FAR EASTERN UNIVERSITY

Institute of Accounts, Business and Finance

ACCOUNTING FOR CORPORATION

BASIC CONCEPTS

1. Features of a Corporation
 artificial being
 created by operation of law,
 has the right of succession and
 powers, attributes and properties expressly authorized by law or incident to its existence.

2. Steps in the Creation of a Corporation

Formal
Promotion Incorporation
organization and
commencement

3. Generally, the corporation does not acquire its juridical personality until the SEC issues to it its certificate of
incorporation.

4. Formal organization and commencement requires

 the adoption of by-laws,
 election of the board of directors (BOD) and of administrative officers and
 Taking such other steps to enable it to transact the legitimate business or accomplish the purpose for which it
was created.

5. Par vs. No-par Shares

a. Par value shares –
a. A specific amount is fixed in the articles of incorporation and appearing on the certificate of stock. This
amount is the minimum issue price of the shares.
 Preference/preferred shares may be issued only as par value shares.
b. No-par value shares –
a. No value appearing on the face of the certificate of stock.
b. A no-par value share may have a stated value which may be fixed in the articles of incorporation or by
the board of directors or the shareholders.
c. However, the minimum stated value of a no-par share is five pesos (P5.00) and is deemed to be
fully paid when issued.

Note that the following are not permitted to issue no-par value shares: (BPI-TB)
Banks Trust Companies; and
Public utilities Building and Loan Associations
Insurance companies Pre-need companies
Other corporations authorized to obtain or access funds from the public,
whether publicly listed or not
Shareholders’ Equity

1. The Shareholders’ Equity

The owners’ equity section of a corporation’s statement of financial position is called shareholders’
equity.

 Elements of Shareholders’ Equity

Illustration:
Shareholders’ Equity
Share Capital
Preference Shares-P10 par, 10,000 shares
authorized, 5,000 issued and outstanding P50,000
Ordinary shares-P5 par, 50,000 shares
authorized, 25,000 issued 20,000 outstanding P100,000
Share Premium –Ordinary 50,000 150,000

Subscribed Share Capital P25,000

Less: Subscription Receivable 10,000 15,000

Revaluation Reserve 50,000

Retained Earnings 150,000
Treasury Shares (30,000)
Total Shareholders’ Equity P385,000

2. Share Capital
a. Ordinary Share Capital or Common Stock
b. Preference Share Capital or Preferred Stock

3. Trust Fund Doctrine

 The corporation must maintain its Legal Capital for the protection of its creditors. It is not available for
distribution to shareholders until the claims of corporate creditors are satisfied.

 Legal Capital –is that portion of the contributed capital or the minimum amount of paid-in capital, which
must remain in the corporation for the protection of corporate creditors.

 In case of par value shares, legal capital is the aggregate par value of all issued and subscribed shares

 In case of no-par shares, legal capital is the total consideration received by the corporation for the
issuance of its shares including the excess of issue price over the stated value.

4. Share Capital Not Yet Fully Paid (Subscribed Share Capital ) –the portion of the authorized share capital that
has been subscribed but not yet fully paid

 (This is very important!): Subscription Receivable is a shareholders’ equity account.

 It is presented in the statement of financial position as a deduction from the related subscribed
ordinary shares (see the illustration from previous page);
 HOWEVER, when it is collectible within one year from the date of statement of financial position, this
is presented as current asset in the current asset portion of the statement of financial position.
Thus, it is ignored in the computation of Shareholder’s equity.

5. Share Premium or Additional Paid-In Capital

 The portion of the paid-in capital representing amounts paid by shareholders in excess of par. It may
also result from transactions involving treasury shares, retirement of shares, donated capital, share
dividends and any other “gain” on the corporation’s own share transactions.

6. Other Appropriation Reserves

 These include revaluation and other reserves properly appropriated by the corporation.

7. Accumulated Profits/Losses or Retained Earnings –represent the component of the shareholders’ equity
arising from the retention of assets generated from profit-oriented activities of the corporation.

8. Accounting for Issuance of Shares

 Measure of Capital When Issued:

1. With Par –credit share capital at par any excess to Share Premium
2. Without Par but with a Stated Value
a. Share Capital may be credited at stated value with the excess to Share Premium or
b. Share Capital at total amount of proceeds on the issue of the share
  Measure of the Consideration Received on the Issue of Share Capital

1. For Cash of Receivable –at Face value

2. For Non-Cash Consideration –at Fair Market Value of non-cash or FMV of the shares issued
whichever is clearly determinable
3. For Services Rendered –at FMV of the services rendered or market value of the shares issued
whichever is clearly determinable

Fair Value is the amount for which an asset could be exchanged or a liability be settled between
knowledgeable, willing parties in an arm’s length transaction.

9. Accounting for Delinquent Subscriptions

When the subscriber fails to settle the subscriptions in full on the date specified in the subscription contract or in
the call made by the board of directors, the subscribed shares are declared delinquent.

The remedy of the corporation in this case is to dispose of the shares in a public auction for the account of the
delinquent subscriber. These shares will be sold to the highest bidder –the person who is willing to pay the “offer
price” which includes the full amount of the subscription balance plus accrued interest, cost of advertisement and
expenses of auction sale in exchange for the smallest number of shares.

Illustration:
Finest Inc.’s 1,000 shares of P10 par value ordinary shares were sold on subscription at P15 per share
on Oct. 17, 2022 to Patrick Santos. Subscription installments of P7,000 and P8,000 will be due on Nov. 1 and
15, respectively.
Patrick was able to pay the first installment; however, he failed to settle the latter one due to his
ensuing financial problems. After complying with the legal procedures pertaining to delinquency sale, a public
auction was held. The offer price is P12,000 including P500 accrued interest and P3,500 expenses of sale.
Three bidders are willing to pay the offer price:
Kris Ann Daclag 900 shares
Bryan Trinidad 600 shares
Rian Soliman 750 shares
Required: Who is the highest bidder?
Ans: Bryan Trinidad is the highest bidder, agreeing to pay the full price of P12,000 for the smallest number
of shares. Consequently, the 1,000 shares are deemed fully paid. Patrick Santos, the original subscriber, gets
400 shares and Bryan T. receives the 600 shares.
If there is no bidder, the corporation may bid for the delinquent shares and the total amount due shall be credited
as paid in full in the books of corporation. These shares shall be considered as treasury shares.

10. Accounting for Treasury Shares

 Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by
the issuing corporation either by purchase, redemption, and donation or through other lawful means. Such
shares may again be disposed of for a reasonable price fixed by the board of directors.

 Treasury share is reported as a deduction from total shareholders’ equity.

 The Cost Method is the preferred method of accounting for treasury shares. Under this method, treasury
share is recorded at cost of purchase regardless of whether it is acquired below or above par.

 The purchase of treasury shares does not decrease the number of shares issued; only the outstanding shares
decrease. Thus:

Authorized Shares – Unissued Shares = Issued Shares

Issued Shares = Outstanding Shares (without the presence of treasury)
 Therefore, unless retired, treasury shares remain to be considered issued.
Issued Shares = Outstanding Shares + Treasury Shares (with Treasury shares)
Treasury share is always
reissued. Par value is ignored. If the reissue price exceeds the cost of the treasury, the excess over cost is
not regarded a “gain” but component of share premium (Share Premium–Treasury).

On the other hand, if the cost exceeds the reissue price, the difference should be debited to share
premium –treasury to the extent of its balance. In the absence of any balance in this account, or if it has
already been depleted, the “loss” is debited to retained earnings.
 Observe that Retained Earnings account may be debited, but is never credited for treasury share
transactions.

 Retirement of treasury shares. Cancel the carrying value of the share and the cost of treasury. The
carrying value includes the Par and the Share Premium at the time the shares were originally issued.
Retirement may result in a “gain” or “loss.”

 The ordinary shares account and the share premium attaching to it when it was originally issued are
debited and the corresponding credit is the treasury share at cost. Any positive excess (excess debits over
credits) is credited to share premium account (Share Premium –Retirement). Any negative excess (excess
credits over debits) is debited to Retained Earnings.

11. Accounting for Donated Capital

 Contributions from shareholders are measured and recorded at Fair Market Value of the items received with
the credit going to a share premium account. If significant, separate share premium account may be set up
designated as Donated Capital.

 If the donation is in the form of shares of the corporation, the receipt of the donated shares is recorded by
means of memorandum entry only. The account share premium or donated capital is credited at the time the
shares are to be reissued.

Retained Earnings

1. The account Retained Earnings represents the firm’s accumulated profit or loss, including prior-period
adjustments less the dividends declared and other amounts transferred to the contributed capital accounts.

2. A debit balance in retained earnings account is referred to as a deficit.

3. Among the common transactions affecting retained earnings are summarized below in the form of increases
(credits) and decreases (debits) to the account.

RETAINED EARNINGS

 Current Loss  Current Profit

 Dividends  Adjustments for
 Treasury Share Correction of prior
Transactions period errors (IAS 8)
 Share Capital
Retirement
 Adjustments for
Correction of prior
period errors (IAS 8)

4. The list is not exhaustive because there are other items affecting retained earnings account.

5. Current Profit or Loss

 At the end of each accounting period, closing entries are made to separate the effects of transactions of
the currents period with the ensuing period.
 The final closing entry in a corporation’s books transfers the profit (credit balance in Profit or Loss
Summary account) or loss (debit balance in Profit or Loss Summary account) to the Retained Earnings
Account.

6. Dividends

 A dividend is a distribution of corporate income to the shareholders on a pro rata basis. They are
distributed out of accumulated earnings of the corporation, except for a liquidating dividend which
represents a return of the shareholder’s investment.

 The important dates concerning dividends are:

a. Date of Declaration. The date when the BOD formally approves and announces the dividend. This is
date that the reduction in retained earnings is recognized or recorded in the accounts.
b. Date of Record. A list of current shareholders who will be entitled to the dividend is prepared and the
dividend payment is based on this list. No journal entry is made on this date.
c. Date of Payment/Distribution. On this date, an entry is made to record the settlement of the
dividend either by payment of cash or distribution of noncash assets or the company’s own shares.

 Cash Dividends –this is the most common type of dividend. For a cash dividend to occur, a corporation must
have retained earnings and adequate cash to pay the dividend.
 Property Dividends –dividend that is payable in assets rather than cash. Property dividend may also be in
the form of equity or debt securities held in other companies. Distribution of Treasury shares as dividends is
also considered as a property dividend and not as a share dividend.
  Share Dividends (Bonus Issue) –is a pro rata distribution of a corporation’s own shares to its shareholders.
Unlike cash and property dividends, a bonus issue does not affect total assets and total shareholder’s
equity because it simply represents a transfer of capital from retained earnings to contributed capital.

a. Small Share Dividend –when the number of shares represents LESS THAN 20% of the shares
previously outstanding, the basis of the measurement would be the current market value of the
additional shares to be issued.
b. Large Share Dividend –when the proportion of the additional shares issued is 20% OR MORE, the
amount capitalized is equal to the par or stated value of the share capital.

 Allocation of Cash Dividends Between Preference Shares and Ordinary Shares

1. Preference shares have priority over ordinary shares in terms of dividends.

2. The amount of dividend payment to preference shares depends on the type and preferential rights attached to
the share, which could be cumulative or non cumulative and participating or non-participating.

a. A cumulative preference share has a right to receive current dividends in arrears before ordinary
shareholders receive any dividends.
b. A participating preference share provides for additional dividends to be paid to its holder after
dividends of a specified amount or rate are paid to ordinary shareholders.

7. Correction of Prior Period Errors

 Prior period errors are omissions from, and misstatements in, the entity’s F/S for one or more periods
arising from failure to use, or misuse of, reliable information that was available when F/S for those periods
were authorized for issue and could reasonably be expected to have been obtained and taken into account in
the preparation of those F/S.

 The adjustment that should be taken up in the retained earnings is net of the related income tax.

ACT 1122_CORPORATION_CONTRIBUTED CAPITAL EXERCISES

Problem 1
Ocean Company was organized at the beginning of the current year and was authorized to issue share capital of
100,000 shares of P50 par value.
The following transactions occurred during the year in connection with the share capital:
1. The incorporation subscribed for 25% of the authorized share capital at par value.
2. The incorporators paid 25% on their subscription.
3. Full payment was received on 15,000 shares originally subscribed.
4. Land with fair value of P600,000 was acquired upon issuance of 10,000 shares. The market value of the share
at this time P55.
5. Cash subscription to 5,000 shares at P60 per share was received.
6. Issued 2,000 shares to the legal counsel in payment for his P100,000 bill for organization services.
Required:
a. Prepare journal entries to record the transactions using the memorandum method.
b. Present the shareholder’s equity in the statement of financial position.

Problem 2
Lake Company was organized at the beginning of the current year and was authorized to issue share capital of 50,000
shares with par value of P100. The following transactions occurred during the year:
1. Received subscriptions at par value from incorporators equal to 40% of the authorized share capital.
2. Received a 25% down payment on the subscriptions from the incorporators.
3. Received full payment on 10,000 shares originally subscribed.
4. A patent was acquired by issuing 5,000 shares. The patent has no fair value.
5. Received cash subscriptions to 15,000 shares at P120 per share.
Required:
a. Prepare journal entries to record the transactions following the journal entry method.
b. Present the shareholder’s equity in the statement of financial position.
c.
Problem 3
A, B, C, D, and E organized Bump Company at the beginning of the current year with an authorized share capital of
P5,000,000 consisting of 50,000 shares of P100 par value.
1. On January 1, subscriptions were taken from A for 12,000 shares from B for 13,000 shares, from C for 8,000
shares, from D for 4,000 shares and from E for 3,000 shares, all at par.
2. A transferred to the corporation in partial payment of the subscription the following assets and liabilities:
Accounts receivable 350,000
Notes receivable 70,000
Inventory 680,000
Accounts payable 100,000
3. B transferred the following assets to the corporation in partial payment of the subscription:
Land 150,000
Building 850,000
4. The remaining incorporators paid 25% of their subscription.
5. The corporation received a bill on January 10 in the amount of P50,000 from the legal counsel for organization
services rendered. The counsel accepted 500 shares of in full payment.
 6. A subscription for 1,000 shares at P120 per share was received from F on January 11. F paid P40 per share on
his subscription.
7. On January 12, A, B, and C paid the remainder of their subscriptions.
Required:
a. Prepare journal entries to record the transactions.
b. Present the shareholder’s equity.

Problem 4
Brook Company was organized at the beginning of the current year. The entity provided the following transactions
affecting shareholder’s equity:
1. The entity was authorized to issue share capital as follows:
Preference share capital, P100 par, 30,000 shares
Ordinary share capital, P50 par value, 100,000 shares
2. 40,000 ordinary shares of were issued for cash at P60 per share.
3. 10,000 preference shares were issued at P120 for cash.
4. 10,000 preference shares were subscribed at par value.
5. P400,000 was received on the above subscription to preference shares.
6. 1,000 preference shares were issued in payment of legal fees of P100,000 in connection with organizing the
corporation.
7. 20,000 ordinary shares were issued for property, plant and equipment which had a fair value of P1,300,000.
8. 15,000 ordinary shares were subscribed for at par.
9. Forty percent of the ordinary share capital subscription was collected.
10. The balance owing on the subscription described in 4 and 5 was collected, and the preference shares were
issued.
11. Acquired 5,000 ordinary share at P40 per share. These shares are to be held as treasury.
12. Appropriated retained earnings to the extent of the cost of the treasury shares.
13. Closed net income of P2,000,000 to retained earnings.
Required:
a. Prepare journal entries to record the transactions using the memorandum method.
b. Present the shareholder’s equity in the statement of financial position.

Problem 5
Lagoon Company was organized at the beginning of the current year.
The entity provided the following transactions affecting shareholder’s equity:
1. The corporation was authorized to issue 100,000 ordinary shares with par value of P100.
2. Twenty-five percent of the authorized ordinary capital was subscribed for at par value.
3. Collected twenty-five percent on the subscription.
4. Full collection was received on 10,000 shares originally subscribed.
5. Issued the share certificates on the fully paid 10,000 shares.
6. Land with fair value of P800,000 and a building thereon fairly valued at P2,500,000 were acquired for 30,000
shares.
7. Issued 10,000 shares for an outstanding bank loan of P1,300,000 including accrued interest of P200,000. On
this date, shares are quoted at P120 per share.
8. Net income for the year amounted P3,000,000.
Required:
a. Prepare journal entries using journal entry method.
b. Present the shareholders’ equity.

Problem 6
Timber Company presented a statement of financial position containing the following accounts among others:
Subscriptions receivable-preference 120,000
Subscription receivable-ordinary 360,000
Preference share capital, P100 par, authorized
100,000 shares, issued and outstanding
22,000 shares 2,200,000
Preference share the capital subscribed, 2,000 shares 200,000
Ordinary share capital, P10 par value, authorized
200,000 shares, issued and outstanding
24,000 shares 240,000
Ordinary share capital subscribed, 24,000 shares 240,000
Share premium-preference 80,000
Share premium-ordinary 950,000
The corporation was organized at the beginning of current year and immediately received subscriptions to 20,000
preference shares. Subscriptions to ordinary shares were received on the same date.
During the year, subscriptions were received for an additional 4,000 preference shares at a price of P120 per
share.
Cash payments were received from subscribers at frequent intervals for several months after subscription. The
entity followed a policy of issuing share certificates only when subscribers had paid in full.
During the year, the entity issued 8,000 ordinary shares in exchange for a tract of land with a fair value of
P230,000.
Required:
a. Prepare journal entries for all the transactions carried out during the year as indicated by the account
balances.
b. Compute the amount of contributed capital for each class of share capital at year-end.

Problem 7
 Fullhouse Company began operations on January 1, 2022. Authorized were 100,000 ordinary shares of P100 par
value and 50,000 convertible preference shares of 10% P100 par value. The following transactions involving
shareholders’ equity occurred during the first year operations:
Jan. 1 Issued 10,000 ordinary shares to the promoters in exchange for land valued at P2,500,000 and services
valued at P500,000. The property had cost the promoters P1,800,000 three years before and was carried on
the promoters’ books at P1,500,000.
Feb. 20 Issued 15,000 preference shares for P120 per share. Each share can be converted to five ordinary shares. The
entity paid P50,000 to an agent for selling the shares.
Mar. 10 Sold 25,000 ordinary shares for P260 per share. Issue costs amounted to P200,000.
Apr.1 Sold 20,000 ordinary share under share subscription at P350 per share. No share certificates are issued until a
subscription contract is paid in full. No cash was received.
July 15 Exchanged 12,000 ordinary shares and 20,000 preference shares for a building with a fair value of
P7,000,000. The building was originally purchased for P6,500,000 by the owner and has a carrying amount of
P4,800,000. In addition, 10,000 ordinary shares were sold for P3,000,000 cash on same date.
Aug. 1 Received payments in full for half of the share subscriptions and partial payments on the rest od the
subscriptions. Total cash received was P4,500,000. Share certificates were issued for the subscriptions paid in
full.
Aug. 31Received notice from holders of share subscriptions for 5,000 shares that they would not pay further on the
subscriptions because the price of the share had fallen to P190 per share. The amount still due on those
contracts was P1,500,000. Amounts previously paid on the contracts are forfeited according to the agreement.
31 Net income for the first year of operations was P3,000,000.
Instructions:
1. Prepare journal entries to record the transactions.
2. Present the shareholder’s equity on December 31, 2022.

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