Review of Share Capital Transactions

3 Primary Forms of Business Organizations

Proprietorship Partnership Corporation

Corporation: (Corporation Code of the Philippines Title I, Section 1)

An artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence

Review of Share Capital Transactions

Advantages of a Corporation
Accumulation of capital Limited liability Variety of ownership interests

Disadvantages of a Corporation
Difficult to create, organize and manage More reportorial requirements with the SEC Double taxation

Review of Share Capital Transactions

Share System
Authorized shares maximum number of shares that can be sold to the public Unissued shares unsold shares Issued shares shares that have been sold Outstanding owned by shareholders

Treasury reacquired shares; not an investment of the company

Retired shares previously issued, but then reacquired and cancelled

Review of Share Capital Transactions

Variety of Ownership Interests
Ownership rights: 1. To share proportionately in profits or losses

2. To share proportionately in management 3. To share proportionately in corporate assets upon liquidation

4. To share proportionately in any new issues of shares in the same class

Ordinary Shares: residual corporate interest that bears the ultimate risks and receives the benefits Preference Shares: certain preferences to earnings

Review of Share Capital Transactions

Ordinary Shares
Basic voting shares of the corporation Bears ultimate risks of loss Receives the benefits of success Not guaranteed dividends nor assets upon dissolution Dividends determined by board of directors

Preference Shares
Generally does not have voting rights Usually has a par or stated value Dividend preference over ordinary shares Preference over ordinary shares in the event of liquidation

Review of Share Capital Transactions

Equity - Residual interest in the assets of the company after deducting all liabilities Categories
Share capital legal capital
Share premium Retained earnings earned capital Other comprehensive income Treasury shares Non-controlling interest

Review of Share Capital Transactions

Issuance of Shares
Par value ABC Corp. was organized with 500 000 ordinary shares authorized with a par value of P5 per share and 200 000, 8% preferred shares with a par value of P10. If ABC issues 20 000 shares for P12/share, prepare the journal entry
No par a. No stated value Suppose ABC is organized with the same number of shares but with no par value, journalize the previous transaction. b. With stated value If the no-par shares have a stated value of P3 per share, how will the entry differ from issuing them with no stated value?

Review of Share Capital Transactions

With other securities
a. ABC issued 25 000 ordinary shares and 10 000 preferred shares, which have a for a total consideration of P450 000. At the time of the transaction, ordinary shares were selling at P12/share and the preferred shares were selling at P20/share. b. ABC issued 5 000, P1 000 bonds for a total consideration of P4 800 000. 4 shares are issued for every bond sold. The fair value of each bond is P940 and the fair value of the shares is P300 000. *IFRS 2, par. 35 the entity shall measure the equity component of the compound

financial instrument as the difference between the fair value of the goods or services received and the fair value of the debt component, at the date when the goods or services are received.

Review of Share Capital Transactions

Non-Cash Transactions
a. ABC issued 30 000 ordinary shares to acquire a land with a cost of P400 000 and

a fair value of P700 000. The shares were selling at P15/share at the time of the transaction b. Suppose all information remained the same, only the land had an appraised value of P650 000. How would the journal entry differ?

Cost of Issuance
ABC issued 50 000 ordinary shares at P25/share. It incurred a total of P100 000

in professional fees in relation to the transaction. Tax rate is 10%. *IAS 32, par. 37 Transactions costs of an equity transaction shall be accounted for as a deduction from equity, net of any related income tax benefit.

Review of Share Capital Transactions

Cost of Issuance (IAS 32, par. 37) Transaction costs of an equity transaction
Deducted from equity Incremental costs directly attributable to the equity transaction *The costs of an equity transaction that is abandoned are recognized as expense.

Examples of cost of issuance Registration fees

Underwriter commissions Printing and clerical costs Legal and accounting fees

Review of Share Capital Transactions

Donation of Shares
a. To help the company in its operations, a total of 40 000 shares were donated to ABC. The shares have an average cost of P14. Fair value of each share is P20. b. The shares were subsequently reissued for P25/share.

Watered Shares
Issued for insufficient consideration Illegal

Review of Share Capital Transactions

Repurchase of Shares
*IAS 32, par. 33: If an entity reacquires its own equity instruments, those instruments (treasury shares) shall be deducted from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale, issue , or cancellation of an entitys own equity instruments. Such treasury shares may be acquired and held by

the entity or by other members of the consolidated group. Consideration paid or

received shall be recognized directly in equity.

Review of Share Capital Transactions

Repurchase of Shares
a. ABC repurchased 50 000 of its own shares at P12/share. b. Suppose after one month, 5 000 of its shares were reissued at P12/share. c. Another 7 000 of its treasury shares were reissued at P10/share. Assume that (a) is the first treasury share transaction of ABC.

d. Another 8 000 treasury shares were reissued at P13/share.

e. Another 5 000 treasury shares were reissued at P8/share.

Review of Share Capital Transactions

ABC had the following balance at Dec. 31, 2012. Account Share capital - ordinary Bonds payable (net of 300 000 discount) Share premium - ordinary Preferred shares Share premium - preferred Share premium donated capital Treasury shares Retained earnings Prepare ABCs equity section Amount 725 000 4 700 000 1 745 000 100 000 80 000 1 000 000 300 000 8 500 000

Review of Share Capital Transactions

ABC Corporation Partial Statement of Financial Position 31-Dec-12 Equity Share capital - preference, P10 par, 8%, 10 000 shares issued and outstanding

100,000.00

Share capital - ordinary, P5 par, 145 000 shares issued, 120 000 shares outstanding
Share premium - preference Share premium - ordinary Share premium - donated capital Retained earnings Treasury shares (25 000 ordinary shares) Total equity

725,000.00 80,000.00 1,745,000.00 1,000,000.00

825,000.00

2,825,000.00 8,500,000.00 (300,000.00) 11,850,000.00