Upon completion of this chapter, you will be able to:

(1) identify core shareholders' equity components;

(2) describe the characteristics of common share types
(3) differentiate key share capital terminology
(4) distinguish between par and no-par value shares;
(5) record cash share issuances;
(6) illustrate share subscriptions, including handling delinquencies;
(7) classify and explain the features of share-based payments;
(8) apply measurement rules to equity-settled share-based payments;
(9) illustrate share-based payments for both employees and non-employees;
(10) record share capital authorization and issuance using journal and memorandum
entries;
(11) define treasury stock;
(12) record treasury stock purchases, reissuances, and retirements;
(13) demonstrate the accounting treatment of donated capital; and
(14) identify and discuss other share capital transactions.

EQUITY’S COMPONENTS

Equity of Shareholders
In corporate accounting, shareholders' equity signifies the owners' right after all
obligations have been settled resolved.
It consists of two primary elements:

• Share Capital: represents the total resources acquired by a company due to

contributions made by investors shareholders, contributions or alternative share capital
dealings.
• Retained Earnings: Cumulative net profits that have been kept within the company
instead of allocated as dividends.

This framework is in accordance with the Philippine Accounting Standards (PAS) as well
as the International Accounting.

Standards (IAS)
Shareholders' Equity

Preference Shares – P30 par, 1,000 shares authorized, P 30,000

Issued and outstanding
Ordinary Shares – P5 par, 20,000 shares authorized, P 100,000
20,000 shares issued and outstanding
Share Premium – Ordinary 30,000______P 130,000___
Total Share Capital P 160,000
Retained Earnings 50,000
Total Shareholder’s Equity P 210,000

WHAT IS LEGAL CAPITAL?

Legal capital is the portion of a corporation's share capital that is legally mandated to
remain within the company. This portion cannot be distributed to shareholders as
dividends or otherwise returned to them, except under specific, tightly regulated
circumstances. The exact definition and determination of legal capital vary across
jurisdictions, often depending on the type of corporation and its governing legal
framework. Generally, it's determined by the par value of issued shares, which is a
nominal value assigned to each share during its issuance. However, some jurisdictions
may also include additional elements, such as retained earnings or other surplus
reserves, within the calculation of legal capital.

In the Philippines (issued par value share):

• The par value of issued shares usually represents the legal capital.
• For example, if a company issues 1,000 shares with a par value of 10, then the
legal capital is 10,000.
• Any amount paid above the par value is considered additional paid-in capital or share
premium, which is not part of legal capital.

Example:
A company issues 5,000 shares with a par value of 10 each:
• Legal Capital = 10.000 shares × 50 = 500,000 If the shares were sold at 17
each:
• 10 (par value) goes to Legal Capital
• 7 (the excess) goes to Share Premium or Additional Paid-in Capital

Common Stock:

● Ownership: Represents ownership in the company, with voting rights

proportional to the number of shares held.

● Dividends: Entitles holders to a share of the company's profits, if and when

dividends are declared by the board. Dividends are not guaranteed.

● Liquidation: Holders have a residual claim on assets in the event of liquidation,

after creditors and preferred stockholders are paid.

 ● Risk: Generally higher risk, higher potential return compared to preferred stock.

Preferred Stock:

● Ownership: Represents ownership, but typically with limited or no voting rights.

● Dividends: Usually pays a fixed dividend, often cumulative (unpaid dividends

accumulate). Dividends are typically paid before common stock dividends.

● Liquidation: Holders have priority over common stockholders in the event of

liquidation.

● Risk: Generally lower risk, lower potential return compared to common stock.

Often considered a hybrid between equity and debt

Several terms relate to share capital

Authorized Capital: The maximum number of shares the company can legally issue,
as defined in its charter. This, multiplied by the share's par value, gives the authorized
share capital.
Authorized Share Capital:The maximum amount of share capital a company can
issue to shareholders, as specified in its charter.
Issued Share Capital: The total value of shares the company has sold and received
full payment for. Generally, this equals the outstanding shares, representing shares in
circulation.
Subscribed Shares: Shares investors have committed to buy, but haven't yet fully
paid for. The company credits its equity for the shares' par value and debits it for
payments received.
Outstanding Share Capital: Shares issued and held by investors, excluding treasury
shares. It's the issued shares minus treasury shares.
Treasury Stock: Shares the company has repurchased but not retired; they're
available for reissue or retirement later.

Par Value vs. No-Par Value Shares

The key difference

Par Value Shares:

Have a nominal value stated in the company's charter. This value is largely
irrelevant to the market price. The accounting treatment requires separate recording of
par value and additional paid-in capital

No-Par Value Shares:

Have no nominal value assigned. The entire proceeds from the sale are credited
to the share capital account. This simplifies accounting and avoids potential legal
complications associated with selling shares below par.

Illustrate: Using the same background scenario, suppose the shareholder failed to pay
a portion of their subscription amounting to 48,000. After the company followed the
required legal process for delinquency, a public auction was held. The shares were
offered at 56,000, which included 3,000 as accrued interest and 5,000 as selling
expenses. Three interested parties placed bids to pay the full amount, as follows:

*Asta– 4,300 shares

* Yuno– 4,500 shares
* Noelle– 4,700 shares

Outcomes:
Asta placed the most favorable bid by offering to take the least number of shares. As a
result, the entire 5,000 shares are treated as fully settled. Ashley Langga, the original
holder, retains 700 shares, while Asta receives 4,300 shares.

Journal Entries:

1. Recording the Subscription

Subscriptions Receivable 60,000

Subscribed Ordinary Shares 50,000
Share Premium 10,000
(To recognize subscriptions above par value)

2. Recording Initial Payment

Cash 12,000
Subscriptions Receivable 12,000
(To recognize the initial partial payment)

3. Accrued Interest on Unpaid Balance

Receivable from Highest Bidder 3,000

Interest Income 3,000
(To recognize accrued interest on delinquent subscription)

4. Recording Auction Costs

Receivable from Highest Bidder 5,000

Cash 5,000
 (To record the expenses incurred in the auction process)

5. Proceeds from the Auction

Cash 56,000
Receivable from Highest Bidder 8,000
Subscriptions Receivable 48,000
(To record the sale of delinquent shares in public auction)

6. Issuing Stock Certificates

Subscribed Ordinary Shares 50,000

Ordinary Shares 50,000
(To issue stock certificates for fully paid shares)

In the Absence of Bidders:

If no one bids on the shares, the company itself may buy back the delinquent shares.
The unpaid balance will then be considered fully paid and the acquired shares will be
booked as "treasury shares". All accounting entries remain the same, except for this
adjustment:

Treasury Stock 56,000

Receivable from Highest Bidder 8,000
Subscriptions Receivable 48,000
(To record reacquisition of shares by the corporation)

Legal Note:
Creditors may take legal action directly against a shareholder to recover unpaid
subscription amounts owed to the company (Keller vs. COB Marketing, 141 SCRA 86)
SHARE-BASED PAYMENTS

"Categories of Share-Based Payments (SBP)"

In accordance with IFRS No. 2 – Share-Based Payment, transactions involving share-
based compensation can be grouped into the following three classifications:
Types and Description :
● Equity-Settle :The company receives goods or services in return for issuing its
own equity instruments, such as shares or stock options.
● Cash-Settled : The company obtains goods or services and creates a liability
based on its own equity's value.
● Equity or Cash Choice :The company or supplier has the discretion to settle the
transaction using either cash or equity instruments.

This section will explore the accounting practices for "equity-settled share-based
compensation". The concept includes a wide range of arrangements—not only stock
options for employees but also share appreciation rights, employee stock ownership
programs, stock purchase plans, and other similar agreements.

Valuation Guidelines

According to IFRS No. 2, particularly under Equity-Settled Share-Based Payment

Transactions (paragraphs 10–13), the valuation rules are as follows:

a. For Non-Employees:
When shares or options are given in exchange for services or goods from non-
employees, the value should be recorded based on the “fair value of what is received”.
If it’s not possible to determine the value of the goods or services with certainty, then
the fair value of the equity instrument should be used instead. The date of valuation is
the point when the goods are received or the service is performed.
b. For Employees:
In cases where share-based payments are granted to employees (including stock
options), the transaction must be measured at the “fair value of the equity instrument
on the grant date”. This approach is taken because the service value from employees is
usually hard to quantify. The value of stock options must be determined when they are
awarded.

Understanding "Fair Value"

"Fair value" refers to the price that an asset would fetch in a typical market
transaction, or the amount a liability could be settled for, between independent and
informed parties. This value is established using a three-level measurement hierarchy:
1. Prices from active markets for identical equity instruments.
2. Market-based inputs from similar recent transactions.
3. Independent appraisals or valuations of the entity or its key assets.

Share-Based Payments to Non-Employees

Example – Shares in Exchange for Assets:

VYRR Construction and Development Corporation, a privately held company located in
Cagayan De Oro City, is of moderate size. A group of Taiwanese investors expressed
interest in acquiring ownership in the company due to its strong profit potential.
Following extensive discussions led by Chairwoman Virginia Yacapin and President Ruth
Russell, the company welcomed outside investment. As part of this transaction, the
company received a parcel of land located in Davao City, which had a fair market value
of 10,000,000.

To document the issuance of 9,000 ordinary shares with a par value of 1,000 each in
exchange for the land, the accounting entry would be:
 Land 10,000,000
Ordinary Shares 9,000,000
Share Premium 1,000,000
(To record the issuance of 9,000 shares in return for land)

If the company's shares are actively traded and possess a fair market value, the
valuation used to record the land acquisition remains unchanged. It’s important to
prioritize the fair value of the asset or service received. However, when the fair value of
the shares is more objectively measurable, that will be the basis for the accounting
entry.

(Example) Shares in Exchange for Services:

A company may also issue shares in return for professional services, such as legal or
accounting support. These are often pre-operating costs like incorporation-related legal
fees, document preparation, or other startup services essential to forming the business.

When shares are used to pay for these incorporation-related services, the "Organization
Expense" account should be debited based on the "fair value of the services provided"
(in accordance with IFRS 2, paragraph 10). Note: shares must not be issued for
services to be rendered in the future.

Under "IAS No. 38 – Intangible Assets", startup expenditures like legal and
administrative fees linked to company formation are treated as expenses once they are
incurred. Previously, such costs were viewed as intangible assets, but under current
rules, they must be recognized immediately as expenses.
Services in Exchange for Shares:
Dynasty BookSource Asia, Inc. hired a promoter to assist with the company’s startup
and setup activities. In return for these services, the corporation issued 800 ordinary
shares, each with a face value of 100. The total fair market value of the services
rendered was 100,000. The corresponding journal entry would be:

Organization Expense 100,000

Ordinary Shares 80,000
Share Premium 20,000
(To record the issuance of 800 ordinary shares in exchange for services)

In cases where shares are issued to settle an existing liability, the liability amount used
as payment should be the basis for the journal entry.

"Equity-Based Compensation for Employees"

Share-based compensation, such as stock plans and share options, is now a widely
used method to reward employees, executives, and directors. This form of
compensation aims to align the interests of personnel with those of the company’s
shareholders and promotes employee retention. A share option gives an individual the
right, without obligation, to purchase the company’s stock at a predetermined price at a
future date.

Glossary of Terms

● Grant Date:The date when the company and another party (e.g., an employee)
enter into an agreement for share-based payment. On this date, the company
 gives the individual the right to receive either equity or cash, subject to meeting
any predefined conditions.

● Vesting: Refers to the point when an individual becomes entitled to the

promised benefits. Under a share-based payment plan, the right to receive equity
or cash is earned when the recipient has fulfilled all necessary conditions. The
vesting date is when this entitlement becomes effective.

● Vesting Period: The duration during which the recipient must meet the terms
of the agreement before receiving the equity or cash benefits.

● Vesting Conditions:These are the criteria the individual must meet for the
company to recognize the services rendered and provide the promised benefits
(either cash or equity).

Employee Share Option Grant:

On January 1, 2018, Rey Rabago Freight, Inc. awarded 100 share options to each
director. The grant was conditional upon the directors staying with the company for the
following three years.

Grant Date:January 1, 2018

Vesting Date:December 31, 2020

This means that the options become exercisable only if the director remains with the
organization for the entire three-year period.

Equity-Settled Share-Based Payment Transactions

 Equity-settled share-based payment transactions are recorded by recognising an
increase in equity and the corresponding goods or services received at the
measurement date. When equity instruments have specific vesting conditions,
the total employee benefits expense is determined based on the grant date fair
value of the share-based payment. This expense must be recognized
systematically over the vesting period, ensuring alignment with the service
period in which employees earn their entitlement.

Cash-Settled Share-Based Payment

Cash-settled share-based payment where a company buys goods or services.

Instead of directly issuing shares, the company commits to pay cash or other
assets, but the amount of this payment is tied to the fluctuating price or value of
its own shares (or shares of another company within its group).

TWO METHODS OF ACCOUNTING FOR SHARE CAPITAL

There are two primary accounting methods for handling share capital:

1. Memorandum Method - In this approach, only a non-financial record, known as a

memorandum entry, is made in the general journal to document the
authorization received from the Securities and Exchange Commission (SEC) for
the issuance of shares of stock.
2. Journal Entry Method - This method involves making a formal journal
entry—debiting "Unissued Share Capital" and crediting "Authorized Share
Capital"—to record the authorization from the SEC to issue shares of stock.
Illustration: OwTas Na Corporation was authorized to issue P500,000 ordinary shares
divided into 5,000 shares with a par value of P100 per share. On July 10, 2018, the
company received subscriptions for 1,200 shares at par from various investors. As of
August 15, 2018, 700 of the subscribed shares had been fully paid and the stock
certificates were issued accordingly. The next day, the company issued 500 shares at
par for cash.
 TREASURY STOCKS

Treasury stocks are shares that have been issued and fully paid for but
were later reacquired by the issuing corporation through purchase, redemption,
donation, or other lawful means. These shares may be reissued at a reasonable
price determined by the board of directors.

Section 41 of the Corporation Code grants a stock corporation the

authority to purchase its own shares for legitimate purposes, provided it has
unrestricted retained earnings. Some common reasons for acquiring treasury
stock include supporting employee stock compensation plans, enhancing the
stock market price by reducing the supply of shares, and preventing a takeover
by an outside party.

Under Section 41 of the Corporation Code, a stock corporation has

the authority to purchase its own shares for legitimate purposes, provided it has
unrestricted retained earnings. Common reasons for acquiring treasury stock
include supporting employee stock compensation plans, enhancing the stock
market price by reducing the supply of shares, and preventing a takeover by an
outside party.

Recorded at Cost Treasury stocks are recorded at their acquisition cost, regardless of
whether they were purchased below or above par or stated value. If acquired using
cash, the cost is equal to the cash payment. If acquired through non-cash
consideration, the cost is typically the recorded amount of the non-cash assets
surrendered or exchanged. Purchasing treasury stock does not reduce the number of
shares issued; rather, it decreases only the outstanding shares. This transaction lowers
both total assets and total shareholders' equity. While it may impact cash flows, it does
not affect the corporation’s profit.

Purchase of Treasury of stocks

When the cost method is used, treasury stock is recorded at its acquisition cost,
regardless of whether the shares are obtained below or above par or stated value. If
purchased for cash, the cost is equal to the cash payment. When acquired through non-
cash consideration, the cost is typically measured by the recorded amount of the non-
cash assets surrendered or exchanged. The purchase of treasury shares does not
decrease the number of shares issued; it only reduces the outstanding shares. This
transaction lowers both total assets and total shareholders' equity. While treasury stock
transactions may impact cash flows, they do not affect the corporation’s profit.

Illustration: My Problem Solutions is a thriving software development company in

Makati. Due to its rapid growth and increasing market value, the board of directors aims
to strengthen corporate control and reduce the risk of a hostile takeover. To achieve
this, the company decided to purchase 2,000 shares with a par value of 500 for
1,200 per share. The journal entry for this treasury stock transaction would be
recorded as follows:

Treasury Stock 2,400,000

Cash 2,400,000

To record acquisition of treasury shares

Reissuance of treasury stocks
At cost
Assume that the treasury shares were subsequently reissued at cost.

Cash 2,400,000
Treasury Stock 2,400,000
To record reissue of treasury shares at cost

Above Cost

Assume that the treasury shares were subsequently reissued at P3,000 per share.

Cash 6,000,000
Treasury Stock 2,400,000
Share Premium –Treasury Stock 3,600,00
To record reissue of treasury shares above cos

Below Cost
Assume that the treasury shares were subsequently reissued at P1,000 per share.

Cash 2,000,000
Retained Earnings 400,000
Treasury Stock 2,400,000
To record reissue of treasury shares below cost

Retirement of treasury stocks

Retirement of Treasury Stock When treasury stock is retired, the Ordinary Shares
Account is reduced by its par value, effectively decreasing the total number of shares
issued. The Treasury Stock Account is credited at its acquisition cost. Treasury shares
are recognized as a deduction from equity and are not classified as assets. Any gains or
losses arising from the retirement of treasury stock are recorded directly in equity
rather than as income or expense(IAS 32 Paragraph 33)

With Gain on Retirement

Assume that JuskowPho purchased the treasury shares for P600 per share. Observe
that there is a “gain” on retirement if the cost of treasury shares is less than par value.

Ordinary Shares ( 2,000shares x P1,500 par) 3,000,000

Share Premium
400,000
Treasury Stock (2,000 shares x P1,300 cost) 2,600,000
To record retirement of retirement shares

With Gain on Retirement

Assume that Greenfield Corporation issued 20,000 ordinary shares at 1,200 per
share. Later, the company purchased 2,000 treasury shares at 1,500 per share.
These treasury shares were not reissued and were ultimately retired.

Ordinary Shares (2,000 shares × 1,000 par) 2,000,000

Share Premium (2,000 shares × 1,200 issue price - 1,000 par) 400,000
Retained Earnings 600,000
Treasury Stock (2,000 shares × 1,500 cost)
3,000,000
To record retirement of treasury shares

When treasury shares are retired, the resulting loss of 2,000,000 should be debited in
the following sequence:
1. Share Premium (Original Issuance) – The loss is first charged against Share
Premium, but only up to the amount credited when the shares were originally
issued.
2. Share Premium (Treasury Stock Transactions) – If additional adjustments are
needed, the remaining amount is debited to Share Premium from treasury stock
transactions (only applicable for the same class of shares).
3. Retained Earnings – Any loss that exceeds available Share Premium accounts is
charged to Retained Earnings, reducing the company’s retained profits and
overall equity.

SUMMARY OF EFFECTS ON ASSETS, LIABILITIES AND EQUITY

At this stage, it is helpful to provide a summary of how the fundamental
shareholders' equity transactions affect the components of the financial situation
statement:
—------------------------------------------------------------------------------------------------
Transaction Assets Liabilities Shareholders
Equity
—---------------------------------------------------------------------------------
Insurance of Shares Increase No effect Increase

Purchased of Decrease No effect Decrease

Treasury Stocks

Reinssuance of Increase No effect Increase

Treasury Stocks
—---------------------------------------------------------------------------------

DONATED CAPITAL
Contributions from shareholders, including corporate shares, should be
recognized at the asset’s fair market value upon receipt. The corresponding
credit is typically made to the share premium account. In cases where the
contribution is substantial, it may instead be classified as donated capital. When
the contribution consists of the company's own shares, the share premium or
donated capital account is credited when the shares are reissued.

Illustration:BrightTech Electronics Corp. received office furniture from one of

its founding shareholders as a gift. The furniture is valued at P150,000 based on
its current market price. The proper journal entry to record this donation is:

Office Furniture 150,000

Donated Capital 150,000
To record receipt of office furniture donated by a shareholder

This entry reflects an increase in both total assets and shareholders’ equity
equivalent to the fair value of the asset received. Donated capital is reported
under the share premium section of equity.

Illustration:Now assume BrightTech Electronics Corp. was given 300 ordinary

shares, each with a par value of P50, by one of its shareholders. The receipt of
these donated shares is acknowledged through a memorandum entry:

"Received 300 ordinary shares as a donation."

This transaction does not alter the company’s assets, liabilities, or equity at the
time of receipt. However, the donated shares reduce the number of shares
currently in circulation.
These donated shares are treated like treasury shares and may be reissued at
any price. If BrightTech later issues these 300 shares at P60 each, the journal
entry would be:

Cash 18,000
Donated Capital 18,000
To record sale of donated shares at P60 per share

CALLABLE PREFERENCE SHARE

Callable Preference Shares grant the issuing corporation the authority to

repurchase the shares from shareholders at a predetermined call price. This
repurchase option can be exercised at the corporation’s discretion, meaning that
the redemption date is not fixed, but rather contingent upon the company
choosing to call the shares.

Illustration:Suppose a company issues 12,000 callable preference shares with

a par value of P80 at a selling price of P95 per share. The journal entry to record
the issuance would be:

Cash (12,000 shares × P95) 1,140,000

Preference Share Capital(12,000 × P80) 960,000
Share Premium–Preference 180,000

Later, the company decides to call these shares in at a call price of P110 per
share. The repurchase (retirement) entry would be:

Preference Share Capital 960,000

Share Premium–Preference 180,000
 Retained Earnings 180,000
Cash (12,000 shares × P110) 1,320,000

In this case, the company incurs a loss of P180,000 upon retiring the shares, as
the repurchase cost exceeds the amount initially received above par. This loss is
charged first against the related share premium from the preference issuance,
and any remainder is deducted from retained earnings. On the other hand, if the
shares had been repurchased at a price below the original issuance value, the
resulting gain would have been credited to share premium from ordinary shares,
increasing equity.

REDEEMABLE PREFERENCE SHARE

Certain financial instruments may appear to be equity in legal form, such as

shares or other ownership interests, but in substance, they meet the definition of
financial liabilities. This typically occurs when the issuer has a contractual
obligation to deliver cash or another financial asset to the holder, regardless of
the instrument’s form.

Illustration:On July 1, 2021, Delta Industries issued P3,000,000 of 4%

preference shares at par. The terms state that shareholders can require the
company to redeem the shares at par if the inflation rate exceeds 6% in any
calendar year. On August 15, 2023, the inflation rate rose above 6%, activating
the redemption right. Since this triggering event is beyond the control of both
Delta Industries and the shareholders, the preference shares must be classified
as a financial liability. The journal entry to record the issuance is:

Cash 3,000,000
 Redeemable Preference Shares Liability 3,000,000

Dividends paid on these redeemable preference shares are recorded as interest

expense. This classification aligns with accounting standards that require
instruments to be classified based on their substance, not just their legal form.
Further discussion on financial assets and liabilities will be covered in Financial
Accounting.

CONVERTIBLE PREFERENCE SHARE

Preference shares impact a corporation's accounting by primarily affecting the

equity section of the balance sheet and the treatment of dividends. When issued,
they increase equity, recorded in distinct "Preference Share Capital" accounts.
Their key accounting implication lies in dividend payments: these are typically
fixed and prioritized over common dividends. For cumulative preference shares,
unpaid dividends ("dividends in arrears") require disclosure. Crucially, depending
on their terms (e.g., mandatory redemption), preference shares might be
classified as financial liabilities instead of equity, moving them to the liabilities
section and potentially treating "dividends" as interest expense on the income
statement, significantly altering financial ratios and reported profitability.

Illustration: SuwaNha Corp. has the following balances in its capital accounts:

Preference Shares, 100 par value, 2,000,000

20,000 shares issued

Ordinary Shares, 50 par value, 300,000 shares 7,500,000

authorized, 150,000 shares
outstanding
 Share Premium – Preference 500,000

Share Premium – Ordinary 3,000,000

Retained Earnings 6,000,000

If the preference shares are all converted into ordinary shares in a 1:3
ratio, the entries:

Preference shares 2,000,000

Share Premium – Preference 500,000
Ordinary shares (40,000shs x 50) 2,000,000
Share Premium – Ordinary 500,000

If the articles of incorporation do not explicitly grant convertibility, preference shares

cannot be converted into ordinary shares (SEC Opinion, Sec. 6, par. 1, May 19, 1992).
Even when convertibility is provided, the process is not automatic, it still requires:
1. An amendment to the articles of incorporation, ensuring compliance with
corporate regulations to prevent watering down of stocks (Sec. 64, Revised
Corporation Code of the Philippines).
2. Verification that the conversion does not exceed the authorized share capital,
avoiding unauthorized issuance (SEC Opinion, Sept. 3, 1990).

RECAPITALIZATION

Recapitalization is a financial restructuring measure undertaken by a corporation

to alter the composition of its capital structure, typically involving a reallocation
between debt and equity components. This strategic adjustment is implemented
to enhance the corporation’s financial stability, reduce the overall cost of capital,
or align its capital framework with long-term objectives. The process may include
the issuance of additional debt to repurchase equity, the issuance of new equity
to retire existing debt, or the conversion of one class of securities—such as
preference shares—into another, such as ordinary shares. It may also encompass
the reclassification of share types or modifications to the par value of shares.
Recapitalization is commonly pursued to improve financial ratios, deter hostile
takeovers, comply with regulatory or stakeholder requirements, or to support
corporate expansion and restructuring initiatives.

Change from Par to No-Par

Ordinary Shares, P100 par value, 20,000 shares P2,000,000
Share Premium 300,000
Retained Earnings 700,000
If all the par value shares are cancelled and replaced with the same number of
P40 stated value shares, the recapitalization entries will be:
Ordinary Shares 2,000,000
Share Premium – Ordinary 300,000
Ordinary Shares (20,000 shs. x P40) 800,000
Share Premium – Recapitalization 1,500,000
Change from No-Par to Par
Ordinary Shares, no-par, P60 stated value, 30,000 shares P1,800,000
Retained Earnings 900,000

If all the no-par value shares are canceled and replaced with the same number
of P90 par value shares, the recapitalization entries will be:
Ordinary Shares, no-par 1,800,000
Retained Earnings 900,000
 Ordinary Shares, P90 par (30,000 shs. x P90) 2,700,000

Reduction of Par Value

Ordinary Shares, P 100 par value, 20, 000 shares P 2, 000,000

Share Premium 200,000
Retained Earnings P1,800,000

if the par value is reduced to P80, the recapitalization entries will be:
Ordinary Shares (20,000 shs. X P20) P400,000
Share Premium - Recapitalization P400,000

Reduction of Stated Value

Ordinary Shares, P 100 par value, 20, 000 shares P 200, 000,00
Retained Earnings P1,800,000
if the stated value is reduced to P80, the recapitalization entries will be:
Ordinary Shares (20,000 shs. X P20) P400,000
Share Premium - Recapitalization P400,000

EXERCISES
1.1 FACT OR BLUFF

Indicate whether the following statements are FACT OR BLUFF

1. Share capital represents the total resources acquired by a company due to

contributions made by investors.
2. Retained Earnings are cumulative net profits that have been distributed as
dividends.
 3. In the Philippines, for issued par value shares, the par value typically represents
the legal capital.
4. Common stockholders usually have priority over preferred stockholders in the
event of liquidation.
5. Authorized Share Capital is the total value of shares the company has sold and
received full payment for.
6. Subscribed shares are shares that investors have committed to buy but have not
yet fully paid for.
7. The Memorandum Method for accounting for share capital involves making a
formal journal entry to record authorization.
8. Treasury stocks are classified as assets on the balance sheet.
9. The purchase of treasury shares decreases the number of shares issued and
outstanding.
10. Equity-settled share-based payment transactions involve the company creating a
liability based on its own equity's value.

1.2 IDENTIFICATION
Provide the term that best fits each description.

1. The cumulative net profits that have been kept within the company instead of
allocated as dividends.
2. The maximum amount of share capital a company can legally issue to
shareholders, as specified in its charter.
3. Shares that investors have committed to buy, but haven't yet fully paid for.
4. Shares the company has repurchased but not retired; they're available for
reissue or retirement later.
5. These shares have a nominal value stated on the share certificate, representing
the minimum price at which they can be issued.
6. The method of accounting for share capital where only a memorandum entry is
made to record authorization received from SEC to issue shares.
7. The type of share-based payment where the company receives goods or services
in return for issuing its own equity instruments. t
8. The date when the company and another party enter into an agreement for
share-based payment.
9. The point when an individual becomes entitled to the promised benefits under a
share-based payment plan.
 10. The portion of a corporation's share capital that is legally mandated to remain
within the company and cannot be distributed as dividends except under specific
circumstances.

1.3 Problem Solving

Problem #1: Suppose that Juan Tamad's no-par ordinary shares have a stated value
of P30. The entity issued 6,000 shares at P15 per share. The entry will be:

Problem #2: Mabuhay Corp. is authorized to issue P500,000 ordinary shares divided
into 5,000 shares, with a par value of P100 per share. The company issued for cash
1,500 shares at par. The share issuance entry would be?

Problem #3: On January 4, 2022, Den Mark, Inc. received its articles of incorporation
authorizing the issuance of the following shares:

5% Preference Shares, P100 par, 100,000 shares Ordinary Shares, P50 par, 10,000,000
shares

The following transactions took place during 2021:

Jan 16. Den Mark sold 10,000 ordinary shares for P640,000 cash.
Feb 6. Den Mark exchanged 8,000 ordinary shares for a small concrete
structure with a fair value of P512,000.
Mar. 25. Den Mark issued 10,000 preference shares for P180 per share.
June 30. Den Mark sold 19,000 ordinary shares for P72 per share.
Problem #4: BlueWave Corporation has 10,000 ordinary shares outstanding with a par
value of P100 per share. On March 10, 2025, the company repurchased 1,000 of its
own shares from the open market at P120 per share. Prepare the journal entry to
record the purchase of the treasury shares using the cost method. After the purchase,
how many shares are outstanding?

Problem #5: Assume that GreenFields Inc. repurchased its own ordinary shares and
held them as treasury stock at P600 per share. The par value of the shares is P800. The
company now decides to retire 1,000 of these treasury shares. Observe that there is a
"gain" on retirement since the treasury shares were acquired at a cost lower than their
par value. Prepare the journal entry for the retirement of treasury shares.