Chapter Accounting for Share Capital Transactions Review Questions Authorized share capital—the total number of shares authorized by the state of incorporation for issuance Unissued share capital—the total number of shares authorized but not issued Issued share capital—the total number of shares issued (distributed to shareholders) Outstanding share capital—the total number of shares issued and still in the hands of shareholders (issued less treasury) Treasury shares—shares issued and repurchased by the issuing corporation but not retired 10 The issuance for cash of no-par value ordinary shares at a price in excess of the stated value of the ordinary share is accounted for as follows: Cash is debited for the proceeds from the issuance of the ordinary shares Ordinary share is credited for the stated value of the ordinary share Additional paid-in capital is credited for the excess of the proceeds from the issuance of the ordinary shares over its stated value 11 The general rule to be applied when share is issued for services or property other than cash is that the property or services be recorded at either their fair market value or the fair market value of the share issued, whichever is more clearly determinable If neither is readily determinable, the value to be assigned is generally established by the board of directors 12 The direct costs of issuing shares, such as underwriting costs, accounting and legal fees, printing costs, and taxes, should be reported as a reduction of the amounts paid in Issue costs are there-fore debited to Additional Paid-in Capital because they are unrelated to corporate operations 13 The major reasons for purchasing its own shares are: (1) to provide taxefficient distributions of excess cash to shareholders, (2) to increase earnings per share and return on equity, (3) to provide stock for employee share compensation contracts, (4) to thwart takeover attempts or reduce the number Chapter of shareholders, (5) to make a market in the company’s shares, and (6) to contract the operations of the business 14 Additional paid-in capital results from: (1) premiums on shares issued, (2) sale of treasury shares above cost, (3) recapitalizations or revisions in the capital structure, (4) assessments on shareholders, (5) conversion of convertible bonds or preference shares, and (6) declaration of a small share dividend Exercises Exercise YOUNG CORPORATION Shareholders’ Equity December 31, 2007 Share capital - Ordinary, P5 par value P  210,000 Paid-in capital in excess of par  1,320,000 Retained earnings  2,340,000  3,870,000 Less treasury shares Total shareholders’ equity    (90,000) P3,780,000 Exercise Land   Share Capital – Ordinary (2,000 X P5) Paid-in Capital in Excess of Par Exercise 31,000 10,000 21,000 Accounting for Share Capital Transactions Cash (P70,000 – P1,500) Share Capital - Ordinary Paid-in Capital in Excess of Par 68,500 20,000 48,500 Exercise Treasury Shares Cash  8,500 Cash Treasury Shares Paid-in Capital from Treasury Shares  5,400 Cash Paid-in Capital from Treasury Shares Treasury Shares  3,320     80 Treasury Shares Cash 15,000 Cash Retained Earnings Treasury Shares 14,000  1,000 Cash Preference Shares Paid-in Capital in Excess of Par—Preference 61,500 7/1/07 9/1/07 11/1/07  8,500  5,100    300  3,400 Exercise 8/1/07 11/1/07 15,000 15,000 Exercise 45,000 16,500 Exercise Requirement (a) Jan 10 Cash (80,000 X P6) 480,000 Chapter Share Capital – Ordinary (80,000 X P5) Paid-in Capital in Excess of Par Mar Organization Expense Share Capital – Ordinary (5,000 X P5) Paid-in Capital in Excess of Par 400,000  80,000  35,000  25,000  10,000 (Note: In the past, these costs would have been charged to Organization Costs) July Sept Cash (30,000 X P8) 240,000 Share Capital – Ordinary (30,000 X P5) Paid-in Capital in Excess of Par (30,000 X P3)    Cash (60,000 X P10) 600,000 Share Capital – Ordinary (60,000 X P5) Paid-in Capital in Excess of Par (60,000 X P5) 150,000  90,000 300,000 300,000    Requirement (b) Jan 10 Mar July Sept Exercise Cash (80,000 X P6) Share Capital – Ordinary (80,000 X P3) Paid-in Capital in Excess of   Stated Value (80,000 X P3) 480,000 240,000 240,000 Organization Expense 35,000 Share Capital – Ordinary (5,000 X P3) Paid-in Capital in Excess of   Stated Value (P35,000 – P15,000 or 5,000 X P4)    Cash (30,000 X P8) 240,000 Share Capital – Ordinary (30,000 X P3) Paid-in Capital in Excess of   Stated Value (30,000 X P5) Cash (60,000 X P10) Share Capital – Ordinary (60,000 X P3) Paid-in Capital in Excess of   Stated Value (60,000 X P7)  15,000  20,000  90,000 150,000 600,000 180,000 420,000 Accounting for Share Capital Transactions Jan 10 Cash (80,000 X P5) Share Capital – Ordinary (80,000 X P1) Paid-in Capital in Excess of Stated   Value—Ordinary Shares (80,000 X P4) 400,000  80,000 320,000    Mar Cash (5,000 X P108) 540,000 Share Capital – Preference (5,000 X P100) 500,000 Paid-in Capital in Excess of Par   Value—Preference Shares (5,000 X P8)  40,000    April Land  80,000 Share Capital – Ordinary (24,000 X P1)  24,000 Paid-in Capital in Excess of Stated   Value—Ordinary Shares (P80,000 – P24,000)  56,000    May Cash (80,000 X P7) 560,000 Share Capital – Ordinary (80,000 X P1)  80,000 Paid-in Capital in Excess of Stated   Value—Ordinary Shares (80,000 X P6) 480,000    Aug Organization Expense*  50,000 Share Capital – Ordinary (10,000 X P1)  10,000 Paid-in Capital in Excess of Stated   Value—Ordinary Shares (P50,000 – P10,000)  40,000    *(In the past, these costs would have been charged to Organization Costs) Sept Nov Cash (10,000 X P9) Share Capital – Ordinary (10,000 X P1) Paid-in Capital in Excess of Stated   Value—Ordinary Shares (10,000 X P8)    Cash (1,000 X P112) Preference Shares (1,000 X P100) Paid-in Capital in Excess of Par   Value—Preference Shares (1,000 X P12)     90,000  10,000  80,000 112,000 100,000  12,000 Chapter Exercise Requirement (a) Land (P62 X 25,000) 1,550,000 Treasury Shares (P53 X 25,000) 1,325,000 Paid-in Capital from Treasury Shares   225,000 Requirement (b) One might use the cost of treasury shares However, this is not a relevant measure of this economic event Rather, it is a measure of a prior, unrelated event The appraised value of the land is a reasonable alternative since the value of the asset acquired should preferably determine the issue price of the shares However, it is an appraisal as opposed to a cash price The trading price of the share is probably the best measure of market value in this transaction Exercise 10 Requirement (a) Cash [(5,000 X P45) – P7,000] Share Capital – Ordinary (5,000 X P5) 218,000  25,000 Paid-in Capital in Excess of Par 193,000 Requirement (b) Land (1,000 X P46) Share Capital – Ordinary (1,000 X P5) Paid-in Capital in Excess of Par   (P46,000 – P5,000)  46,000   5,000  41,000 Note: The market value of the share (P46,000) is used to value the exchange because it is a more objective measure than the appraised value of the land (P50,000) Requirement (c) Accounting for Share Capital Transactions Treasury Shares (500 X P43) Cash 21,500 21,500 Exercise 11 May May 10 15 Exercise 12 Cash Share Capital – Ordinary (12,000 X P5) Paid-in Capital in Excess of Par—   Ordinary Shares (12,000 X P11) 192,000 Cash Preference Shares (10,000 X P30) Paid-in Capital in Excess of Par—   Preference Shares (10,000 X P30) 600,000 Treasury Shares* Cash  60,000 132,000 300,000 300,000 15,000  15,000 Chapter a Feb 10 Treasury Shares 435,000 Cash 435,000 Purchased 14,500 treasury shares at P30 per share June  4 Cash 198,000 Treasury Shares 180,000 Additional Paid-in Capital: Treasury Share Transactions 18,000 Sold 6,000 treasury shares, cost P180,000, for P33 per share Dec 22 Cash 112,000 Additional Paid-in Capital: Treasury Share Transactions 8,000 Treasury Shares 120,000 Sold 4,000 treasury shares, cost P120,000, for P28 per share b Restriction of retained earnings for treasury shares owned at year-end: P135,000 (4,500 shares still owned × P30 per share cost) c No, a restriction on retained earnings does not affect the total amount of retained earnings reported in the balance sheet A restriction of retained earnings is disclosed, but does not reduce the total amount of retained earnings of a company The restriction on retained earnings simply limits the amount of dividends the corporation can pay as long as it holds treasury shares  ... might use the cost of treasury shares However, this is not a relevant measure of this economic event Rather, it is a measure of a prior, unrelated event The appraised value of the land is a reasonable... the total amount of retained earnings reported in the balance sheet A restriction of retained earnings is disclosed, but does not reduce the total amount of retained earnings of a company The... declaration of a small share dividend Exercises Exercise YOUNG CORPORATION Shareholders’ Equity December 31, 2007 Share capital - Ordinary, P5 par value P  210,000 Paid-in capital in excess of par