SHARE CAPITAL (CAPITAL STOCK)
Share Capital
• Also known as capital stock
• It is the amount fixed by the corporate charter
to be subscribed and [aid in or secured to be
paid in by the shareholders of a corporation
either in money or in property, labor or
services upon the organization of a
corporation or afterwards.
Classes of Share Capital
• There are two classes of share capital:
- Ordinary share capital (common stock)
- Preference share capital (preferred stock)
Ordinary Share Capital
• Entitles the holder to an equal or pro-rata
division of profits without any preference or
advantage over any class of shares.
Preference Share Capital
• Entitles the holder to enjoy priority as to
distribution of dividends and distribution of
assets upon corporate liquidation.
• Dividends – are corporate profits distributed
to its shareholders.
Other terms
• Par value share capital – has a nominal or face
value stated on the face of the stock certificate
and in the articles of incorporation.
• No par but with stated value share capital – has a
nominal value stated in the articles of
incorporation but not on the face of the stock
certificate.
• No par, no stated value share capital – has no
nominal value stated either in the articles of
incorporation or on the face of the stock
certificate.
Authorized Share Capital
• The maximum number of shares (both preference
and ordinary shares) that a corporation may issue
is termed as authorized shares.
• The authorized share capital is determined by
multiplying the authorized shares by the par or
stated value of the share capital.
• Authorized share capital may be recorded under
the journal entry method or the memorandum
entry method.
Illustrative Problem
• The Monster, Inc. was organized on January 1 ,
2012 with authorized share capital as follows:
10,000 shares of 10% preference share capital
with a par value of P100 per share
200,000 shares ordinary share capital with a
par value of P10 per share
Illustrative Problem
• Memorandum Entry Method
2012
Jan. 1 Authorized to issue 10,000 shares of 10%
preference share capital with a par value of
P100 per share
1 Authorized to issue 200,000 shares of
ordinary share capital with a par value of P10
per share.
Illustrative Problem
• Journal Entry Method
2012
Jan. 1Unissued Pref. Share Capital
1M
Authorized Pref. Share Capital 1M
Unissued Ordinary Share Cap. 2M
Authorized Ordinary Share Cap. 2M
Issuance of Share Capital
• A share capital may be issued in exchange for
cash, non-cash assets, services, liability or
other for of securities.
• It may be sold also on a subscription basis.
• Outstanding share – a share capital issued to a
shareholder
Issuance for Cash
• The Monster, Inc. was organized on January 1,
2012 and is authorized to issue 100,000 shares
of P10 par value ordinary shares.
Subsequently, 25,000 shares were sold.
Issuance for Cash
• Case 1 – The issuance price is P10 (at par)
Cash
250,000
Ordinary Share Capital
250,000
• Case 2 – The issuance price is P15 (above par)
Cash
375,000
Ordinary Share Capital
250,000
Ordinary Share Premium 125,000
Issuance for Cash
• Case 3 – The issuance price is P8 (below par)
Cash
200,000
Discount on Ord. Sh. Cap.
50,000
Ordinary Share Capital
250,000
Issuance in Exchange for Non-Cash
Assets
• The Monster, Inc. issued 10,000 shares of its
P10 par ordinary share capital in exchange for
land.
Case 1 – The land has a market value of
P175,000.
Land
175,000
Ordinary Share Capital
100,000
Ordinary Share Premium
75,000
Issuance in Exchange for Non-Cash
Assets
• Case 2 – The land has no known market value.
The fair market value of ordinary share capital
on the date of exchange is P15.
Land
150,000
Ordinary Share Capital
100,000
Ordinary Share Premium
50,000
Issuance in Exchange for Non-Cash
Assets
• When a share capital is issued in exchange for
non cash assets, the asset received is recorded
at its fair market value of the share capital
issued,
whichever
is
more
clearly
determinable.
Issuance in Exchange for Non-Cash
Assets
• Case 3 – There is no known market value for
both land and the ordinary share capital.
Land
100,000
Ordinary Share Capital 100,000
-if no market is known for both the asset
received or the share capital issued, the
exchange should be recorded using the par
value of the share capital.
Issuance in Exchange for Services
Rendered
• The Monsters, Inc. issued 1,000 shares of P10
par ordinary share capital in payment for the
services of the lawyer rendered during
incorporation.
Issuance in Exchange for Services
Rendered
• Case 1 – The services of the lawyer is valued at
P25,000.
Pre-operating Expenses
25,000
Ordinary Share Capital
10,000
Ordinary Share Premium
15,000
Issuance in Exchange for Services
Rendered
• Case 2 – There is no known fair market value
for the services of the lawyer. The fair market
value of the ordinary share capital issued is
P15 per share.
Pre-operating Expenses
Ordinary Share Capital
Ordinary Share Premium
15,000
10,000
5,000
Issuance in Exchange for Services
Rendered
• Case 3 – There is no known market value for
both the services rendered and the ordinary
share capital issued.
Pre-operating Expenses
Ordinary Share Capital
10,000
10,000
Sale of Share Capital on a Subscription
Basis
• Subscription is a contract between a
subscriber (buyer of share capital) and a
corporation (seller) whereby the former
purchases shares of stock of the latter with
the payment to be made at a later date.
• The corporation issues the corresponding
stock certificate upon full payment of
subscription.
Illustrative Problem
• On June 1, 2012, the Monsters, Inc. received
subscription for P5,000 shares of its P10 par
value ordinary share capital at P15. A down
payment of 25% was received and the balance
was paid in full on July 1, 2012.
Illustrative Problem
Jun 1 OSC Subscription Rec.
75,000
OSC Subscribed
50,000
Ord. Share Premium
25,000
Cash
18,750
OSC Subscription Rec.
18,750
Illustrative Problem
Jul 1 Cash
56,250
OSC Subscription Rec.
56,250
OSC Subscribed 50,000
Ordinary Share Capital
50,000