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. Page 1 of 18 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. Page 2 of 18 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 Page 3 of 18 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 Page 4 of 18 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 Page 5 of 18 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 Page 6 of 18 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 Page 7 of 18 (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 Page 9 of 18 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 Page 10 of 18 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 Page 11 of 18 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 Page 12 of 18 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 Page 13 of 18 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 Page 14 of 18 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 Page 15 of 18 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 Page 16 of 18 (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. Page 17 of 18 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. Page 18 of 18