AUDIT OF SHAREHOLDERS EQUITY - Contributed capital – amount invested or

contributed by owners
Components of Shareholder’s Equity

Shareholder’s equity – residual interest of owners in the Classes of share capital:

- Ordinary share capital – subordinate to all classes.
net assets of a corporation measured by the excess of
- Preference share capital – gives the holder certain
assets over liabilities (assets – liabilities = shareholder’s
preference over ordinary shareholders.
equity)

Share Capital issued XXX Two methods of accounting for share capital
Subscribed share capital XXX - Memorandum method
Less: Subscription receivable (XXX) XXX - Journal entry method

Share premium: Legal Capital – portion of the paid in capital which cannot
Share premium excess over par XXX be returned to stockholders in any form. Consists of par
Share premium – treasury XXX value of the shares and shares issued and subscribed.
Share premium conversion option – XXX
Convertible bonds payable Legal capital (with par value)
Donated capital XXX Share capital XXX
Share premium Warrants Outstanding XXX Subscribed share capital XXX
Share premium options outstanding XXX XXX Total Legal Capital XXX
Total paid in capital XXX
Legal capital (no par) XXX
Retained earnings – unappropriated XXX Share capital XXX
Retained earnings – appropriated XXX XXX Paid in capital in excess of stated value XXX
Total legal capital XXX
Other comprehensive income (cumulative balance)
Revaluation surplus XXX Organization cost and expenses related to share capital
Unrealized gain or loss on FVOCI XXX 1. Legal fees in connection with the incorporation
Remeasurement gain or loss PAS19 XXX 2. Incorporation feed
Translation gain or loss XXX 3. Share issuance cost
Cash flow hedge – effective portion XXX
Change in FV due to credit risk of - Organization costs, except share issuance cost,
Designated FVPL XXX XXX shall be recognized as expense in the first year of
TOTAL XXX operations
Less: Treasury shares XXX - Share issuance costs shall be accounted as a
TOTAL SHAREHOLDER’S EQUITY XXX deduction from equity, net of any related income
tax benefit. Stock issuance cost shall be debited in
Share Capital – paid-in capital representing amount of the the following order:
total par or stated value of shares issued. Portion of the o Share premium from issuance
authorized capital that has been fully paid. o Share premium from previous issuance
o Retained earnings
- Subscribed share capital – portion of the share - Indirect costs shall be charged as expense
capital that the investor agreed to purchase.
Added to the Share Capital Watered share – share issued at discount or for
inadequate/insufficient consideration or consideration
- Subscription receivable – refers to unpaid portion received at less than par value.
of the subscribed share capital. Netted against - Related discount on share capital shall be
subscribed share capital. Presented as current presented as deduction to total shareholder’s
asset if collectible currently. equity
Secret reserve – it arises when asset is understated or
- Reserves – generally includes stockholders’ equity liability is overstated with a consequent understatement
items other than the total par or stated value of of capital.
capital stock and unrestricted retained earnings
o Share premium reserve
o Revaluation reserve
o Retained earnings reserve
o Net changes reserve
 Foreign currency translation
reserve
 Equity adjunct or contra reserve

- Retained earnings – used to record the

accumulated corporate periodic earnings
Issuance of noncash consideration When sold to the highest bidder
Consideration received Valuation Cash xx
Noncash asset or service Share capital is recorded Subscription receivable xx
at: Advances from sales of
1. Fair value of the delinquent shares xx
noncash consideration interest income xx
received
2. Fair value of shares subscribed share capital xx
3. Par value of Shares share capital xx
Extinguishment of liability Share capital is recorded
at - In recording auctioned subscription, the winner is
1. Fair value of shares of bidding is the one with the lowest number
2. Fair value of liability shares. Cost incurred in auction will be debited to
3. Carrying amount of receivable from highest bidder. Collection from
liability the highest bidder will derecognize the existing
subscribed receivable and receivable from highest
any difference between bidder, then the whole share capital will be
the carrying amount of recognized, and subscribed share capital will be
the financial liability (or derecognized.
part) extinguished and the
measurement of equity When no highest bidder and the corporation acquires the
instrument issued shall be share
recognized in profit or loss
Treasury shares xx
Issuance of two or more classes of share Subscription receivable xx
a. Issued separately – accounted separately Receivable from highest bidder xx
b. Issued simultaneously at a basket or lump-sum
price - In case of delinquent subscription, where there is
o Proportional method – both shares have no highest bidder, it will be accounted as treasury
fair value shares. Treasury will be recorded at cost. Then the
o Incremental method – only one has fair share capital will be recognized, and derecognize
value the subscription capital.
Note: if both has no fair value, use proportional method
based on their par value of shares issued When no highest bidder and the corporation is
prohibited to acquire the shares
Subscriptions – written contract by which one engages to
take and pay for the capital stock of a corporation in some Subscribed capital xx
future date. Approval of incorporation requires that at Share premium xx
least 25% of authorized shares must be subscribed and at Subscription receivable xx
least 25% of subscription should be paid. Receivable from highest bidder xx
Share premium – delinquent xx
Delinquent subscription – if a stock subscriber does not
pay in full his unpaid subscription on the date fixed by the - In case of delinquent subscription where there is
board of directors, he may be declared a delinquent no higher bidder and the entity is prohibited to
subscriber. reacquire the shares, related accounts to the
subscription will all be derecognized, share
Forfeited downpayment premium – delinquent subscription might be
Subscribed share capital xx recognized.
Premium on share capital xx
Subscription receivable xx Treasury shares – company’s own stock previously issued,
Share premium – forfeited dp xx reacquired but not cancelled.

- In recording forfeited downpayment, subscribed Accounting for treasury shares

share capital, premiums, and subscription - Cost method – recognized at acquisition cost
receivable must be derecognized and then - Par value method – recognized at par value,
recognize the forfeited downpayment. including other necessary accounts.

Auctioned subscription Cost method

- Acquisition
Advances from sales Treasury shares (at cost) xx
of delinquent shares xx Cash xx
Cash xx
- Reissuance at cost, above, and below cost
Cash xx
Treasury shares (at cost) xx
 Step 2 – if the retirement resulted to gain, the difference
should be credited to share premium – retirement
Cash xx Step 3 – if the retirement resulted to loss, the difference
Treasury shares (at cost) xx should be debited to retained earnings
Share premium – ts xx
- Retirement at gain and at loss
Cash xx Share capital xx
Share premium – ts xx Share premium xx
Retained earnings xx Cash xx
Treasury shares (at cost) xx Share premium – rt xx

- Retirement, gain and loss Share capital xx

Ordinary shares xx Share premium xx
Share premium – os xx Retained earnings xx
Treasury shares (at cost) xx Cash xx
Share premium – ts xx
Preference share
Ordinary shares xx Item Description Treatment
Share premium – os xx Convertible Entitle the Equity
Share premium – ts xx preference holder thereof
Retained earnings xx shares to exchange the
Treasury shares (at cost) xx same to ordinary
Important note: shares, at the
- regardless whether there is a perceived gain or option of the
loss, share premium arising from original issuance shareholders
must be derecognized Callable Gives the issuing Equity
- gain, if the original issue price is higher than the preference corporation the
reacquisition price or cost of treasury shares shares right, but not
- loss, if the original issue price is lower than the the obligation,
reacquisition price or cost of treasury shares to reacquire and
retire the share
Par value method at a fixed or
- Acquisition determinable
Treasury shares (at par) xx call price
Share premium – orig xx Mandatorily or One that must Financial liability
Retained earnings (if any) xx compulsorily be retired or
Cash xx redeemable reacquire by the
Share premium xx preference issuing
Note: upon acquisition under par value method, it is shares corporation at a
treated as if it is being retired. fixed
determinable
- Reissuance at par, above par, and below par date
Cash xx
Treasury shares (at par) xx Conversion of convertible preference shares
a. at gain
Cash xx preference shares xx
Treasury shares (at par) xx share premium – ps xx
Share premium – ts xx ordinary shares xx
share premium – os xx
Cash xx
Share premium – ts xx b. at loss
Retained earnings xx preference shares xx
Treasury shares xx share premium – ps xx
retained earnings xx
ordinary shares xx
Donated capital – donated received from shareholders. share premium – os xx
Note: receipt of entity’s own share, even if recorded only
through memo, will decrease the number of outstanding note: just like in any retirement, there is always debit to
shares share premium from original issuance of the shares
retired or converted.
Retirement of share capital
Step 1 – derecognize the share capital and its related
share premium when it was originally issued by debits to
the capital stock account and the related share premium
from original issuance and credit cash.
Recapitalization – when there is a change in the capital multiply: no. of ordinary shares claimable xx
structure of the company, old shares are cancelled and market value of share warrants xx
new shares are issued
- change from par to no par total proceeds xx
ordinary share capital xx less: market value of share warrants xx
share premium – os xx value assigned to preference shares xx
retained earnings (sqz) xx
ordinary shares xx - share warrants issued with bonds payable
share premium – rcptlzn (sqz) xx Rights issue/stock right/right of preemption
- granted to existing shareholders to enable them
- change from no par to par acquire new shares at a specified price during a
ordinary share capital xx specific period
share premium xx
retained earnings (sqz) xx
ordinary share capital xx
share premium – rcptlzn (sqz) xx

- reduction of par value or stated value

ordinary share capital xx
share premium – rcpltzn xx

- split up or split down

MEMO ENTRY ONLY

Split up – original shares are called in for cancellation and

replaced by a larger number accompanied by reduction in
par or stated value

Split down – original shares are cancelled and replaced by

smaller number accompanied by an increase in par or
stated value

Share warrants – certificates that entitle the holder

thereof to acquire shares at a certain price within a
specific period. It might be issued for the following
reasons:
- additional compensation
- to make securities more attractive
- as right of preemption to existing shareholders of
the corporation

Non-detachable warrants
- stock warrants that can be traded separately from
the security
o issuance of warrant:
memo entry
o exercise of warrant:
cash xx
share capital xx
share premium (if any) xx
o expiration of warrant:
memory entry

Detachable warrants
- stock warrants that can be traded separately from
the security
- share warrants issued with preference shares
o both fair value known – use relative fair
value method (proportion method)
o only one has fair value – use increment
method
o both fair value unknown
market value of ordinary shares xx
less: option price/exercise price xx
intrinsic value of warrant xx