SHARE CAPITAL (CAPITAL STOCK)

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.

Classes of Share Capital There are two classes of share capital: -Ordinary share capital (common stock) -Preference share capital (preferred stock)

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.

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.

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.

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.

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 share 200,000 shares ordinary share capital with a par value of P10 per share

Illustrative Problem Memorandum Entry Method 2012 Jan. 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.

Illustrative Problem Journal Entry Method 2012 Jan. 1Unissued Pref. Share Capital1M Authorized Pref. Share Capital1M Unissued Ordinary Share Cap.2M Authorized Ordinary Share Cap.2M

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

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.

Issuance for Cash Case 1 – The issuance price is P10 (at par) Cash250,000 Ordinary Share Capital250,000 Case 2 – The issuance price is P15 (above par) Cash375,000 Ordinary Share Capital250,000 Ordinary Share Premium125,000

Issuance for Cash Case 3 – The issuance price is P8 (below par) Cash200,000 Discount on Ord. Sh. Cap. 50,000 Ordinary Share Capital250,000

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. Land175,000 Ordinary Share Capital100,000 Ordinary Share Premium 75,000

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. Land150,000 Ordinary Share Capital100,000 Ordinary Share Premium 50,000

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.

Issuance in Exchange for Non-Cash Assets Case 3 – There is no known market value for both land and the ordinary share capital. Land100,000 Ordinary Share Capital100,000 -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.

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.

Issuance in Exchange for Services Rendered Case 1 – The services of the lawyer is valued at P25,000. Pre-operating Expenses25,000 Ordinary Share Capital10,000 Ordinary Share Premium15,000

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 Expenses15,000 Ordinary Share Capital10,000 Ordinary Share Premium 5,000

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 Expenses10,000 Ordinary Share Capital10,000

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.

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.

Illustrative Problem Jun 1 OSC Subscription Rec.75,000 OSC Subscribed50,000 Ord. Share Premium25,000 Cash18,750 OSC Subscription Rec.18,750

Illustrative Problem Jul 1Cash56,250 OSC Subscription Rec.56,250 OSC Subscribed50,000 Ordinary Share Capital50,000