Shareholders' Equity

1. SHAREHOLDERS’
EQUITY
By: Dan Ryan Magalang, CPA

2. Agenda
Presentation title
• Concept of a Corporation
• Share Capital-Ordinary and Preference
• Trust Fund Doctrine
• Accounting for Share Capital
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3. Introduction
The following are the three forms of business organization:
Single Proprietorship, Partnership, and Corporation.
• In a single proprietorship, the owner's claim against the
assets is called capital or owner's equity.
• In a partnership, the partners' claim against the assets
is called partners' capital or partners' equity.
• In a corporation, the owners' claim against the assets is
called shareholders' equity or stockholders' equity.
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4. Introduction
Accounting records for business organizations are
practically the same except the accounting for the
capital accounts.
• In a single proprietorship and partnership, the
investment of the owner or owners and the
changes therein resulting from net income or loss
from operations are recorded in then capital
accounts.
• In a corporation, distinction is made between
invested capital and earnings or losses
accumulated in the business.
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5. Introduction
This distinction and other matters affecting the
shareholders’ equity will be discussed in this
chapter.
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6. Concept of a
Corporation
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7. Concept
A corporation is 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 legal or juridical person
with a personality separate and apart
from the individual members or
shareholders.
The corporation is not in fact and in
reality a person but the law treats it as
though it were a person by process of
fiction.
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8. Organization
A corporation is created by operation
of law.
• This means that a corporation cannot
come into existence by mere
agreement of parties as in the case of
a business partnership.
• A corporation requires the authority and
grant from the state.
Revised Corporation Code otherwise
known as Republic Act 11232
• The general law which governs the
creation of private corporations in the
Philippines
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9. Section 10 of the Revised Corporation Code
States that any person, partnership,
association or corporation, simply or
jointly with others but not more than
fifteen in number may organize a
corporation for any lawful purpose or
purposes.
Provided, that natural persons who are
licensed to practice a profession and
partnerships or associations organized
for the purpose of practicing a profession
shall not be allowed to organize as a
corporation unless otherwise provided
under special laws.
A corporation with a single shareholder is
considered a One Person Corporation.
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10. Elements of
Shareholders’
Equity
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11. Shareholders’ Equity
Shareholder’s Equity
• the residual interest of owners in the
net assets of a corporation measured
by the excess of assets over liabilities.
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12. Shareholders’ Equity Formula
Issued Share Capital XXX
Subscribed Share Capital XXX
Share Premium XXX
Total Contributed Capital XXX
Retained Earnings XXX
Treasury Shares (XXX)
Total Shareholder’s Equity XXX
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13. Shareholders’ Equity Formula
Note:
• The cost of the treasury shares is not deducted in computing
contributed capital or paid-in capital.
• Th subscription receivable is a deduction from the related subscribed
share capital. However, subscription receivable collectible within one
year is shown as current asset.
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14. Assessment 1
M Company provided the following data at year-end:
Authorized Share Capital 5M
Unissued Share Capital 2M
Subscribed Share Capital 1M
Subscription Receivable 400K
Share Premium 500K
Retained Earnings Appropriated 600K
Retained Earnings Unappropriated 300K
Treasury Shares 100K
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15. Solution (Assessment 1):
Authorized Share Capital 5M
Unissued Share Capital (2M)
Issued Share Capital 3M
Subscribed Share Capital 1M
Subscription Receivable (400K) 600K
Share Premium 500K
Retained Earnings Appropriated 600K
Retained Earnings Unappropriated 300K 900K
Treasury Shares (100K)
Shareholder’s Equity 4.9M
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16. Share Capital-
Ordinary and
Preference
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17. Share Capital-Ordinary and Preference
Ordinary Share Capital
• Right to vote
• To share in the income and in the
event of liquidation
• To share in all assets after satisfying
creditors' and preference
shareholders' claims
• Have the same rights and privileges
and enjoy no preference over each
other
• Have no fixed or specific return on
investment.
• Their financial reward is dependent on
the operations of the entity.
• If the entity is exceptionally profitable,
the holdings of ordinary shareholders
will become more valuable.
• If an entity suffers losses, the value of
the ordinary shareholders' equity will be
reduced as fewer assets are available
to satisfy residual claims.
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18. Share Capital-Ordinary and Preference
Preference Share Capital
• The preferences granted to the
shareholders.
• Usually pertain to the preference
shareholders' claims on dividends
and net assets in the event of
liquidation.
• a company’s stock with dividends that
are paid out to shareholders before
common stock dividends are issued.
• If the company enters bankruptcy,
preferred stockholders are entitled to be
paid from company assets before
common stockholders.
• Have only a limited or fixed return on
investment.
• Do not hold any voting rights
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19. Legal Capital
Legal Capital
• Also called as minimum permanent investment
• A portion of the paid in capital arising from
issuance of share capital which cannot be
returned to the shareholders in any form during
the lifetime of the corporation..
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20. Legal Capital
Accounts included in computing the
legal capital:
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21. Assessment 2
G Corporation provided the following information at year-end:
Preference Share Capital, P100 par 3M
Share Premium- Preference Share 500K
Ordinary Share Capital, P10 par 6M
Share Premium- Ordinary Share 2M
Subscribed Ordinary Share Capital 4M
Retained Earnings 2.5M
Subscription Receivable- Ordinary Shares 1M
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22. Solution (Assessment 2)
Legal Capital:
Preference Share Capital, P100 par 3M
Ordinary Share Capital, P10 par 6M
Subscribed Ordinary Share Capital 4M
Total Legal Capital 13M
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23. Trust Fund Doctrine
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24. Trust Fund Doctrine
Preference Share Capital
• A contributed capital of a corporation
constitute a “trust fund” to which the
corporate creditors have a right for
satisfaction of their claims. (Section 122
of the Corporation Code)
• It is illegal to return legal capital to
shareholders during the life time of the
corporation.
• The corporation can still pay dividends
to shareholders but limited only to the
retained earnings balance
.
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25. Accounting for
Share Capital
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26. Accounting for Share Capital
With Par Value
Proceeds from Issuance of Shares:
Share Capital at Par Value XXX
Paid in Excess of Par XXX
Total CC XXX
Without par value, with stated value
In this case, the proceeds from the
issuance or the sale of shares will be
based on the given stated value of the
company.
Proceeds from Issuance of Shares:
Share Capital at Stated Value XXX
Paid in Excess of Stated Value XXX
Total CC XXX
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27. Assessment 3
At the beginning of the current year, G Company was organized and authorized to
issue 100,000 shares with P50 par value.
During the current year, the entity had the following transactions:
• Issued 10,000 shares at P70 per share.
• Issued 20,000 shares at P80 per share.
• Reported net income of P1,000,000.
• Paid dividends of P200,000.
• Purchased 3,000 treasure shares at P100 per share.
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28. Assessment 3
Questions:
1. What amount should be reported as share capital at year-end?
2. What amount should be reported as share premium at year-end?
3. What amount should be reported as total shareholders’ equity at year-end?
4. What amount should be reported as contributed capital at year-end?
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29. Solution (Assessment 3)
1. Issued (10,000 shares x 50) 500,000
Issued (20,000 shares x 50) 1,000,000
Share Capital 1,500,000
2. Issued (10,000 shares x 20) 200,000
Issued (20,000 shares x 30) 600,000
Share Premium 800,000
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30. Solution (Assessment 3)
3. Share Capital 1,500,000
Share Premium 800,000
Retained Earnings 800,000
Treasury Shares (3,000 x 100) (300,000)
Total Shareholders’ Equity 2,800,000
4. Share Capital 1,500,000
Share Premium 800,000
Share Premium 2,300,000
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31. The way to get
started is to quit talking
and begin doing.
Walt Disney
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32. Thank you
Dan Ryan
Magalang,
CPA
Email:
romanseightt
wentyeight.cp
a@gmail.com
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