LUMP SUM SALE OF SHARE CAPITAL

When two classes of share capital are sold for a lump sum
price, the following rules shall be used in allocating the
consideration between the ordinary and preference shares:
1. If both equities have market values, allocate the
consideration received on the basis of their individual market
value (also known as “relative price allocation”).
2. If only one equity has a known market value, assign such
value to the equity with a known value, assign the balance as
well to the equity without a known market value. (incremental
method)
3. If both have no market value, the par value of each class of
share capital shall be used to allocate the lump sum price.( par
NOTE BENE: It must be observed that the
allocation should not violate the rule that the
shares of stock shall not be issued below par.
ILLUSTRATION:
A company issued 3,000 shares of P60 par value
ordinary shares and 1,000 shares of P100 par value
preference shares for a lump price of P560,000. On the
day of issuance of the stocks for lumpsum, the market
value per share of ordinary share and preference share
were P100 and P200 respectively.
Required: Prepare the entry on the date of issuance
under the following assumptions:
a. both market values are given
b. only the market value of the preference share is given
c. only the market value of the ordinary share is given &
d. both have no known market values
A. RELATIVE PRICE ALLOCATION (Both market values is given)
Market Value Allocated
Price
PS 1,000 shs. X P200 = P200,000 2/5 x P560,000 =
P224,000
OS 3,000 shs. X P100 = 300,000 3/5 x 560,000 =
336,000
Total P500,000
Cash 224,000
Preference Shares (1,000 shs. x P100) 100,000
Share Premium – PS 124,000

Cash 336,000
Ordinary Shares (3,000 shs. x P60) 180,000
Share Premium-OS 156,000
B. INCREMENTAL METHOD
P560,000 Lump sum price
- 200,000 MV OF PS – Allocated value for PS
Bal. P360,000 Allocated price for OS
Cash 200,000
Preference Shares 100,000
Share Premium – PS 100,000

Cash 360,000
Ordinary Shares 180,000
Share Premium-OS 180,000
C. INCREMENTAL METHOD (MV of OS is given)
P560,000 Lump sum price
- 300,000 MV OF OS – Allocated value for 0S
Bal. P260,000 Allocated Value For PS
Cash 260,000
Preference Shares 100,000
Share Premium – PS 160,000

Cash 300,000
Ordinary Shares 180,000
Share Premium-OS 120,000
D. PAR VALUE METHOD (Both market value is
not given)
Par Value Allocated
Price
PS P100,000 10/28 x P560,000 = P200,000
OS 180,000 18/28 x P560,000 = 360,000
Total P280,000
Cash 200,000
Preference Shares 100,000
Share Premium – PS 100,000

Cash 360,000
Ordinary Shares 180,000
Share Premium-OS 180,000
 SAMPLE PROBLEM
Assume the following data related to the sale of
ordinary and preference shares at a lump sum price of
P200,000.
No. of Shares Par Value Market Value
Preference 400 P150 P170
Ordinary 600 100 130
Required: Prepare the entry on the date of issuance under
the following assumptions:
a. both market values are given
b. only the market value of the preference share is given
c. only the market value of the ordinary share is given &
d. both have no known market values
 1. Alloc. Price - Par = Share Premium
PS 68/146 x P200K = 93,151 - 60,000* = 33,151
OS 78/146 x P200K = 106,849 - 60,000 * = 46,849
P200,000
*MARKET VALUE
PS 400 X P170 = P68,000
OS 600 X P130 = 78,000

*PAR VALUE
PS 400 X P150 = P60,000
OS 600 X P100 = 60,000
Cash 93,151
Preference Shares 60,000
Share Premium – PS 33,151

Cash 106,849
Ordinary Shares 60,000
Share Premium-OS 46,849
2. Alloc. Price - Par = Share Premium
PS = 68,000 – 60,000 = 8,000
OS P200K – 68,000 = 132,000 - 60,000 = 72,000
P200,000
Cash 68,000
Preference Shares 60,000
Share Premium – PS 8,000

Cash 132,000
Ordinary Shares 60,000
Share Premium-OS 72,000
3. Alloc. Price - Par = Share Premium
PS P200K – 78,000 = 122,000 – 60,000 = 62,000
OS = 78,000 - 60,000 = 18,000
P200,000
Cash 122,000
Preference Shares 60,000
Share Premium – PS 62,000

Cash 78,000
Ordinary Shares 60,000
Share Premium-OS 18,000
4. Alloc. Price - Par = Share Premium
PS 60/120 x P200K = 100,000 – 60,000 = 40,000
OS 60/120 x P200K = 100,000 - 60,000 = 40,000
P200,000
Cash 100,000
Preference Shares 60,000
Share Premium – PS 40,000

Cash 100,000
Ordinary Shares 60,000
Share Premium-OS 40,000
 REDEMPTION OF PREFERENCE SHARES
Two Types:
1. Callable – redeemable at the option of the
issuer/corporation
2. Redeemable - redeemable at the option of the
holder/stockholder
ACCOUNTING PROCEDURES FOR THE REDEMPTION

1. The preference share and the share premium

accounts related to the redemption shall be
closed.
2. Compare the call price and the total par value &
share premium of the preference shares being
redeemed.
* Call price – the amount of cash that the corporation
will pay to the stockholder.
If:
a. Call price = Total Par & Share Premium
Preference Shares (# of shares x Par) xx
Share Premium - PS xx
Cash xx

b. Call price < Total Par & Share Premium

Preference Shares (# of shares x Par) xx
Share Premium - PS xx
Cash xx
Share premium – Redemption xx
c. Call price >Total Par & Share Premium
Preference Shares (# of shares x Par) xx
Share Premium- PS xx
Accu. Profits & Losses xx
Cash xx
 PRACTICE PA MORE!!!
An entity issued 20,000 callable preference
shares with par value of P100 at P120. Subsequently
the preference shares are redeemed.

Case 1 20,000 shares @ P150

Case 2 15,000 shares @ P130
Case 3 10,000 shares @ P120
Case 4 18,000 shares @ P110
1. Preference Shares (20,000 x P100) 2,000,000
Share Premium – PS (20,000 x P20) 400,000
Retained Earnings 600,000
Cash (20,000 x P150) 3,000,000

2. Preference Shares (15,000 x P100) 1,500,000

Share Premium – PS (15,000 x P20) 300,000
Retained Earnings 150,000
Cash (15,000 x P130) 1,950,000
3. Preference Shares (10,000 x P100) 1,000,000
Share Premium – PS (10,000 x P20) 200,000
Cash (10,000 x P120) 1,200,000

4. Preference Shares (18,000 x P100) 1,800,000

Share Premium – PS (18,000 x P20) 360,000
Cash (18,000 x P110) 1,980,000
Share premium – Redemption 180,000
 ACCOUNTING PROCEDURES FOR THE CONVERSION

Convertible Preference Shares – it gives the holder to

exchange his holdings for other securities of the
issuing corporation.
Example:
1. Preference Shares to Ordinary
- Operations are successful and earnings on ordinary
shares are unlimited
2. Preference Shares to Bonds
- Wants to change his equity from being an owner to
being a creditor
 ACCOUNTING PROCEDURES FOR THE CONVERSION
(Preference to Ordinary)
1. Compute how many ordinary shares are to be
issued in connection with the conversion.

2. Compute how much is the total par value of the

ordinary shares to be issued (computed above).

3. Compare the total par value of the ordinary shares

to be issued and the total par value and share
premium of the preference shares converted.
If:
a. Total par value and share premium of preference
shares converted = par value of ordinary shares
Preference Shares xx
Share Premium – PS xx
Ordinary Shares xx
b. Total par value and share premium of preference
shares converted > par value of ordinary shares
Preference Shares xx
Share Premium – PS xx
Ordinary Shares xx
Share Premium – OS xx
If:
c. Total par value and share premium of preference
shares converted < par value of ordinary shares
Preference Shares xx
Share Premium – PS xx
Accu. Profits & Losses xx
Ordinary Shares xx
6. 5,000 x P10 = P50,000

7. Par of PS 5,000 x P100 = P500,000

Share Premium 5,000 x P10 = 50,000
Total Consideration for OS P550,000
Par Value of OS (10,000 x P10) 100,000
Share Premium – OS P450,000
 PRACTICE PA MORE!!!
Same data on page 6-31 except that the
preference shares converted are:

Case 1 4,000 @ a ratio of 1:3

Case 2 3,000 @ a ratio of 1:4
Case 3 2,000 @ a ratio of 1:5
Case 1 4,000 @ a ratio of 1:3
Preference Shares (4,000 x P100) 400,000
Share Premium – PS (4,000 x P10) 40,000
Ordinary Shares (12,000 x P10) 120,000
Share Premium – OS 320,000

Case 2 3,000 @ a ratio of 1:4

Preference Shares (3,000 x P100) 300,000
Share Premium – PS (3,000 x P10) 30,000
Ordinary Shares (12,000 x P10) 120,000
Share Premium – OS 210,000
Case 3 2,000 @ a ratio of 1:5
Preference Shares (2,000 x P100) 200,000
Share Premium – PS (2,000 x P10) 20,000
Ordinary Shares (10,000 x P10) 100,000
Share Premium – OS 120,000
 DONATED CAPITAL

1. Donation from shareholders – recognized directly in

equity (i.e., credited to share premium).
2. Donation from the government – recognized as
government grant (see discussion in Intermediate
Financial Accounting Part 1B).
3. Donation from other sources – recognized in profit or
loss (i.e., income) when (a) the conditions attached
to the donation are fulfilled or reasonably expected
to be fulfilled, (b) the donation becomes receivable,
and (c) the criteria for asset recognition is met.
 DONATED CAPITAL

• Cash – recognized at the amount of cash received or

receivable.
• Noncash assets – recognized at the fair value of the
noncash assets
• Entity’s own shares – initially recorded through memo
entry. Donated capital is recognized only when the
donated shares are subsequently reissued. This is because
no asset is generated from the donated shares until they
are subsequently reissued. If the donated shares are not
to be resold, the entity should effect a formal reduction of
its authorized capital by retiring the shares received.
 RECAPITALIZATION

Recapitalization occurs when there is a change in the capital

structure of the entity. The old shares are canceled and new
shares are issued.
Typical recapitalizations:
1. Change from par to no-par
2. Change from no-par to par
3. Reduction of par value
4. Reduction of stated value
5. Share split up
6. Share split down
 SHARE SPLIT

Split up(share split proper) is a transaction whereby the original

shares are called for cancelation and replaced by a larger number
accompanied by a reduction in the par value or stated value.

The purpose is to increase the number of outstanding shares to

effect a reduction in unit market price.
•There must NOT be any change in the amount of share capital of
the entity
•There is only a change in the number of shares and the par value
or stated value
•Equity accounts are balances are not affected. It remains the
same before and after the share split may it be split up or down.
 SHARE SPLIT

Split down (reverse share split) is a transaction

whereby the original shares are called for cancelation
and replaced by a smaller number accompanied by a
increase in the par value or stated value.
 SHARE SPLIT

No formal entry is necessary to record a share split. Only

memorandum entry is made.
Share Split Up (Proper):
Issued 50,000 new shares with a par value of P20 per share,
as a result of a 5 for 1 share split of 10,000 old shares with a
par value of P100 per share.
Share Split Down (Reverse):
Issued 2,000 new shares with a par value of P500 per share,
as a result of a 1 for 5 share split of 10,000 old shares with a
par value of P100 per share.