through the profitable operations of the business.
Shareholders EquityShare CapitalPreference Shares P50 par, 1,000 shares authorized, issued and outstandingP 50,000Ordinary Shares P5 par, 30,000 shares authorized, 20,000 shares issued and outstandingP100,000Share Premium - Ordinary50,000150,000Total Share CapitalP200,000Retained Earnings80,000Total Shareholders EquityP280,000
Share CapitalIt is the shares to be subscribed and paid in or secured to be paid in by the shareholders, either in money, property or services, at the time of organization of the corporation or afterwards, and upon which it is to conduct its operations.Legal capital:Capital contributed by shareholders comes from the sale of shares of stock.Portion of the contributed capital or the minimum amount of paid-in capital, which must remain in the corporation for the protection of corporate creditors.
The amount of legal capital is determined as follows:In case of par value shares, legal capital is the aggregate par value of all issued and subscribed shares.In case of no-par shares, legal capital is the total consideration received by the corporation for the issuance of its shares to the shareholders including the excess of issue price over the stated value (Section 6, par. 3, Corporation Code of the Philippines).Share premium (or Additional Paid-in Capital):The portion of the paid-in capital representing amounts paid by shareholders in excess of par.It may also result from transactions involving treasury stocks, retirement of shares, donated capital, share dividends and any other gain on the corporations own stock transactions.
Two Basic Types of SharesA share of stock represents the interest or right of a shareholder in a corporation and is evidenced by a certificate of stock.Ordinary share:The basic ownership class of the corporation.Ordinary shares are the entitys residual equity.Preference share:These special benefits relate either to the receipt of dividends when declared before the ordinary shareholders (preferred as to dividends) or to priority claims on assets in the event of corporate liquidation (preferred as to assets).
Terms Related to Share CapitalAuthorized share capital: the number of authorized shares indicates the maximum number of shares the corporation can issue as specified in the article of incorporation. This maximum number of shares when multiplied by the par value of the share will yield the authorized share capital. Any increase of decrease in the authorized share capital requires prior approval of the SEC and formal amendment to the articles of incorporation.
Issued share capital: these are shares which have been sold and paid for in full. Issued shares may include treasury shares. Share Capital, either Ordinary Shares account or Preference Shares account, is credited for the total par value of fully collected subscriptions or in the case of no-par value shares, for the total consideration received in relation to the issue. Share Capital is debited only when the issued shares are retired, redeemed or canceled by the corporation.
Subscribed share capital: it is the portion of the authorized share capital that has been subscribed but not yet fully paid. This shareholders equity account is credited for the total par value of the shares subscribed and debited for the total par value of the fully collected subscriptions.Outstanding share capital: these are issued shares, which are in the hands of the shareholders. The number of outstanding shares will equal the difference between the issued shares and the treasury shares.
Treasury stock: these are issued shares acquired by the corporation but not retired and are therefore, awaiting to be reissued at a later date.
Accounting for Issuance of Share CapitalWhen shares with par value are sold, the proceeds should be credited to the share capital account to the extent of the par value of the shares, with any excess being reflected as share premium.When shares without par value are sold, the proceeds should be credited to the share capital account. If the no-par stock has a stated value, the excess proceeds over stated value may alternatively be credited to share premium.
Section 65 of the Corporation Code prohibits the original issue of share capital (or capital stock) for a consideration less than the par or stated value (i.e. issued at a discount).Corporations set the par value of their ordinary shares at nominal amounts such as P1 per share. The par value is no indication of its market value; it merely indicates the amount per share to be entered in the share capital account.
Considerations for Issuance of SharesShare capital may be issued in exchange for any of the following considerations:Actual cash paid to the corporation.Tangible or intangible properties actually received by the corporation.Labor already performed for or services actually rendered to the corporation.Previously incurred indebtedness by the corporation.In issuing its share capital, a corporation may avail of the services of an investment banker who is a specialist in marketing shares to investors.
The investment banker may underwrite a share issue which means that the banker agrees to buy the shares of the corporation and sell them to investors.The underwriter bears this risk in return for gains from selling the shares at a price higher than that paid to the corporation.An investment banker who is not willing to underwrite may handle a share issue on a best effort basis. The banker undertakes to sell as many shares as possible at a set price but the corporation bears the risk on unsold shares.
Share issue costs include costs associated with preparing, printing and filing the relevant documentation and marketing the share issue.Accounting for share issue costs is covered in paragraph 37 of International Accounting Standards (IAS) No. 32, Financial Instruments: Presentation:An entity typically incurs various costs in issuing or acquiring its own equity instruments. Those costs might include registration and other regulatory fees, amount paid to legal, accounting and other professional advisers, printing costs and stamp duties. The transaction costs of an equity transaction are accounted for as a deduction from equity (net of any related income tax benefit) to the extent they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. The costs of an equity transaction that is abandoned are recognized as an expense.
Share Issuance for CashMost share issues are for cash since the primary reason for issuing shares is to raise capital for a corporations operating activities.With par value:Issuing share capital at par:Ex.: Narsan Holdings is authorized to issue P1,000,000 ordinary shares divided into 10,000 shares, with a par value of P100 per share. The diversified company issued on cash basis 2,000 shares at par. The issuance entry will be:Cash200,000Ordinary Shares200,000The amount of P200,000 invested in the corporation is called paid-in capital or contributed capital. The credit to Ordinary Shares increases the share capital of the corporation.
Issuing share capital above par:Ex.: Suppose the 2,000 shares were sold at P150 per share, the entry follows:Cash300,000Ordinary Shares200,000Share Premium100,000This sale of shares increases the corporations contributed capital by P300,000. When the shares with par value are sold, the proceeds should be credited to the Ordinary Shares account to the extent of the par value in this case, P200,000; with any excess to be reflected in the Share Premium account. The excess of P100,000 is not a gain. The company can neither earn a profit nor incur a loss when it issues shares to or acquires shares from its shareholders.
Without par value:Issuing no-par share capital:Ex.: Morning Star Travel is a domestic corporation engaged in the business of organizing tour packages for Asian and European visitors to the Philippines. The company which is located at J. Bocobo St., Manila, has two classes of shares preference shares and no-par ordinary shares. 5,000 ordinary shares were issued for P85,000. The entry to record the issue of these no-par shares will be:Cash85,000Ordinary Shares85,000When shares without par value are sold, the proceeds should be credited to the Ordinary Shares account. Accounting for issuance of preference shares is basically the same as that of ordinary shares. Section 6 of the Corporation Code prohibits the issue of no-par value preference shares.
Issuing no-par share capital with stated value:Ex.: Suppose that Morning Star Travels no-par ordinary shares have a stated value of P20. The company issued 5,000 shares at P25 per share. The entry will be:Cash125,000Ordinary Shares125,000When shares without par value are sold, the proceeds should be credited to the Ordinary Shares account. If the no-par stock has a stated value, the excess proceeds over stated value in this case, P5 per share, may alternatively be credited to share premium.Cash125,000Ordinary Shares100,000Share Premium 25,000
Subscription of SharesThe subs