6.5 Other Owners’ Equity

6.5.1 Share Premium

 'Premium' means the difference between the issue price of the share and its par value. A share premium account is an account into which sums received as payment for shares in excess of their nominal value must be placed.

The share premium account is a reserve that cannot be distributed. A company can use the balance of the account only for purposes that have been established in its by laws.

The reason for creating such non-distributable reserves is to maintain the capital of the company.

6.5.2 Retained Earning

Retained earnings constitute accumulated profit made by the company and can be distributed to shareholders as dividend.

It is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that period, the net income (or net loss) at that point is transferred from the Profit and Loss Account to the retained earnings account. 

【Example 2】

The shareholders' equity accounts of the ABC's company at January 1, 20X9, are as follows:

Common share, $5 par        $800,000

Preference share, $100 par, 8%  300,000

Retained earnings             500,000

During 20X9, the company had the following transactions and events:

July 1  Declared an 8% cash dividend on Preference share

Sept. 1  Paid the cash dividend declared on July I to preferred stockholders.

Dec 1  Declared 10% share dividend on common share when the market value of the share was $12 per share.

Dec 31 Determined that net income for the year was 350,000

Required: Journalize the transactions and event.

Answer:

July 1  Dr Retain earning    24,000

Cr Dividend payable      24,000

Sept. 1  Dr Dividend payable  24,000

Cr Cash                24,000

Dec. 1  Dr retained earning  192,000 ($800,000÷$5×10%×12)

Cr Share dividend to be issued 80,000

Cr Share premium         112,000

Dec. 31 Dr Income summary  350,000

Cr Retained earning     350,000

6.5.3 Other Components of Equity   

OCE  (1) Asset revaluation surplus

 (2) Foreign currency translation differences

(3) Fair value differences.

Asset Revaluation Surplus

According to International Accounting Standard (IAS) 16 Property, Plant and Equipment, if the revaluation model is chosen, revaluation increases are recognized in other comprehensive income and accumulated in equity via an asset revaluation surplus or asset revaluation reserve in other components of equity.

However, this reserve is non-distributable, as it represents unrealised profits on the revalued assets. It is another capital reserve.