2 primary sources of Equity

corporation 1. Paid in (contributed capital)

a) Par value of Ordinary share
b) Par value of Preference share
c) Share premium
lesson 1: terminologies 2. Retained earnings

→ prospectus A report provided to potential investors that represents

a company's financial statements and explains its business plan, lesson 2: corporation and corporate
sources of financing, and significant risks.
→ Outstanding shares refers to the total number of shares of a
stock
company's stock that have been issued and are currently held by
investors. These are the shares that are actively in the hands of corporation a legal entity chartered by a state:ownership is represented
shareholders. by transferable shares of stock
→ LLC (limited liability company) offers the limited liability legal → Legally distinct form the persons responsible for their creation. In
protection of a corporation as well as the favorable partnership many respects, they are accorded the same right as individuals: can
treatment for income tax purposes. conduct business, be sued, enter in contacts, and own property.
→ Organization Cost represents costs incurred in forming or → is an artificial being created by operation of law, having the right of
organizing a corporation. (Expensed) succession and the powers, attributes and properties expressly
◦ Legal fees in connection with the incorporation, such as authorized by law or incident to its existence
drafting of articles of incorporation and by-laws and → A corporation is a legal and juridical person with a personality
corporation registration separate and apart from its individual stockholders or members and
◦ Incorporation fees legal fees, promoters' fees, and amounts from any other legal entity to which it may be connected.
paid to obtain a charter → Special characteristicc of the corporate form: (1) influence of
corporate law, (2) use of the share system, (3) development of
◦ Share issuance costs, such as printing of share certificates,
variety of ownership interest
cost of stock and transfer book, seal of corporation,
underwriting and promotional fees, accounting and legal
fees related to share issuance. Corporate law
expense xxx → Corporation must submit articles of incorporation to the
Cash xxx appropriate governmental agency for the country in which
incorporation is desired
→ Issue cost Direct costs incurred to sell shares, such as
→ Governmental agency issues a corporation charter (juridical person).
a) underwriting costs,
b) accounting and legal fees, → Advantage to incorporate where laws favor the corporate form of
c) printing costs, and business organization.
d) taxes,
should reduce the proceeds received from the sale of the shares. Components of Corporation
Share premium xxx → Corporators those who compose the corporation whether
Cash xxx shareholders or members or both.
(With share premium)
→ Incorporators those corporators mentioned in the articles of
Retained earning xxx incorporation as originally forming and composing the corporation.
Cash xxx (only natural persons)
(without share premium)
◦ All incorporators are shareholders but not all shareholders
→ Paid-in (contributed) capital is the total amount of cash and other are incorporators
assets the corporation receives from its stockholders in exchange
for its stock. (share capital plus share premium) → Shareholders or stockholders owners of shares in a stock
corporation. (may be natural or artificial persons). Individuals or
organizations that own a portion (shares of stock) of a corporation.
Equity the residual interest of owners in the assets of the entity after
deducting all its liabilities. → Members corporators of a non-stock corporation.
→ Share capital The portion of the paid in capital representing the total
par value or stated value of the shares issued. (shares that have Managements
been issued to shareholders) ◦ Board of Directors are responsible for and have final authority
→ Subscribed Share Capital The portion of the authorized share capital for managing corporate activities. A board can act only as a
that has been subscribed but not yet fully paid and therefore still collective body and usually limits its actions to setting general policy.
unissued.
→ A group of stockholders owning or controlling votes of more than a
Subscription receivable (current asset or deduct in stockholders equity) xxx 50% share of a corporation's stock can elect the board and control
Subscribed capital(paid in or contributed capital) xxx the corporation.

→ Share Premium (additional paid in capital) The portion of the → Corporate Governance the system by which companies are directed
authorized share capital representing excess over the par or stated and controlled.
value. (issued price minus par value) → A corporation usually holds a stockholder meeting at least once a
→ Accumulated other comprehensive income is a component of year to elect directors.
shareholders' equity that includes gains and losses not reflected in → Proxy Signed by stockholders who do not attend stockholders’
the income statement, such as changes in the fair value of meetings to give their voting rights to an agent. A document that
investments. gives a designated agent the right to vote the stock.
→ Treasury shares contra equity account. Shares of a company's stock
that it has repurchased from the open market, reducing the number Two types of corporation
of outstanding shares and often held for future use or resale. ◦ Privately Held (Closely Held) Corporation does not offer its stock for
Treasury shares xxx public sale and usually has few stockholders..
cash xxx ◦ Publicly Held Corporation offers its stock for public sale and can have
thousands of stockholders.
→ Non controlling interest (minor interest) typically seen in
consolidated financial statements, which combine the financial ◦ Public Sale means selling and trading stock on an organized
results of both the parent company and its subsidiary or stock market.
subsidiaries. represents the portion of the subsidiary's equity that is ◦ Direct interest purchase of share, shareholder
not owned by the parent company.
◦ Indirect interest investments in mutual fund, covered by a
pension plan
Characteristics → The corporation must formally organize and commence operations
within two years from the date of incorporation, or its corporate
◦ Separate legal entity a corporation conducts its affairs with the
powers shall cease.
same rights, duties, and responsibilities of a person. It takes action
through its agents, who are its officers and managers.
◦ Limited liability the legal protection given stockholders whereby they Formal Organization requires the adoption of by-laws and the election
are responsible for the debts and obligations of a corporation only to of officers by the board of directors pursuant to the by-laws, and taking
the extent of their capital contributions (unless fraud can be such steps as are necessary to enable the corporation to transact the
proven). legitimate purpose for which it was created.
◦ Easy transfer ability of ownership Transfer of shares from one
stockholder to another has no direct effect on operations except By-laws the rules ofaction adopted by the corporation for its internal
when it causes a change in directors who control or manage the government and for the government of its officers, shareholders, or
corporation. members.
◦ Unlimited Life A corporation’s life is indefinite because it is not tied → It shall be adopted and filed with the Securities and Exchange
to the physical lives of its owners. Commission within one month from the date of incorporation,
◦ Lack of mutual agency for stockholders A corporation acts through failure to do so shall render the corporation liable for the
its agents, who are its officers and managers. Stockholders, who are revocation of its registration.
not its officers and managers, do not have the power to bind the a) The time, place, manner of calling and rules for meetings of
corporation to contracts shareholders and directors. The place of shareholders'
◦ Professional Management The shareholders own a corporation but meeting must be the principal place of business.
they do not manage it on a daily basis. To administer the affairs of b) The number, qualifications, duties, powers, and length of office
the corporation, the shareholders elect a board of directors, where of directors. A director must be a registered owner of at
they hire professional managers to run the business. least one share of stock, and majority of the directors
◦ Ease of Capital Accumulation Buying stock is attractive to investors must be residents of the Philippines.
because e of the advantages above, which helps corporations collect c) The appointment, duties, powers, compensation and. length of
large sums of money. office of corporate officers other than directors.
◦ Government Regulation A corporation must meet requirements of a d) The manner of issuing share certificates.
state's incorporation laws, which subject the corporation to state
e) The method of amending by-laws.
regulation and control. Proprietorship and partnerships avoid many
of these regulations and governmental reports. f) Any other rules governing the acts of officers and directors.
◦ Corporate Taxation (Double Taxation) First, corporation must pay The Corporation Code provides that the Securities and Exchange Commission
corporate income taxes on its earnings. Second, shareholders must shall not register any stock corporation unless 25% of its authorized
pay personal income taxes on any portion of these earnings that number of shares has been subscribed, and at least 25% of the subscription
they receive as dividends. has been paid. However, in no case shall the paid in capital be less than P5,000.
◦ Cost of Formation An unincorporated business can be formed at
little or no cost. Forming a corporation, however, normally requires Variety of ownership interest
the services of a lawyer and higher costs.
◦ Ordinary shares represent the residual corporate interest.
◦ Separation of Ownership and Management If shareholders do not → Bears ultimate risks of loss.
approve of the manner in which management runs the business,
→ Receives the benefits of success.
they may find it difficult to take the united action necessary to
remove that management group. → Not guaranteed dividends nor assets upon dissolution. ( If the
company does not declare dividends, common shareholders
will not receive them.)
Corporate organization and management ◦ Preference shares are created by contract, when shareholders'
A corporation is created by getting a charter from a stat government. A sacrifice certain rights in return for other rights or privileges,
charter application is signed by the prospective stockholders called usually dividend preference.
incorporators or promoters and then filed with the state.
When the application process is complete and fees paid, the charter is issued Common stock (common share or ordinary share or share
and the corporation is formed Investors then:
capital) The most frequently issued class of stock; typically provides a
◦ purchase the corporation’s stock, voting right but is secondary to preferred stock in dividend and liquidation
◦ meet as stockholders, and rights
◦ elect a board of directors. Share system In the absence of restrictive provisions, each share carries the
following rights:
1. Right to vote in corporate matters(1 vote per share)
Corporation code a general law which governs the creation of private 2. To share proportionately in profits and losses (cash dividends)
corporations in the Philippines. 3. Sell or otherwise dispose of their stock
4. To subscribe additional share issues and Right to maintain
proportionate ownership (preemptive or share or stock right)
Articles of incorporation 5. ownership of all excess corporate assets upon liquidation of the
a) The name of the corporation. corporation. (all excess belongs to common stockholders)
b) The purpose or purposes for which the corporation is formed. 6. Rigth to receive timely financial reports
c) The place where the principal office of the corporation is to be
established or located, which place must be within the Philippines. Common stockholders are the true owners of the business. Delegate for
d) The term for which the corporation is to exist not exceeding 50 decision making authority to the BOD who in turn delegate for day to day
years. operations to manager. (has no fixed or specific return of investments.
e) The names and residences of the incorporators. Their financial rewards is dependent on the operations of the entity. If the
f) The names and addresses of the incorporating directors who must entity is exceptionally profitable, the holdings of ordinary shareholders will
not be less than five nor more than fifteen. become more valuable.
g) The amount of share capital, its par value, and the number of shares preemptive right is a provision that gives existing shareholders the
into which it is divided. If the share has no par value, the articles opportunity to purchase additional shares of a company's stock before those
need state only the number of shares but the fact that the share is
shares are offered to outside investors. This right allows current
without par shall be stated therein.
shareholders to maintain their proportional ownership in the company if the
h) The amount of share capital or the number of no par shares actually
company decides to issue more shares, typically through a new stock offering
subscribed, including the names and residences of the subscribers
or the sale of additional shares.
with an indication of the amount or number of no par shares
subscribed and paid by each.
preferred stock (preferred share and preference share) A
class of stock that usually provides dividend and liquidation preferences over
Certificate of incorporation issued by SEC and serves as final
common stock.
determination of the corporation's right to do business, its judicial
personality, and its legal existence. ◦ Preferred stock typically carries preferential claims to dividend and
net assets in the event of liquidation privileges
◦ has no voting rights and usually receives fixed amount of cash → One without any value appearing on the face of the share
dividend or return of investments certificate.
1. Raise capital without sacrificing control → A no par value has always an issue value or stated value based
2. Boost the return earned by common stockholders on the consideration for which it is issued

◦ Cumulative gives its owners right to be paid both the current and all → The minimum consideration or issue price for no par value
prior period’s unpaid dividends if they were not declared in those share as provided for the revised corporation code is 5
prior periods. → When no-par stock is issued, the amount the corporation
◦ Participating right to receive additional dividends beyond their fixed receives is credited to a no-par stock account.
rate if the company's profits exceed a certain level, allowing them to Assume that UBM Company does not have par value and that the corporation
participate in the extra earnings. issued 1 000 shares for $50 per share. The entry to record the stock issuance
is:
◦ convertible preferred stock preferred stock that can be converted
to common stock at specified conversion rate Cash 50 000
◦ Callable give the company the option to repurchase them from Share capital -ordinary 50 000
shareholders at a specified price, typically at the company's
Some countries require that no-par shares have a stated value. If a company
discretion. issued 4,000 of the shares with a €5 stated value at(€15 per share for cash, it
◦ recorded on the balance sheet as equty makes the following entry.
◦ Dividends paid on callable shares are generally treated as
regular dividends Cash 15 000
Preferred share xxx Share capital -ordinary 5 000
Share premium xxx Share premium -ordinary 10 000
Cash 50 000
3. Non cash assets A corporation can receive assets other than
◦ Redeemable can be bought back by the issuing company or the cash in exchange for its stock. It also can take liabilities such as a
shareholder at specified terms and conditions, offering flexibility in mortgage on property received.
their redemption. (same journal entry with callable) → fair value of the goods or services received
◦ recorded on the balance sheet as a liability. → fair value of the shares issued
◦ dividends paid on redeemable shares are treated as interest
→ par value or stated value of the share
expense.
The following series of transactions illustrates the procedure for recording
the issuance of 10,000 shares of €10 par value ordinary shares for a patent
lesson 3: accounting for stock for Marlowe Company, in various circumstances.
1. Marlowe cannot readily determine the fair value of the shares, but it
determines the fair value of the patent is €150,000
Legal capital represents the amount of the invested funds that cannot be patent 150 000
returned to the shareholders in any form as long as the corporation is in Share capital -ordinary 100 000
existence. Share premium -ordinary 50 000
◦ Originally intended to protect a company’s creditors, without it, excessive 2. Marlowe cannot readily determine the fair value of the patent, but it knows
dividends could be paid, leaving nothing to creditors.
the fair value of the shares is €140,000
◦ Formula: par value x total number of outstanding share
patent 140 000
◦ The amount of legal capital is determined as Share capital -ordinary 100 000
a) In case of par value share, legal capital is the aggregate par value of the
Share premium -ordinary 40 000
shares issued and subscribe. 3. At par value
b) In the case of no par value share, legal capital is the total consideration patent 100 000
received from shareholders including excess over the stated value. Share capital -ordinary 100 000
(stated value plus share premium)

Two important elements in accounting for issuance Treasury stocks (treasury share) Issued stock that has subsequently
been reacquired by the corporation.
1. The equity accounts identify the type of stock being issued (ordinary or
preferred). → reasons for a firm to buy back its own previously issued stock.
2. The proceeds from the sale of the stock are divided into the portion
1. Wants the stock for a profit-sharing, bonus, or stock-option plan for
attributable to its par value and the portion paid in excess of par value. employees
(share premium( 2. Feels that the stock is selling for an unusually low price and is a good
buy
Issuance of stock at 3. Wants to stimulate trading in the company's stock
4. Wants to remove some shares from the market in order to avoid a
1. Par value A nominal value assigned to and printed on the face of hostile takeover
each share of a corporations stock. The purpose of par value is to fix 5. Wants to increase reported earnings per share by reducing the
the minimum issue price of the share. (appear in the article of
number of shares of stock outstanding
incorporation and on the share certificate)
6. Provide tax-efficient distributions of excess cash to shareholders.
◦ Premium (market value > par value) a corporation sells its stock for
more than par (or stated) value. 7. Increase earnings per share and return on equity.
8. Provide shares for employee compensation contracts or to meet
→ Paid-in capital in excess of par value or Additional Paid-in Capital potential merger needs.
is reported as part of equity (balance sheet) and not
revenue which is not listed on the income statement. (net 9. Prevent takeover attempts or to reduce the number of shareholders.
increase in equity. → When a firm purchases stock of another company, the investment is
included as an asset on the balance sheet. However, a corporation
Assume that UBM Company issued 1,000 shares of $1 par-value common stock cannot own part of itself, so treasury stock is not considered an
for $50 per share. The entry to record the stock issuance is: asset. Instead, it is a contra-equity account and is included on the
balance sheet as a deduction from equity.
Cash 50 000
Share capital - Ordinary 1 000 → When corporation buys those shares back, its equity decreased.
Share premium - Ordinary 49 000 → Treasury is part of issued shares but not outstanding. (not
dividends, and no voting right) (outstanding _ right to receive
dividends and has voting right)
◦ Discount (market value < par value) occurs when stock issued is sold → the total equity account and the number of outstanding shares can
for less or below than par value. (if stock is issued at discount, be impacted by the presence of treasury shares.e
stockholders could later be held liable to make up the difference
between their investments and par values of the shares they → Earnings per share
purchased.) Formula:
��� ������ − ��������� ���������
����ℎ��� ������� ������ ����� ������������
2. No Par value if the stock has been issued has no par value, only
→ Return on equity
one credit item is included in the entry.
 ��� ������ − ��������� ���������
Formula: ������� �������� ������
Retained earnings The portion of a corporation's equity that has been
earned from profitable operations and not distributed to stockholders.
→ Cost method
→ is increased each year by net income and decreased by losses,
→ treasury shares shall be recorded at cost regardless of whether the dividends, and some treasury stock transactions.
shares are acquired below or above par value or stated value
→ Retained earnings is not same as cash
→ acquired for cash consideration, the cost is equal to the cash
payment → Although both Cash and Retained Earnings are usually increased
→ acquired for non cash consideration, the cost is actually measured when a company has earnings, they typically are increased by
by the carrying amount of the non cash asset surrendered different amounts. This occurs for two reasons:
1. The company's net income, which increases Retained
Purchasing treasury stock Earnings, is accrual-based, not cash-based.
2. Cash from earnings may be invested in productive assets
→ Treasury stock is usually accounted for on a cost basis; that is, the like inventories, used to pay off loans, or spent in any
stock is debited at its cost (market value) on the date of repurchase. number of ways, many of which do not affect net income or
retained earnings.
Assume that 100 shares of the $1 par-value common stock were reacquired by
UBM for $60 per share. The entry to record the repurchase is: → Retained earnings represent the cumulative balance of the following
a. Net income or loss for the period
Treasury stock, common 6 000 b. Dividend distributions
Cash 6 000 c. Changes in accounting policy
d. Prior period errors (When a prior period error is discovered,
it should be corrected by adjusting the beginning balance of
Reissuing treasury stock above cost retained earnings. This adjustment is made net of tax)
→ Note that when the re-issuance price is greater than the repurchase e. Changes in accounting policy (retrospective: adjust prior
cost, no gain can be recognized as part of net income. A company year)
cannot earn a profit from selling (issuing) its own stock. f. Re-classifications of some components of the other
comprehensive income
Assume that 40 of the 100 shares of the treasury stock that were originally → Kinds of Retained Earnings:
purchased for $60 per share are reissued at $80 per share. The entry to
record that re-issuance is: a) Unappropriated Retained Earnings (Unrestricted) represents that
portion which is free and can be declared as dividends to
cash 3 200 shareholders.
Treasury stock, common 2 400
Share premium, treasure share 800 b) Appropriated Retained Earnings (Restricted) represent that portion
which has been restricted and therefore is not available for any
dividend declaration
Reissuing treasury stock below cost ◦ Legal Appropriation arises from the fact that legal capital
→ When treasury stock is sold below cost, the entry depends on cannot be returned to the shareholders until the entity is
whether the Paid-In Capital, Treasury Stock account has a credit dissolved and liquidated
balance. ◦ Contractual Appropriation arises from the fact that the terms
◦ Paid in capital, treasure stock if there is a balance in that account of the bond issue and preference share issue may impose
from previous transaction restriction on the payment of dividends (dr. Ure, cr. rre)
◦ Retained earnings, if there is no balance in the paid in capital, ◦ Voluntary or Discretionary Appropriation arise from the fact
treasure stock account. that management wishes to preserve the funds for
expansion
Retained earnings are not increased by treasury shares
because treasury shares represent the company's own shares → Dividend policy Few companies pay dividends in amounts equal to their
that have been repurchased from shareholders legally available retained earnings. Why?
a. Maintain agreements with creditors.
Assume that another 30 shares of treasury stock are reissued for $40 per b. Meet corporation requirements.
share, $20 less than their cost. Because Paid-in Capital, Treasury Stock has a c. To finance growth or expansion.
balance of $800, the entry to record this transaction is: d. To smooth out dividend payments.
e. To build up a cushion against possible losses.
cash 1 200
Paid in capital, treasury stock 600 In a corporation, a formal action by the board of directors is required before
Treasury stock, common 1 800 money can be distributed to the owners. In addition, such payments must be
made on a pro rata basis (each owner must receive a proportionate amount
Note that after this transaction is recorded, the balance in Paid-in Capital, on the basis of ownership percentage.) These pro rata distributions to
Treasury Stock is $200 ($800 - $600). owners are called dividends. When paid in the form of cash, they are called
cash dividends.
Next, assume that the company reissues 20 additional shares at $45 per
share. The entry to record this transaction is:
Deficit cumulative profits and losses that have been retained over time,
cash 900 have a negative balance.
Paid in capital, treasury stock 200
Retained earnings 100
Treasury stock, common 1 200
dividends Distributions to the owners (stockholders) of a corporation.
Companies are not required to pay dividend.
→ Types of dividends
lesson 4: retained earnings a.
b.
Cash dividends
Property dividends
→ When cash dividends are declared, a liability is created and Retained c. Liquidating dividends (came form capital: return of investment)
Earnings is reduced. When those dividends are paid, the liability is d. Share dividends
eliminated and cash is reduced. (all dividends except share dividends, reduce the total equity in
the corporation)
→ Stock dividends do not require cash payment, and no liability is
created when stock dividends are declared. Stock dividends result in
a decrease in Retained Earnings, and an increase in Common Stock cash dividend A cash distribution of earnings to stockholders.
and Paid in Capital in Excess of Par (if any).a → Board of directors vote on the declaration of cash dividends
→ A decllared cash dividends is liabilty
Common stockholders can invest money in two ways → Companies do not declare or pay cash dividends on treasure shares
1. Common stockholders can buy stock
2. When corporation makes money, the common stockholders can allow Accounting for cash dividend
the corporation to keep those earning to be reinvested in the 1) Declaration date the date on which a corporation’s boar of directors
business. This agregate collection of corporation earnings that have
formally decides to pay a dividend to stockholders.
been reinvested is called retained earnings.
→ total stockholders equity decrease
 Retained earnings/ dividend 11 000
Assuming that the board of directors votes on December 15, 2018, to declare
Preferred dividends payable 3 000
an $8.000 dividend, this liability may be recorded as follows
Ordinary share 8 000
Dividends/retained earnings 8 000 Non Cummulative
Dividends payable 8 000
At the end of the year, the dividends account is closed to Retained Earnings
by the following entry:
Retained earning 8 000
Dividends 8 000
(which ever method is used, the end result is the same: a decrease in retained 5 000 3 000
earning)
2) Date of record The date selected by a corporation's board of 2021:
directors on which the stockholders of record are identified as those Retained earning/ dividend 5 000
who will receive dividends. (no journal entry: the date of record is Preferred dividends payable 2 000
simply noted in the minutes of the directors’ meeting and in letter Ordinary share 3 000
to stockholders.
2022:
→ No effect to total stockholders equity Retained earnings/ dividend 11 000
3) Dividend Payment date The date on which a corporation pays Preferred dividends payable 2 000
dividends to its stockholders. Ordinary share 9 000
→ There is no equity account therefore No effect to total
stockholders equity
Dividend payout ratio ratio of interest to stockholders. The ratio
indicates the percentage of net income paid out during the year in the form
the entry to record a dividend payment would typically be
of cash dividends.
Dividends payable 8 000 ◦ Formula:
���ℎ ���������
cash 8 000 ��� ������

Dividend preference The portion of a corporation's equity that has share dividend (stock dividend) A form of dividends that requires a
been earned from profitable operations and not distributed to stockholders. company to issue new shares to its shareholders without receiving cash.
1. Current dividend preference The right of preferred stockholders to receive ◦ Decreases retained earnings and increases common stock and the
current dividends before common stockholders receive dividends. associated excess of par (if any)
→ Preferred stock has a dividend percentage associated with it ◦ Increases number of outstanding share, total equity remains
and is typically presented as percentage of par value unchanged, leading to the proportionate decrease in the company’s
equity (book value) per share.
→ Example: 5% preferred stock, p20 par value, 1 000 shares
outstanding. Current year dividend is p2 per share (p40*5%) ◦ Amount of earning per share is decreased proportionally
or a total of 2 000 for 1 000 shares ( 1000*40*5%) (1000*40 ◦ Issuance by a corporation of its own shares to shareholders on a
are called total par value) pro rata basis, without receiving any consideration.
→ Total par value ◦ Share dividend does not affect any asset or liability.
Formula: number of shared issue x par value per share ◦ Journal entry reflects a reclassification of equity.
→ Current year dividend ◦ Ordinary share dividend distributable reported in the equity section
Formula: number of shared issue x par value per share as an addition to share capital-ordinary.
x % share ◦ Small stock dividends amount capitalized is equal the fair value of the
2. Cumulative dividend preference The right of preferred stockholders to new shares. Dividend declared is below 20% of outstanding share
receive current dividends plus all dividends in arrears before common Taking Hess Inc. as an example, suppose that its common stock has a par value
stockholders receive any dividends. of €1, and market value of €2.5 per share. In the case of declaring 15% stock
◦ dividends in arrears Missed dividends for past years that dividends (7,500 new shares), the journal entry is as follows:
preferred stockholders have a right to receive under the Retained earning 18 750
cumulative-dividend preference if and when dividends are Stock dividend distributable/payable 7 500
declared Share premium 11 250
◦ Do not represent actual liabilities and thus are not recorded in
the accounts. Instead reported in the notes to financial Stock dividend distributable is an equity account, not a liability.
statements.
Stock dividend will be closed to retained earning as follows
◦ Non cummulative confers no right to prior periods unpaid
dividends if they were not declared in those prior periods. Retained earning 18 750
Dividends 18 750
Cummulative
The following are the balances in the RFC company’s financial statement in Date of distribution
the current year. No changes in the balances since the date of incorporation. Stock dividend distributable 7 500
Share premium -sdd 11 250
◦ 5 % Preferred Share, P40, par value, 1,000 shares issued and Ordinary share 7 500
outstanding P 40,000 Share premium -ordinary share 11 250
◦ Ordinary shares, P5, par value, 5,000 shares issued and ◦ Large stock dividends amount capitalized is equal to par value.
outstanding 25,000 Dividend declared is 20% and above of outstanding shares
Assume that RFC has not paid any dividends for the last two years but has When Hess declares a 30% stock dividend, it would issue 15,000 (50,000 X 30%)
declared dividends in 2021 for P5,000 and P11,000 for 2022 new shares. The par value rather than market value will be assigned to the
new shares. Therefore, the account Paid- in Capital in Excess of Par will not
be involved. The
journal entry is as follows:
Stock dividend 15 000
Stock dividend distributable 15 000
Stock dividend distributable 15 000
Stock dividend 15 000
2021: ◦ Line between small and large stock dividend Is often set at 20% to
Retained earning/ dividend 5 000 25% of the company's issued shares
Preferred dividends payable 5 000
Stock split Stock
2022: dividends
 ◦ Participating preference share is one which is entitled to receive
Number of outstanding share increase increase
dividends in excess of the basic or fixed rate. Ordinary share should
Total equity No change No change receive first an amount equal to the basic preference rate
Retained earnings (date of declaration) No change decrease → Formula: Preference Rate x Par Value of ordinary share
Contributed capital (date of declaration) increase In the absence of specific designation, preference share is assumed to be
noncumulative and nonparticipating. Dividends in arrears usually include
Common stock No change increase current year dividends,
Paid in capital in excess of par, common No change increase
stock
Formulas
Par value per share decrease No change
→ Ordinary
����� �ℎ���ℎ������ ������ − ��������� �ℎ��� (��� �� �����������) − ��������� �� ��������������� �ℎ���ℎ������ ������

Stock split Results in increase of the number of outstanding in the same �������� �ℎ��� ������������

proportion as par or stated value per share decreases

◦ Is often accompanied by the proportionate reduction in market value outstanding share issued
per share in order increase marketability. - treasured share

◦ No entry recorded for a share split

→ Preferred
◦ Decrease par value increased number of shares ��������� �ℎ���� + ��������� �� �������
���������� �ℎ��� ������������
◦ Stock splits can affect the numbers of issued shares, treasury
shares, outstanding shares, and authorized shares. outstanding share issued
- treasured share

◦ Any balance of the total shareholders’ equity in excess of par or

stated value is apportioned taking into account the liquidation value
and divided rights of the preference shareholder.
◦ Subscription receivable if any should not be deducted from the
subscribed capital.
lesson 5: other equity items Problem: Gaza Company has an authorized share capital of 10,000, 8% cumulative
◦ The retained earnings portion of the equity does not reflect all preference shares with P100 par value and 100,000 ordinary shares with P10
economic gains and losses that impact equity par value.
◦ Unrealized gains and losses stemming from the impact of foreign The entity reported the following shareholders’ equity at year end:
currency exchange rate changes on the value of foreign subsidiaries
Preference share capital ……………………….. 500,000
and from changes in the market value of certain categories of
financial assets are not determinants of net income but do impact Ordinary share capital …………………………900,000
equity. Share premium ………………………………….90,000
Retained earnings …………………………….....138,000
Treasury ordinary shares – 1000 at cost ……….(20,000)
Accumulated other comprehensive income certain market related 1,608,000
gains and losses that are not included in the computation of net income. (it is Dividends on preference shares are in arrears for the current.
an equity category that summarizes the effect on equity of certain market- What is the book value per ordinary share?
related gains and losses, It is also termed as other equity or other reserves.) a. 12.00
b. 11.87
statement of comprehensive income A financial statement that c. 18.08
d. 12.45
provides information on revenues, expenses, net income, and other
comprehensive income. The sum of net income and other comprehensive
income is comprehensive income. Net income is the most used measure of a Earning per share The earnings per share figure is the amount
company's operating performance in an accounting period. Other attributable to every ordinary share outstanding during the period.
comprehensive income (OCI) arises primarily from unrealized valuation gains
or losses for certain assets or foreign currency translation adjustment. → PAS 33 requires two presentation of earnings per share,
namely Basic EPS & Diluted EPS.
��� ������ − ��������� ���������
statement of changes in equity A financial statement that reports → Formula: ����ℎ��� ������� ������ ����� ������������
all changes in stockholders' equity.
→ Presentation of EPS is required for:
1) Entities whose ordinary shares are publicly traded.
lesson 6: additional topic 2) Entities that are in the process of issuing ordinary shares or
potential ordinary shares in the public securities market.
book value per share income is the amount that would be paid on each → If cumulative, the preference dividend for the current year only is
share assuming the entity is liquidated and the amount available to deducted whether such dividend is declared or not.
shareholders is exactly the amount reported as shareholder's equity. → If noncumulative, dividend is deducted from the net income only if
→ For purposes of book value computation, treasury shares shall there is declaration.
be treated as retired → Computation of Weighted Average Capital
→ Liquidation Value of preference share is the amount which the ◦ Share dividend or share split shall be treated as change from
preference shareholders normally receive upon the the date the original shares were issued (retroactively)
liquidation of the corporation
◦ Ordinary shares that will be issued upon the conversion of a
→ Call Price of preference is the amount paid to preference mandatory convertible instrument are included in the
shareholders upon redemption (when redeemed, is not calculation of basic earnings per share from the date of
included in the computation of the book value (or book capital) conversion.
of the preference shares.
◦ Subscribed shares are entitled to participate fully in dividends,
◦ Noncumulative preference share is one on which the right to receive therefore they are included in weighted average capital.
dividends is forfeited in any year in which the dividends are not
declared. (one year dividend) ◦ Ordinary shares issued as part of business combination that is
an acquisition are included in the weighted average number
◦ Cumulative preference share is one on which any undeclared of shares from the date of acquisition.
dividends accumulate each year until paid. Entitled to all dividends in
arrears, Problem: Troy Company provided the following share transactions for the
current year:
◦ Nonparticipating preference share is one that is entitled to receive
only the dividends equal to the fixed rate. Januar 1 Shares outstanding ………………………………. 44,000
February 1 Issued for cash ……………………….……………… 56,000
May 1 Acquired treasury shares ……………….…………………. 25,000
August 1 ……………….……………………………. 25% share dividend
September 1 Resold treasury shares …………………………… 10,000
November 1 ……………….……………………………Issued 3 for 1 split

What is the weighted average number of shares outstanding for the year?
305 000

Diluted earning per share

→ Potential ordinary share is a financial instrument or other contract
that may entitle the holder to ordinary shares. (Convertible bonds,
convertible preference share, share option and warrants.)
→ Diluted EPS includes the effect of all potential dilutive ordinary
shares that were outstanding during the period.
→ Companies will not report diluted EPS if the securities in their capital
structure are antidilutive. (DEPS > BEPS)