01 review of share capital transactions

7/31/2019 01 Review of Share Capital Transactions

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Review of Share Capital Transactions

Advantages of a Corporation Accumulation of capital

Limited liability

Variety of ownership interests

Disadvantages of a Corporation Difficult to create, organize and

manage

More reportorial requirements with

the SEC

Double taxation


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Share System

Authorized sharesmaximum number of shares that can be sold to the public

Unissued sharesunsold shares

Issued sharesshares that have been sold

Outstandingowned by shareholders

Treasuryreacquired shares; not an investment of the company

Retired sharespreviously issued, but then reacquired and cancelled


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Variety of Ownership Interests

Ownership rights:

1. To share proportionately in profits or losses

2. To share proportionately in management

3. To share proportionately in corporate assets upon liquidation

4. To share proportionately in any new issues of shares in the same class

Ordinary Shares: residual corporate interest that bears the ultimate risks and

receives the benefits

Preference Shares: certain preferences to earnings


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Ordinary Shares Basic voting shares of the

corporation

Bears ultimate risks of loss

Receives the benefits of success

Not guaranteed dividends nor

assets upon dissolution

Dividends determined by board of

directors

Preference Shares Generally does not have voting

rights

Usually has a par or stated value

Dividend preference over ordinary

shares

Preference over ordinary shares in

the event of liquidation


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Equity

- Residual interest in the assets of the company after deducting all

liabilities

Categories

Share capitallegal capital

Share premium

Retained earningsearned capital

Other comprehensive income

Treasury shares

Non-controlling interest


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Issuance of Shares

Par value

ABC Corp. was organized with 500 000 ordinary shares authorized with a par

value of P5 per share and 200 000, 8% preferred shares with a par value of P10. If

ABC issues 20 000 shares for P12/share, prepare the journal entry

No par

a. No stated value

Suppose ABC is organized with the same number of shares but with no par value,

journalize the previous transaction.

b. With stated value

If the no-par shares have a stated value of P3 per share, how will the entry differ

from issuing them with no stated value?


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With other securities

a. ABC issued 25 000 ordinary shares and 10 000 preferred shares, which have a

for a total consideration of P450 000. At the time of the transaction, ordinary

shares were selling at P12/share and the preferred shares were selling at

P20/share.b. ABC issued 5 000, P1 000 bonds for a total consideration of P4 800 000. 4 shares

are issued for every bond sold. The fair value of each bond is P940 and the fair

value of the shares is P300 000.

*IFRS 2, par. 35

the entity shall measure the equity component of the compound

financial instrument as the difference between the fair value of the goods or

services received and the fair value of the debt component, at the date when the

goods or services are received.


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Non-Cash Transactions

a. ABC issued 30 000 ordinary shares to acquire a land with a cost of P400 000 and

a fair value of P700 000. The shares were selling at P15/share at the time of the

transaction

b. Suppose all information remained the same, only the land had an appraised value

of P650 000. How would the journal entry differ?

Cost of Issuance

ABC issued 50 000 ordinary shares at P25/share. It incurred a total of P100 000in professional fees in relation to the transaction. Tax rate is 10%.

*IAS 32, par. 37

Transactions costs of an equity transaction shall be accounted for as a deduction

from equity, net of any related income tax benefit.


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Cost of Issuance (IAS 32, par. 37)

Transaction costs of an equity transaction

Deducted from equity

Incremental costs directly attributable to the equity transaction

*The costs of an equity transaction that is abandoned are recognized as expense.

Examples of cost of issuance

Registration fees

Underwriter commissions

Printing and clerical costs

Legal and accounting fees


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Donation of Shares

a. To help the company in its operations, a total of 40 000 shares were donated to

ABC. The shares have an average cost of P14. Fair value of each share is P20.

b. The shares were subsequently reissued for P25/share.

Watered Shares

Issued for insufficient consideration

Illegal


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Repurchase of Shares

*IAS 32, par. 33: If an entity reacquires its own equity instruments, those

instruments (treasuryshares) shall be deducted from equity. No gain or loss shall

be recognized in profit or loss on the purchase, sale, issue , or cancellation of an

entitys own equity instruments. Such treasury shares may be acquired and held by

the entity or by other members of the consolidated group. Consideration paid or

received shall be recognized directly in equity.


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Repurchase of Shares

a. ABC repurchased 50 000 of its own shares at P12/share.

b. Suppose after one month, 5 000 of its shares were reissued at P12/share.

c. Another 7 000 of its treasury shares were reissued at P10/share. Assume that (a)

is the first treasury share transaction of ABC.

d. Another 8 000 treasury shares were reissued at P13/share.

e. Another 5 000 treasury shares were reissued at P8/share.


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ABC Corporation

Partial Statement of Financial Position

31-Dec-12

Equity

Share capital - preference, P10 par, 8%, 10 000

shares issued and outstanding 100,000.00

Share capital - ordinary, P5 par, 145 000 shares

issued, 120 000 shares outstanding 725,000.00 825,000.00

Share premium - preference 80,000.00

Share premium - ordinary 1,745,000.00

Share premium - donated capital 1,000,000.00 2,825,000.00

Retained earnings 8,500,000.00

Treasury shares (25 000 ordinary shares) (300,000.00)

Total equity 11,850,000.00

01 review of share capital transactions

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