SHAREHOLDERS’ EQUITY (Part 1)

DEFINITION & COMPONENTS OF SHAREHOLDERS’ EQUITY

Shareholders’ equity or stockholders’ equity is the RESIDUAL INTEREST of owners in the
net assets of a corporation measured by the excess of assets over liabilities.

COMPONENTS OF SHAREHOLDERS’ EQUITY

CONTRIBUTED CAPITAL ACCUMULATED CONTRA-EQUITY
COMPREHENSIVE ACCOUNTS
INCOME
 Share Capital (Ordinary &  Accumulated Profit or  Treasury Shares
Preferred) Loss (Retained Earnings)  Discount on Share Capital
 Subscribed Share Capital  Accumulated Other  Capital Liquidated
(Ordinary & Preferred) Comprehensive Income
 Share Premium and Losses
 Less: Subscription
Receivable

NOTES!!!

(1) Presentation of Subscription Receivable

General rule and if silent as to maturity Exception:

Subscription receivable is presented as a deduction If the maturity date of the subscription receivable is
from contributed capital within 12 months, it is presented as a current asset
rather than deduction from contributed capital

(2) Distinction between ordinary shares and preferred shares

Ordinary Shares Preferred Shares

Return on investment (income) Residual Fixed
Priority during liquidation Least priority High priority
Can be issued with no par value? Yes No
With voting rights? Yes General rule: No
Exception: Sec. 6 of Revised
Corporation Code

(3) Par value and no par value shares

* A par value share is one with specific value fixed in the articles of incorporation and appearing on the share
certificate.

* A no-par value share is one without any value appearing on the face of the share certificate. But a no-par
value share has always an “issued value” or “stated value” which may be fixed in the AOI or by BOD. The
minimum stated value of no-par share is P5
(4) Legal Capital

It is the portion of the paid in capital arising from the issuance of share capital which cannot be returned to the
shareholders in any form during the lifetime of the corporation. NOTE: Subscription receivable is ignored in
computing legal capital

Computation of legal capital:

Share capital – ordinary and preferred Xxx

Subscribed share capital – ordinary and preferred Xxx
Share dividends payable Xxx
Share premium – in excess of par or stated value (only for no par shares) Xxx
TOTAL LEGAL CAPITAL xxx

ISSUANCE AND SUBSCRIPTION OF SHARES

Two methods of accounting for share capital
a. Memorandum entry method – Under this method, a memorandum entry is to be made
when the corporation is authorized to issue shares of stocks. The company credits the share
capital when shares are issued.
b. Journal entry method – Under this method, a journal entry debiting Unissued Share
Capital and crediting Authorized Share Capital is made when the corporation is authorized to
issue shares of stocks. When shares are issued, the Unissued Share Capital account is then
credited.
Summary of Journal Entries
Transactions Memorandum method Journal Entry Method
Authorization of Shares No Entry Unissued Share Capital xxx
Authorized Share Capital xxx
Subscriptions Subscription Receivable xxx Subscription Receivable xxx
Subscibed Share Capital xxx Subscibed Share Capital xxx
Collections Cash xxx Cash xxx
Subsription Receivable xxx Subscription Receivable xxx
Issuance of Certificates Subscribed Share Capital xxx Subscribed Share Capital xxx
Share Capital xxx Unissued Share Capital xxx
Full payment upon acquisition of Cash xxx Cash xxx
shares Share Capital xxx Unissued Share Capital xxx

Measurement of Consideration
Type of Consideration Measurement
Cash Face Value
Non-cash assets or services General rule: Fair value of consideration received
If none: (1) Fair value of shares issued
(2) Par value of shares issued

Organization cost and expenses related to share capital

Accounting for organization cost – Organization costs, except for share issuance costs, shall
be recognized as expense in the first year of operations.
Accounting for share issuance costs – Stock issuance cost shall be debited in the following
order: (1) share premium from issuance; (2) share premium from previous issuance; (3)
Retained earnings
Delinquent Subscriptions
If a subscriber of shares does not pay on the date fixed by the board of directors, the
subscriptions is declared delinquent and the delinquent shares will be sold at a public
auction to a HIGHEST BIDDER.
HIGHEST BIDDER: person who is willing to pay the offer price of the delinquent shares for the SMALLEST
number of shares.

OFFER PRICE: it includes the balance due on the subscription, interest accrued on the subscription due, and
expenses of advertising and other costs of sale.

If there is no HIGHEST BIDDER, the corporation may purchase for itself the delinquent
shares and will be part of treasury shares.
Summary of Journal Entries
Transactions
Expenses were incurred related to Advances from sales of delinquent shares xxx
auction of subscribed shares Cash xxx
When sold to the highest bidder Cash xxx
Subscription Receivable xxx
Advances from sales of delinquent shares xxx
Interest income xxx
Issuance of share certificates Subscribed share capital xxx
Share capital xxx
When there is no highest bidder Treasury Shares xxx
and the corporation acquires the Subscription Receivable xxx
shares Advances from sales of delinquent shares xxx

TREASURY SHARES AND RETIREMENT

Treasury Shares are company’s own stock previously issued, reacquired but not cancelled.
Treasury shares may be accounted as follows:
(1) Cost method – under this method, treasury shares are debited at its acquisition cost.
Also, any subsequent reissuance and/or retirement of the treasury shares is credited at the
cost.
The cost is:
a.) Cash – face value
b.) Non-cash – carrying amount
(2) Par value method – under this method, the amount debited to treasury shares is equal to
the total par value of the treasury shares. In addition, share premium from the original
issuance is also debited. Any subsequent reissuance and retirement of the treasury shares
is also credited at par.
NOTE: In the Philippines, the standards require treasury shares to be accounted
exclusively under the cost method
Summary of Journal Entries
Transactions
Acquisition of Treasury Shares Treasury Shares (at cost) xxx
Cash xxx
Reissuance Reissuance at cost:
Cash xxx
Treasury Shares (at cost) xxx

Reissuance at above cost:

Cash xxx
Treasury Shares (at cost) xxx
Share premium – treasury shares xxx

*Any difference between the consideration received and the cost of

treasury shares shall be credited to share premium – treasury shares

Reissuance at below cost:

Cash xxx
Share premium – treasury shares xxx
Retained Earnings xxx
Treasury Shares (at cost) xxx

*Any difference between the consideration received and the cost of

treasury shares shall be debited to the following:
a. Share premium – treasury shares
b. Any excess to retained earnings

Retirement of Shares
Retirement of shares is known as cancellation of issued shares. In accordance with the trust
fund doctrine, before you retire shares, there should be an unrestricted balance of retained
earnings since before you retire shares, you are effectively reacquiring it first.
Summary of Journal Entries
Transactions
Retirement at perceived gain Share capital xxx
Share premium – original issuance xxx
Treasury Shares (at cost) xxx
Share premium – retirement of shares xxx

Retirement at perceived loss Share capital xxx

Share premium – original issuance xxx
Share premium – treasury shares xxx
Retained Earnings xxx
Treasury Shares (at cost) xxx
DONATED CAPITAL
Transactions credited to Donated Capital account are donations received from shareholders.
Donations received from parties other than shareholders are credited to appropriate income
account.
Donated shares are secured without cost and consequently, the entity’s assets, liabilities,
and equity are not affected but the number of outstanding shares is reduced.
Receipts of entity’s own shares, though recorded only through a memo, will decrease the
number of outstanding shares.
Summary of Journal Entries
Transactions
Upon receipt of donated shares Memorandum entry only
from shareholders
Upon sale Cash xxx
Share premium - Donated Capital xxx
Donated shares are retired or Share Capital xxx
canceled before their reissuance Share premium – Donated Capital xxx

Share split
Two forms of share split include:
1.) Split up – it is a transaction in which the original shares are cancelled and replaced
with a larger number of shares with a lower par value or stated value.
2.) Split down – it is the opposite of split up. It is a transaction in which the original shares
are cancelled and replaced with a lower number of shares but with the par or stated
value being increased
Summary of effect of share split
Split up Split down
No. of shares Increase Decrease
Par value per share Decrease Increase
Total shareholders’ equity Same Same

Rights Issue
Rights issue is granted to existing shareholders to enable them to acquire new shares at a
specified price during a specified period.
Accounting treatment
Issuance of rights No entry is necessary because the warrants are normally issued without
consideration.

The entity just needs to make a memorandum entry to show how many shares can
be purchased through the exercise of those rights.
Expiration of rights Only a memorandum entry is necessary
Exercise of rights A memorandum entry is prepared to reflect the reduction in number of shares
claimable as a result of the rights being exercised.

The exercise of rights result in the sales of shares, which is subsequently recorded
the usual way.
MULTIPLE CHOICE (THEORIES)
1. The net assets of a corporate entity is popularly known is
a. Contributed capital
b. Retained earnings
c. Shareholders’ equity
d. Legal capital

2. The par value is used to determine the share’s

a. maximum issue price
b. minimum issue price
c. fair value
d. market price

3. Contributed capital does not include

a. Share capital account
b. Share premium account
c. Retained earnings
d. All of these are included in contributed capital

4. When par value shares are issued, the excess of the proceeds over the par value is
credited to which of the following?
a. Share capital
b. Share premium
c. Retained earnings
d. Gain on issuance of shares

5. If shares are issued for noncash consideration, the shares issued shall be measured
by reference to which of the following?
a. Fair value of the noncash consideration
b. Carrying amount of the noncash consideration
c. Fair value of the shares
d. Par value of the shares

6. Subscription receivable from sale of shares which are not collectible within 12
months from the balance sheet shall be presented as a
a. Current asset
b. Non-current asset
c. Deduction from the related subscribed share capital under shareholders’ equity
section of the statement of financial position
d. Trade receivable

7. Outstanding shares are

a. shares that have been authorized by the state for issuance
b. shares held in treasury
c. shares in the hand of the shareholders
d. shares that are performing well on the stock market

8. Treasury shares are

a. Issued and Outstanding
b. Issued but not outstanding
c. Outstanding only
d. None of these
9. The total cost of treasury shares shall be reported as
a. Financial asset
b. Deduction from share premium
c. Deduction from retained earnings
d. Deduction from shareholders’ equity

10. When treasury shares are sold at a price above cost

a. A gain is credited
b. A loss is reported
c. A revenue account is credited
d. Share premium is increase

11. Loss from sale of treasury shares shall be charged to which of the following?
a. Loss on sale of treasury shares
b. Share premium from original issuance and then retained earnings
c. Share premium from treasury shares and then retained earnings
d. Retained earnings and then share premium from treasury shares

12. Loss on retirement of treasury shares shall be charged to which of the following?
a. Retained earnings
b. Share premium from treasury shares and then retained earnings
c. Share premium from treasury shares, share premium from original issuance and
then retained earnings
d. Share premium from original issuance, share premium from treasury shares and
then retained earnings

MULTIPLE CHOICE (PROBLEM SOLVING)

1. At the beginning of 2024, Pinoy Company was organized with authorized capital of
100,000, P200 par value shares

Jan. 15 Issued 10,000 shares at P280 per share

May 1 Issued 5,000 shares in exchange for land with a fair value of P1,200,000. On
this date, fair value of the shares was P250 per share

Nov. 23 Issued 2,000 shares for legal services when the fair value was P260 per
share

Q1: What amount should be reported as share capital?

a. 3,400,000
b. 3,600,000
c. 4,520,000
d. 4,570,000

Q2: What amount should be reported as share premium?

a. Zero
b. 1,000,000
c. 1,120,000
d. 1,170,000
2. At the beginning of 2019, Umberto Company issued 20,000 ordinary shares of P20
par value and 40,000 cumulative preference shares of P20 par value for a total of
P1,600,000. At this date, the ordinary share was selling for P36 and the cumulative
preference share was selling for P27.

Q1: What amount of the proceeds should be allocated to the preference shares?
a. 880,000
b. 960,000
c. 1,080,000
d. 1,200,000

Q2: What amount of the proceeds should be allocated to the ordinary shares?
a. 400,000
b. 640,000
c. 720,000
d. 800,000

Q3: What is the share premium from the issuance of preference shares?
a. Zero
b. 160,000
c. 200,000
d. 360,000

Q4: What is the share premium from the issuance of ordinary shares?
a. Zero
b. 240,000
c. 320,000
d. 400,000

3. At the beginning of 2018, Baker Company reported the following shareholders’ equity:

Share capital, P10 par, outstanding 450,000 shares P4,500,000

Share premium 1,800,000
Retained earnings 4,380,000

During 2018, the company had the following share transactions:

 Acquired 12,000 treasury shares for P540,000
 Sold 7,200 treasury shares at P50 per share
 Sold the remaining treasury shares at P41 per share.

What is the total amount of share premium on December 31, 2018?

a. 1,740,000
b. 1,783,200
c. 1,816,800
d. 1,855,200
4. Ghostbuster’s Company showed the following balances related to an issuance of
ordinary share capital:

Ordinary share capital, P50 par, 200,000 shares P10,000,000

Ordinary share premium 4,000,000

The company retired 2,000 shares of ordinary share capital

Q1: If the retirement price is P80, how much shall be debited to retained earnings?
a. Zero
b. 20,000
c. 60,000
d. 120,000

Q2: If the retirement price is P65, how much is the share premium arising from
retirement of share capital?
a. Zero
b. 10,000
c. 20,000
d. 60,000

5. Sherlock Company provided the following information at year end:

Preference share capital, P100 par P460,000

Share premium – Preference 161,000
Ordinary share capital, P10 par 1,050,000
Share premium – ordinary 550,000
Subscribed ordinary share 10,000
Retained earnings 380,000
Subscription receivable – ordinary 8,000
Treasury shares – common 12,000
Q1: What is the amount of legal capital?
a. 1,500,000
b. 1,520,000
c. 2,211,000
d. 2,231,000

Q2: Assume the same information except that the ordinary share has P10 stated
value, what is the amount of legal capital?
a. 1,520,000
b. 2,070,000
c. 2,211,000
d. 2,231,000
JOURNALIZING
Castiel Corp. was authorized to issue 500,000 ordinary shares with a par value of P20. The
following transactions relative to the share capital took place:

a. Received subscription for 125,000 shares at P25 receiving a down payment of 60%
b. The subscriber failed to pay his obligation, so his subscription was declared delinquent.
c. Paid delinquency sale expenses totaling P50,000
d. Received bids from the following:
Person 1 – 75,000
Person 2 – 80,000
Person 3 – 70,000
e. Received payment from the highest bidder and shares were issued accordingly.

1. Prepare the journal entries to record the foregoing transactions.

2. Assuming there were no bidders, prepare the journal entry to record the issuance of the shares
in the name of the corporation.

Answer:

(1)

a. Cash 1,875,000
Subscription receivable 1,250,000
Subscribed ordinary share capital 2,500,000
Share premium 625,000

b. Receivable from the highest bidder 1,250,000

Subscription receivable 1,250,000

c. Receivable from the highest bidder 50,000

Cash 50,000

e. Cash 1,300,000
Receivable from the highest bidder 1,300,000

Subscribed ordinary share capital 2,500,000

Ordinary share capital 2,500,000

(2)

Same journal entries from A to C

e. Treasury Shares 1,300,000

Receivable from the highest bidder 1,300,000

Subscribed ordinary share capital 2,500,000

Ordinary share capital 2,500,000
Honda Company provided the following data during the first year of operations:

a. Sold 30,000 preference shares, 12%, P100 par, at P140.

b. Sold 100,000 ordinary shares of P50 par at P55
c. Purchased and retired 10,000 preference shares at P120
d. Purchased 15,000 ordinary shares at P52 to be held as treasury
e. Sold 10,000 treasury ordinary shares at P60
f. Shareholders donated to the entity 20,000 ordinary shares when shares had a market price of
P60. One half of these shares were sold for P65
g. Net income for the year was P3,000,000

Prepare journal entries to record the transactions

a. Cash 4,200,000
Preference share capital 3,000,000
Share premium – preference shares 1,200,000

b. Cash 5,500,000
Ordinary share capital 5,000,000
Share premium – ordinary shares 500,000

c. Preference share capital 1,000,000

Share premium – preference shares 200,000
Cash 1,200,000

d. Treasury shares – ordinary shares 780,000

Cash 780,000

e. Cash 600,000
Treasury shares – ordinary shares 520,000
Share premium – treasury shares 80,000

f. *Memo entry* Received 20,000 ordinary shares from the

shareholders as donation
*Memo entry* Sold 10,000 donated ordinary shares

Cash 650,000
Donated capital – ordinary shares 650,000

g. Income Summary 3,000,000

Retained earnings 3,000,000
Toyota Company has two classes of share capital outstanding consisting of 12%, P100 par value
preference share and P50 par value ordinary share.

The entity reported the following balances at the beginning of the current year:

Preference share capital – 5,000 shares 500,000

Ordinary share capital – 50,000 shares 2,500,000
Share premium – preference shares 200,000
Share premium – ordinary shares 500,000
Retained earnings 2,000,000

The following data summarize the transactions for the current year:

1. Sold 20,000 ordinary shares at P50 per share

2. Purchased 5,000 ordinary shares at P60 per share to be held in treasury
3. A 2 for 1 share split for ordinary shares is effected
4. Sold 3,000 treasury ordinary shares at P40
5. Sold 15,000 ordinary shares at P35 per share
6. Shareholders donated 15,000 ordinary shares to the corporation. Subsequently, 10,000 donated
shares were reissued at P40 per share.
7. Net income for the year was P500,000

Prepare journal entries to record the transactions

1. Cash 1,000,000
Ordinary share capital 1,000,000

2. Treasury shares – ordinary shares 300,000

Cash 300,000

3. *memo entry* Issued 140,000 new ordinary shares with new

par value of P25, as a result of 2 for 1 split of 70,000 old
ordinary shares with par value of P50

4. Cash 120,000
Treasury shares – ordinary shares 90,000
Share premium – treasury shares 30,000

5. Cash 525,000
Ordinary share capital 375,000
Share premium – ordinary shares 150,000

6. *memo entry* Received 15,000 ordinary shares from

shareholders by way of donation

*memo entry* Sold 10,000 donated shares

Cash 400,000
Share premium – donated capital 400,000

7. Income Summary 500,000

Retained earnings 500,000
 SHAREHOLDERS’ EQUITY (PART 2)

BASIC CONCEPTS AND TYPES OF RETAINED EARNINGS

Retained earnings represent the cumulative profits and losses which are retained and not
yet distributed as dividends to shareholders.
Total retained earnings may be:

 Unappropriated retained earnings – represent that portion which is free and can be
declared as dividends to stockholders.
 Appropriated retained earnings – represent that portion which is restricted and
therefore not available for any dividend declaration unless the restriction is
subsequently reversed.
Types of Appropriation

 Legal appropriation – these are appropriations required by law as in the case of

treasury shares. Retained earnings must be appropriated to the extent of the cost of
treasury shares.
 Contractual appropriation – these are appropriations required by contract such as
appropriation for bond or preference share redemption.
 Voluntary appropriation is a matter of discretion on the part of management such as
appropriations for plant expansion or appropriations for contingencies.
NOTE: Whether legal, contractual or voluntary, the intent or purpose of the appropriation of retained earnings
is to limit the declaration of dividend. Funding is a different concept from appropriation

The appropriation of retained earnings is recorded as follows:

Retained earnings – unappropriated xxx
Retained earnings - appropriated xxx

NOTE: Appropriations of retained earnings DO NOT AFFECT SHAREHOLDERS’ EQUITY as well as TOTAL
RETAINED EARNINGS since both types of retained earnings comprise total retained earnings.

Negative balances in equity

 When the retained earnings has a debit balance, it is called a “deficit”. This is
presented as a deduction from total shareholders’ equity
 When total shareholders’ equity has a negative balance, this is described as “capital
deficiency”
DIVIDENDS
Dividends are resources distributed to entity’s shareholders. Dividends may be in the form of
cash, non-cash assets, short-term and long-term liabilities or shares of stocks. If the entity
has a deficit, it is illegal to pay dividends.
Shares entitled to dividends
Only shares issued and outstanding are entitled to dividends. Issued and outstanding shares
may be determined as follows:
No. of shares Amount
Number of share capital issued xxx P xxx
Add: Subscribed share capital xxx xxx
Total xxx xxx
Less: Treasury shares (*at par) xxx xxx
Total outstanding shares xxx xxx
*for the purpose of calculating the amount of issued and outstanding shares, the treasury shares shall be
deducted at par instead of cost.

Relevant dated in accounting for dividends

 Date of declaration – the date when the board of directors formally announces the
distribution of dividends. This is the date when the liability for dividend must be
recognized (IFRIC 17).
 Date of record – the date on which the stock and transfer book of the corporation is
closed for registration. Only those who are listed as of this date is entitled to receive
dividends.
 Date of payment or distribution – the date when the dividends declared are distributed to
the shareholders who are entitled to the dividends.
NOTE: Generally, only the date of declaration and date of payment requires journal entries. THERE IS NO
JOURNAL ENTRY INVOLVE ON DATE OF RECORD.

Types of Dividends

 Cash Dividends – it is the most common form of dividends. It can be declared as a

certain amount per share or a certain percentage of the par value shares.
 Property Dividends (Dividends in kind) – these are dividends in the form of non-cash
assets (e.g. inventory, investment in shares of another entity, property plant and
equipment and etc.)

The accounting for property dividends has two accounting issues, namely:
 Accounting for property dividends payable (The liability)
 Accounting for non-cash asset to be distributed as property dividend (The asset)
Measurement of property dividends payable Measurement of noncash asset distributed
The dividend payable is initially recognized at the fair An entity shall measure a non-current asset classified
value of the non-cash asset on date of declaration for distribution to owners at the lower of carrying
and is increased or decrease as a result of the amount and fair value less cost to distribute.
change in fair value of the asset at year end and date
of settlement. Accordingly, if the fair value less cost to distribute is
lower than the carrying amount of the asset at the
The offsetting debit or credit is through equity or end of the reporting period, the difference is
directly to retained earnings. accounted for as impairment loss.

When an entity settles the dividend payable, the

difference between the carrying amount of the
property dividend payable and the carrying amount of
 the asset distributed shall be recognized in profit or
loss.

 Share dividends (Bonus Issue) – stock dividend is distribution of the earnings of the entity
in the form of the entity’s own shares. Thus, declaration of this type of dividend in effect
results to capitalization of retained earnings.
NOTE: Dividend payable in stock or stock dividend payable is not a liability but an addition to the share
capital in the shareholders’ equity.

Share dividends are accounted for as:

a.) If what is declared as stock dividends are unissued shares, you need to determine first
whether it is a large stock dividends or small stock dividends.
* If the stock dividend is 20% or more, it is considered a large stock dividend. The par value
or stated value is capitalized or debited to retained earnings.
* If the stock dividend is less than 20%, it is considered a small stock dividend. The fair value
of the share on the date of declaration is capitalized.

 Scrip or liability dividends (deferred cash dividends) – this are measured at face or
present value of the dividend. If scrip dividends bear interest, the interest portion of the
cash payment should be debited to interest expense and should not be treated as
dividends
 Liquidating Dividends – liquidating dividend is a distribution or return of capital to
shareholders. This type of dividend can legally be paid under the following
circumstances (1) When the entity is undertaking a complete dissolution or liquidation.
(2) When the entity is engaged in the exploitation of natural resources.

Preference Shares
Preference shares can be:
a.) Preference over assets – preference shares are settled first upon corporate liquidation
and after the creditor’s claims. Any remaining amount is paid to the ordinary shareholders. If
the preference shares are not preferred as to assets, the remaining amount after settlement
of liability is shared PROPORTIONATELY by preference shares and ordinary shares.
b.) Preference over dividends – when dividends are declared, preference shares are paid
first before the ordinary shareholders.
Preference over dividends may be:

 A non-cumulative preference share is one on which the right to receive dividends is

forfeited in any one year in which dividends are not declared.
 A cumulative preference share is one on which any undeclared dividends accumulate
each year until paid. Accordingly, the cumulative preference share is entitled to any
dividends in arrears.
 A non-participating preference share is one that is entitled to receive only the
dividends equal to the fixed preference rate.
 A participating preference share is one which is entitles to receive dividends in
excess of the basic or fixed dividend rate. Participating preference share may be fully
participating with ordinary share on a pro-rata basis or participating only to a certain
 amount or percentage. However, before the preference share can participate, the
ordinary share should receive first an amount equal to the basic preference rate,
meaning preference rate times the par value of the ordinary share outstanding.
NOTE: (1) In the absence of specific designation, preference share is assumed to be non-cumulative and non-
participating. (2) If there are 2 or more classes of participating preference shares, use the lowest participation
rate to determine the basic dividend the ordinary share should receive first.

MULTIPLE CHOICE (THEORIES)

1. Which shareholders’ equity account is used to pay dividends?
a. Common stock
b. Treasury stock
c. Accumulated deficit
d. Retained earnings

2. Dividend (other than share dividend) is recognized as liability on the

a. date of declaration
b. date of record
c. reporting date
d. date of payment

3. A journal entry is not made on which of the following dates?

a. date of declaration
b. date of record
c. date of payment
d. An entry is made on all of these

4. I. If the share dividends declared is less than 20%, retained earnings shall generally
be debited equal to the fair value of the shares on the date of declaration
II. If the share dividends declared is 20% or more, retained earnings shall be debited
equal to the par value of the shares
a. Only statement I is true
b. Only statement II is true
c. Both statements are correct
d. None of the statements are correct

5. The balance in “Stock Dividend Payable” account should be reported as a(n)

a. Current liability
b. Contra-retained earnings account
c. Addition to contributed capital
d. Contra-asset account
JOURNALIZING AND PROBLEM SOLVING
On December 31, 2024, Zebra Company showed the following shareholders’ equity:

Share capital, P100 par, 100,000 shares authorized, 50,000 shares issued 5,000,000
Share premium 1,000,000
Retained earnings 2,000,000
Treasury shares, 5,000 shares at cost 600,000

On December 31, 2024, Zebra Company declared a cash dividend of P30 per share to
shareholders of record on January 15, 2025 and payable on January 31, 2025

Prepare journal entry on December 31, 2024, January 15, 2025 and January 31, 2021

Answer:
December 31, 2024

Retained earnings 1,350,000

Dividends Payable 1,350,000

January 15, 2025

No entry

January 31, 2025

Dividends Payable 1,350,000

Cash 1,350,000

On October 1, 2020, Greece company declared a property dividend of machinery payable on April
1, 2021.

The carrying amount of the machinery is P4,000,000 on October 1, 2020.

The machinery had the following fair value:

October 1, 2020 3,800,000

December 31, 2020 3,700,000
April 1, 2021 3,500,000

Prepare journal entries for 2020 and 2021 in connection with the property dividend.

October 1, 2020

Retained earnings 3,800,000

Property dividend payable 3,800,000

December 31, 2020

Property dividend payable 100,000

Retained earnings 100,000

Impairment loss 300,000

Machinery 300,000

April 1, 2021

Property dividend payable 200,000

Retained Earnings 200,000
Property dividend payable 3,500,000
Loss on distribution of property dividends 200,000
Machinery 3,700,000

Valerie Company showed the following data:

Share capital, par value P100, 50,000 shares issued 5,000,000

Share premium 200,000
Retained earnings 2,000,000
Market value of shares on declaration date 150
Market value of shares on distribution date 170

For each of the following, prepare journal entries on the date of declaration and date of payment:
1. A 20% share dividend is declared
2. A 10% share dividend is declared

(1) 20% share dividend (Large share dividend)

Date of declaration:

Retained earnings 1,000,000

Share dividends payable 1,000,000

Date of payment:

Share dividends payable 1,000,000

Share capital 1,000,000

(2) 10% share dividend (Small share dividend)

Date of declaration:

Retained earnings 750,000

Share dividends payable 500,000
Share premium 250,000

Date of payment:

Share dividends payable 500,000

Share capital 500,000
Taylor Company had sufficient retained earnings in 2018 as a basis for dividends but was
temporarily short of cash. The company declared a dividend of P500,000 on September 1, 2018,
and issued promissory notes to shareholders in lieu of cash.

The notes which were dated September 1, 2018, had a maturity date of August 31, 2019 and a
12% interest date.

Prepare journal entries for the year 2018 and 2019

September 1, 2018

Retained earnings 500,000

Scrip dividends payable 500,000

December 31, 2018

Interest Expense 20,000

Scrip dividends payable 20,000

August 31, 2019

Scrip dividends payable 520,000

Interest expense 40,000
Cash 560,000

OTSO Inc. declared P2,400,000 cash dividends to its preference and ordinary shareholders out of
its unappropriated retained earnings in 2022. No dividends have been declared since 2020.
OTSO’s shareholders’ equity before the dividend declaration is as follows:

10% Preference share capital P6,000,000

Ordinary share capital 3,000,000
Retained earnings 4,000,000
Ordinary share premium 800,000

Requirement: Compute the amount of dividends to be allocated to ordinary shareholders and

preference shareholders under the following assumptions:

(a) The preference shares are non-cumulative and non-participating

(b) The preference shares are cumulative but not participating
(c) The preference shares are non-cumulative and fully participating
(d) The preference shares are cumulative and fully participating
(e) The preference shares are cumulative and participating only up to 15%
(f) There are two types of preference shares and they are as follows:
* 10% preference share capital, P300 par, cumulative and participating P6,000,000
* 12% preference share capital, P150 par, noncumulative and participating 1,500,000
 BOOK VALUE PER SHARE (BVPS)

BASIC CONCEPTS
Book value per share is the amount that would be paid on each preference share and
ordinary share assuming the entity is liquidated and the amount available to shareholders is
exactly the same amount reported as shareholders’ equity.

FORMULA FOR THE COMPUTATION OF BOOK VALUE PER SHARE

When there is only one class of shares: When there are two or more classes of
shares:

Book value per preference shares:

Total Shareholders ′ 𝐸𝑞𝑢𝑖𝑡𝑦 Preference Shareholders′ 𝐸𝑞𝑢𝑖𝑡𝑦
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 =
Number of Outstanding Shares Number of Outstanding Shares

Book value per ordinary shares:

Ordinary Shareholders′ 𝐸𝑞𝑢𝑖𝑡𝑦
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 =
Number of Outstanding Shares

Reminder!!!

 Do not deduct subscription receivable from total shareholders’ equity.

 Treasury shares are considered retired for book value per share computation

ACCOUNTING PROCEDURES
For purposes of apportionment between the preference share and ordinary shares, the
following procedures should be observed:
1. An *amount equal to the par or stated value is allocated to the preference share and
ordinary share.
NOTES!!!

*amount equal to the par or stated value:

Ordinary Shareholders’ Equity = Ordinary Share Capital + Subscribed Ordinary Share Capital

Preference Shareholders’ Equity = Preference Share Capital + Subscribed Preference Share Capital
2. Any balance of the shareholders’ equity in excess of the par or stated value is then
apportioned taking into account the liquidation value and dividend rights of the
preference shareholders.
NOTES!!!

*in excess of the par or stated value consists of the following

1.) Share premium
2.) Retained Earnings
3.) Other comprehensive income and losses (OCI and OCL)

*Liquidation value is the amount which the preference shareholders normally receive upon the liquidation of the
corporation. The liquidation value may be more than the par or stated value. In the absence of a liquidation value, the
preference shareholders shall receive an amount equal to the par or stated value

*Dividend rights of the preference shareholders:

1.) A non-cumulative preference share is one on which the right to receive dividends is forfeited in any one year in which
dividends are not declared.
2.) A cumulative preference share is one on which any undeclared dividends accumulate each year until paid.
3.) A non-participating preference share is one that is entitled to receive only the dividends equal to the fixed preference
rate.
4.) A participating preference share is one which is entitled to received dividends in excess of the basic or fixed dividend
rate. Participating preference share may be fully participating with ordinary share on a pro-rata basis or participating only to
a certain amount or percentage.

 If there are 2 classes of preference shares, both of which are participating, the lower rate shall be used for the
basic dividend to be given to ordinary shares before participation
 The balance for participation is allocated to various classes of shares pro-rata based on aggregate par values
 If there is deficit, the preference shareholder would share on a pro-rata basis with the ordinary shares.

MULTIPLE CHOICE (THEORIES)

1. Which of the following is considered from the denominator used in computing book
value per share?

I. Subscribed but unpaid shares

II. Issued shares
III. Treasury shares
a. I and II
b. II and III
c. I and III
d. I, II, and III

2. Which of the following is incorrect in computing book value per share?

a. Par value is the liquidation value of preference shares in the absence thereof
b. For book value per share computation, treasury shares are assumed retired and
subscription receivable are ignored
c. Residual equity theory supports the computation of book value per share when an
entity has more than one class of share
d. If there are 2 or more classes of preference shares which are both participating, the
highest rate shall be used in allocating a one-year dividend for ordinary shares before
participation

3. Which of the following shareholder rights is most commonly enhanced in an issue of

preference shares?
a. The right to vote for the board of directors
b. The right to maintain one’s proportional interest
c. The right to receive a full cash dividend before dividends are paid to other classes
of share capital
d. The right to vote on major corporate issues
PROBLEM SOLVING
1. Data relating to the shareholders’ equity of Carlo Co. during December 31 are as
follows:
Ordinary share capital, P50 par, 200,000
shares issued P10,000,000
Subscribed ordinary share capital 1,000,000
Share premium 2,500,000
Subscription receivable (1,200,000)
Retained earnings 4,900,000
Revaluation surplus 620,000
Unrealized loss on FVTOCI securities (400,000)
Treasury shares, at cost, 20,000 shares (1,200,000)
Total shareholders’ equity P16,220,000

How much is the book value per ordinary share?

a. P87.10
b. P81.10
c. P79.18
d. P73.73

2. Equity balance of Joyce Company on December 31, 2024 follow:

10% preference share capital, 30,000

shares, P100 par 3,000,000
Ordinary share capital, 50,000 shares,
P100 par 5,000,000
Share premium 1,000,000
Retained earnings 2,000,000

The preference shares have a call price of 120, a liquidation price of 115 and
dividends have not been paid for 3 years. The book value per preference share
should be
a. 125
b. 130
c. 145
d. 110

3. On December 31, 2024, Danalene Company had 50,000 ordinary shares of P100 par
value and 30,000 shares of P100 par value 10% noncumulative preference share
capital outstanding. The total shareholders’ equity on December 31, 2024 amounted
to P9,000,000. The preference shareholders have a liquidation value of P105 per
share and preference dividends have been paid up to December 31, 2024. The book
value of ordinary share on December 31, 2024 should be
a. 117
b. 109
c. 120
d. 114
4. A company provided the following information on December 31, 2020:

15% non-cumulative and participating

preference share capital, P300 par
value P4,000,000
10% cumulative and participating
preference share capital, P100 par
value 2,000,000
Ordinary share capital, P100 par value 6,000,000
Share premium 4,000,000
Retained Earnings 5,400,000

Dividends are in arrears for four years since 2017. What is the book value per
ordinary share?
a. P171.67
b. P174.17
c. P179.17
d. P186.67

5. An entity provided the following on December 31, 2024:

Preference share capital, 10%

cumulative and non-participating,
45,000 shares, P100 par 4,500,000
Ordinary share capital P100, 60,000
shares 6,000,000
Subscribed ordinary share capital,
30,000 shares 3,000,000
Subscription receivable 750,000
Share premium 4,500,000
Retained earnings 7,200,000
Treasury ordinary shares, 15,000
shares 1,200,000

Preference dividends are in arrears for 5 years. What is the book value per ordinary
share?

a. 230
b. 192
c. 383
d. 224
 EARNINGS PER SHARE (EPS)

BASIC CONCEPTS
Earnings per share (EPS) represents the amount expected to be received by an
ordinary shareholder each year as a return on investment. Basically, EPS is a profitability
ratio computed to show the profit or loss earned or incurred by each ordinary share.
The presentation of EPS is required for:

 Entities whose ordinary shares are publicly traded

 Entities that are in the process of issuing ordinary shares or potential ordinary shares
in the public securities market.
Simply stated, public entities are required to present EPS. Non-public entities are not
required but encouraged to present earnings per share.

TYPES OF EARNINGS PER SHARE (EPS)

Note: Both types of EPS are presented in the financial statements with equal prominence
1.) Basic earnings per share (Basic EPS)
2.) Diluted earnings per share (Diluted EPS)

BASIC EARNINGS PER SHARE (Basic EPS)

Basic EPS is computed using the following formula:
Profit or Loss less Preferred Dividends
𝐵𝑎𝑠𝑖𝑐 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 =
Weighted Average Ordinary Shares Outstanding

NOTES FOR THE USE OF FORMULA

Numerator (Profit or Loss less Preferred Dividends) Denominator (Weighted Average Ordinary Shares)

 Profit or loss should be after tax  Outstanding shares = Issued shares + Subscribed
 Preferred dividends are to be deducted as follows: shares – Treasury Shares
a.) If the preference are CUMULATIVE, ONE  The denominator used is the WEIGHTED
YEAR DIVIDEND is deducted, WHETHER AVERAGE number of outstanding shares. This
DECLARED OR NOT means, a time-weighted factor is applied to
b.) If the preference shares are NON- compute the weighted average amount. Shares
CUMULATIVE, only the DIVIDENDS DECLARED are usually time-weighted from the date the
during the period is deducted. consideration in receivable (generally the date of
DIVIDEND IN ARREARS are ignored for EPS issue)
computation purposes  When ordinary shares are issued without a
corresponding change in resources, the basic
EPS as well as diluted EPS and the weighted
average number of outstanding shares during the
period and all periods presented are adjusted for
retrospectively.
DILUTED EARNINGS PER SHARE (Diluted EPS)
Diluted EPS is the amount attributable to every share of ordinary share outstanding during
the period while giving effect to all dilutive potential ordinary shares outstanding during the
period.
Stated otherwise, potential ordinary shares are considered when computing for diluted EPS
only when they are dilutive. They are dilutive if, when exercised, they decrease basic
earnings per share or increase basic loss per share.
The three major types of potential ordinary shares are:
a. Convertible bonds payable
b. Convertible preference shares
c. Share option and warrant
Computing diluted earnings per share uses the “as-if assumption”; As if the convertible
preference shares or convertible bonds have been converted or as if the options and
warrants have been exercised.
The conversion or exercise is assumed to have taken place on the date the potential
ordinary shares first became outstanding, regardless of the date of actual conversion or
exercise.

CONVERTIBLE BONDS PAYABLE

The convertible bonds were assumed to have been
𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝐿𝑜𝑠𝑠 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 + converted into additional ordinary shares. Therefore,
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒, 𝑛𝑒𝑡 𝑜𝑓 𝑡𝑎𝑥 if that is the assumption, interest expense after tax
𝐷𝐸𝑃𝑆 =
Weighted Average Outstanding Shares + incurred on the bonds are added back to profit or
Potential Ordinary Shares loss.

CONVERTIBLE PREFERENCE SHARES

If there are convertible preference shares, the
𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝐿𝑜𝑠𝑠 preference shares are assumed to be converted into
𝐷𝐸𝑃𝑆 = ordinary shares. Accordingly, the net income is not
Weighted Average Outstanding Shares +
Potential Ordinary Shares reduced by the amount of preference dividend. The
number of ordinary shares outstanding is increased
by the number of ordinary shares that would have
been issued upon conversion of the preference
shares.

SHARE OPTION AND WARRANT

Options and warrants are included in the
𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝐿𝑜𝑠𝑠 computation of diluted earnings per share only when
𝐷𝐸𝑃𝑆 = they are dilutive. They are dilutive when the exercise
Weighted Average Outstanding Shares +
Potential Ordinary Shares price is less than the average market price of the
ordinary share.

In computing the potential ordinary shares for diluted

EPS computation, the treasury share method is to be
used which assumes the following:

 The options or warrants are exercised

 The proceeds received from the exercise are used
to purchase treasury shares at the average market
price
 The difference between treasury shares assumed
to have been purchased and the option shares
represents the incremental shares or potential
ordinary shares.
MULTIPLE POTENTIAL ORDINARY SHARES
When there are two or more potential ordinary shares, they need to be ranked according to
their dilutive effect on basic EPS. The entity shall provide selection or combination of
securities producing the lowest EPS.
The following steps shall be followed in computing Diluted EPS:
Step 1: Compute the Basic EPS
Step 2: Rank securities according to which of them is most dilutive (i.e. producing the least
incremental EPS). They are included in the computation step by step according to their
ranking.
Usually, the most dilutive securities are options and warrants since they affect only the
denominator of the formula but not the numerator. The following are the computation of the
incremental EPS generated by each security, to be used for their ranking
A. Options and warrants – When exercise price < market price
B. Convertible bonds – After tax interest expense / Potential ordinary shares
C. Convertible preference shares – Preferred dividends / Potential ordinary shares
NOTE!!!
If any time the dilutive EPS exceeds the basic EPS, the entity discontinues considering further potential ordinary shares and
the lowest amount computed is the amount presented as diluted EPS.

MULTIPLE CHOICE (THEORIES)

1. PAS 33 titles as “Earnings per Share” is mandatory for
I. Public entities
II. Non-public entities
a. I only
b. II only
c. Both I and II
d. Neither I nor II

2. Earnings per share shall be computed on the basis of

a. Ordinary shares outstanding at the end of the year
b. Ordinary shares outstanding at the beginning of the year
c. Ordinary shares outstanding at the middle of the year
d. Average ordinary shares outstanding during the year

3. Options and warrants are dilutive if

a. The exercise price is lower than the average market price
b. The exercise price is higher than the average market price
c. The exercise price is equal to the average market price
d. The option shares represent 20% of the ordinary shares actually outstanding
4. I. In computing basic earnings per share, the amount of preference dividends on non-
cumulative preference shares shall be deducted from net income only when declared.

II. In computing basic earnings per share, the amount of the required preference
dividends on cumulative preference share for the period shall be deducted from net
income whether declared or not.

Which is/are correct?

a. I only
b. II only
c. Both I and II
d. Neither I nor II

5. In calculating earnings per share, which of the following should not be considered?
a. The weighted average number of ordinary shares outstanding
b. The amount of dividends declares on cumulative preference shares
c. The amount of cash dividends declared on ordinary shares
d. The number of ordinary shares resulting from the assumed conversion of
debentures outstanding.

6. In the diluted earnings per share computation, when the exercise price of the options
or warrants exceeds the average price, the comparison would be
a. Fairly present diluted earnings per share on a prospective basis
b. Fairly present the maximum potential dilution of diluted earnings per share on a
prospective basis
c. Reflect the excess of the number of shares assumed over the number of shares
assumed reacquired as the potential dilution of earnings per share
d. Be antidilutive

MULTIPLE CHOICE (PROBLEM SOLVING)

1. On January 1 of the current year, Stephanie Company had 200,000 issued and
outstanding ordinary shares. The entity had the following transactions during the year:

March 1: Issued 15,000 ordinary shares

April 1: Declared 20% bonus issue
July 1: Reacquired 10,000 ordinary shares to be held in treasury
October 1: Reissued 4,000 treasury shares

The weighted average ordinary shares in computing for the earnings per share would
be:
a. 251,000
b. 250,000
c. 230,000
d. 188,000
2. On January 1 of the current year, Solomon Company had 240,000 issued ordinary
shares and 220,000 outstanding ordinary shares. The entity had the following
transactions during the year:

March 1: Issued 12,000 ordinary shares

March 30: Completed a 4 for 1 share split for the ordinary shares
April 1: Reissued 9,000 of the treasury shares
October 1: Reissued 6,000 treasury shares

The weighted average ordinary shares in computing for the earnings per share would
be:
a. 928,250
b. 926,750
c. 760,250
d. 692,500

3. On December 31, Noah Co. had 40,000 weighted average outstanding ordinary
shares. During the year, Noah Co. reported a net income of P3,000,000

I. Assuming there were no preference shares issued, the basic earnings per share
should be reported at P75
II. Assuming there were 10,000 shares of 10%, P50 par, cumulative preference
shares, the basic earnings per share should be reported at P73.57

Which is/are correct?

a. I only
b. II only
c. I and II
d. None of the choices

4. On January 1, Albero Co. has 120,000 outstanding ordinary shares. During the year,
Albero Co. reported net income of P3,000,000. Income tax rate is 30%. In addition,
Albero Co. has P1,800,000 (10%) bonds, convertible into 9,000 ordinary shares.

I. The basic earnings per share should be reported at P25

II. Assuming the bonds were issued on January 1 and no conversions were made
during the year, the diluted earnings per share should be reported at P24.23

a. Only statement I is true

b. Statements I and II are true
c. All statements are false
d. Only statement II is true

5. On January 1, Kim Co. has 200,000 outstanding ordinary shares. During the year,
Kim Co. reported a net income of P4,000,000. Income tax rate is 30%. In addition,
Kim Co. has 5,000 issued and outstanding P100 par, cumulative preference shares.
The preference shares have a 10% fixed rate and each share is convertible into 5
ordinary shares.

Q1: How much is the basic EPS for the year?

a. P19.75
b. P19.39
c. P18.29
d. P17.78
 Q2: How much is the diluted EPS for the year assuming preference shares were
issued on January 1 and no conversions were made during the year?
a. P19.75
b. P19.39
c. P18.29
d. P17.78

6. Montina Company had 56,000 ordinary shares outstanding on January 1, 2021, which
remained unchanged throughout 2021 and 2020. Certain executives were given
options to purchase 9,000 shares of the company’s ordinary stock at P70 per share.
During 2021, the average market price of an ordinary share was P105 per share.

What is the total number of shares that will be used to calculate diluted earnings per
share in 2021?
a. 50,000
b. 55,000
c. 59,000
d. 62,000

7. GALACTUS Company reported the following on December 31, 2024:

Common stock 110,000 shares

Convertible, non-cumulative preferred stock 20,000 shares
10% convertible bonds payable P2,000,000

Share options:
Share options to purchase 20,000 shares at P15 were outstanding. Average market
price of Galactus’ share was P20 during 2024.

Convertible, non-cumulative preferred stock:

The company paid the annual dividend of P5 on the preference share. Each
preference share are convertible into two common stocks.

10% convertible bonds payable:

The 10% bonds are convertible into 30,000 common stocks.

The net income for 2024 is P650,000. The tax rate is 30%.

What amount should be reported as diluted earnings per share?

a. P4.19
b. P4.27
c. P4.78
d. P5.00