Intermediate Accounting 3

1. Chapter 3: Shareholders' Equity (Part 1)

2. Introduction

Related standard: PAS 32 Financial Instruments: Presentation

Our discussion on shareholders' equity is subdivided into the following chapters:

Module No. Title Sub-topics

Module 1 Shareholders' Equity - Part 1 Share capital
Module 2 Shareholders' Equity - Part 2 Retained earnings

Entities are primarily organized as sole proprietorship, partnership corporation or cooperative. The PFRSs apply
equally to all reporting entities regardless of the form of organization. The main difference in the accounting for sole
proprietorships, partnership, corporations and cooperatives lies in the accounting for equity. This and the
succeeding chapters discuss the accounting for the equity of corporations. The accounting for the equity of
partnerships is discussed in advanced accounting. The accounting for the equity of. sole proprietorships (and
cooperatives) is discussed in basic accounting.

3. Learning Outcome

a. State the components of shareholders' equity.

b. Account for the initial issuances of shares of stocks.
c. Account for the reacquisition and retirement of shares of stocks.
d. Account for stock rights, convertible preference shares and donated capital.

4. Learning Content

Corporation
The Philippine Corporation Code defines a corporation as "an artificial being created by operation of law, having
the right of succession and the powers, attributes and properties expressly authorized by law or incident to its
existence."

A corporation is a separate legal entity distinguished from its owners (i.e., shareholders or members). It is formed
through an operation of law and not by mere agreement between the owners. It has the right of succession,
meaning it continues to exist notwithstanding the withdrawal, death, insolvency or incapacity of the individual
owners, and is dissolved only again through an operation of law. The operations of a corporation are subject to a
higher degree of government regulation compared to other forms of businesses.

Organization of a corporation
Some of the provisions of the Corporation Code regarding the organization of a corporation are highlighted below:
• A corporation is formed by at least 5 but not exceeding 15 natural persons, all of legal age and a majority of
whom are residents of the Philippines,
• The entity's articles of incorporation must be authorized by the Securities and Exchange Commission (SEC).
• The articles of incorporation states, among other things, the corporation's authorized capital stock, which is the
maximum number of shares that the corporation can issue. Any excess share issued is deemed illegal. In order
to issue shares in excess of the authorized capital stock, the corporation must amend its articles of incorporation.
• To amend the articles of incorporation, a majority vote of the board plus a vote by shareholders representing at
least two-thirds (2/3) of the outstanding share capital is needed. After ratification, the amended articles of
incorporation are filed with the SEC and shall become effective only upon SEC's approval.
• At least 25% of the corporation's authorized capitalization must be subscribed and at least 25% of the total
subscription must be paid upon subscription. The paid-up capital cannot be less than five thousand pesos
(P5,000).

Shareholders' equity
Shareholders' equity is the residual interest in the assets of corporation after deducting all its liabilities. This is the
equivalent of the "Owner's equity" in a sole proprietorship and the aggregate of partners' capital balances in a
partnership.
Page 1 of 20
Chapter 1 | Intermediate Accounting 3
The components of the shareholders' equity include the following:

• Share capital (Capital stock)

✓ Preference share capital (Preferred stock)
✓ Ordinary share capital (Common stock)
✓ Subscribed share capital (Subscribed capital stock)
✓ Subscription receivable (as a deduction)
✓ Share dividends distributable (Stock dividends payable)
✓ Discount on share capital (as a deduction)
✓ Capital liquidated (as a deduction)
✓ Share premium (Additional paid-in capital)

• Retained earnings (appropriated and unappropriated)

• Other components of equity

✓ Revaluation surplus
✓ Cumulative unrealized fair value gains/losses on FVOCI securities
✓ Translation differences of foreign operations
✓ Effective portion of cash flow hedges

• Treasury shares (Treasury stock)

The equity of regulated entities (e.g., banks, insurance, and cooperatives) includes statutory reserves required
under relevant laws and regulations. For example, a bank that engages in trust operations is required under Bangko
Sentral ng Pilipinas (BSP) regulations to establish a trust reserve which is a percentage of the bank's trust fee
income for the year.

The following transactions affect the accounting for a corporation's equity:

a. Authorization, subscription, issuance, acquisition, reissuance and retirement of shares
b. Origination of other equity instruments, such as share options, detachable warrants, and equity component of
compound financial instruments.
c. Distributions to owners (Dividends)
d. Transactions giving rise to "other components of equity"
e. Recapitalization and Quasi-reorganization

Accounting for Share capital

An entity accounts for its share capital using one of the following:
1. Memorandum method — Only a memorandum is made for the authorized capitalization. Subsequent
issuances of shares are credited to the share capital account.
2. Journal entry method — The authorized capitalization is recorded by crediting "authorized share capital" and
debiting "unissued share capital." Subsequent issuances of shares are credited to "unissued share capital." The
difference between the two accounts represents the issued share capital.

➢ The more commonly used method in practice is the memorandum method.

Illustration: Memorandum method vs. Journal entry method

Authorized capitalization
1. On January 1, 20x1, ABC Co. received authorization from the SEC to issue share capital of P1,000,000 divided
into 10,000 shares with par value per share of P100.

The authorized share capital is recorded under each of the two methods as follows:

Memorandum method Journal entry method

Memo entry — The authorized capitalization is Unissued share capital 1M
P1,000,000 divided into 10,000 shares with par value Authorized share capital 1M
per share of P100.

• Authorized share capital — represents the maximum number of shares fixed in the entity's authorized articles
of incorporation that can be subscribed and issued to shareholders.
• Unissued share capital — represents the portion of the authorized share capital not yet issued and is still
available for subscription and issuance.
Page 2 of 20
Chapter 1 | Intermediate Accounting 3
Subscription
2. Of the total authorized share capital, 25% was subscribed at par value and 25% of the total subscription was
paid at subscription date.

Memorandum method Journal entry method

Cash (1M x 25% x 25%) 62.5K Cash (1M x 25% x 25%) 62.5K
Subscription receivable* 187.5K Subscription receivable 187.5K
Subscribed share capital (1M x 25%) 250K Subscribed share capital (1M x 25%) 250K
*(250,000 – 62,500 = 187,500)

➢ Notice that same entry is made under both methods.

• Subscription — a contract between the purchaser of shares (i.e., investor) and the issuer (i.e., corporation) in
which the purchaser promises to buy shares of the issuing company’s stocks.
• Subscription receivable — represents the unpaid portion of the subscription price. Subscription receivable is"
presented as a deduction from the related subscribed share capital, i.e., contra equity account.
• Subscribed share capital — represents the portion of the authorized share capital that is subscribed but not
yet issued.

Collection of subscription receivable & Issuance of shares

3. On February 1, 20x1, ABC Co. received full payment for 2,000 subscribed shares and issued the related share
certificates.

Memorandum method Journal entry method

Cash 150K* Cash 150K*
Subscription receivable 150K Subscription receivable 150K
Subscribed share capital 200K Subscribed share capital 200K
Share capital 200K Unissued share capital 200K

*Subscription price of 2,000 shares (2,000 x P100 par) 200,000

Portion already paid (P200,000 x 25%) (50,000)
Balance collected 150,000

• Share capital — represents the portion of the authorized share capital that is already issued.
• Share certificate — is a document that evidences the ownership of a share.

Notes:
➢ "Share capital" is credited (under memorandum method) and "Unissued share capital" is credited (under journal
entry method) only upon the issuance of shares,
➢ Under the Corporation Code, shares (and share certificates) are issued to subscribers only upon full payment
of the subscription price.
➢ The Corporation Code prohibits the issuance of shares in exchange for promissory notes or future services.
The corporation must receive first the full consideration before shares are issued.

Cash subscription
4. On February 28, 20x1, ABC received cash subscription for 1,000 shares at par value.

Memorandum method Journal entry method

Cash (1,000 x P100) 100K Cash (1,000 x P100) 100K
Share capital 100K Unissued share capital 100K

➢ Notice that "Share capital" (‘Unissued share capital’) is directly credited (debited) for cash subscriptions.

Page 3 of 20
Chapter 1 | Intermediate Accounting 3
The share capital of ABC Co. as of February 28, 20x1 is shown below:

Memorandum method Journal entry method

Share capital 300,000 Authorized share capital 1,000,000
Subscribed share capital 50,000 Unissued share capital (700,000)
Subs. receivable (37,500) Issued share capital 300,000
Subscribed share capital 50,000
Subscription receivable (37,500)
Total Share capital 312,500 Total Share capital 312,500

➢ The "subscription receivable" is presented as deduction.

➢ Most companies use the memorandum method. As such, only this method will be used in the succeeding
illustrations.

Classes of Share capital

Share capital is basically classified into two, namely:
a. Ordinary share capital (Common stock); and
b. Preference share capital (Preferred stock).

Ordinary shares
Ordinary shares (common stock) represent the residual corporate interest that bear the ultimate risk of loss and
receives the benefits of success. Ordinary shareholders are guaranteed neither dividends nor assets upon
dissolution but they generally control the management of the corporation and tend to profit the most if the corporation
is successful.

If an entity has only one class of share capital, it necessarily is an ordinary share capital. The Corporation Code
prohibits the issuance of only preference shares without ordinary shares.

Ordinary shareholders, generally, enjoy the same rights with no preference over other shareholders. The following
are the four basic rights of ordinary shareholders:
1. Right to attend and vote in shareholders' meetings
2. Right to purchase additional shares (also known as preemptive right or stock right)
3. Right to share in the corporate profits (also known as right to dividends)
4. Right to share in the net assets of the corporation upon liquidation

For stock corporations, voting rights are normally conferred to shareholders in proportion to their shareholdings.
Thus, a shareholder who holds more shares normally will have more voting rights.

The preemptive right (right of preemption) protects shareholders from involuntary dilution of their ownership
interests. Without this right, an ownership interest may be reduced by the issuance of additional shares without the
shareholders knowledge.

Some corporations have more than one type of ordinary shares, such as "Class A" and "Class B" ordinary shares.
In such cases; one class of ordinary shares (normally ‘Class A’, but not always) will have more voting rights than
the other class. The class that has more voting rights is sometimes called "super voting" shares. One purpose of
issuing "super voting" shares is to give key company insiders (e.g., founders and executives) greater control over
the company's voting rights. This enables them to control corporate policies and management decisions.

Preference shares
Preference shares (preferred stocks) are shares that give the holders thereof certain preferences over other
shareholders. Such preferences may include priority claims over (a) dividends and/or (b) net assets of the
corporation in the event of liquidation. In exchange for such preference(s), preference shareholders sacrifice certain
inherent rights of ordinary shareholders (e.g., voting rights over election of directors and officers). One purpose of
issuing preference share is to broaden investor appeal, thereby increasing the corporation's opportunity to generate
equity financing.

Share premium
Share premium (additional paid-in capital) arises from various sources which include the following:
1. Excess of subscription price over par value or stated value.

Page 4 of 20
Chapter 1 | Intermediate Accounting 3
2. Excess of reissuance price over cost of treasury shares issued.
3. Distribution of "small" stock dividends.

Illustration:
1. ABC Co. started operations on January 1, 20x1. Its authorized capitalization is P1,000,000 divided into 10,000
shares with par value per share of P100. ABC Co. receives cash subscriptions for 5,000 shares at P120 per
share.

Jan. 1, 20x1 Cash (5,000 x P120 subscription price) 600,000

Share capital (5,000 x P100 par value) 500,000
Share premium [5,000 x (P120 – P100)] 100,000

2. On January 31, 20x1, ABC receives subscription for 2,000 shares at P160 per share.

Jan. 31, 20x1 Subscription receivable (2,000 x P160) 320,000

Subscribed share capital (2,000 x P100) 200,000
Share premium [2,000 x (P160 – P100)] 120,000

Notes:
➢ ‘Share capital’ and 'Subscribed share capital' are credited at par value regardless of the subscription price.
➢ Share premium is credited at the subscription date even for subscriptions that are not yet paid; provided that, it
is probable that the total subscription price will be collected.
➢ ABC Co.'s total contributed capital as of January 31, 20x1 is computed as follows:

Share capital 500,000

Subscribed share capital 200,000
Subscription receivable (320,000)
Share premium (100K + 120K) 220,000
Total contributed capital 600,000

Par value and No-par value shares

A par value share is one with a peso value fixed in the articles of incorporation. The purpose of which is to fix the
amount of issuance price. A par value share cannot be issued below its par value. The par value appears on each
share certificate issued.

A no-par value share is one without a peso value fixed in the articles of incorporation. However, a no-par value
share has a stated value (issued value) which is also indicated in the articles of incorporation but not on the share
certificate issued. Par value and no-par value shares are distinguished by the presence or absence of a value per
share on the share certificate issued. Under the Corporation Code, no-par value shares should not be issued for a
consideration less than five (P5) pesos per share. The excess of subscription price over the stated value is credited
to share premium.

Example:
An entity issues 5,000 shares with stated value of P100 per share for P120 per share. The issuance is recorded as
follows:

Date Cash (5,000 x P120) 600,000

Share capital (5,000 x P100) 500,000
Share premium [5,000 x (P120 – P100)] 100,000

Under the Corporation Code, ordinary shares may be issued as either par or no-par value shares. However,
preference shares should only be issued as par value shares.

Legal capital
Legal capital is the portion of contributed capital that cannot be distributed to the owners during the lifetime of the
corporation unless the corporation is dissolved and all of its liabilities are settled first. Legal capital is based on the
concept of trust fund doctrine which states that the share capital of a corporation is a trust fund held for the
protection of its creditors. Legal capital is computed as follows:
a. For par value shares, legal capital is the aggregate par value of shares issued and subscribed.

Page 5 of 20
Chapter 1 | Intermediate Accounting 3
b. For no-par value shares, legal capital is the total consideration received or receivable from shares issued or
subscribed. Total consideration refers to the subscription price inclusive of any amount in excess of stated
value.

Illustration: Legal capital

The equity section of ABC Co.'s statement of financial position shows the following information:

6% Preference share capital, P 100 par value 200,000

Share premium — preference share capital 50,000
Ordinary share capital 800,000
Share premium — ordinary share capital 300,000
Subscribed share capital — ordinary 100,000
Subscription receivable — ordinary share capital (50,000)
Retained earnings 400,000

Requirements: Compute for the legal capital assuming:

a. The ordinary shares are par value shares; and
b. The ordinary shares are no-par value shares.

Solutions:
Par No-Par
6% Preference share capital, P 100 par value 200,000 200,000
Ordinary share capital 800,000 800,000
Share premium — ordinary share capital - 300,000
Subscribed share capital — ordinary 100,000 100,000
Legal capital 1,100,000 1,400,000

Notes:
➢ In case of no-par value shares, legal capital includes the share premium of ordinary shares.
➢ Preference shares can only be issued as par value shares. Thus, the share premium of the preference shares
is not included.

Share issuance costs

Issuing shares entails expenditures, such as regulatory fees, legal, accounting, and Other professional fees,
commissions and underwriter’s fees, printing costs of certificates, and documentary stamp tax and other transaction
taxes.

These expenditures called 'share issuance costs', are deducted from any resulting share premium from the
issuance. If share premium is insufficient, the excess is charged to retained earnings.

Illustration:
On January 1, 20x1, ABC Co. issued 1,000 shares with par value of P100 for P120 per share. Share issuance costs
amounted to P5,000.

The entries are as follows;

Jan. 1, 20x1 Cash (1,000 x P120) 120,000

Share capital (1,000 x P100) 100,000
Share premium [1,000 x (P120 – P100)] 20,000
Jan. 1, 20x1 Share premium 5,000
Cash 5,000

Shares issued at a discount

As stated earlier, shares shall not be issued for a consideration below their par value or stated value, (issued value).
If they are issued below par or stated value, the shares are said to be issued at a discount. The discount is the
difference between the consideration received and the par or stated value of the shares issued. The shareholder
concerned is held liable to the corporation for the discount; otherwise, the issuance is deemed illegal. The discount
is often termed as the discount liability of the shareholder.

Example:
An entity issues 1,000 shares with par value per share of P100 for P80 er share. The entry is as follows:
Page 6 of 20
Chapter 1 | Intermediate Accounting 3
 Date Date Cash (1,000 x P80) 80,000
Discount on share capital 20,000
Share capital (1,000x P100) 100,000

The discount on share capital is a receivable from the shareholder concerned but presented in the financial
statements as a contra-equity account (deduction from shareholders' equity).

Issuing shares below par or stated value is prohibited only on original issuance. Thus, treasury shares may be
reissued below par or stated value.

Watered stocks
Shares issued for non-cash consideration with fair value that is below par or stated value are referred to under
tile Corporation Code as "watered stocks," The "water" (discount) is the difference between the fair value of the non-
cash consideration received and the par or stated value of the shares issued. For watered stocks' both the
shareholder concerned and the director or officer consenting to the issuance are held liable for the discount liability.

Example:
An entity issues 1,000 shares with par value per share of P100 for land with fair value of P80,000. The entry is as
follows:

Date Land 80,000

Discount on share capital 20,000
Share capital (1,000 x P100) 100,000

If the discount is not recorded and both the land and shares issued are recorded at par value, assets and equity will
be overstated.

Secret reserve
A secret reserve arises when shares are issued for non-cash consideration with fair value that is above par or stated
value but the consideration received is recorded at par or stated value. Secret reserve is the opposite of watered
stocks. It understates assets and equity.

Secret reserve may also arise from transactions other than issuances of share capital, such as when provisions for
losses are made excessively or when income earned is not recognized.

Treasury shares
Treasury shares (treasury stocks) are an entity's Own shares that were previously issued but are subsequently
reacquired but not retired. Under the Corporation Code, an entity may reacquire its previously issued shares only if
it has sufficient unrestricted retained earnings.

Treasury share transactions are entered into for various reasons, such as:
a. To increase the fair value per share when corporations feel their shares are undervalued, to increase earnings
per share, to reduce dividends, or to increase return on equity by reducing outstanding shares;
b. As a tax-efficient method of providing cash to shareholders rather than by paying dividends;
c. As a result of redemption of previously issued redeemable shares;
d. To use shares reacquired to acquire new assets, to issue share dividends, to issue share options, or as reserve
for future issuance;
e. To buy out one or more specific shareholders as protection against takeover threat;
f. To settle shares held by a dissenting shareholder (i.e., appraisal right) as provided under the Corporation Code;
g. To eliminate fractional shares arising from share dividends; or
h. To settle delinquent subscriptions when there is no highest bidder.

Accounting for treasury shares

Treasury shares are accounted for using the cost method. Under this method, the reacquisition and subsequent
reissuance of treasury shares are recorded at cost.

Treasury shares are presented as deduction in the shareholders' equity (i.e., contra equity account).

Page 7 of 20
Chapter 1 | Intermediate Accounting 3
Illustration:
On January 1, the statement of financial position of ABC Co. shows the following information:

Share capital (P100 par value) 800,000

Share premium 160,000
Retained earnings 540,000
Total shareholders' equity 1,500,000

On July 1, 20x1, ABC reacquires 1,000 shares at P90.

July 1, 20x1 Treasury shares (1,000 x P90) 90,000

Cash 90,000
July 1, 20x1 Retained earnings — unrestricted 90,000
Retained earnings — appropriated 90,000

The automatic appropriation of retained earnings is in accordance with the provision of Section 41 of the Corporation
Code which states that a corporation may be permitted to enter into a treasury share transaction provided it has
sufficient retained earnings to cover the shares to be purchased.

The appropriated retained earnings is presented as part of retained earnings but disclosed as "appropriated,"
meaning it is not available for distribution as dividends.

Case #1 — Reissuance at cost

On Sept. 1, 20x1, ABC reissues the 1,000 treasury shares at P90.

Sept. 1, 20x1 Cash (1,000 x P90) 90,000

Treasury shares (1,000 x P90) 90,000
Sept. 1, 20x1 Retained earnings — appropriated 90,000
Retained earnings — unrestricted 90,000

When treasury shares are reissued, the related appropriated retained earnings are reverted back to unrestricted
retained earnings.

Case #2 — Reissuance at more than cost

On Sept. 1, 20x1, ABC reissues the 1,000 treasury shares at P140.

Sept. 1, 20x1 Cash (1,000 x P140) 140,000

Treasury shares (1,000 x P90) 90,000
Share premium — treasury shares 50,000
Sept. 1, 20x1 Retained earnings — appropriated 90,000
Retained earnings — unrestricted 90,000

When treasury shares are reissued at more than the reacquisition cost, the excess of the reissuance price over the
cost is credited to "Share premium – treasury shares”. This forms part of the entity's total share premium.

As a general rule, transactions with owners do not give rise to Income Or expense. "No gain or loss shall be
recognized in profit or loss on the purchase, sale, issue or cancellation of an entity's own equity instruments."
(PAS 32.33)

Case #3 — Reissuance at below cost

On September 1, 20x1, ABC reissues the 1,000 treasury shares at P60.

Sept. 1, 20x1 Cash (1,000 x P60) 60,000

(a) Share premium — treasury shares -
(b) Retained earnings 30,000
Treasury shares (1,000 x P90) 90,000
Sept. 1, 20x1 Retained earnings — appropriated 90,000
Retained earnings — unrestricted 90,000

Page 8 of 20
Chapter 1 | Intermediate Accounting 3
When treasury shares are subsequently reissued at below the reacquisition cost, the excess of the cost over the
reissuance price is debited to the following in the order of priority:
a. Any balance in "share premium — treasury shares" arising from the same class of share capital.
b. If the balance in "share premium — treasury shares" is insufficient or if it has no outstanding balance, any
excess is debited to retained earnings.

In the illustration above, since ABC Co. does not have "Share premium — treasury shares", the P30,000 excess
(i.e., P90,000 reacquisition cost – P60,000 reissuance price) is debited to "Retained earnings."

The effect of:

• Reacquisition of treasury shares is a decrease in total shareholders' equity equal to the cost of the reacquired
treasury shares.
• Reissuance of treasury shares is an increase in total shareholders' equity equal to the reissuance price.

Using 'Case #3' the effects of the treasury share transactions on shareholders' equity are analyzed, below:

Reacquisition
Jan, 1, 20x1 July 1, 20x1 Case #3
Share capital 800,000 800,000 800,000
Share premium 160,000 160,000 160,000
Retained earnings 540,000 540,000 510,000
Treasury shares - (90,000) -
Total SHE 1,500,000 1,410,000 1,470,000
Increase (decrease) (90,000) 60,000

Notice that the reacquisition decreased the total shareholders' equity by the reacquisition cost while the reissuance
increased the total shareholders' equity by the reissuance price. (Refer to the credit and debit to 'cash’ in the entries
above.)

Retirement of shares
Shares are considered retired if they have been reacquired and cancelled in accordance with Securities and
Exchange Commission (SEC) regulations. Unlike for treasury shares which can be subsequently reissued, retired
shares cannot be reissued anymore.

When shares are retired, the total par value and the related share premium of the retired shares are removed from
the books of accounts. Any difference between the total amount removed and the retirement cost is accounted for
as follows:
1. If the par value and related share premium of the retired shares exceed the retirement cost, the difference is
credited to "Share premium — retirement. "
2. If the par Value and related share premium of the retired shares are less than the retirement cost, the difference
is debited to the following in the order of priority:
a. Share premium — treasury shares
b. Retained earnings

Illustration: Retirement of shares

On January 1, 20x1, the statement of financial position of ABC Co. shows the following information:

Share capital (P100 par value) 800,000

Share premium 160,000
Share premium — treasury shares 5,000
Retained earnings 535 000
Total shareholders' equity 1,500,000

Case #1 — Retirement cost less than Original issuance price

ABC reacquires 1,000 shares at P80 per share on July 1, 20x1 and retires them on September 1, 20x1.

July 1 - Reacquisition
July 1, 20x1 Treasury shares (1,000 x P80) 80,000
Cash 80,000

Page 9 of 20
Chapter 1 | Intermediate Accounting 3
Sept. 1 - Retirement
Sept. 1, 20x1 Share capital (1,000 x P100) 100,000
Share premium — original issuance (1,000 x P20*) 20,000
Treasury shares (1,000 x P80) 80,000
Share premium – retirement 40,000
To simplify the illustration, journal entries for the appropriation of retained earnings and the reversal thereof are
ignored.

*Total share premium before retirement P160,000

Divide by: Total issued shares before retirement
(P800,000 Share capital  P100 par value) 8,000
Share premium per share from original issuance P20

Case #2 — Retirement cost greater than Original issuance price

ABC reacquires 1,000 shares at P140 on July 1, 20x1 and immediately retires them.

July 1, 20x1 Share capital (1,000 x P100) 100,000

Share premium — original issuance (10,000 x P20) 20,000
(a) Share premium — treasury shares 5,000
(b) Retained earnings (balancing figure) 15,000
Cash (1,000 x P140) 140,000

When shares are reacquired and immediately retired, there is no need to set up a treasury share account. The par
value and related share premium of the retired shares are immediately debited, with a corresponding credit to
"Cash".

Notice that in the accounting for treasury shares' and retirement of shares, retained earnings may be decreased but
never increased.

Par value method of accounting for treasury shares

Another method of recording treasury shares is the par value method. Under this method, the reacquired treasury
shares are accounted for as if they are retired. However, the par value method is not acceptable for financial
reporting.

Illustration: Cost method vs. Par value method

On January 1, 20x1, the statement of financial position of ABC Co. shows the following information:

Share capital (authorized 10,000 shares with par value of P 100) 800,000
Share premium 160,000
Retained earnings 540 000
Total shareholders' equity 1,500,000

On July 1, 20x1, ABC reacquires 1,000 shares at P90.

Requirement: If ABC inappropriately used the par value method instead of the cost method, what is the effect on
equity?

Solution:
Cost method (should be) Par value method (made)
Treasury shares 90K Treasury shares 100K
Cash 90K Share premium — orig. issuance 20K
Cash 90K
Share premium — treasury shares 30K

Notes: Under the par value method:

➢ The "Treasury shares" account is debited at par value, i.e., 10,000 sh. x P100 par = 100,000.
➢ The share premium from the original issuance is derecognized similar to the retirement of shares, i.e., 160,000
x (1,000 sh. reacquired  8,000 total shares issued) = 20,000.
➢ The difference between the sum of the par value and share premium from original issuance and the reacquisition
cost is credited to the "Share premium on treasury share" account, i.e., [(100,000 + 20,000) – 90,000] = 30,000.

Page 10 of 20
Chapter 1 | Intermediate Accounting 3
The balances in the shareholders' equity after the reacquisition are analyzed as follows:

Par value
Jan, 1, 20x1 Cost method method Difference
Share capital 800,000 800,000 800,000
Share premium 160,000 160,000 170,000 10,000 Over
Retained earnings 540,000 540,000 540,000
Treasury shares - (90,000) (100,000) (10,000) Over
Total SHE 1,500,000 1,410,000 1,470,000 -

Answer: If the par value method is used instead of the cost method, share premium and treasury shares are both
overstated by P10,000. However, total shareholders' equity is unaffected.

Delinquent subscriptions
Under the Corporation Code, if a subscription remains unpaid at a due date set by the entity's board of directors,
the subscriber is declared delinquent. After thirty (30) days but not exceeding sixty (60) days from the date the
shares are declared delinquent, the delinquent shares are sold at a public auction to the highest bidder. The highest
bidder is the person who is willing to pay the "offer price" for the smallest number of shares.

The "offer price" includes the following:

a. Unpaid balance on the subscription
b. Interest accrued on the subscription
c. Expenses in public auction, such as advertising and other selling costs

Illustration:
You subscribed 1,000 shares of ABC Co. with par value of P100 per share for a total subscription price of P120,000.
After paying only P50,000, you defaulted on the remaining balance of the subscription on call date. Consequently,
ABC declared your subscription as delinquent.

After due consideration for costs, the board of directors of ABC declared by resolution an "offer price" of P80,000
comprising the unpaid balance of P70,000, accrued interest of P2,000, and estimated selling costs of P8,000. The
following are the bidders in the public auction with their respective bids:

Juan Balut 700 shares

John Penoy 650 shares
Jane Itlog 600 shares

Jane Itlog is deemed the highest bidder being the person who is willing to pay the "offer price" of P80,000 for the
lowest number of shares. Ms. Itlog will be issued 600 shares. You will still receive the balance of 400 shares (1,000
— 600) from the subscription (lucky you, thank Ms. Itlog).

The pertinent entries are as follows:

Date Subscription receivable 120,000

Subscribed share capital 100,000
Share premium 20,000
to record the receipt of subscription
Date Cash 50,000
Subscription receivable 50,000
to record the collection on the subscription
Date Due from highest bidder 8,000
Cash 8,000
to record expenditures on the public auction
Date Cash 80,000
Subscription receivable (120K - 50K) 70,000
Due from highest bidder 8,000
Interest income* 2,000
to record receipt of payment for the offer price
Date Subscribed share capital (1,000 x 100) 100,000
Share capital (1,000 x100) 100,000
to record the issuance o shares

Page 11 of 20
Chapter 1 | Intermediate Accounting 3
*This amount clearly constitutes a financing transaction rather than consideration received from an equity
transaction, i.e., the interest charged is a consideration for the deferred payment.

Equity instruments are measured at the fair value of the consideration received, net of direct costs of issuing the
equity instruments. If payment is deferred and the effect of time value of money is material, the initial measurement
is made on a present value basis.

In the illustration above, the fair value of the consideration received is equal to the original subscription price of
P120,000. Notice that even after the delinquency sale, the measurement of the equity instruments remained
unchanged at P120,000 (P100,000 par + P20,000 share premium).

Query #1: What if there are no bidders at the public auction?

Under the Corporation Code, should there be no bidders at the public auction, the corporation may, subject to the
provisions of the Code, bid for the delinquent shares and shall be credited as paid in full in the books of the
corporation. Title to all the shares shall be vested in the corporation as treasury shares.

If there are no bidders, ABC may, if it has sufficient unrestricted retained earnings, bid for the shares and hold them
as treasury shares. You are then released from your liability regarding the unpaid subscription (whew!)... but you
will not be entitled for any number of shares in your subscription (bye-bye P50K).

The pertinent entries for the reacquisition of the delinquent shares ABC Coe are as follows:

Date Due from highest bidder 8,000

Cash 8,000
to record the expenditures on public auction
Date Treasury shares** (70,000 + 8,000) 78,000
Subscription receivable (120K - 50K) 70,000
Due from highest bidder 8,000
to record the acquisition of delinquent subscription as treasury shares
Date Retained earnings — unrestricted*** 100,000
Retained earnings — appropriated 100,000
to record the appropriation of RE for the treasury shares acquired
Date Subscribed share capital (1,000 x 100) 100,000
Share capital (1,000 x 100) 100,000
to record the delinquent subscription as deemed fully paid

**The accrued interest of P2,000 is ignored. To recognize an unrealizable interest would overstate both the cost of
the treasury shares and retained earnings. The absence of a highest bidder provides evidence that the "offer price"
of P80,000 is not the fair value of the consideration for the equity instruments. Therefore, the cost of the treasury
shares is limited to the unpaid portion of the subscription plus any direct costs incurred on the public auction. Title
to all of the 1,000 delinquent shares shall be vested in ABC Co. as treasury shares.

***The amount appropriated is equal to the aggregate par value of the delinquent shares. This is because, under
the Corporation Code' shares shall not be issued below par or issued value. The provision of the Corporation Code
will be indirectly violated if only the actual cost of the treasury shares (i.e., P78,000) is appropriated. There is no
accounting problem if the cost of acquiring the delinquent shares exceeds the shares' aggregate par value.

The provision of Section 9 of the Corporation Code that treasury "shares may again be disposed of for a reasonable
price fixed by the board of directors" may be construed that the delinquent shares acquired at below par value
should not be reissued below par value in order not to indirectly create watered stocks.

The sale of treasury shares below par value is permitted only for shares which were originally issued at or above
par value. It does not apply to treasury shares resulting from delinquent subscriptions.

Query #2: What if there are no bidders and ABC Co. is precluded under the Corporation Code from purchasing the
shares due to insufficiency of retained earnings?

In such case, the subscription is cancelled in its entirety.

The pertinent entries for the cancellation of the delinquent shares are:
Page 12 of 20
Chapter 1 | Intermediate Accounting 3
 Date Due from highest bidder 8,000
Cash 8,000
to record the expenditures on public auction
Date Expenses on delinquent sale* 8,000
Due from highest bidder 8,000
to recognize the expenditures made on abandoned equity
transaction as expense
Date Share premium 20,000
Subscribed share capital 100,000
Subscription receivable (120K - 50K) 70,000
Share premium — delinquent 50,000
to derecognize the equity accounts on the abandoned equity transaction

*PAS 32.37 provides that "the costs of an equity transaction that is abandoned are recognized as an expense."

**It can be construed from the provision of the Corporation Code that the amount you have paid on the subscription
will be forfeited (bye-bye 50K). This is treated as share premium by Co. PAS 32.33 provides that the consideration
paid or received from the purchase, sale, issue or cancellation of an entity's own equity instruments shall be
recognized directly in equity.

Sale of different classes of share capital

When an entity issues more than one class of share capital for a lump sum price (basket sale), the issuance is
accounted for in one of the following:
1. Proportional method — if the fair values of all classes of share capital issued are determinable, the lump sum
price is allocated to the classes of share capital issued based on their relative fair values.
2. Incremental method — if only one class of shares has a determinable fair value, such class is assigned its fair
value and the excess of the lump sum price is assigned to the other class of shares that does not have a
determinable fair value.

Illustration:
ABC Co. issued 1,000 ordinary shares with par value per share of P100 and 200 preference shares with par value
per P130 for a lump sum price of P200,000.

Case #1 — Proportional method

Quoted prices per share are P120 and P150 for the ordinary and preference shares, respectively.

The lump sum price is allocated as follows:

No. of Fair value Total fair

shares per share value Fraction Allocation
Preference shares 120 150 30,000 30/150 40,000
Ordinary shares 1,000 200 120 000 120/150 160,000
1,200 150,000 150/150 200,000

The entry to record the issuance is as follows:

Date Cash 200,000

Preference share capital (200 x P130 par) 26,000
Share premium — PS (40,000 — 26,000) 14,000
Ordinary share capital (1,000 x P100 par) 100,000
Share premium — OS (160,000 — 100,000) 60,000

Case #2 — Incremental method

The ordinary shares have quoted price of P120 per share. However, the fair value of the preference shares cannot
be determined reliably.

Page 13 of 20
Chapter 1 | Intermediate Accounting 3
The lump sum price is allocated as follows:

Lump sum price 200,000

Allocation to ordinary shares, at fair value (1,000 x P120) (120,000)
Excess allocated to preference shares 80,000

The entry to record the issuance is as follows:

Date Cash 200,000

Preference share capital (200 x P130 par) 26,000
Share premium — PS (80,000 — 24,000) 54,000
Ordinary share capital (1,000 x P100 par) 100,000
Share premium — OS (120,000 — 100,000) 20,000

Equity instrument vs. Financial liability

The issuer classifies a financial instrument, or its component parts as a financial asset, a financial liability or an
equity instrument in accordance with the substance of the contract (rather than its legal form) and the definitions of
a financial/ asset, a financial liability and an equity instrument.

When determining whether a financial instrument is a financial liability or an equity instrument, the overriding
consideration is whether the instrument meets' the definition of a financial liability.

Financial liability Equity instrument

The entity has a contractual obligation to pay cash or The entity has no obligation to pay cash or, another
another financial asset or to exchange financial financial asset or to exchange financial instruments
instruments under potentially unfavorable condition. under potentially unfavorable condition.

Redeemable and Callable preference shares

An essential feature of an equity instrument is the absence of a contractual obligation to pay cash or another
financial asset. This is true even if the holder of the instrument is entitled to pro rata share in dividends or of the net
assets of the entity in case of liquidation.

Legal form is also irrelevant when determining if a financial instrument is a financial liability or an equity instrument.
Some instruments are in the form of shares of stocks but the issuer classifies them as financial liabilities if they meet
the definition of a financial liability.

Redeemable preference shares Callable preference shares

• are preferred stocks which the holder has the right • are preferred stocks which the issuer has the right
to redeem at a set date. to call at a set date.
• are classified as financial liability because when • are classified as equity instrument because the
the holder exercises its right to redeem, the issuer right to call is at the discretion of the issuer and
is mandatorily obligated to pay for the redemption therefore has no obligation to pay unless it chooses
price. to call on the shares.

Illustration: Callable preference shares

ABC co. issued 1,000 callable preference shares with par value of P100 for P120 per share. The entry to record the
issuance is as follows:

Date Cash (1,000 x P120) 120,000

Preference share capital (1,000 x P100) 100,000
Share premium – Preference share 20,000

Case 1
The preference shares are subsequently called in for redemption at P130 per share. The entry to record the
redemption is as follows:

Date Preference share capital (1,000 x P100) 100,000

Share premium Preference share 20,000
Retained earnings 10,000
Cash (1,000 x P130) 130 000

Page 14 of 20
Chapter 1 | Intermediate Accounting 3
The share capital and share premium arising from the original issuance are derecognized when the shares are
called in for redemption. If redemption price exceeds the original issuance price, the excess is debited to retained
earnings.

Case 2
The preference shares are subsequently called in for redemption at P90 per share. The entry to record the
redemption is as follows:

Date Preference share capital (1,000 x P100) 100,000

Share premium — Preference share 20,000
Cash (1,000 x P90) 90,000
Share premium — redemption 30,000

If redemption price is less than the original issuance price, the difference is credited to share premium.

Origination of other equity instruments

Corporations may issue equity instruments other than shares of stocks, whether as separate or standalone equity
instruments or bundled with other financial instruments, subject to the provisions of the Corporation Code. Examples
of such equity instruments include the following:
1. Stock rights
2. Conversion options included in convertible bonds and convertible preference shares
3. Detachable warrants issued with bonds and preference shares
4. Stock options

Stock rights
stock rights are issued to existing ordinary shareholders in relation to their preemptive rights. The stock rights enable
existing shareholders to protect their current ownership interests by acquiring new shares issued by the corporation
before such shares are offered to new investors. Stock rights normally enable existing shareholders to purchase
new shares at a price lower than the shares' market value. Stock rights issued are evidenced by share warrants.

Share warrants are certificates that entitle the holder thereof to acquire shares at a certain price within a stated
period. Share warrants are issued in conjunction with the following:
a. Issuance of stock rights in relation to shareholders' right of preemption.
b. Issuance of detachable warrants with other securities as "sweetener" or "equity kicker" to make' the principal
instrument more attractive to investors.
c. Issuance of share options to employees as additional compensation. (The accounting for share options is
discussed in Module 3).

Share warrants issued are exercisable only within a definite period of time and shall expire thereafter. Share
warrants issued for stock rights normally have a shorter duration compared to share warrants issued with other
securities.

Accounting for stock rights

Stock rights are recorded through memo entry only because stock rights are issued to existing shareholders
without consideration. entry is made only when the rights are exercised or recalled.

If the stock rights are subsequently recalled, any consideration paid is debited to share premium. No entry is made
if the stock rights expire but not recalled.

Illustration:
ABC Co. issues 10,000 stock rights to shareholders which entitle them to purchase one ordinary share with par
value of P100 for each stock right held at a subscription price of P120. The fair value per share is P150.

The issuance of stock rights is recorded through memo entry as follows:

“Issued 10,000 stock rights to shareholders enabling them to purchase 10,000 ordinary shares with par value of
P100 for a subscription of P120 per share.”

Page 15 of 20
Chapter 1 | Intermediate Accounting 3
Subsequently, half of the stock rights issued were exercised. The entry is as follows:

Date Cash (10,000 x 1/2 x P120) 600,000

Ordinary share capital (10,000 x 1/2 x P100) 500,000
Share premium — Ordinary share 100,000

Case #1
Assume that ABC Co. recalls the other half at P1 per stock right. The entry is as follows:

Date Share premium - Ordinary share 5,000

Cash (10,000 x 1/2 x P1) 5,000

Case #2
Assume that the other half expires but not recalled. ABC co. will make a memo entry indicating that the unexercised
stock rights have been cancelled.

Convertible bonds and convertible preference shares

Entities often issue bonds or preference shares with conversion feature in order to improve salability. The conversion
feature gives the holder an option of converting the originally purchased instrument (i.e., convertible bonds or
preference shares) into ordinary shares.

When convertible bonds are issued, in effect, the entity has issued two types of instruments — (1) a financial
liability for the bonds and (2) an equity instrument for the conversion feature. These components are segregated
and accounted for separately. Financial liabilities are presented in the liabilities section of the statement of financial
position while own equity instruments are presented in shareholders' equity. The accounting for convertible bonds
is discussed in detail in previous part of IA.

When preference shares convertible to ordinary shares are issued, the entity has issued only one type of
financial instrument - equity instrument, but of different classes. Normally, no separate accounting is required upon
issuance because both the principal instrument (i.e., preference share) and the conversion option are presented in
shareholders' equity. The equity conversion option is an embedded derivative that requires no separate recognition.
However, on conversion date, a reclassification entry is made from preference share capital to ordinary share
capital.

Illustration: Convertible preference shares

ABC Co. issued 1,000 convertible preference shares with par value of P100 for P120 per share. The entry to record
the issuance is:

Date Cash (1,000 x P120) 120,000

Preference share capital (1,000 x P100) 100,000
Share premium Preference share 20,000

Case 1
Subsequently, the preference shares are converted into ordinary shares at "1 ordinary share for 1 preference share
held" basis. The ordinary shares have par value per share of P50. The entry to record the conversion is as follows:

Date Preference share capital 100,000

Share premium Preference share 20,000
Ordinary share (1,000 x P50 par) 50,000
Share premium — Ordinary share (squeeze) 70,000

Case 2
Subsequently, the preference shares are converted into ordinary shares at "3 ordinary shares for 1 preference share
held" basis. The ordinary shares have par value per share of P50. The entry to record the conversion is:

Date Preference share capital 100,000

Share premium — Preference share 20,000
Retained earnings (squeeze). 30,000
Ordinary share (1,000 x 3 x P50 par) 150,000

Page 16 of 20
Chapter 1 | Intermediate Accounting 3
Bonds with detachable warrants
Similarly with the issuance of convertible bonds, when bonds are issued with detachable warrants, the entity has in
effect issued a compound instrument having two components — (1) a financial liability for the bonds and (2) an
equity instrument for the detachable warrants. These components are segregated and accounted for separately.
The accounting for bonds issued with detachable warrants is discussed in detail in your previous IA subject.

Preference shares with detachable warrants

Similarly with the issuance of preference shares convertible to ordinary shares, when preference shares are issued
with detachable warrants, the entity has issued only one type of financial instrument — equity instrument, but of
different classes.

However, in this case, the detachable warrant is not an embedded derivative but a standalone instrument that
should be accounted for separately. Detachable warrants are capable of being transferred or sold separately.

PFRS 9 provides that "a derivative that is attached to a financial instrument but is contractually transferable of that
instrument, or has a different counterparty from that instrument, is not an embedded derivative, but a separate
financial instrument."

Accordingly, the issue price should be allocated to the preference shares and the detachable warrants based on
their relative fair values on issuance date.

When both the preference shares and warrants do not have available fair values, the allocation of the issue price is
based on the intrinsic value of the warrants computed as the difference between the fair value of the ordinary
shares and the subscription price. The warrants are assigned their intrinsic value and any excess of the issue price
is allocated to the preference shares.

Illustration 1: Preference shares with detachable warrants

ABC Co. issued 1,000 preference shares with par value of P100 for P135,000. The preference shares included
1,000 share warrants that entitle the holder to acquire 500 ordinary shares with par value of P50 for P70 per share.
The fair values are determined as follows:

Preference share ex-warrant 110

Warrant 10

The issue rice is allocated as follows:

Equity instruments FV per sh. Fair values Fraction Allocation

Preference sh. 1,000 110 110,000 110/120 123,750
Warrants 1,000 10 10,000 10/120 11,250
120,000 120/120 135,000

The entry to record the issuance is as follows:

Date Cash 135,000

Preference share capital (1,000 x P100 par) 100,000
Share premium — PS (123,750 — 100K) 23,750
Share premium — warrants outstanding 11,250

Case 1
Subsequently, all of the warrants were exercised. The entries are as follows:

Date Cash (500 x P70) 35,000

Ordinary share (500 x P50 par) 25,000
Share premium — Ordinary share 10,000
Date Share premium — warrants outstanding 11,250
Share premium — Ordinary share 11,250

Case 2
All of the warrants expire unexercised. The entry is as follows:
Date Share premium — warrants outstanding 11,250
Share premium — Ordinary share 11,250
Page 17 of 20
Chapter 1 | Intermediate Accounting 3
When the warrants expire, the share premium from warrants outstanding is simply closed to the share premium
general account because the share warrants are not outstanding anymore.

Illustration 2: Allocation based on intrinsic value

ABC Co. issued 1,000 preference shares with par value of P100 for P135,000. The preference shares included
1,000 share warrants that entitle the holder to acquire 500 ordinary shares with par value of P50 for P70 per share.
The fair values of the preference shares and share warrants are not available. However, the ordinary shares have
a fair value of P100 per share.

The intrinsic value of the warrants is computed as follows:

Fair value of ordinary share 100

Subscription price (70)
Intrinsic value per share of warrant 30
Number of ordinary shares purchasable under the warrants 500
Assigned value of share warrants 15,000

Issue price 135,000

Assigned value of share warrants (15,000)
Excess allocated to preference shares 120,000

The entry to record the issuance is as follows:

Date Cash 135,000

Preference share capital (1,000 x P100 par) 100,000
Share premium PS (120K 100K) 20,000
Share premium — warrants outstanding 15,000

Donated capital
Donated capital arises from gifts received by the corporation from nonreciprocal transactions. Donated capital may
arise from the following:
1. Donations from shareholders — these are credited to share premium.
2. Donations from the government — these are recognized as government grants. (Government grants are
discussed in other Intermediate Accounting subject)
3. Donations from other sources — these are recognized as income when (a) the conditions attached to the
donation are fulfilled or are reasonably expected to be fulfilled, (b) the donation becomes receivable, and (c)
the criteria for asset recognition are met.

Donations from shareholders may be in the form of:

a. Cash — recognized at the amount of cash received or receivable.
b. Noncash assets — recognized at the fair value of the noncash assets
c. Entity's own shares — initially recorded through memo entry. Donated capital is recognized only when the
donated shares are subsequently reissued. This is because no asset is generated from the donated shares until
they are subsequently reissued. If' the donated shares are not to be resold, the entity should effect a formal
reduction of its authorized capital by retiring the shares received.

Illustration 1: Cash and Noncash donations from shareholders

ABC Co. received cash of P100,000 and land with fair value of P500,000 and historical cost of P300,000 from a
shareholder. No conditions are attached to the donation.

Date Cash 100,000

Land 500,000
Share premium — donated capital 600,000

Illustration 2: Donated shares received from shareholders

ABC Co. received 1,000 shares with par value of P100 and fair value of P120 per share from a shareholder as
donation.

Page 18 of 20
Chapter 1 | Intermediate Accounting 3
 The receipt of the shares is recorded through memo entry as follows:

"Received 1,000 shares with par value of P100 from a shareholder as donation.”

Subsequently, ABC Co. reissues the 1,000 donated shares at P130 per share.

Date Cash (1,000 x P130) 130,000

Share premium — donated capital 130,000

Assessments on shareholders
The shareholders of a financially troubled corporation may vote to provide additional capital based on their
respective shareholdings. The assessment or additional capital provided is credited to share premium.

Example: ABC Co. has 1,000 shares outstanding. The shareholders vote to provide P 130 additional capital per
share held. The entry is:

Date Cash or Assessment receivable 130,000

Share premium — assessment (1,000 x P130) 130,000

5. Assessment Tasks

Problem 1: True or False Questions. Answer “True” if the statement is correct and “False” if the statement is not
correct.
1. A corporation is formed by at least 5 but not exceeding 15 natural persons, all of legal age and a majority of
whom are residents of the Philippines.
2. To amend the articles of incorporation, a majority vote of the board plus a vote by shareholders representing at
least two – thirds (2/3) of the outstanding share capital is needed.
3. Under the memorandum method of accounting for share capital, the entity records its authorized capitalization
in a debit/credit form.
4. Preferred stock is generally issued with a par value.
5. In the Philippines, a Corporation may issue only one class of shares which is the preferred stock.
6. Convertible preferred stock allows the issuing corporation to redeem the stock.
7. The call price on callable preferred stock is usually specified in the original agreement and provides for payment
of dividends in arrears, if applicable, as part of the repurchase price.
8. Stock Subscriptions Receivable is usually regarded as a current asset.
9. Additional paid-in capital for the excess of the stock subscription price over par or stated value is recorded at
the time of subscription.
10. When capital stock is issued for consideration in the form property other than cash, the carrying amount of the
property is used to record the transaction.

Problem 2: Problem Solving. Answer the requirement(s) of each problem.

1. The following transactions relate to the stockholders' equity transactions of Lindsay Corporation for its initial
year of existence.

(a) Jan, 7 Articles of incorporation are filed with the state. The state authorized the issuance of 10,000
shares of P50 par value preferred stock and 200,000 shares of P10 par value common stock.
(b) Jan. 28 40,000 shares of common stock are issued for p14 per share.
(c) Feb. 3 80,000 shares of common stock are issued in exchange for land and buildings that have fair
values of P250,000 and P1,000,000, respectively.
(d) Feb. 24 2,000 shares of common stock are issued to Shane and Winston, Attorneys-at-Lawn in
payment for legal services rendered in connection with incorporation. The company charged
the amount to organization costs. The market value of the stock was P16 per share.
(e) Sep. 12 Received subscriptions for 10,000 shares of preferred stock at P53 per share. A 40 percent
down payment accompanied the subscriptions. The balance is due on October 1.
(f) Oct. 1 Received the final payment for 10,000 shares.

Requirements: Prepare journal entries to record the foregoing transactions. Identify the entries by letter (a - f).
Assume the entity uses the "memorandum method. "

Page 19 of 20
Chapter 1 | Intermediate Accounting 3
 2. The data below are from the December 31, 20x2, balance sheet of the Handi Comer Corporation:

Common stock, P50 par, 3,000 shares issued and outstanding P150,000
Paid-in capital in excess of par 45,000
Retained earnings 75,000

During 20x3, the following transactions affecting corporate capital were recorded:

Aug. 16 Purchased 400 shares of treasury stock at P78 per share.

Oct. 23 Purchased 225 shares of stock at P71 per share and immediately retired the stock.
Nov. 3 Sold 150 shares of the treasury stock purchased on Aug. 16 at P81 per share.

Requirement: Assuming the cost method is used for treasury stock and that retained earnings are to be reduced
minimally in stock reacquisition transactions, provide the entries required to record the above transactions.

3. Barker Corp. received a charter authorizing 120,000 shares of common stock at P15 par value per share. During
the first year of operations, 40,000 shares were sold at P28 per share. 600 shares were issued in payment of a
current operating debt of P18,600. In the first year, the net income was P 142,000.

During the year, dividends of P36,000 were paid to stockholders. At end of the year, total liabilities were
P82,000.

Requirements: Use the given data to compute the following items at the end of the first year (show all
computations):
1. Total liabilities and stockholders' equity
2. Stockholders' equity
3. Contributed capital
4. Issued capital stock (par)
5. Outstanding capital stock (par)
6. Unissued capital stock (number of shares)
7. Paid-In capital in excess of par value

4. On August 10, Jameson Corporation reacquired 8,000 shares of its P100 par value common stock at P134.
The stock was originally issued at P110. The shares were resold on November 21 at P145.

Requirement: Provide the entries required to record the reacquisition and the subsequent resale of the stock
using the cost method of accounting for treasury stock.

5. The Perry Company wants to raise additional equity capital. The company decides to issue 5,000 shares of P25
par preferred stock with detachable warrants. The package of the stock and warrants sells for P105. Each
warrant enables the holder to purchase two shares of P10 par common stock at P30 per share. Immediately
following the issuance of the stock, the stock warrants are selling at P14 each. The market value of the preferred
stock without the warrants is P96.

Requirements:
a. Prepare a journal entry for Perry Company to record the issuance of the preferred stock and the detachable
warrants.
b. Assuming that all the warrants are exercised, prepare a journal entry for Perry to record the exercise of the
warrants.
c. Assuming that only 70 percent of the warrants are exercised, prepare a journal entry for Perry to record the
exercise and expiration of the warrants.

6. References

Millan, Z. 2019. Intermediate Accounting. Bandolin Enterprises

Philippine Financial Reporting Standards (PFRS)

ISUE__ __ Syl ___

Revision: 02
Effectivity: August 1, 2020
Page 20 of 20
Chapter 1 | Intermediate Accounting 3