SHARE CAPITAL (CAPITAL STOCK)
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Transcript of SHARE CAPITAL (CAPITAL STOCK)
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SHARE CAPITAL (CAPITAL STOCK)
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Share Capital
• Also known as capital stock• It is the amount fixed by the corporate charter
to be subscribed and [aid in or secured to be paid in by the shareholders of a corporation either in money or in property, labor or services upon the organization of a corporation or afterwards.
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Classes of Share Capital
• There are two classes of share capital:
- Ordinary share capital (common stock)- Preference share capital (preferred stock)
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Ordinary Share Capital
• Entitles the holder to an equal or pro-rata division of profits without any preference or advantage over any class of shares.
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Preference Share Capital
• Entitles the holder to enjoy priority as to distribution of dividends and distribution of assets upon corporate liquidation.
• Dividends – are corporate profits distributed to its shareholders.
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Other terms
• Par value share capital – has a nominal or face value stated on the face of the stock certificate and in the articles of incorporation.
• No par but with stated value share capital – has a nominal value stated in the articles of incorporation but not on the face of the stock certificate.
• No par, no stated value share capital – has no nominal value stated either in the articles of incorporation or on the face of the stock certificate.
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Authorized Share Capital
• The maximum number of shares (both preference and ordinary shares) that a corporation may issue is termed as authorized shares.
• The authorized share capital is determined by multiplying the authorized shares by the par or stated value of the share capital.
• Authorized share capital may be recorded under the journal entry method or the memorandum entry method.
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Illustrative Problem
• The Monster, Inc. was organized on January 1 , 2012 with authorized share capital as follows:10,000 shares of 10% preference share capital with a par value of P100 per share200,000 shares ordinary share capital with a par value of P10 per share
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Illustrative Problem
• Memorandum Entry Method2012Jan. 1 Authorized to issue 10,000 shares of 10%
preference share capital with a par value of P100 per share 1 Authorized to issue 200,000 shares of ordinary share capital with a par value of P10 per share.
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Illustrative Problem
• Journal Entry Method2012Jan. 1Unissued Pref. Share Capital 1M
Authorized Pref. Share Capital1M
Unissued Ordinary Share Cap. 2MAuthorized Ordinary Share Cap.
2M
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Issuance of Share Capital
• A share capital may be issued in exchange for cash, non-cash assets, services, liability or other for of securities.
• It may be sold also on a subscription basis.• Outstanding share – a share capital issued to a
shareholder
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Issuance for Cash
• The Monster, Inc. was organized on January 1, 2012 and is authorized to issue 100,000 shares of P10 par value ordinary shares. Subsequently, 25,000 shares were sold.
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Issuance for Cash
• Case 1 – The issuance price is P10 (at par)Cash 250,000
Ordinary Share Capital 250,000• Case 2 – The issuance price is P15 (above par)
Cash 375,000Ordinary Share Capital 250,000Ordinary Share Premium 125,000
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Issuance for Cash
• Case 3 – The issuance price is P8 (below par)Cash 200,000Discount on Ord. Sh. Cap. 50,000
Ordinary Share Capital250,000
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Issuance in Exchange for Non-Cash Assets
• The Monster, Inc. issued 10,000 shares of its P10 par ordinary share capital in exchange for land.
Case 1 – The land has a market value of P175,000.
Land 175,000Ordinary Share Capital 100,000Ordinary Share Premium 75,000
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Issuance in Exchange for Non-Cash Assets
• Case 2 – The land has no known market value. The fair market value of ordinary share capital on the date of exchange is P15.
Land 150,000Ordinary Share Capital 100,000Ordinary Share Premium 50,000
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Issuance in Exchange for Non-Cash Assets
• When a share capital is issued in exchange for non cash assets, the asset received is recorded at its fair market value of the share capital issued, whichever is more clearly determinable.
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Issuance in Exchange for Non-Cash Assets
• Case 3 – There is no known market value for both land and the ordinary share capital.
Land 100,000Ordinary Share Capital 100,000
-if no market is known for both the asset received or the share capital issued, the exchange should be recorded using the par value of the share capital.
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Issuance in Exchange for Services Rendered
• The Monsters, Inc. issued 1,000 shares of P10 par ordinary share capital in payment for the services of the lawyer rendered during incorporation.
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Issuance in Exchange for Services Rendered
• Case 1 – The services of the lawyer is valued at P25,000.
Pre-operating Expenses 25,000Ordinary Share Capital 10,000Ordinary Share Premium 15,000
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Issuance in Exchange for Services Rendered
• Case 2 – There is no known fair market value for the services of the lawyer. The fair market value of the ordinary share capital issued is P15 per share.
Pre-operating Expenses 15,000Ordinary Share Capital 10,000Ordinary Share Premium 5,000
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Issuance in Exchange for Services Rendered
• Case 3 – There is no known market value for both the services rendered and the ordinary share capital issued.
Pre-operating Expenses 10,000Ordinary Share Capital 10,000
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Sale of Share Capital on a Subscription Basis
• Subscription is a contract between a subscriber (buyer of share capital) and a corporation (seller) whereby the former purchases shares of stock of the latter with the payment to be made at a later date.
• The corporation issues the corresponding stock certificate upon full payment of subscription.
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Illustrative Problem
• On June 1, 2012, the Monsters, Inc. received subscription for P5,000 shares of its P10 par value ordinary share capital at P15. A down payment of 25% was received and the balance was paid in full on July 1, 2012.
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Illustrative Problem
Jun 1 OSC Subscription Rec. 75,000OSC Subscribed 50,000Ord. Share Premium 25,000
Cash 18,750OSC Subscription Rec. 18,750
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Illustrative Problem
Jul 1 Cash 56,250OSC Subscription Rec. 56,250
OSC Subscribed 50,000Ordinary Share Capital 50,000