2.  Identify the key components of stockholders’ equity.  Define share capital.  Discuss the two basic types of shares.  Discuss the terms related to share capital.  Discuss accounting for issuance of share capital.  Discuss accounting for treasury stocks. Learning Objectives

3. The Nature of Shareholders’ Equity Assets – Liabilities = Shareholders’ Equity Shareholders’ Equity Paid-in Capital Retained Earnings Amounts earned by corporation Amounts invested by shareholders Accumulated Other Comprehensive Income Other gains and losses not included in net income Sources of Shareholders’ Equity Net Assets

4. Contributed Capital Retained Earnings Account Retained Earnings Account Additional Paid- in Capital Account Additional Paid- in Capital AccountLess: Treasury Stock AccountLess: Treasury Stock Account Two Primary Sources of Equity Corporate Capital Preferred Stock Account Preferred Stock Account Assets – Liabilities = Assets – Liabilities = Equity

5. Concept Owner’s Equity  The equity section title in a sole proprietorship is most commonly called “Owner’s Equity”.

6. SHARE CAPITAL  LEGAL CAPITAL – capital contributed by shareholders comes from the sale of shares of stock.  It is the portion of the contributed capital or the minimum amount of paid-in capital, which must remain in the corporation for the protection of corporate creditors.  LEGAL CAPITAL OF PAR VALUE SHARES = Par value x all issued and subscribed shares  LEGAL CAPITAL OF NO-PAR VALUE SHARES = Total consideration received by the corporation (including the excess of issue price of the stated value.  SHARE PREMIUM (Additional Paid-in Capital) – amounts paid by shareholders in excess of par.

7. SHARE CAPITAL  Example: Roar Inc. has the following data: # of issued shares w/ no par value of sold at P15/share1,250,000 # of subscribed shares w/ no par value of subscribed at P12/share1,000,000 1.COMPUTE FOR THE LEGAL CAPITAL. 2.COMPUTE FOR THE SHARE PREMIUM.

8. TWO BASIC TYPES OF SHARES  Common Stock Common Stock  Preferred Stock Preferred Stock

9. Issuance of Stock Accounting problems: 1. Par value stock. 2. No-par stock. 3. Stock issued with other securities. 4. Stock issued in noncash transactions. 5. Costs of issuing stock. Corporate Capital Shares authorized - Shares sold - Shares issued

10. CONSIDERATIONS FOR ISSUANCE OF SHARES Actual cash paid to the corporation Tangible or intangible properties actually received by the corporation Labor already performed for or services actually rendered to the corporation Previously incurred indebtedness by the corporation Amounts transferred from unrestricted retained earnings to stated capital Outstanding shares exchanged for stocks in event of reclassification or conversion Shares of stock in another corporation Other generally accepted form of consideration Corporate Capital

11. Kofi Co. issued 300 shares of P10 PAR VALUE per common stock. Prepare Kofi's’ journal entry. Cash3,000 Common stock (300 x P10) 3,000 Journal entry: ISSUE SHARES AT PAR Share Issuances for Cash

12. When shares are issued at a price higher than the face value then it is called as the issue of shares at premium. The excess of issue price over the face value is the amount of premium. The premium on issue of shares is treated as revenue profits. Issue of Shares at Premium : Nov 1. K.K issued 35,000 shares of Common stock par value P1 each at a premium of P5 cash ? Recorded Sol: Cash ( 35000 × 5 ) 175,000 Common stock ( 35000 × 1 ) 35,000 Share Premium 140,000

13. Corporate Capital No-Par Stock Reasons for issuance: Avoids contingent liability. Avoids confusion over recording par value versus fair market value. Reasons for issuance: Avoids contingent liability. Avoids confusion over recording par value versus fair market value. Some states require that no-par stock have a stated value.

14. Karbala Co. issued 600 shares of no-par common stock for $10,200. Prepare Karbala’s journal entry if (a) the stock has no stated value, and (b) the stock has a stated value of $2 per share. Cash10,200 Common stock 10,200 Journal entry: Cash10,200 Common stock (600 x $2) 1,200 a. b. Corporate Capital Additional paid-in capital 9,000

15. EXERCISE:  CORPUZ issued 200,000 shares of P1 par value ordinary shares at P15.  Bradley has authorized shares of 1,000,000 shares with par value of P5 per share. Upon the IPO, it issued 150,000 shares with par value of P5 per share for P12/ share. After the IPO, Bradley issued additional 80,000 shares for P15/share.  Prepare the journal entries.  Compute for the legal capital.  Compute for the share premium. CONSIDERATIONS FOR ISSUANCE OF SHARES

16. Stocks issued with other Securities Kut Co. issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $14,200. The common stock has a market value of $20 per share, and the preferred stock has a market value of $90 per share. Proportional Method

17. Stocks issued with other Securities Kut Co. issued 1,400 shares of $10 par value common stock and 300 shares of $20 par value preferred stock for a lump sum of $50,000. The common stock has a market value of $20 per share, and the preferred stock has a market value of $90 per share. Proportional Method

18. Baghdad Baghdad Co. issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $14,200. The common stock has a market value of $20 per share, and the preferred stock has a market value of $90 per share. Cash14,200 Preferred stock (100 x $50) 5,000 Journal entry (Proportional): Additional paid-in capital-preferred3,520 Common stock (300 x $10) 3,000 Additional paid-in capital-common2,680 Corporate Capital

19. Stocks Issued in Noncash Transactions The general rule: Companies should record stock issued for services or property other than cash at either the: fair value of the stock issued or fair value of the noncash consideration received, whichever is more clearly determinable. Corporate Capital

20. Land80,000 Common stock (24,000 x $1) 24,000 April 1 Issued 24,000 shares of common stock for land. The asking price of the land was $90,000; the fair market value of the land was $80,000. Additional paid-in capital56,000 Kut Co. was organized on January 1, 2007. It is authorized to issue 500,000 shares of no par common stock with a stated value of $1 per share. Prepare the journal entry to record the following. Corporate Capital

21. Organization expense100,000 Common stock (20,000 x $1) 20,000 Aug. 1 Issued 20,000 shares of common stock to attorneys in payment of their bill of $100,000 for services rendered in helping the company organize. Additional paid-in capital80,000 Kut Kut Co. was organized on January 1, 2007. It is authorized to issue 1000,000 shares of no par common stock with a stated value of $1 per share. Prepare the journal entry to record the following. Corporate Capital

22. Accounts Payable50,000 Common stock (20,000 x $1) 20,000 Aug. 1 Issued 20,000 shares of common stock to supplier in payment of the corporation’s liability of $50,000 for services rendered in helping the company organize. Additional paid-in capital30,000 Kut Kut Co. was organized on January 1, 2007. It is authorized to issue 1000,000 shares of no par common stock with a stated value of $1 per share. Prepare the journal entry to record the following. Corporate Capital

23. Costs of Issuing Stock Direct costs incurred to sell stock, such as underwriting costs, accounting and legal fees, printing costs, and taxes, should be reported as a reduction of the amounts paid in (additional paid-in capital). Corporate Capital

24. Subscription of Shares SUBSCRIPTION CONTRACT – legally binding contract which provides for the number of shares subscribed, the subscription price, the terms of payment and other conditions of the transaction. SUBSCRIBER – becomes a shareholder upon subscription but stock certificate will only be given upon full payment of the subscription. TERMS RELATED TO SUBSCRIPTION: 1.SUBSCRIPITONS RECEIVABLE – debited for the total proceeds of the subscriptions - credited for the collections - a shareholder’s equity account, presented as a deduction from the related subscribed ordinary shares 2. SUBSCRIBED SHARE CAPITAL - total subscribed shares at par value

26. Subscription of Shares Fashion Fabrics Ltd. issued 100,000 shares of P10 par value shares on April 1, 2020. April 5 Jones subscribed 5,000 shares at P12 per share. April 10 Jones paid half of the subscribed shares. April 13 James purchased 12,000 shares at P18 per share. April 20 Jones paid the remaining balance of the subscription

27. Subscription of Shares Highest bidder – a person who is willing to pay the “offer price” which includes the full amount of the subscription balance plus accrued interest, cost of advertisement and any necessary expenses. April 5 Jones subscribed 5,000 shares at P12 per share. Assume the subscriber failed to settle his subscription in the amount of P48,000. The offer price during public auction is P56,000 including P3,000 accrued interest and P5,000 expenses. Three bidders: Leonor4,300 shares Luz4,500 shares Winnie4,700 shares

28. EXERCISES: ABC COMPANY has been authorized to issue 125,000 shares of P10 par ordinary shares. The following 2019 transactions relate to the initial issuance of ABC Co. Jan 1ABC sold subscriptions for 25,000 shares of stock. The shares have a subscription price of P15 per share. One-third of the subscription price was received as down payment. 15ABC sold 10,000 shares for P180,000 Feb 1An installment amounting to one-third of the subscription price was received. 19ABC exchanged 20,000 shares of stock for a parcel of land with a fair value of the P450,000 March 1Received the final installment of the subscription.