Accounting 3 & 4
Module 7 ACCOUNTING FOR SHARE CAPITAL (CAPITAL STOCK)
Definition of Terms
To facilitate the discussion of the different share capital (capital Stock) transactions, the following terms
related to share capital (capital stock) are defined:
Authorized Share Capital (Authorized Capital Stock). It is the amount of shares (stocks) stated in the
corporate charter as authorized by the government to be issued.
Outstanding Share Capital (Outstanding Capital Stock). Amount of shares duly issued and remain in the
hands of the stockholders.
Unissued Share Capital (Unissued Capital Stock). The amount of shares not yet subscribed nor paid-up
and still with the corporation. The difference between the authorized shares and the outstanding
shares.
Subscribed Share Capital (Subscribed Capital Stock). Amount of shares covered by subscriptions and are
not regarded outstanding until full payment of the amount subscribed is received.
Subscription Receivable. Amount of contract price collectible from the subscriber.
Paid-up Share Capital (Paid-up Capital Stock). It is the portion of subscribed shares which full payment is
already received.
Share or stock. One of the units into which the share capital or capital stock is divided.
Certificate of Shares (Certificate of Stock). A written evidence of the holder’s ownership of shares.
Par Value. Represents the amount of cash or its equivalent actually invested.
Par Value Shares (Par Value Stocks). Shares the amount of which are stated in the certificate of shares
and in the articles of incorporation.
No Par Value but with Stated Value Share. One with nominal value in the articles of incorporation but
not on the face of the certificate of share.
No Par and No Stated Value Share. One with no nominal value in either articles of incorporation or on
the certificate of share.
Ordinary Share (Common Stock). A kind of share which exercises no special preference over other kind
of shares. When a corporation issues only one kind of share, it is ordinary share.
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Preference Share (Preferred Stock). A kind of share which has special preference over ordinary share. Its
holder has a priority over the dividends of the corporation and asset distribution upon corporate
liquidation.
ACCOUNTING FOR PAR VALUE SHARE
Authorization of Share Capital
Upon the corporate formation, a corporation is authorized in its charter to issue a certain number of
shares. It may issue one kind of share which is ordinary share (common stock) or may issue both
ordinary shares and preference shares (preferred stock). However, the amount of stocks it can be issued
should not exceed the authorized number stated in its charter regardless of whether it has one or two
kinds of shares. It does not necessarily mean, however, that a corporation should issue all of the shares
it is authorized. It may issue only a portion of its authorized share capital and keep the remainder until a
future date when it needs to sell additional shares without filing another application for the right to
issue additional shares.
For example, a corporation which is authorized to issue Php1,000,000 shares may issue only Php500,000
for its initial operation. It may keep the remaining shares and if it needs additional capital, it may issue
the remaining shares without reapplying for the right to issue more shares.
When a corporation receives its charter, two methods of recording can be used: the memorandum entry
method and the journal entry method. For example, 10,000 ordinary shares at Php100 par value is
authorized.
Memorandum Entry Method
If the memorandum entry method is used, a memorandum is written across the top of the Ordinary
Share account as shown below:
________________ ____________Ordinary Share_________________________________
Authorized on __(date)_____ to issue 10,000 shares of Php100 par value
Journal Entry Method
Unissued share capital
Authorized share capital
Php1,000,000
Php1,000,000
Subscription of Shares
Usually shares are issued through subscription. If a share is issued by means of subscription, the
subscriber signs a blank subscription in which the number of shares he subscribed and the amount of
payment, which is either in a lump sum amount or in installment, are stated.
When a corporation accepts the subscription of the prospective shareholder, it actually acquires asset,
that is, the right to receive payment from the subscriber, and at the same time, the shareholders’ equity
is increased by the amount the subscriber agreed to pay.
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This increase in assets and shareholders’ equity is recorded as follows:
Subscription Receivable – Ordinary Share
Subscribed Ordinary Shares
Phpxxx
Phpxxx
When both ordinary share and preference share are issued through subscriptions, separate subscription
receivable and subscribed share accounts should be kept for each kind of share issued.
For example, Leen Martin subscribed to 1,000 shares of Php100 par value of ordinary shares and 500
shares of Php50 par value preference shares. The entry to record this transaction would be:
Subscription Receivable - Ordinary Share
Subscription Receivable - Preference Share
Subscribed Ordinary Shares
Subscribed Preference Shares
To record the subscriptions received.
(OS=1,000x100; PS=500x50)
Php100,000
25,000
Php100,000
25,000
Collection of Receivables
Subscription receivable account is a temporary account. It will be reduced into cash or other assets
when the subscriber paid the amount of shares he subscribed. The payment of subscriptions may be in
one payment or in installment.
In our previous example, if Leen Martin paid her account in full, the entry is:
Cash
Php125,000
Subscription Receivable – Ordinary Share
Subscription Receivable – Preference Share
To record the full collection of subscription receivable.
Php100,000
25,000
Suppose Leen Martin paid her account in two equal installments, the entries would be:
Cash
Cash
Php62,500
Subscription Receivable – Ordinary Share
Subscription Receivable – Preference Share
To record the partial collection of subscription receivable.
62,500
Subscription Receivable – Ordinary Share
Subscription Receivable – Preference Share
To record the collection of subscription receivable balance.
Php 50,000
12,500
50,000
12,500
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Issuance of Share Certificate
Share certificate is an evidence of the shares purchased by a shareholder from a corporation. When
payment to the subscription is already completed, the share certificate is issued to the shareholder.
For example, upon completion of payments of Leen Martin, she is issued the corresponding share
certificate. The entry is:
Memorandum Entry Method
Subscribed Ordinary Shares
Php100,000
Subscribed Preference Shares
25,000
Ordinary Shares
Preference Shares
To record the issuance of share certificate.
Php100,000
25,000
Journal Entry Method
Subscribed Ordinary Shares
Php100,000
Subscribed Preference Shares
25,000
Unissued Ordinary Shares
Unissued Preference Shares
To record the issuance of share certificate.
Php100,000
25,000
Selling Shares for Cash
When shares are sold for cash, share certificates are immediately issued. For example, a prospective
shareholder bought 100 ordinary shares at Php100 par value. The entry is:
Memorandum Entry Method
Cash
Php10,000
Ordinary Shares
Php10,000
To record the sale of 100 ordinary shares a tPhp1 par value.
Journal Entry Method
Cash
Php10,000
Unissued Ordinary Shares
Php10,000
To record the sale of 100 ordinary shares at Php100 par value.
Exchanging Shares for Assets Other than Cash
Shares can also be issued in exchange for assets other than cash. Assets exchanged for shares are
recorded at its fair market value (direct measurement). If, however, the fair market value of the asset
received is not known, then it will be recorded at the fair market value of the shares issued (indirect
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measurement). For example, an interested person exchanged his piece of land with fair market value of
Php100,000 and a building worth Php120,000 for 2,200 ordinary shares with par value of Php100. The
entry is:
Memorandum Entry Method
Land
Php100,000
Building
120,000
Ordinary Shares
To record the issuance of 220 ordinary shares in exchange
for land and building.
Php220,000
Journal Entry Method
Land
Php100,000
Building
120,000
Unissued Ordinary Shares
To record the issuance 220 ordinary shares in exchange
for land and building.
Php220,000
Organizational Costs
Organizational costs include costs of organizing the corporation such as costs of printing shares, legal
fees, promoters’ fees, and other cost incurred in its organization. Organizational Cost is an intangible
asset of the business, which is written off in the early years of the corporation. It is presented in the
statement of financial position under the intangible asset section.
A corporation may issue shares to its promoters in exchange for the services they rendered to get the
corporation organized. For example, 100 shares of 100 par value were issued to a promoter. The journal
entry is:
Memorandum Entry Method
Organization Cost
Php10,000
Ordinary Shares
To record the issuance of 100 shares to corporate promoter.
Php10,000
Journal Entry Method
Organization Cost
Php10,000
Unissued Ordinary Shares
To record the issuance of 100 shares to corporate promoter.
Php10,000
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Share Premium
When shares are sold and issued at a price above the par value, the share is issued at a premium.
Premium is an amount in excess of par value. It is not considered gain but a part of the investment of
the shareholder. For example, if an investor paid Php110 for 1,000 ordinary shares with 100 par value,
the entry would be:
Memorandum Entry Method
Cash
Php110,000
Ordinary Shares
Php100,000
Premium on Ordinary Shares
10,000
To record issuance of 1,000 shares at Php10 premium per share.
Journal Entry Method
Cash
Php110,000
Unissued Ordinary Shares
Php100,000
Premium on Ordinary Shares
10,000
To record issuance of 1,000 shares at Php10 premium per share.
Share Discounts
Shares issued at less than par is said to be issued at a discount. Issuing shares at a discount, however, is
not allowed. The discount is not considered a loss to the issuing company but the investors are investing
the shares at an amount less than the minimum legal capital. Discount on share capital is a deduction
from the total shareholders’ equity.
For example, if an investor paid Php95 for each share of 1,000 Php100 par value shares, the entry would
be: (illustration for academic purposes only)
Memorandum Entry Method
Cash
Php95,000
Discount on Ordinary Shares
5,000
Ordinary Shares
To record issuance of 1,000 shares of Php100
par value ordinary shares at Php95.
Php100,000
Journal Entry Method
Cash
Php95,000
Discount on Ordinary Shares
5,000
Unissued Ordinary Shares
To record issuance of 1,000 shares of Php100
par value ordinary shares at Php95.
Php100,000
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Delinquent Subscription (Subscription Defaults)
If a subscriber fails to pay on the due date, the board of directors, through a board resolution, may
declare the subscription delinquent. The delinquent subscription will then be sold at a public auction.
At the public auction, the number of shares covered by the unpaid subscription, advertising expenses,
and other costs incurred will be sold to the highest bidder.
A highest bidder is one who is willing to accept the least number of shares and is willing to pay the
uncollected amount of subscription including interest, advertising, and other expenses incurred related
to its sale.
For example, Mr. Cruz subscribed to 1,000 shares of Php50 par value shares. He gave 20% down
payment and the balance is payable in four equal monthly installments. He paid the first installment but
was not able to pay the remaining balances. After all lawful notices, his subscription was sold in public
auction in which Php2,000 was incurred for advertising. Mr. Valdez, the highest bidder, was willing to
pay Php32,000.
Journal Entries
(a) Subscription Receivable
Php50,000
Subscribed Share Capital
To record receipt of subscription to 1,000 share.
(b) Cash
10,000
Subscription Receivable
To record receipt of 20% down payment.
(c) Cash
10,000
10,000
Subscription Receivable
To record receipt of the first monthly installment.
10,000
(d) Delinquent Subscription Receivable
30,000
Subscription Receivable
To record the subscription default of the subscriber.
(e) Delinquent Subscription Receivable
Cash
To record the payment for advertising the
subscription default.
(f) Cash
Php50,000
30,000
2,000
2,000
32,000
Delinquent Subscription Receivable
To record the payment received from the highest bidder.
32,000
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(g) Subscribed Share Capital
Share Capital (or Unissued Share Capital)
To record the issuance of stock certificate.
50,000
50,000
Note: All subscribed shares are issued, first to the highest bidder and any excess to the defaulting
subscriber. If there is no highest bidder, all the subscribed shares will be issued in the name of
the corporation, in which, these shares will be considered treasury shares.
Illustration:
On March 1, 200A, Four Aces Corporation was granted its charter authorizing it to issue 100,000
Php50 par value ordinary shares and 100,000 Php20 par value 8% preference shares. The following
transactions were completed:
March 2 – Received subscriptions to 500 ordinary shares and 200 preference shares, both at par
value, from Mike Jackson.
4 – Received subscriptions to 200 ordinary shares at Php52 and 300 preference shares at
Php23 from Agapito Muhlach.
5 – Issued 1,000 ordinary shares in exchange for pieces of office furniture with fair value of
Php55,000.
8 – Received one-half of the subscription receivable from Mike Jackson.
10 – Received from Juan Carlos subscription to 1,000 preference shares at par value. Received
50% down payment and the balance is payable in two equal installments.
12 – Received in full the balance of the subscription receivable from Mike Jackson and issued
the corresponding shares.
15 – Issued 200 ordinary shares and 200 preference shares to the corporate lawyer
for
working out the formation of the corporation.
20 - Agapito Muhlach
paid one-half of his subscription.
21 – Juan Carlos failed to pay the balance of his subscription. It was then sold at public
auction.
22 – Paid Php1,500 for advertising the sale of the delinquent subscription.
25 – Ray Lau agreed to pay the unpaid subscription plus other expenses incurred.
28 - Agapito Muhlach paid his subscription in full.
Memorandum Entry Method
Ordinary Shares___________
Authorized to issue on | March 1, 200A 100,000
shares at Php50 par| value
Preference Shares_______________
Authorized to issue | on March 1, 200A
100,000 shares | at Php20 par value March
Page 8 of 18
2 – Subscription Receivable – Ordinary Shares
Php25,000
Subscription Receivable – Preference Shares
4,000
Subscribed Ordinary Shares
Subscribed Preference Shares
To record subscriptions received from
Mike Jackson: 500 ordinary shares and 200
preference shares, both at par.
4 – Subscription Receivable – Ordinary Share
10,400
Subscription Receivable – Preference Share
6,900
Subscribed Ordinary Shares
Subscribed Preference Shares
Premium on Ordinary Shares
Premium on Preference Shares
To record the subscriptions received:
200 ordinary shares at Php52/share and 300
preference shares at Php23 per share.
5 – Office Furniture
55,000
Ordinary Shares
Premium on Ordinary Shares
To record issuance of 1,000 ordinary shares
in exchange for pieces of furniture.
8 – Cash
Php25,000
4,000
10,000
6,000
400
900
50,000
5,000
14,500
Subscription Receivable- Ordinary Shares
Subscription Receivable- Preference Shares
To record the partial payment of Mike Jackson.
12,500
2,000
10 – Cash
10,000
Subscription Receivable – Preference Shares
10,000
Subscribed Preference Shares
To record receipt of subscription to
1,000 preference shares. Terms: 50% down
Payment, balance in two equal weekly installments.
12 – Cash
20,000
14,500
Subscription Receivable – Ordinary Shares
Subscription Receivable – Preference Shares
To record the full payment of Mike Jackson.
12,500
2,000
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12 – Subscribed Ordinary Shares
Subscribed Preference Shares
Ordinary Shares
Preference Shares
To record the issuance of shares.
25,000
4,000
25,000
4,000
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March 15 – Organizational Costs
Ordinary Shares
Preference Shares
To record issuance of 20 ordinary shares
and 20 preference shares to corporate lawyer.
20 – Cash
14,000
10,000
4,000
8,650
Subscription Receivable – Ordinary Shares
Subscription Receivable – Preference Shares
To record receipt from A. Muhlach.
5,200
3,450
21 – Delinquent Subscription Receivable
10,000
Subscription Receivable – Preference Share
To record the default subscription of Juan Carlos.
22 – Delinquent Subscription Receivable
1,500
Cash
To record the payment for advertising
the delinquent subscription.
25 – Cash
10,000
1,500
11,500
Delinquent Subscription Receivable
To record receipt from the highest bidder.
25 – Subscribed Preference Shares
Preference Shares
To record the issuance of shares.
11,500
20,000
28 – Cash
20,000
8,650
Subscription Receivable – Ordinary Shares
Subscription Receivable – Preference Shares
To record the full payment of A. Muhlach.
28 – Subscribed Ordinary Shares
10,000
Subscribed Preference Shares
6,000
Ordinary Shares
Preference Shares
To record the issuance of share certificates
to Agapito Muhlach.
5,200
3,450
10,000
6,000
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Journal Entry Method
200A
March 1 – Unissued Ordinary Shares
Php5,000,000
Unissued Preference Shares
2,000,000
Authorized Ordinary Shares
Authorized Preference Shares
To record the authorization granted to
issue 100,000 ordinary shares at Php50 par value
and 100,000 preference shares at Php20 parvalue.
2 – Subscription Receivable – Ordinary Shares
Subscription Receivable – Preference Shares
Subscribed Ordinary Shares
Subscribed Preference Shares
To record the subscription received from
Mike Jackson: 500 ordinary shares and
200 preference shares, both at par.
25,000
4,000
25,000
4,000
4 – Subscription Receivable – Ordinary Shares
10,400
Subscription Receivable – Preference Shares
6,900
Subscribed Ordinary Shares
Subscribed Preference Shares
Premium on Ordinary Shares
Premium on Preference Shares
To record receipt of subscription to 200
ordinary shares at Php52 per share and 300 preference
shares at 23 per share.
5 – Office Furniture
55,000
Unissued Ordinary Shares
Premium on Ordinary Shares
To record the issuance of 1,000 ordinary shares
in exchange for office furniture.
8 – Cash
Php5,000,000
2,000,000
10,000
6,000
400
900
50,000
5,000
14,500
Subscription Receivable – Ordinary Shares
Subscription Receivable – Preference Shares
To record the partial payment of Mike Jackson.
12,500
2,000
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10 – Cash
10,000
Subscription Receivable – Preference Shares
10,000
Subscribed Preference Shares
To record the receipt of subscription to
1,000 preference shares. Terms: 50% down payment
and the balance in two equal weekly installments.
March 12 – Cash
20,000
Php14,500
Subscription Receivable – Ordinary Shares
Subscription Receivable – Preference Shares
To record the full payment of M. Jackson.
Php12,500
2,000
12 – Subscribed Ordinary Shares
Subscribed Preference Shares
Unissued Ordinary Shares
Unissued Preference Shares
To record the issuance of shares to M. Jackson.
25,000
4,000
15 – Organizational Costs
Unissued Ordinary Shares
Unissued Preference Shares
To record the issuance of 20 ordinary shares and
20 preference shares to the corporate lawyer.
14,000
20 – Cash
25,000
4,000
10,000
4,000
8,650
Subscription Receivable – Ordinary Shares
Subscription Receivable – Preference Shares
To record the partial payment of A. Muhlach.
5,200
3,450
21 – Delinquent Subscription Receivable
10,000
Subscription Receivable – Preference Shares
To record the default subscription of Juan Carlos.
22 – Delinquent Subscription Receivable
Cash
To record the payment for advertising the
delinquent subscription.
25 – Cash
10,000
1,500
1,500
11,500
Delinquent Subscription Receivable
To record the payment of the highest bidder.
11,500
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25 – Subscribed Preference Shares
Unissued Preference Shares
To record the issuance of shares.
20,000
20,000
28 – Cash
8,650
Subscription Receivable – Ordinary Shares
Subscription Receivable – Preference Shares
To record the full payment of A. Muhlach.
28 – Subscribed Ordinary Shares
Subscribed Preference Shares
Unissued Ordinary Shares
Unissued Preference Shares
To record the issuance of shares to A. Muhlach.
5,200
3,450
10,000
6,000
10,000
6,000
ACCOUNTING FOR NO-PAR VALUE SHARE
No Par Value Shares are those without par or stated value. There are advantages in issuing no par value
shares:
1. No par value share can be issued at any price without a discount liability attached to it.
2. It enables its holder to examine the factors of its value such as earnings, dividends, or future
prospects, and not based on its nominal value.
3. It gives a more realistic values when they are exchange for assets.
Issuance of No Par Value Shares at Stated Value
No Par Value Shares are usually given a stated value. When shares are issued at stated value, the
memorandum entry method is use in recording share transactions. The entire amount of sale of no par
value share is credited to No Par Value Share account.
For example, a corporation sold for cash 500 no par value ordinary shares. The stated value of the share
is Php20 per share. The entry to record this transaction would be:
Cash
Php10,000
No Par Ordinary Shares
To record issuance of 500 no par ordinary
shares Php20 per share.
Php10,000
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Issuance of No Par Value Shares at More Than Stated Value
When a No Par Value Share is issued at more than the stated value, No Par Value Share account is
credited for the stated value and the remainder is credited to Contributed Capital in Excess of Stated
Value account.
For example, a corporation issued 500 no par value ordinary shares at Php25 per share. The stated value
of the share is Php20. The entry would be:
Cash
Php12,500
No Par Ordinary Shares
Contributed Capital in Excess of Stated Value
To record issuance of 500 no par ordinary
shares at Php25 per share.
Php10,000
2,500
Recording No Par Value Shares at Issue Price
No Par Value Shares account can also be credited for the entire proceeds from the sale of no par value
shares. This is recording the shares at its issuance price.
For example, 500 no par ordinary shares with stated value of Php20 per share were sold for Php25 each.
The entry to record this transaction would be:
Cash
Php12,500
No Par Ordinary Shares
To record issuance of 500 no par ordinary
shares at Php25 per share.
Php12,500
Illustration
(a) Authorized to issue 1,000 shares of no par ordinary shares with a stated value of Php20 per
share.
(b) Received subscription to 200 shares for Php21 per share.
(c) Received subscription to 300 shares at stated value.
(d) Sold for cash 100 shares at Php22 per share. (e) Received the full payment in letter (b).
At Issue Price
(a) ____________________No Par Ordinary Share________________________________
Authorized to issue 1,000 no par value | shares with stated value of Php20 per share
(b) Subscription Receivable
Subscribed No Par Ordinary Shares
To record the receipt of 200 shares
at Php21 per share.
Php4,200
Php4,200
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Subscription Receivable
6,000
Subscribed No Par Ordinary Shares
To record the receipt of 300 shares at stated value.
(c) Cash
6,000
2,200
No Par Ordinary Shares
To record the issuance of 100 shares
at Php22 per share.
2,200
(d) Cash
4,200
Subscription Receivable
To record the collection of account in letter (b).
Subscribed No Par Ordinary Share
No Par Ordinary Share
To record the issuance of shares.
4,200
4,200
4,200
At Stated Value
(a) ________________No Par Ordinary Share_____________________________________
Authorized to issue 1,000 no| par ordinary shares with stated value of Php20 per share
(b) Subscription Receivable
Subscribed No Par Ordinary Shares
Contributed Capital in Excess of Stated Value
To record the receipt of subscription to
200 shares at Php21 per share.
Php4,200
(c) Subscription Receivable
Subscribed No Par Ordinary Share
To record the receipt of subscription to
300 shares at stated value.
6,000
(d) Cash
2,200
Subscribed No Par Ordinary Shares
Contributed Capital in Excess of Stated Value
To record the issuance of 100 shares
at Php22 per share.
Php4,000
200
6,000
2,000
200
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(e) Cash
4,200
Subscription Receivable
To record the collection of account in letter (b).
Subscribed No Par Ordinary Shares
No Par Ordinary Shares
To record the issuance of shares.
4,200
4,000
4,000
Exercises:
1. On April 1, 200A, Billy Jean Co. was granted its charter authorizing it to issue 100,000 shares of
Php20 par value ordinary shares and 50,000 preference shares of Php10 par value. The following
transactions were then completed in April:
April 3 – Received from Johnny Jones subscriptions to 1,000 ordinary shares and 1,000
preference shares, both at par. Received 20% down payment.
4 – Sold for cash 500 ordinary shares at par.
6 – Received from Paul Lennon subscription to 2,000 ordinary shares at Php21 and 500
preference shares at Php12. Received 25% down payment.
10 – Received office equipment with fair value of Php11,000 from an investor for 500
ordinary shares.
12 – Issued 50 ordinary shares and 50 preference shares to the corporate promoter for
services rendered during the incorporation.
14 - Received subscription to 250 ordinary shares at Php21 and 150 preference shares
at Php12 per share.
16 - Received one-half of the balance of the account of Paul Lennon.
20 - Sold for cash 300 ordinary shares at Php22 per share and 200 preference shares
at Php12 per share.
24 - Johnny Jones failed to pay his account. His subscriptions were declared delinquent
and sold to public auction.
25 – Paid Php2,000 for advertising the delinquent subscription of Johnny Jones.
26 – Olivia Newton, the highest bidder, agreed to pay the balance of the subscription
plus Php2,000 spent for advertising.
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27 - Paul Lennon paid in full the balance of his account and was issued the corresponding
Shares.
Required:
Journal entries using two methods of recording share transactions.
2. The ABC Co. was organized with an authorized Php100,000 no par ordinary shares. The board of
directors fixed the stated value at Php10 per share. The following transactions were completed:
Jan. 2 – Sold 2,000 shares at Php11 per share.
Sold 1,000 shares at Php12, collecting 50% down payment.
Feb. 1 – Received subscriptions to 4,000 shares at Php12 per share and received 20% down
payment.
March 1 - Sold 300 shares at Php10 in cash.
April 1 – Collected the balance of the subscription on January 2.
April 15 – Collected the balance of the subscription of February 1.
May 6 – Sold the balance of the remaining shares at Php12 per share and received 20% down
payment.
Required:
Journal entries to record the above transactions using the following assumptions
1. Shares are recorded at issue price.
2. Shares are recorded at par value.
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