Shareholders' Equity Flashcards
Define a corporation.
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 legal or juridical person with a personality separate and distinct from its members/shareholders.
The shareholders or members compose the corporation but they are NOT the corporation.
Explain the organization of a corporation.
Created by operation of law, thus requires the authority and grant from the State as opposed to mere agreement of parties (as in partnership)
What are the contents of Articles of Incorporation?
[KEY: NPPTIDSS]
- Name
- Purpose
- Place of principal office
- Term
- Incorporators
- Incorporating directors
- Total share capital, par, number of shares
- Subscribed capital & subscribers
What are by-laws?
By-laws may be defined as the rules of action adopted by the corporation for its internal government and for the government of its officers, shareholders or members.
Differentiate corporators vs. incorporators
Corporators - those who compose the corporation
Incorporators - those corporators mentioned in the AOI as originally forming and composing the corporation
Differentiate shareholders vs. members
Shareholders - owners of shares of stock in a stock corporation
Members - corporators of a nonstock corporation
Explain organization cost and its accounting treatment.
Costs incurred in forming or organizing a corporation.
Generally, expensed immediately (except share issuance cost, which shall be a deduction from APIC).
Explain the meaning of shareholders’ equity.
Residual interest of owners in the net assets of a corporation measured by the excess of assets over liabilities
Explain the treatment of deposits on subscription to a proposed increase in authorized share capital.
May be reported as part of SHE as a separate item in the equity section
Define legal capital.
That portion of the paid-in capital which CANNOT BE RETURNED to the shareholders in any form during the lifetime of the corporation.
For par value shares: Aggregate par value of shares issued and subscribed
For no-par value shares: Total consideration received including excess over stated value (share premium)
Explain the trust fund doctrine.
The share capital of a corporation is considered a trust fund for the protection of creditors. Consequently, it is illegal to return such LEGAL CAPITAL to shareholders during the lifetime of the corporation.
However, the corporation can pay dividends to shareholders but limited only to the retained earnings balance.
Accordingly, it is illegal to pay dividends if the entity has a deficit.
May share capital be issued at less than par or stated value? Explain.
No. Our Corporation Code prohibits the issue of shares at a discount. In doing so, the shareholder incurs a DISCOUNT LIABILITY.
Pro-forma entry:
Dr. Cash
Dr. Discount on share capital
Cr. Share capital
The discount liability account is a DEDUCTION FROM SHE.
Explain the accounting for share capital issued for non-cash consideration.
The share capital is recorded at an amount equal to the following hierarchy:
- FV consideration received
- FV shares issued
- Par value shares issued
Explain the accounting for share capital issued for services.
The share capital shall be recorded at:
- FV of such services
- FV shares issued
Whichever is more clearly determinable
Explain the treatment of share issuance costs.
Debited to share premium arising from the share issuance (i.e. deduction from APIC)
Pro-forma entry:
Dr. APIC/Share premium
Cr. Cash
Share issuance costs:
- Legal fees
- CPA fees
- Underwriting fees
- Commissions
- Cost of printing certificates
- Documentary stamps
- Filing fees with SEC
- Cost of advertising and promotion
- Newspaper publication fee
Explain the treatment of costs of public offering of shares.
Expense in the income statement
Costs of listing shares include:
A. Road show presentation
B. Public relations consultant’s fees
C. Listing fees
Explain the treatment of joint costs relating to the concurrent listing and issuance of new shares, and listing of old existing shares.
Allocate prorata based on outstanding newly issued and listed shares vs outstanding newly listed old existing shares
Examples:
- Audit and other professional advice
- Opinion of counsel
- Tax opinion
- Fairness opinion and valuation report
- Prospectus design and printing
Pro-forma entry:
Dr. Share Premium (relating to issuance of new shares)
Dr. Listing Fee (expensed, relating to old shares)
Cr. Cash
What is watered share?
Share capital issued for insufficient or inadequate consideration.
Pro-forma entry:
Dr. Asset
Dr. Discount on share capital
Cr. Share capital
Who is the highest bidder?
The highest bidder is the person who is willing to pay the “offer price” of the delinquent shares for the smallest number of shares.
The offer price normally includes the following:
- Balance due on subscription
- Interest accrued on subscription due
- Expenses of advertising and other costs of sale
Pro-forma entry: Dr. Cash Cr. Subscription receivable (unpaid portion) Cr. Interest income Cr. Advances on delinquency sale
Dr. Subscribed share capital
Cr. Share capital
If there are no bidders, the corporation may bid in the absence of a bidder or of a highest bidder.
Pro-forma entry: Dr. Treasury stock Cr. Subscription receivable Cr. Interest income Cr. Advances on delinquency sale
Dr. Subscribed share capital
Cr. Share capital
Distinguish callable preference share and redeemable preference share.
Callable P/S = no specified redemption date; at the option of the issuing corporation
Pro-forma entry - called at more than original issue price Dr. Preference share capital Dr. Share premium on original issuance Dr. Retained earnings Cr. Cash
Pro-forma entry - called at less than original issue price
Dr. Preference share capital
Dr. Share premium
Cr. Cash
Redeemable P/S = with specified, mandatory redemption date; satisfies definition of a financial liability
Explain fully a redeemable preference share.
A preference share which has a mandatory redemption date, or one which must be redeemed at the option of the holder.
Shall be classified as current or noncurrent LIABILITY depending on the redemption date.
Dividends paid on these preference shares shall be accounted for as INTEREST EXPENSE.
Any gain or loss on redemption shall be recognized in profit or loss.
Explain convertible preference shares.
Gives the holder the right to exchange the holdings for other securities of the issuing corporation. Usu. convertible to ordinary share.
Pro-forma entry: Dr. P/S Dr. APIC-P/S Cr. C/S Cr. APIC-C/S
or
Dr. P/S
Dr. APIC-P/S
Dr. R/E
Cr. C/S
Explain accounting for stock rights.
ISSUANCE OF STOCK RIGHTS: Memo entry
EXERCISE OF RIGHTS: Normal accounting for share issuance
EXPIRATION OF RIGHTS: Memo entry
Explain accounting for preference share issued with share warrants.
Two securities - preference share and share warrants. Allocate on the basis of market value!
Allocation:
(1) FV preference share ex-warrant
(2) FV warrant
Pro-forma entry:
Dr. Cash
Cr. P/S (@ par)
Cr. Share premium - P/S (excess over par)
Cr. APIC - Share warrants outstanding (allocated)
Upon exercise: Dr. Cash Dr. APIC - SWO Cr. C/S Cr. APIC - C/S
