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.
DEFINITIONS
1. A par value is the nominal or face value of a share stated on the face of the share certificate
and the articles of incorporation.
2. A stated value is the nominal value of a share stated in the articles of incorporation but not on
the face of the share certificate.
3. A watered share is a share capital which is issued at a consideration which is less than its par
or stated value.
4. A secret reserve is the reverse of watered share. It arises when asset is understated or liability
is overstated with a corresponding understatement of capital.
5. A subscription is the amount that the subscriber contracted to pay.
6. A share certificate is the instrument or document that evidences the ownership of a share. As a
general rule, a share certificate is issued only when the subscription is fully paid.
METHODS OF ACCOUNTING FOR SHARE CAPITAL TRANSACTIONS
A. Memorandum Entry Method
Under this method, the authorization to issue share capital is recorded by means of a
memorandum entry only. Subscriptions are recorded by a debit to Subscriptions Receivable account
and a credit to Subscribed Share Capital account. Upon full payment of subscription, a share
certificate is issued and recorded by a debit to Subscribed Share Capital account and a credit to
Share Capital account.
This method is used unless it is specified that the journal entry method will be used in
recording.
B. Journal Entry Method
This method records the authorization by means of a journal entry debiting the Unissued
Share Capital account and crediting Authorized Share Capital account. Subscriptions are also
recorded by a debit to Subscriptions Receivable account and a credit to Subscribed Share Capital
account. However, upon full payment of a subscription, a share certificate is issued and recorded by
a debit to Subscribed Share Capital account and a credit to Unissued Share Capital account.
Illustrative Transactions:
Assume the following transactions transpired in the month of June, 2015:
June 1 Authorized to issue 100,000 ordinary shares with a par value of P100 per share. On this
date, the five incorporators share capital and paid 25% of their subscription subscribed 25%
of the authorized
5
Issued 500 ordinary shares at P200 par.
10
Issued 3,000 ordinary shares for a piece of land valued at P 450,000.
15
Issued 350 ordinary shares to a lawyer for legal services rendered in organizing the
corporation. His services were valued at P 50,000.
25
The incorporators paid the balance of their subscription and corresponding share
certificates were issued.
Required: Journal entries under both methods to record the above transactions.
Date

Memorandum Entry Method

Journal Entry Method

Accounting for Par Value Shares Issued at Par, at a Discount, and at a Premium
Illustrative Transactions:
1. Issued 1,000 shares for cash.
2. Received subscription for 2,000 shares.
3. Received the full payment of subscription one week after.
Required: Prepare journal entries assuming (A) Issuance is at par of P 100/share, (B) Issuance is at P
120/share, (C) Issuance is at P 90/share
Case A
Debit

Credit

Debit

Credit

Case B

Case C
Debit

Credit

PRESENTATION OF ACCOUNT TITLES IN THE STATEMENT OF FINANCIAL POSITION

1. Share Capital Preference share capital is presented first under contributed capital section.
Ordinary share capital follows the preference share capital.
2. Subscribed Share Capital addition to the issued share capital
3. Subscriptions Receivable If currently collectible, current asset; if not currently collectible, as
deduction from subscribed share capital
4. Share Premium Share premium for preference shares is presented first under the additional
paid-in capital section, next to the contributed capital. Share premium for ordinary shares comes
next to share premium for preference shares.
5. Treasury Shares shown as deduction from the total shareholders equity.
ACCOUNTING FOR TREASURY SHARES
Treasury shares are shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption, donation, or through some other
lawful means. These shares were reacquired but not cancelled.
Illustrative Transactions:
1. The corporation acquired 1,500 shares of its own stock at P 65, with a par value of P 50.
2. From the reacquired shares, 1,000 shares were subsequently re-issued for P68 and the remaining
500 shares were sold for P 60.
3. Assume instead that 1,000 treasury shares were subsequently re-issued for P65 and the
remaining 500 shares were sold for P 62.
Journal Entries
Debit

Credit

SHARE SPLITS
When the corporation authorizes 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. It 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 affect the total share capital nor the total shareholders equity. It
simply changes the number of shares outstanding and the par value per share.
Types of Share Split: (A) Share split up and (B) Share split down or Reverse Share Split
Sample:
1. On June 1, the corporation has 10,000 ordinary shares outstanding, with a par value of P 100 per
share. The Board authorized a share split of 5-for-1. This split means that five new shares will be
issued for every share held. Prepare a memorandum entry to record this.

2. Assume instead that the corporation authorized a 1-for-4 share split on its 100,000 ordinary
shares outstanding with a par value of P5. This kind of split means that one new share will be issued
for every four shares held. Prepare a memorandum entry to record this.

RETAINED EARNINGS or ACCUMULATED PROFITS/LOSSES

Two kinds of retained earnings:
1. Unappropriated represent that portion which is free and available for dividend declaration to
shareholders.
2. Appropriated represent that portion which has been restricted, therefore, not available for
dividend declaration.
A dividend is that part or portion of the profits of a corporation set aside, declared and ordered by
the directors to be paid ratably to the shareholders on demand or at fixed time. It is a payment to
the shareholders of a corporation as a return on their investment. Only outstanding share capital is
entitled to receive dividends.

Significant Dates Concerning Dividends:

A. Date of Declaration This is the date when the Board of Directors approved the resolution to
distribute dividends. On this date, the liability for the dividend is recognized.
B. Date of Record This is the date when the list of shareholders who are entitled to receive
dividends is prepared. No journal entry is made.
C. Date of Payment This is the date when the dividend declared is paid to the shareholders. The
liability for dividend is extinguished on this date.
Illustrative Transactions:
1. Diane Corporation has 10,000 shares of P 100 par value ordinary share capital outstanding as of
December 1, 2015. On this date, the Board of Directors declared a cash dividend of P 10.00 per
share to shareholders of record of December 31, 2015, payable on January 31, 2016. Prepare
entries for this transaction.
Debit

Credit

2. Roy Corporation has 100,000 ordinary shares of P 20 par value that were outstanding as of
December 1, 2015. On this date, the Board of Directors declared a share dividend of 10,000 shares
to shareholders of record of December 31, 2015, payable on January 31, 2016. On the date of
declaration, the shares have fair market value of P 25 per share.
Debit

3. Assume instead, that 20,000 shares were declared as dividends in problem 2.

Debit

Credit

Credit

4. Three S Food Industries based in Pulilan, Bulacan jas 1,000 souvenir items in inventory acquired
at a cost of P 500,000. The fair market value of these items is P 600,000 and were declared as
property dividends to be distributed to its outstanding par value shares.
Debit
Credit