Corporation

Corporation

Corporation is 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.
Shareholders’ equity

Shareholders’ equity is the residual interest in the assets of a corporation after

deducting all its liabilities.
Components of the shareholders’ equity

Share capital (capital stock) Treasury shares

- Preference share capital Other component of equity

- Ordinary share capital
- Subscribed share capital
- Subscription receivable
- Stock dividends payable
- Capital liquidated
- Share premium
Transactions affect the accounting for a
corporation’s equity

Authorization, subscription, and issuance of shares

Acquisition and reissuance of treasury shares

Retirement of shares

Donated capital

Distribution to owners (Dividends)

Accounting for Share Capital

1. Memorandum method 2. Journal entry method

Only a memorandum is made for the The authorized capitalization is recorded by

authorized capitalization. Subsequent crediting “authorized share capital” and debiting
issuances of shares are credited to the “unissued share capital”. Subsequent issuance
share capital account of shares are credited to “unissued share
capital”. The difference between the two
accounts represents the issued share capital.
 Memorandum method

Illustration Memo entry - The authorized capitalization is

P1,000,000 divided into 10,000 with par value per
On January 1, 2021, ABC Co. received share of P100.
authorization from the SEC to issue
share capital of P1,000,000 divided
into 10,000 shares with par value share
of P100,

Journal entry method

Unissued share capital 1,000,000

Authorized share capital 1,000,000
 Memorandum method

Illustration Cash 62,500

Subscription receivable 187,500
On January 1, 2021, ABC Co. received Subscribed share capital 250,000
authorization from the SEC to issue
share capital of P1,000,000 divided
into 10,000 shares with par value share
of P100.

Of the total authorized share capital, Journal entry method

25% was subscribed at par value and
25% of the total subscription was paid
Cash 62,500
at subscription date.
Subscription receivable 187,500
Subscribed share capital 250,000
Classes of Share Capital

Ordinary share capital (Common stock)

Preference share capital (Preferred stock)

Ordinary shares

Ordinary shares represent the residual corporate interest that bears the
ultimate risk of loss and receives the benefits of success.

No guaranteed dividends or assets upon dissolution

Generally control the management of the corporation and tend to profit the
most if the corporation is successful.
Basic rights of ordinary shareholders

1. Right to attend and vote in shareholders’ meetings

2. Right to purchase additional shares (known as preemptive right or stock
right)
3. Right to share in the corporate profits (right to dividends)
4. Right to share in the net assets of the corporation upon liquidation
Preference shares

Preference shares are shares that give the holders thereof certain preference
over other shareholders. Such preferences may include:

a) Preferred as to dividends - preference in the distribution of dividends

b) Preferred as to assets - preference in the distribution of assets in case of
corporation liquidation
Share premium

Share premium (additional paid-in capital) arises from various sources which
include the following:

a. Excess of subscription price over par value or stated value

b. Excess of reissuance price over cost of treasury shares issued
c. Distribution of small stock dividends
Par value shares

A par value share is one with a peso value fixed in the articles of incorporation.
The purpose of which is to fix the amount of issuance price. A par value share
cannot be issued below its par value. The par value appears on each share
certificate issued.
No-par value shares

A no-par value share is one without a peso value fixed in the articles of
incorporation. However, a no-par share has a stated value (issued value) which
is also indicated in the AOI but not on the share certificate issued.

The excess of subscription price over the stated value is credited to share
premium.
Par value and No-par value shares

Corporation Code:

No-par value shares should not be issued for a consideration less than P5 per
share

Ordinary shares may be issued either par or no-par value shares

Preference shares should only be issued as par value shares

Subscription of shares

The subscription contract is a legally binding contract which provides for the
number of shares subscribed, the subscription price, the terms of payment and
other conditions of the transaction.

The subscriber becomes a shareholder upon subscription but the stock

certificates evidencing ownership over shares of stocks are not issued until the
full collection of the subscription.
 9/1/22 Subscription Receivable 60,000
Subscribed O/S 50,000
Illustration Share premium 10,000

Assume that 5,000 shares of P10 par

value ordinary shares of W Inc. were 9/16/22 Cash 24,000
sold on subscription at P12 per share Subscription Receivable 24,000
on September 1, 2022 to A.
Subscription installments of P24,000
and P36,000 will be due on September
16 and 30. 9/30/22 Cash 36,000
Subscription Receivable 36,000

Prepare the related entries.

Subscribed O/S 50,000
Ordinary Shares 50,000
Share issuance costs

● Regulatory fees
● Legal fees
● Accounting fees
● Commissions
● Underwriter’s fees
● Printing costs of certificates
● Documentary stamp tax
● Other transaction taxes
How to account for share issuance costs?

Deducted from any resulting share premium from the issuance. If share
premium is insufficient, the excess is charged to retained earnings.
 Jan-1-2022 Cash 600,000
Share capital 500,000
Illustration Share premium 100,000

ABC Co. started its operations on Share premium 5,000

January 1, 2022. Its authorized
Cash 5,000
capitalization is P1,000,000 divided
into 10,000 shares with par value per
share of P100. ABC Co. receives cash
subscription for 5,000 shares at P120.
Share issuance costs amounted to
Jan-31-2022 Subscription receivable 320,000
P5,000 Subscribed share capital 200,000
Share premium 120,000
On January 31, 2022 ABC receives
subscription for 2,000 shares at P160
per share
 ABC Co.’s total contributed capital as of January 31, 2022 is as
follows:
Illustration
Share capital 500,000.00
ABC Co. started its operations on
January 1, 2022. Its authorized Subscribed share capital 200,000.00
capitalization is P1,000,000 divided
into 10,000 shares with par value per Subscription receivable (320,000.00)
share of P100. ABC Co. receives cash
subscription for 5,000 shares at P120.
Share premium 215,000.00
On January 31, 2022 ABC receives
subscription for 2,000 shares at P160 Total contributed capital 595,000.00
per share
Legal capital

Legal capital is the portion of contributed capital that cannot be distributed to

the owners during the lifetime of the corporation unless the corporation is
dissolved and all of its liabilities are settled first.

This is based on the concept, trust fund doctrine, which states that the share
capital of a corporation is a trust fund held for the protection of its creditors.
How to compute legal capital?

a. Par value shares: aggregate par value of shares issued and subscribed
b. No-par value shares: total consideration received or receivable from shares
issued or subscribed. Total consideration refers to the subscription price
inclusive of any amount in excess of stated value.
 Illustration Par No-par

The equity section of ABC Co.’s statement

6% Preference share capital P100 par value 200,000 200,000
of financial position shows the following
information:
Ordinary share capital 800,000 800,000

Share premium - ordinary share capital - 300,000

6% Preference share
capital P100 par value 200,000
Subscribed share capital - ordinary 100,000 100,000
Share premium - preference share
capital 50,000

Ordinary share capital 800,000 Legal Capital 1,100,000 1,400,000

Share premium - ordinary share capital 300,000

Subscribed share capital - ordinary 100,000

Subscription receivable - ordinary

share capital (50,000)

Retained earnings 400,000

Retained earnings

Retained earnings represent the cumulative profits that are retained in the
business and not yet distributed to the shareholders.

Total retained earnings may consist of:

a. Unrestricted - the portion that is available for future distribution to shareholders.

b. Appropriated (Restricted) - the portion that is not available for distribution unless the
restriction is subsequently reversed.
Treasury shares

Treasury shares are an entity’s own shares that were previously issued but are
subsequently reacquired but not retired.

NOTE: An entity may reaquire its previously issued shares only if it has
sufficient unrestricted retained earnings.
Accounting for treasury shares

Cost method - the reaquisition and subsequent reissuance of treasury shares

are recorded at cost.

Treasury shares are presented as deduction in the shareholders’ equity

 On July 1, 2022, ABC reacquires 1,000 shares at P90

Illustration
1-Jul-22 Treasury shares 90,000

On January 1, 2022, the statement of Cash 90,000

financial position of ABC Co. shows
the following information
Retained earnings - unrestricted 90,000

Retained earnings - appropriated 90,000

Share capital (P100 par value) 800,000
Share premium 160,000
Retained earnings 540,000
Total shareholders' equity 1,500,000
 Case 1 - reissuance at cost
On September 1, 2022, ABC reissues the 1,000 treasury
Illustration shares at P90.

Statement of financial position of ABC

Co. after reacquisition of shares 1-Sep-22 Cash 90,000

Treasury shares 90,000

Share capital (P100 par value) 800,000

Retained earnings - appropriated 90,000
Share premium 160,000
Retained earnings - unrestricted 90,000
Retained earnings 540,000
Treasury shares (90,000)
Total shareholders' equity 1,410,000
 Case 2 - reissuance at more than cost
On September 1, 2022, ABC reissues the 1,000 treasury
Illustration shares at P140.

Statement of financial position of ABC

Co. after reacquisition of shares 1-Sep-22 Cash 140,000
Treasury shares 90,000
Share premium - treasury shares 50,000

Share capital (P100 par value) 800,000

Retained earnings - appropriated 90,000
Share premium 160,000
Retained earnings - unrestricted 90,000
Retained earnings 540,000
Treasury shares (90,000)
Total shareholders' equity 1,410,000
 Case 3 - reissuance at below cost
On September 1, 2022, ABC reissues the 1,000 treasury
Illustration shares at P60.
1-Sep-22 Cash 60,000
Statement of financial position of ABC
Share premium - treasury shares (a) -
Co. after reacquisition of shares
Retained earnings (b) 30,000
Treasury shares 90,000

Share capital (P100 par value) 800,000 Retained earnings - appropriated 90,000
Share premium 160,000 Retained earnings - unrestricted 90,000
Retained earnings 540,000
Treasury shares (90,000)
Total shareholders' equity 1,410,000
Excess of cost over reissuance price is debited (in order of
priority):
a. Share premium - treasury shares
b. Retained earnings
Retirement of shares

Shares are considered retired if they have been reacquired and cancelled in
accordance with SEC regulations.

NOTE: Retired shares cannot be reissued.

How to account for retirement of shares?

The total par value and the related share premium of the retired shares are removed
from the books. Any difference between the total amount removed and the retirement
cost is accounted for as follows:

1. par value + related share premium of the retired shares > retirement cost
- credit to “share premium - retirement”

1. par value + related share premium of the retired shares < retirement cost
- debited to the following (order of priority):
a. Share premium - treasury shares
b. Retained earnings
 Illustration
On January 1, 2022 the statement of
financial position of ABC Co. shows
the following information:

Share capital (P100 par value) 800,000

Share premium 160,000
Share premium - treasury shares 5,000
Retained earnings 535,000
Total shareholders' equity 1,500,000
 Illustration Case 1 - Retirement cost < original issue price
ABC reacquires 1,000 shares at P80 per share on July 1, 2022
On January 1, 2022 the statement of
and retires them on September 1, 2022.
financial position of ABC Co. shows
the following information:
1-Jul-21 Treasury shares 80,000

Cash 80,000

1-Sep-21 Share capital 100,000

Share capital (P100 par value) 800,000 Share premium - orig. issuance 20,000
Share premium 160,000 Treasury shares 80,000
Share premium - treasury shares 5,000 Share premium - retirement 40,000

Retained earnings 535,000

Total shareholders' equity 1,500,000
 Illustration Case 2 - Retirement cost > original issue price
ABC reacquires 1,000 share at P140 per share on July 1, 2022
On January 1, 2022 the statement of
and immediately retires them
financial position of ABC Co. shows
the following information:
1-Sep-22 Share capital 100,000
Share premium - orig. issuance 20,000
Share premium - treasury shares (a) 5,000
Retained earnings (b) 15,000

Share capital (P100 par value) 800,000 Cash 140,000

Share premium 160,000

Share premium - treasury shares 5,000
NOTE: In the accounting for treasury shares and retirement of
Retained earnings 535,000
shares, retained earnings may be decreased but never
Total shareholders' equity 1,500,000
increased.
Donated capital

Donated capital arises from gifts received by the corporation from

non-reciprocal transactions.

● Donations from shareholders - credited to share premium

● Donations from the government - recognized as government grants
● Donations from other sources - recognized as income when:
a. The conditions attached to the donation are fulfilled or are reasonably
expected to be fulfilled
b. The donation becomes receivable
c. The criteria for asset recognition are met
Donations from shareholders

Forms:

1. Cash - recognized at the amount of cash received or receivable

2. Non-cash assets - recognized at fair value
3. 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 assets is generated from the donated shares
until they are subsequently reissued.
Illustration
On July 1, 2022, ABC Co. received cash
of P100,000 and land with fair value of 1-Jul-22 Cash 100,000
P500,000 and historical cost of Land 500,000
P300,000 from a shareholder. No
Share premium - donated
conditions are attached to the
capital 600,000
donation.
Illustration
On July 1, 2022, ABC Co. received
1,000 shares with par value of P100 Received 1,000 shares with par value of P100 from a
and fair value of P120 per share from a
shareholder as donation.
shareholder as donation.

Subsequently, ABC Co. reissues the 1-Jul-22 Cash 130,000

1,000 donated shares at P130 per
share. Share premium - donated
capital 130,000
Accounting for dividends
Retained earnings

Retained earnings represent the cumulative profits that are retained in the
business and not yet distributed to the shareholders.

RETAINED EARNINGS = PROFITS - LOSSES - DISTRIBUTION TO OWNERS +/-

OTHER ADJUSTMENTS
Retained earnings

Total retained earnings may consist of:

a. Unrestricted - the portion that is available for future distribution to shareholders.

b. Appropriated (Restricted) - the portion that is not available for distribution unless the
restriction is subsequently reversed.

NOTE: Appropriations of retained earnings do not mean that a corresponding

cash fund has been set aside. Appropriations only indicate amounts that are
not available for distribution to the owners.
Negative balance

Retained Earnings (negative balance) ----> Deficit

Total Shareholders’ Equity (negative balance) ----> Capital deficiency

Dividends

Dividends are called distribution to shareholders.

1. Cash dividends - distributions in the form of cash

2. Property dividends - distributions in the form of non-cash assets (NCA)
3. Share dividends - distributions in the form of entity’s own shares
Dates relevant
to the accounting for dividends

a. Date of declaration - the date when the board of directors formally announce the
distribution of dividends
b. Date of record - the date on which the stock and transfer books of the corporation is
closed for registration. Only those who are listed as of this date are entitled to
receive dividends
c. Date of distribution - the date when the dividends declared are distributed to the
shareholders
Cash dividends

Cash dividends may be declared as a certain amount per share or as a certain

percentage of par value of the shares.

Only the outstanding shares are entitled to dividends.

Outstanding shares = issued shares + subscribed shares - treasury shares

 Illustration The outstanding shares are computed as follows:
On April 1, 2022, the board of directors
of ABC CO. declared a P50 dividend
per share to shareholders of record as
of April 15, 2022, for distribution on
May 1, 2022. The shareholders’ equity
of ABC Co. on April 1, 2022 is as
follows:

Share capital, P100 par value 800,000

The cash dividends payable is computed as follows:

Subscribed share capital 220,000

Share premium 100,000

Retained earnings 524,000

Treasury shares (@cost of P120

per share) (144,000)

Total shareholders' equity 1,500,000

 Illustration The outstanding shares are computed as follows:
On April 1, 2022, the board of directors
of ABC CO. declared a P50 dividend Shares issued 8,000
per share to shareholders of record as
of April 15, 2022, for distribution on Shares subscribed 2,200
May 1, 2022. The shareholders’ equity Treasury shares (1,200)
of ABC Co. on April 1, 2022 is as
Outstanding shares 9,000
follows:

Share capital, P100 par value 800,000

The cash dividends payable is computed as follows:

Subscribed share capital 220,000

Share premium 100,000

Outstanding shares 9,000

Retained earnings 524,000 Multiply by: Dividends per share 50

Treasury shares (@cost of P120 Total cash dividends 450,000

per share) (144,000)

Total shareholders' equity 1,500,000

 Illustration Journal entries
On April 1, 2022, the board of directors
of ABC CO. declared a P50 dividend 1-Apr-22 Retained earnings 450,000
per share to shareholders of record as
of April 15, 2022, for distribution on Cash dividends payable 450,000
May 1, 2022. The shareholders’ equity
of ABC Co. on April 1, 2022 is as
follows: 15-Apr-22 (no entry)

Share capital, P100 par value 800,000

1-May-22 Cash dividends payable 450,000
Subscribed share capital 220,000
Cash 450,000

Share premium 100,000

Retained earnings 524,000

Treasury shares (@cost of P120

per share) (144,000)

Total shareholders' equity 1,500,000

Share dividends

● Small or < 20% of the outstanding shares = use fair value (date of declaration)

Fair value - par value = share premium

● Large or 20% or more of the outstanding shares = use par value

 Illustration
On April 1, 2022, ABC Co. declared share
dividends of “1 share for every 10 shares
Is the declared share dividends
held” to shareholders of record as of April
15, 2022, for distribution on May 1, 2022.
small or large?
The fair value per share on declaration
date is P140. ABC’s shareholders’ equity
immediately before the dividend
declaration is shown below:
What is the basis of valuation of
Share capital, P100 par value 800,000
share dividends?
Subscribed share capital 220,000

Share premium 100,000

Retained earnings 524,000

Treasury shares (@cost of P120
per share) (144,000)

Total shareholders' equity 1,500,000

 Illustration The outstanding shares are computed as follows:
On April 1, 2022, ABC Co. declared share
dividends of “1 share for every 10 shares
held” to shareholders of record as of April Shares issued 8,000
15, 2022, for distribution on May 1, 2022.
Shares subscribed 2,200
The fair value per share on declaration
date is P140. ABC’s shareholders’ equity Treasury shares (1,200)
immediately before the dividend Outstanding shares 9,000
declaration is shown below:
Share capital, P100 par value 800,000
The stock dividends payable/ share dividends distributable is
Subscribed share capital 220,000 computed as follows:

Share premium 100,000 Outstanding shares 9,000

Retained earnings 524,000 Multiply by: Dividends per share 1/10

Treasury shares (@cost of P120 No. of shares declared as dividends 900

per share) (144,000)
Multiply by: fair value per share 140
Total shareholders' equity 1,500,000 Total share dividends 126,000
 Illustration Journal entries
On April 1, 2022, ABC Co. declared share
dividends of “1 share for every 10 shares
held” to shareholders of record as of April 1-Apr-22 Retained earnings 126,000
15, 2022, for distribution on May 1, 2022. Stock dividends payable 90,000
The fair value per share on declaration
Share premium 36,000
date is P140. ABC’s shareholders’ equity
immediately before the dividend
declaration is shown below: 15-Apr-22 (no entry)
Share capital, P100 par value 800,000

1-May-22 Stock dividends payable 90,000

Subscribed share capital 220,000
Share capital 90,000
Share premium 100,000

Retained earnings 524,000

Treasury shares (@cost of P120

per share) (144,000)

Total shareholders' equity 1,500,000

 Illustration Before After Increase
On April 1, 2022, ABC Co. declared share
declaration declaration (decrease)
dividends of “1 share for every 10 shares
held” to shareholders of record as of April
15, 2022, for distribution on May 1, 2022. Share capital 800,000 800,000 -
The fair value per share on declaration
date is P140. ABC’s shareholders’ equity Subscribed share capital 220,000 220,000 -
immediately before the dividend
declaration is shown below: Stock dividends payable - 90,000 90,000
Share capital, P100 par value 800,000
Share premium 100,000 136,000 36,000
Subscribed share capital 220,000
Retained earnings 524,000 398,000 (126,000)
Share premium 100,000
-
Treasury shares (144,000) (144,000)
Retained earnings 524,000

Treasury shares (@cost of P120 Total shareholders' equity 1,500,000 1,500,000 -

per share) (144,000)

Total shareholders' equity 1,500,000

 Illustration
On April 1, 2022, ABC Co. declared share
dividends of “1 share for every 5 shares
Is the declared share dividends
held” to shareholders of record as of April
15, 2022, for distribution on May 1, 2022.
small or large?
The fair value per share on declaration
date is P140. ABC’s shareholders’ equity
immediately before the dividend
declaration is shown below:
What is the basis of valuation of
Share capital, P100 par value 800,000
share dividends?
Subscribed share capital 220,000

Share premium 100,000

Retained earnings 524,000

Treasury shares (@cost of P120
per share) (144,000)

Total shareholders' equity 1,500,000

 Illustration The outstanding shares are computed as follows:
On April 1, 2022, ABC Co. declared share
dividends of “1 share for every 5 shares
held” to shareholders of record as of April Shares issued 8,000
15, 2022, for distribution on May 1, 2022.
Shares subscribed 2,200
The fair value per share on declaration
date is P140. ABC’s shareholders’ equity Treasury shares (1,200)
immediately before the dividend Outstanding shares 9,000
declaration is shown below:
Share capital, P100 par value 800,000
The stock dividends payable/ share dividends distributable is
Subscribed share capital 220,000 computed as follows:

Share premium 100,000 Outstanding shares 9,000

Retained earnings 524,000 Multiply by: Dividends per share 1/5

Treasury shares (@cost of P120 No. of shares declared as dividends 1,800

per share) (144,000)
Multiply by: par value per share 100
Total shareholders' equity 1,500,000 Total share dividends 180,000
 Illustration Journal entries
On April 1, 2022, ABC Co. declared share
dividends of “1 share for every 5 shares
held” to shareholders of record as of April 1-Apr-22 Retained earnings 180,000
15, 2022, for distribution on May 1, 2022. Stock dividends payable 180,000
The fair value per share on declaration
date is P140. ABC’s shareholders’ equity
immediately before the dividend 15-Apr-22 (no entry)
declaration is shown below:
Share capital, P100 par value 800,000 1-May-22 Stock dividends payable 180,000
Share capital 180,000
Subscribed share capital 220,000

Share premium 100,000

Retained earnings 524,000

Treasury shares (@cost of P120

per share) (144,000)

Total shareholders' equity 1,500,000

Treasury shares declared as
share dividends

Use cost method = cost of the treasury shares declared

Note: no share premium arises

 Illustration The outstanding shares are computed as follows:
On April 1, 2022, ABC Co. declared share
dividends of “1 share for every 10 shares
held” from its treasury shares, to Shares issued 8,000
shareholders of record as of April 15, 2022,
Shares subscribed 2,200
for distribution on May 1, 2022. The fair
value per share on declaration date is P140. Treasury shares (1,200)
ABC’s shareholders’ equity immediately Outstanding shares 9,000
before the dividend declaration is shown
below:
Share capital, P100 par value 800,000
The stock dividends payable/ share dividends distributable is
Subscribed share capital 220,000 computed as follows:

Share premium 100,000 Outstanding shares 9,000

Multiply by: Dividends per share 1/10

Retained earnings 524,000
Treasury shares (@cost of P120 No. of shares declared as dividends 900
per share) (144,000)
Multiply by: cost per treasury share 120

Total shareholders' equity 1,500,000 Total share dividends 108,000

 Illustration Journal entries:
On April 1, 2022, ABC Co. declared share
dividends of “1 share for every 10 shares
1-Apr-22 Retained earnings 108,000
held” from its treasury shares, to
shareholders of record as of April 15, 2022, Stock dividends payable 108,000
for distribution on May 1, 2022. The fair
value per share on declaration date is P140.
ABC’s shareholders’ equity immediately 15-Apr-22 (no entry)
before the dividend declaration is shown
below:
Share capital, P100 par value 800,000 1-May-22 Stock dividends payable 108,000

Treasury shares 108,000

Subscribed share capital 220,000

Share premium 100,000

Retained Earnings Appro. 108,000

Retained earnings 524,000 Retained Earnings

Unrestricted 108,000
Treasury shares (@cost of P120
per share) (144,000)

Total shareholders' equity 1,500,000

Preference shares

Preference shares are have one or both of the following preference over
ordinary shares:

a) Preferred as to dividends - preference in the distribution of dividends

b) Preferred as to assets - preference in the distribution of assets in case of
corporation liquidation
Preference over assets

Preference shares that are preferred as to assets are settled first and any remaining
amount is paid to the ordinary shareholders.

Entitled to a liquidation value = amount that preference shareholders are entitled to

receive
in case of corporate liquidation
= usually > par value (of the preference shares)

***If the preference shares are not preferred as to assets, the remaining amount after
settlement of liabilities is shared proportionately by the preference and ordinary shareholders.
Preference over assets

In case where the net assets of the corporation after settlement of creditors’ claims are
insufficient to pay the liquidation value, the preference shares will be entitled only to the
remaining net assets.

NONE will be paid to the ordinary shareholders BUT they will not be obliged to provide any
additional capital. (limited liability concept = personal assets of the owners are not
subject to corporate claims)
Preference over dividends

When dividends are declared, preference shares that are “preferred as to dividends” are
paid first before ordinary shareholders.
Preference over dividends

Preference over dividends may be:

1. Noncumulative - a noncumulative preference share is one which the dividend

entitlement for a year is forfeited when dividends are not declared in that year
2. Cumulative - a cumulative preference share is one which the dividend entitlement
accumulates each year until paid. Accumulated unpaid dividends are disclosed as
dividends in arrears but not accrued as liability unless dividends are declared.
3. Nonparticipating - a nonparticipating preference share is one which is entitled only
to a fixed amount of dividends
Preference over dividends

4. Participating - a participating preference share is one which is entitled to an amount in

excess of the fixed amount of dividends. The amount of participation is computed after
both the preference and ordinary shares are allocated their basic dividends.
a. Fully participating - pro-rata basis (based on aggregate par values of OutShe) with
ordinary shareholders
b. Partially participating - up to a certain amount of %
Basic dividends

The amount of participation is computed after both the preference and ordinary shares
are allocated their basic dividends.

● Cumulative preferred shares - includes dividends in arrears

● Noncumulative preferred shares includes only the current-year dividend entitlement
● Ordinary shares - aggregate par value of the OS x multiplied by the preference rate. If
there is more than one class of preference shares with different preference rates,
the lowest preference rate is used to compute for the basis dividend of ordinary
shareholders
Preference shares

Preference shares may have more than one dividend preference. For example, preference
shares may be both cumulative and participating.

Dividend entitlement of preference shares may be expressed as:

a. % of par (fixed rate based on par value) - Ex. 12% preference share with par value of P100
b. Amount per share - Ex. P5 preference share with par value of P100 is entitled to a dividend
of P5
NOTE: If problem is silent, preference shares are presumed to be preferred as to dividends with
dividend preference of noncumulative and nonparticipating.
 Illustration Steps for case 1 & 2:
ABC Co. declared P1,800,000 cash
1. Provide the dividends of the preference shares first.
dividends to its preference and ordinary
shareholders in 2021. No dividends have a. If the preference shares are noncumulative,
been declared since 2018. ABC’s provide one-year dividends only
shareholders’ equity immediately before b. If the preference shares are cumulative, provide all
the dividend declaration is as follows:
dividends in arrears
2. Any excess is paid to the ordinary shareholders.
10% Preference share capital,
P200 par 2,000,000

Ordinary share capital, P100 par 8,000,000

Retained earnings 5,000,000

Total shareholders' equity 15,000,000

 Illustration Case 1: Preference shares are noncumulative and
ABC Co. declared P1,800,000 cash
nonparticipating
dividends to its preference and ordinary
shareholders in 2021. No dividends have
been declared since 2018. ABC’s Total dividends declared 1,800,000
shareholders’ equity immediately before Allocation:
the dividend declaration is as follows:
1. Preference shares 200,000
2. Ordinary shares 1,600,000
10% Preference share capital,
P200 par 2,000,000 As allocated 1,800,000

Ordinary share capital, P100 par 8,000,000

Retained earnings 5,000,000 *Only the current year dividend is paid because the preference
shares are noncumulative.
Total shareholders' equity 15,000,000
 Illustration Case 2: Preference shares are cumulative and
ABC Co. declared P1,800,000 cash
nonparticipating
dividends to its preference and ordinary
shareholders in 2021. No dividends have
been declared since 2018. ABC’s Total dividends declared 1,800,000
shareholders’ equity immediately before Allocation:
the dividend declaration is as follows:
1. Preference shares 600,000
2. Ordinary shares 1,200,000
10% Preference share capital,
As allocated -
P200 par 2,000,000

Ordinary share capital, P100 par 8,000,000

Retained earnings 5,000,000 *All the unpaid dividends from 2018 to 2020 are paid because
the preference shares are cumulative.
Total shareholders' equity 15,000,000
 Illustration Steps for fully participating preference shares:
ABC Co. declared P1,800,000 cash
1. Provide the dividends of the preference shares first.
dividends to its preference and ordinary
shareholders in 2021. No dividends have a. If the preference shares are noncumulative,
been declared since 2018. ABC’s provide one-year dividends only
shareholders’ equity immediately before b. If the preference shares are cumulative, provide all
the dividend declaration is as follows:
dividends in arrears
2. Provide the basic dividends of the ordinary shares using
10% Preference share capital,
the preference share rate.
P200 par 2,000,000 3. Allocate the excess dividends after deducting amounts
in 1&2 pro rata based on the aggregate par values of the
Ordinary share capital, P100 par 8,000,000 outstanding shares

Retained earnings 5,000,000

Total shareholders' equity 15,000,000

 Illustration Case 3: Preference shares are noncumulative and fully
ABC Co. declared P1,800,000 cash participating
dividends to its preference and ordinary
Total dividends declared 1,800,000
shareholders in 2021. No dividends have
been declared since 2018. ABC’s Basic allocation:
shareholders’ equity immediately before
1. Preference shares 200,000
the dividend declaration is as follows:
2. Ordinary shares 800,000
Excess subject to participation 800,000
10% Preference share capital,
P200 par 2,000,000
1. Preference shares 160,000
2. Ordinary shares 640,000
Ordinary share capital, P100 par 8,000,000 As allocated -

Retained earnings 5,000,000

1. Preference shares 360,000
Total shareholders' equity 15,000,000
2. Ordinary shares 1,440,000
Total dividends 1,800,000
 Illustration Case 4: Preference shares are cumulative and nonparticipating
ABC Co. declared P1,800,000 cash
dividends to its preference and ordinary
Total dividends declared 1,800,000
shareholders in 2021. No dividends have
been declared since 2018. ABC’s Basic allocation:
shareholders’ equity immediately before
1. Preference shares 600,000
the dividend declaration is as follows:
2. Ordinary shares 800,000
Excess subject to participation 400,000
10% Preference share capital,
P200 par 2,000,000
1. Preference shares 80,000
2. Ordinary shares 320,000
Ordinary share capital, P100 par 8,000,000 As allocated -

Retained earnings 5,000,000

1. Preference shares 680,000
Total shareholders' equity 15,000,000
2. Ordinary shares 1,120,000
Total dividends 1,800,000
Share split

1. Split up or share split - occurs when old shares are cancelled and replaced by a larger
number of new shares but with a reduced par value (stated value) per share.
Effect: increases the no. of shares available for issuance while decreasing the fair
value per share
2. Split down or reverse share split - occurs when old share are cancelled and replaced by a
smaller number of new shares but with an increased par value (stated value) per share.
Do not affect A, L or E or the aggregate par value of issued shares. Memo entry only.
Effect: no. of share outstanding and par value per share
Share split

Case 1: Split up
ABC Co. declares a 2-for-1 share split.

Memo entry:
“Issued 20,000 shares with par value of P50 as a result of a 2-for-1 split of 10,000 old
shares with par value of P100.
Share split

Case 2: Split down

ABC Co. declares a 1-for-2 reverse share split.

Memo entry:
“Issued 5,000 shares with par value of P200 as a result of a 1-for-2 reverse share split of
10,000 old shares with par value of P100.
Share split

Before share split After split up After split down

No. of shares outstanding 10,000 20,000 5,000

Par value 100 50 200

Total par value 1,000,000 1,000,000 1,000,000