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A partnership is a contract whereby two or more persons bind themselves to contribute money, property or industry into a common fund with the intention of dividing the profit among themselves (Article 1767 of the Civil Code of the Philippines). This joint effort may be supported by a partnership agreement known as the Articles of Co-Partnership, which is an agreement in writing among the partners governing the nature and terms of the partnership contract. A written agreement is required when partnership capital is P 3,000 or more in money or in property. The Article of Co-partnership helps in avoid misunderstanding among the partners. The written agreement among the partners governs the formation, operation and dissolution of the partnership and is required to be registered with SEC. The Article of Co-partnership contains the following information: 1. The name of the partnership; 2. The names, addresses of the partners, classes of partners stating whether the partner is a general or a limited partner; 3. The effective date of the contract; 4. The purpose and principal place of business of the business; 5. The capital of the partnership stating the contributions of each of the partners; 6. The rights and duties of each of the partners; 7. The manner of dividing profit or loss among the partners; 8. The conditions under which the partners may withdraw money or other assets; 9. The manner of keeping the books of accounts; 10. The causes for dissolution and the provision for arbitration in settling disputes.
Characteristics of a Partnership
1. Based on contract – partnership is formed through the mutual agreement of all the partners. The contract may be written or oral. 2. Voluntary association – no one should be forced or coerced in joining a partnership. 3. Mutual agency – any partner may act as an agent of the partnership in conducting its affairs. 4. Limited life – a partnership may be dissolved at any time by action of the partners or by operation of law. The withdrawal, death, retirement, bankruptcy, incapacity of a partner and the admission of a new partner dissolves the partnership. 5. Unlimited liability – the personal assets of a general partner may be used to satisfy the claims of the creditors of the partnership if the partnership assets are not enough to settle the liabilities to outsiders upon liquidation. 6. Co-ownership of property – properties contributed to the partnership are owned by the partnership. Properties invested by a partner cease to be his own personal property.
7. Co-ownership of profit – a partner has the right to share in partnership profits. The partners are entitled to share in the firm’s profits as a return on their investment. 8. Legal entity – a partnership has a legal personality separate and distinct from that of each of the partners. 9. Income tax – partnerships are subject to income tax rate of 30% beginning the fiscal year 2010 with the exception of general professional partnerships (i.e., those partnerships organized for the exercise of professions, e.g., CPAs, doctors, lawyers, etc.)
Advantages of a Partnership
1. It is easy and inexpensive to form and to dissolve. It may be created orally except when partnership capital is P3,000 or more. A partnership is ended whenever there are changes in the ownership structure such as withdrawal of a partner or admission of a new partner. 2. Greater amount of capital may be raised compared to a sole proprietorship. The combined capital of 2 or more partners offers a greater source of capital. 3. There is relative freedom and flexibility in decision-making compared to a corporation. Decisions are effected simply by agreement among the partners without the formalities necessary under a corporation. 4. It is better managed because more than one person supervises business affairs. Better management results from the combined experience and ability of several individuals. 5. The unlimited liability of general partners makes it reliable from the point of view of creditors.
Disadvantages of a Partnership
1. There is lack of business continuity because it can be easily dissolved. 2. Limited amount of capital may be raised compared to a corporation. 3. The unlimited liability of a partnership deters many from joining in a partnership form of business. 4. A general partner may be subjected to a personal liability for erroneous management decisions made by his associates. 5. There is likelihood of dissension and disagreement when each of the partners has the same authority in the management of the firm. 6. There is difficulty in transferring ownership interest because ownership interest in the partnership cannot be transferred without the consent of all the partners.
Kinds of Partnerships
1. According to activities a. Service – main activity is the rendering of services b. Merchandising or Trading – main activity is the purchase or sale of goods c. Manufacturing – main activity is the production of goods
2. According to liability a. General – one wherein all the partners are general partners who are liable for the partnership debts to the extent of their personal property after all the partnership assets have been exhausted. b. Limited – one consisting of one or more general partners and one or more limited partners. 3. According to object a. Universal partnership of all present property – one in which the partners contribute all the property which actually belong to each of them, at the time of the constitution of the partnership, to a common fund with the intention of dividing the same among them as well as the profits which they may acquire therewith. All assets contributed to the partnership and subsequent acquisitions become common partnership assets. b. Universal partnership of profits – one which comprises all that the partners may acquire by their industry or work during the existence of the partnership and the usufruct of movable or immovable property which each of the partners may possess at the time of the institution of the contract. The original movable or immovable property contributed do not become common partnership assets. c. Particular partnership – one which has for its object determinate things, their use or fruits or a specific undertaking or the exercise of a profession of vocation. 4. According to duration of partnership existence a. Partnership at will – one for which no term is specified and is not formed for a particular undertaking or venture and which may be terminated any time by mutual agreement of the partners or the will of one alone. b. Partnership with a Fixed Term – one in which the term or period for which the partnership is to exist is agreed upon (Baysa and Lupisan, 2000).
Kinds of Partners
1. According to contribution a. Capitalist – one who contributes capital in money or property. b. Industrial – one who contributes industry, labor, skill or service c. Capitalist-Industrial – one who contributes money, property and industry According to Liability a. General – one whose liability to third persons extends to his private property b. Limited – one whose liability to third persons is limited only to the extent of his capital contribution to the partnership. According to management a. Managing Partner – one who manages actively the business of the partnership b. Silent – one who does not participate in the management of partnership affairs.
Others a. Nominal- a partner in name only. b. Secret – one who takes active part in the business but whose connection with the partnership is concealed on unknown to the public. c. Dormant partner – one who does not take active part in the business and is not known to the public as a partner.
Basic Features of Partnership Accounting
1. More than one capital and drawing accounts – there will be as many capital accounts and as many drawing accounts as there are partners 2. Partner’s loans – partners may advance money to the partnership in the form of loans when the business is in need of additional funds. The account title to be credited is Loans Payable to Partner or Partner, Loan 3. Partner’s borrowings – the partnership may advance money to partners other than withdrawals in the form of loans. The account title to be debited is Receivable from Partner. 4. Partner’s salaries – partners are paid salaries for services rendered in the conduct of partnership business. 5. Interest on investment – interest is allowed to earn on the asset investment of the partners. 6. Division of profit and losses – net profit or net loss is to be divided among the partners based on their agreement.
Two Kinds of Partnership Formation
1. Two or more individuals form a business for the first time.
DATE PARTICULARS Cash investment July 1 Cash Rose, Capital To record initial investment. Investment in the form of non-cash assets July 1 Non-cah assets Rose, Capital To record initial investment. Note: Fair market value of the non-cash asset is used in recording the investment. Investment in the form of non-cash assets with assumption of liability July 1 Non-cah assets Liability Rose, Capital To record initial investment. Note: Fair market value of the non-cash asset is used in recording the investment; credit the applicable liabilily account using the loan balanceto be assumed by the partnebrship; and credit the capital account of the partner using the net amount (I.e., non cash assets - liability). Investment in the form of service or industry Memorandum entry: Guada is admitted as an industrial partner with ____ share in profits. P/R D E B I T X X X X X X X X X X C R E D I T
X X X X X X X X X X
X X X X X X X X X X X X X X X
a. Note 3: Other partners' investment are recorded in the same way as in No. b. Capital Note 1: If the sole proprietor assets includes Accounts Receivable. 1 (Formed by individulas) Marivic Valenzuela-Manalo . Date PARTICULARS Increase in the asset value with no contra-asset account Asset Rose.e. Capital All asset accounts P/R DEBIT X X X X X X X X X X X X CREDIT X X X X X c. Capital Decrease in the asset value with no contra-asset account Rose. An individual forms a business with a sole proprietor or a sole proprietorship(s) converted into a partnership The following are the accounting procedures in converting a sole proprietorship form of business into partnership. DEBIT X X X X X X X X X X X X X X X X X CREDIT Date PARTICULARS P/R To record the investment of the sole proprietor All assets from the original business Allowance for doubtful accounts All liabilty accounts Rose. the said account must be recorded at gros amount and the allowance for doubtful accounts is carried over in the new set of partnership books.2. Date Close the existing books of the sole proprietorship(s). Adjust the existing books of the sole proprietorship(s). Capital Contra-asset P/R DEBIT X X X X X X X X CREDIT X X X X X X X X X X X X X X X X X X X X X X X X Note: These adjusting entries are similar to year-end adjustments. i. accumulated depreciation account is not recorded in the partnership books . Note 2: Depreciable assets are recorded in the new set of partnership books at their net cvarrying value. Record the investment of all the partners in the new set of partnership books. The only difference is that the Capital account replaces all the nominal accounts . Capital Decrease in the asset value with contra-asset account Rose. PARTICULARS All contra asset accounts All liability accounts Rose. Capital Asset Increase in the asset value with contra-asset account Contra-asset Rose..
Date PARTICULARS July 1 Cash Partner. Recording of the business transactions 2. loan or Loan Payable to Partner P/R DEBIT X X X X CREDIT X X X X 2. Recording of the closing entries of a partnership/Dividing partnership profits or losses– individual drawing accounts of partners are not automatically closed to their capital accounts in order to maintain the original capital balances of the partners as stated in the Articles of Co-Partnership. Marivic Valenzuela-Manalo 1 . the entry is to debit Accounts receivable and credit the Sales account which is the same as that of a sole proprietorship In fact the Accounting Cycle of a Partnership is similar to that of sole proprietorship: 1. Recording of loan extended by the partnership to the partner/s. Recording adjusting entries 6. Preparing a post-closing trial balance 9. Preparing the worksheet 5. Recording and posting reversing entries However. Date PARTICULARS July 1 Receivable from Partner Cash P/R DEBIT X X X X CREDIT X X X X 3. Recording and posting closing entries 8. For example. problems distinctive only to partnership operations are encountered in the following: 1.Unit 3 Accounting for Division of Profits & Losses Partnership Operations Accounting for a partnership form of business is basically similar to that of a sole proprietorship. Purchase of supplies is debited either to Supplies or Supplies Expense account and when merchandise are sold on account. drawing accounts are closed to the capital accounts only if agreed upon in the articles of co-partnership. Recording of partner’s loan account when a partner lends money to a partnership. Posting to ledgers 3. Prepare financial statements 7. Preparing a trial balance 4.
a. d. b. drawing Guada. 31 Rose. Distributing net loss Date PARTICULARS Dec. Salaries to partners and the remainder on a fixed ratio. e. A partner's share of net income or net loss is recognized in the accounts through closing entries. and the remainder on a fixed ratio. A fixed ratio. A ratio based either on capital balances at the beginning of the year or on average capital balances during the year. Closing entries for a partnership are identical to the entries made for a proprietorship. Salaries to partners. The various income ratios that may be used include: a. Statement of Financial Position – the owner’s equity section is labeled Partners’ Equity Marivic Valenzuela-Manalo 2 . The objective is to reach agreement on a basis that will equitably reflect the differences among partners in terms of their capital investment and service to the partnership.a. expressed as a proportion (6:4). drawing Income Summary P/R DEBIT X X X X X X X X CREDIT X X X X Partnership net income or net loss is shared according to the partners’ capital ratio unless the partnership contract specifically indicates otherwise. except for the use of multiple capital and drawing accounts. Interest on partners' capitals and the remainder on a fixed ratio. 4. or a fraction (2/3 and 1/3).the financial statements prepared for a partnership form of business is basically the same as sole proprietorship except for the following: a. drawing P/R DEBIT X X X X CREDIT X X X X X X X X a. Distributing net income Date PARTICULARS Dec. a percentage (70% and 30%). Detailed information concerning the division of net income or net loss should be shown at the bottom of the income statement. 31 Income Summary Rose. b. drawing Guada. Provisions for salaries and interest must be applied before the remainder of net income or net loss is allocated on the specified fixed ratio. interest on partners' capitals. c. Preparation of financial statements .
125 P 508.000 314.000 80.000.000 120.000 4 P Liabilites and Partners' Equity Current liabilites Trade and other payables Long term liabilities Mortgage Payable Total liabilities Partners' Equity Rose. Capital Total Labilities and Partners' Equity P 5 P 178.000 63.875 299.000 1.000 P 495.000. Plant and Equipment Total Assets P 3 78.000 1.000 505.000 492. 20X5 Assets Note Current assets Cash Investment in Trading Securities Trade and other receivables Merchandise Inventory Prepaid expenses Property.000 Marivic Valenzuela-Manalo 3 .RGem Trading Statement of Financial Position December 31.000 154. Capital Guada.000 P 208.
000 188.125 P P Total 60.000 Capital balances.000 10% interest on beginning capital 15.475 Net Income P 113.500 102.400 Balance: capital ratio (15/40.000 5% bonus based on net income 9.875 55. RGem Trading Income Statement For the year ended December 31.000 80.000 208.875 Guada P 25.000 113. Statement of Partners’ Equity – a statement that reports the changes that have taken place in the partners’ equity during the period.000 Distribution of Net Income Rose Annual salary to managing partner P 60.000 475. 20X5 Note 1 2 Net Sales Revenue Cost of Sales Gross profit Operating Expenses General and administrative expense Distribution expense Net income P P 880.000 49.600 188.400 78.125 Total 400.b.000 508.Income Statement – an additional section called Distribution of Net Income or Net Loss is included. This profit or loss distribution provides a full analysis of the distribution of earnings or losses which is presented at the bottom part of the partnership income statement.000 74. January 1 Add: Net Income Sub-total Less: Drawings Capital balances P P P P P P P P P Marivic Valenzuela-Manalo 4 . 20X5 Rose 150.000 9.125 74.000 588. RGem Trading Statement of Changes in Partners' Equity For the year ended December 31.125 324.000 P 114.000 405.000 299.000 40.500 P 217.000 188.875 263. Each partner is provided a column heading which explains details of the changes in his/her equity account.000 c. 25/40) 29.125 25.875 Guada 250.
The law also provides that if the sharing of profits has been agreed upon by the partners. But the distribution to individual partners of this profit or loss is the primary objective of the accounting process. And if profits or losses are to be divided fairly and equitably these contributions by the partners must be properly considered. the Philippine Partnership Law provides that the share of each partner in the profit or loss shall be in proportion to what he has contributed. but the industrial partner shall receive such shares as what is just and equitable under the circumstances. Capital Debit Credit Permanent Initial and additional withdrawals investments Rules for Dividing Profit and Loss in a Partnership business The computation of the result of business’ operation of a partnership is essentially the same as that of the sole proprietorship.Capital Account of a Partner Rose. but no provision was made as to the distribution of losses. Therefore.. The partnership may come up with their profit and loss ratio in the distribution of profits and losses of the firm. entrepreneurial ability or managerial skills . services rendered or time devoted in the management of the business. The income of the partnership is realized as the result of combining the contribution of the partners in terms of capital investment. in accordance with the partners’ contributed capital. capital investment – provide interest to give recognition to differences in the capital contribution given in proportion to the period such capital was actually used. experience or time devoted by a partner to the business. the following scheme may be adapted since the partnership’s net income may be viewed as a return for: 1. 2. 3. i. the share of each partner in the losses shall be divided in the same manner that profits are divided. This is the ratio in which partnership profits and losses are divided and must be stated in the Articles of Co-Partnership. services rendered – provide salaries to give recognition to the ability. and entrepreneurial ability or the partner’s personal business contacts and his credit rating in the business community.e. In the absence of any agreement as to the division of profits or losses. Marivic Valenzuela-Manalo 5 .provide bonus which is an incentive or special compensation which is usually based on net income.
Based on Capital Ratio a. Beginning capital balance c. Interest and Bonus – considered as part of the distribution of net income Marivic Valenzuela-Manalo 6 . Arbitrary Ratio a. Percentages c. Ending capital balance d. Original/Initial investment b. Equally 2.Methods of Dividing Net Income 1. Ratio and Proportion 3. Allowing Salaries. Average capital – most equitable method 4. Fractions b.
The consent of all the partners is necessary. Admission of a new partner 2. Retirement or withdrawal of a partner 3. There is a need to update the capital balances of the partners by a. etc. 2. relationships of partners. incapacity or insolvency of a partner 4. Dissolution and liquidation in relation to partnerships are not synonymous. Dissolution of an old partnership may be followed by: 1. 2. Dissolution 1. A partnership is said to be dissolved when the original association for purposes of carrying on activities has ended. revaluing/ adjusting partnership assets and liabilities using a temporary account called the Capital Adjustment account. The change in the relation of the partners caused by any partner ceasing to be associated in the carrying out of the business (Article 1825. moods. Reasons why a partnership may be dissolved 1. The termination of the life of an existing partnership. determining profit share of each partner from the last balance sheet date to dissolution date. Death. Incorporation of a partnership Admission of a New Partner 1. Civil Code of the Philippines). the existence of the partnership business may be somewhat uncertain since it depends on the personalities.Unit 4 PARTNERSHIP DISSOLUTION WITHOUT LIQUIDATION A partnership depends upon the contractual agreement between or among partners. the formation of a new partnership – new partnership continues the business activities of the dissolved partnership without interruption. therefore. Marivic Valenzuela-Manalo 1 . liquidation – termination of business activities and winding up of partnership affairs preparatory to going out of business. 2. Any events or happenings that cause the technical termination of a partnership may lead to a permanent dissolution or liquidation. b. if the partners decide. A partnership is said to be liquidated when the business is terminated.
a. drawing Guada. Revaluing/ adjusting partnership assets and liabilities Increase in value of an asset without a contra-asset account Date PA RTICULA RS P/R July 1 Asset Capital Adjustment DEBIT X X X X CREDIT X X X X Decrease in value of an asset without a contra-asset account Date PARTICULARS P/R July 1 Capital Adjustment Asset DEBIT X X X X CREDIT X X X X Increase in value of an asset with a contra-asset account Date PARTICULARS P/R July 1 Contra-asset Capital Adjustmnet DEBIT X X X X CREDIT X X X X Decrease in value of an asset with a contra-asset account Date PARTICULARS P/R July 1 Capital Adjustment Contra-asset DEBIT X X X X CREDIT X X X X Increase in value of a liability account Date PARTICULARS July 1 Capital Adjustment Liability P/R DEBIT X X X X CREDIT X X X X Marivic Valenzuela-Manalo 2 . drawing Guada. Date PA RTICULA RS Dec. drawing Rose. Determine profit share of partners. drawing Rose. 31 Income Summary Rose. capital P/R DEBIT X X X X CREDIT X X X X X X X X X X X X X X X X X X X X X X X X b. capital Guada.
capital P/R DEBIT X X X X CREDIT X X X X Note: When a new partner is admitted by purchase of an interest. capital Guada. nominal accounts are being replaced by the Capital Adjustment account. It merely involves a transfer of capital of the selling partner to the capital of the buying partner. c. capital Guada. a new agreement covering partners’ interest. Pro-forma entry Date PARTICULARS July 1 Selling partner's name. There is no increase in total assets and no increase in total partners’ equity. It is considered as a personal transaction between the selling partner and the buyer who becomes a new partner. The only difference is that. Upon the admission of a new partner. capital Buying partner. the partnership is dissolved and a new partnership is formed. Close the Capital Adjustment account Date PARTICULARS July 1 Capital Adjustment Rose. b. profits and loss sharing and other consideration should be drawn because the dissolution of the original partnership cancels the old agreement. By purchase of interest from one or more of the old partners a. capital or Rose.Decrease in the value of a liability account Date PA RTICULA RS July 1 Liability Capital Adjustment P/R DEBIT X X X X CREDIT X X X X Note: These adjusting entries are similar to the year-end adjustments that we studied in partnership formation. Marivic Valenzuela-Manalo 3 . When a new partner is admitted. capital Capital Adjustment P/R DEBIT X X X X CREDIT X X X X X X X X X X X X X X X X X X X X Admission of a new partner An existing partnership may admit a new partner with the consent of all the partners. Types of Admission of a New Partner 1.
XXX XX. By investment or asset contributions to the partnership A new partner may be admitted to the firm by investing directly to the partnership. Each partner's capital account is debited for the ownership claims that have been relinquished. the difference is considered either a bonus or goodwill either to the existing partners or the new partner. Framework in analyzing admission of a new partner by investment New Original Analysis of profit and Agreed profit and Contributed Name of loss ratio variance/difference Capital Capital loss ratio partners Old partner 1 % XX. 2. Agreed capital (AC) – new capitalization of the new partnership which may be equal to.XXX % Old partner 2 % XX.XXX % New partner XX. Fraction of interest – this is the interest or equity of a partner expressed in fraction 4. When the capital credit does not equal the investment of assets in the partnership.XXX % TOTAL 100% XXX. b.XXX XX. and the new partner's capital account is credited with the capital equity purchased. both the total net assets and the total capital of the partnership increase. Marivic Valenzuela-Manalo 4 . Any money or other consideration exchanged is the property of the participants and not the property of the partnership. The transaction is a personal one between one or more existing partners and the new partner.XXX XX. and total capital remain unchanged. Total assets and total partners’ equity will increase. capital P/R DEBIT X X X X X X X X CREDIT X X X X Note: When a new partner is admitted by the investment of assets. This method of admission of a new partner in the partnership implies the following: a. 3. Pro-forma entry Date PARTICULARS July 1 Cash Non-cash asset New partner. Total assets. Contributed capital (CC) – the sum of the investments or contributions of the new and old partners. Percentage of interest – this is the interest or equity of a partner expressed in percentage.XXX XXX. 2. more than the total contributed capital. This is done by debiting Cash/Non Cash assets and crediting the new partner's capital account. c. total liabilities. It involves the investment of assets by new partner into the partnership.XXX 100% Important terms used under admission by investment 1. It is a transaction between the partnership and the incoming partner.
capital P/R DEBIT X X X X CREDIT X X X X X X X X P/R DEBIT X X X X X X X X CREDIT X X X X Note: The amount of bonus is divided among the old partners using the original profit and loss ratio. Determine the new partner's capital credit by multiplying the total capital of the new partnership by the new partner's ownership interest. Bonus to old partners Date PARTICULARS July 1 New partner. Determine the total capital of the new partnership by adding the new partner's investment to the total capital of the old partnership. Capital Bonus to new partner Date PARTICULARS July 1 Old partner 1. The withdrawal of a partner may be accomplished by (a) payment from partners' personal assets or (b) payment from partnership assets. d. Determine the amount of bonus by subtracting the new partner's capital credit from the new partner's investment.Bonus 1. capital Old partner 2. Marivic Valenzuela-Manalo 5 . It is a transfer of capital from one partner to another A bonus to old partners results when the new partner's capital credit on the date of admittance is less than the new partner's investment in the firm. Capital Old partner 2. Withdrawal of a Partner As in the case of the admission of a partner. whereas the latter decreases total net assets and total capital of the partnership. Allocate the bonus to the old partners on the basis of their income ratios. capital Old partner 1. The bonus results in a decrease in the capital balances of the old partners based on their income ratios before admission of the new partner. It is an amount partners are willing to allow as additional credit to a partner’s capital in excess of his actual capital contribution. 2. c. A bonus to a new partner results when the new partner's capital credit is greater than the partner's investment of assets in the firm. b. The former affects only the partners' capital accounts. the withdrawal of a partner legally dissolves the partnership. capital New partner. The procedure for determining the new partner's capital credit and the bonus to the old partners is as follows: a.
b. c. b. a bonus to the retiring partner results. b. Types of Withdrawal of a Partner 1. Payment from partnership assets is a transaction that involves the partnership. a. Both partnership net assets and total capitals are decreased. It is considered a personal transaction between the buying and selling partners. It involves the transfer of the withdrawing partners’ capital to the capital account of the buying partner. Partnership assets are not involved and total capital does not change.The withdrawal of a partner when payment is made from partners' personal assets is the direct opposite of admitting a new partner who purchases a partner's interest. When the partnership assets paid are less than the withdrawing partner's capital interest. Using partnership assets to pay for a withdrawing partner's interest is the reverse of admitting a partner through the investment of assets in the partnership. a bonus to the remaining partners results. 2. b. When the partnership assets paid are in excess of the withdrawing partner's capital interest. In a withdrawal of a partner 1. The bonus is allocated to the capital accounts of the remaining partners on the basis of their income ratios. b. a. Purchase of interest by another partner or an outsider a. The bonus is deducted from the remaining partners' capital balances on the basis of their income ratios at the time of the withdrawal. Payment from partners' personal assets is a personal transaction between the partners. c. Purchase of interest by the partnership a. revaluing/ adjusting partnership assets and liabilities using a temporary account called the Capital Adjustment account. It is considered a transaction between the partnership and the outgoing partner. The effect on the partnership is limited to a realignment of the partners' capital balances. It involves a decrease in capital with the corresponding decrease in partnership assets or increase in partnership liabilities. determining profit share of each partner from the last balance sheet date to dissolution date. Marivic Valenzuela-Manalo 6 . There are instances where asset revaluations may be recorded. There is a need to update the capital balances of the partners by a.
capital New partner. but provision generally is made for the surviving partners to continue operations. capital Remaining partner 2. capital Cash/Liability P/R DEBIT X X X X X X X X X X X X CREDIT X X X X Death of a Partner The death of a partner dissolves the partnership. capital Cash/Liability P/R DEBIT X X X X CREDIT X X X X X X X X X X X X By purchase of interest by the partnership . capital Remaining partner 2.Amount paid is equal to the withdrawing partner's capital Date PARTICULARS July 1 Withdrawing partner. capital Remaining partner 1. capital Remaining partner 1.By purchase of interest by another person or an outsider Date PARTICULARS P/R July 1 Withdrawing partner. When a partner dies it is necessary to determine the partner's equity at the date of death. Capital DEBIT X X X X CREDIT X X X X By purchase of interest by the partnership .Amount paid is more than the withdrawing partner's capital Bonus to the withdrawing partner Date PARTICULARS July 1 Withdrawing partner. capital Cash/Liability P/R DEBIT X X X X CREDIT X X X X By purchase of interest by the partnership . Marivic Valenzuela-Manalo 7 .Amount paid is less than the withdrawing partner's capital Bonus to the remaining partners Date PARTICULARS July 1 Withdrawing partner.
2. to pay off partnership obligations and to distribute cash and any unrealized assets to the individual partners. payment of liabilities and distribution of remaining among the partners. d. 3. 3. paying the liabilities. Dissolution with Liquidation 1. Partnership creditors are paid. Realization – the process of converting non-cash assets into cash. In this unit. The basic objectives of a partnership during liquidation process are to convert the partnership assets to cash. and distributing the remaining cash to partners. the account must be adjusted and closed. b. Remaining assets are distributed to the partners as a return of their investments. Dissolution – the termination of the life of the partnership. The partners mutually agree to close the business.Unit 5 PARTNERSHIP DISSOLUTION WITH LIQUIDATION Liquidation of a partnership means winding up the business usually by selling the assets. . Liquidation – the process of winding up a business which normally consists of conversion of assets into cash. A partnership is liquidated when its business operations are completely terminated or ended. 4. It may be caused by any of the following factors: a. 5. When the business is to be liquidated. emphasis will be placed on the accounting problems and procedures involved in the winding up (liquidation) of the partnership affairs. 2. c. The purpose for which the partnership was organized has been accomplished. The term/period covered by the partnership contract has terminated. and the resulting income or loss in the final period is transferred to the capital accounts of the partners. Partnership assets are sold. Definition of Terms 1. A business which is in the process of converting its assets into cash and making settlement with creditors is said to be in liquidation. The firm became bankrupt.
b. 5. 12. Gain on realization – the excess of the selling price over the carrying amount of the non cash assets sold through realization. all liabilities are paid. Installment method – involves the selling of some assets. Deficient partner – a partner with a debit balance in his capital account. Solvent partner – personal assets of the partner exceed his personal liabilities. Insolvent partner – personal assets of the partner are less than his personal liabilities. 10. Determine the net income/net loss and close the net income/net loss to partners’ capital accounts. 6. and all profits or losses are charged to the partners followed by a single liquidating distribution to the partners. selling additional assets and making further payments to partners. paying the liabilities of the partnership. Lump-sum liquidation – a liquidation method whereby all assets are converted into cash. This process continues until all the assets have been sold and all cash has been distributed to the creditors and to the partners. 9. d. Close all drawing accounts to their respective capital accounts. Partner’s interest – the sum of a partner’s capital. Finish the accounting cycle. dividing the available cash to the partners. loan balance and advances to the partnership. Statement of Liquidation – an accounting statement summarizing the winding up of the business affairs of the partnership. c. Close all nominal accounts. 7.4. a. Adjust the books. Right of offset – the legal right to apply part or all of the amount owing to a partner on a loan balance against a deficiency in his capital account resulting from losses in the process of liquidation. Loss on realization – the excess of the carrying amount over the selling price of the non cash assets sold through realization. 8. Marivic Valenzuela-Manalo 2 . Types of Liquidation 1. Capital deficiency – the excess of a partner’s share on losses over his capital balance resulting to a debit balance in the capital account. Procedures in Lump Sum Liquidation 1. 2. 11.
First. b. Second. to partners for capital accounts. If there is no loan or if capital balance still results in a debit balance: b. If a partner has a loan balance – exercise the right of offset (apply the loan balance against the debit balance). Note: The final distribution of cash to partners is made based on the partners’ capital balances and not based on the profit and loss ratio. The Gain or Loss on Realization account shall be closed to the partners’ capital accounts using profit and loss ratio. a. 5.1 If partner is solvent and a general partner – deficient partner makes additional cash investment to remove his capital deficiency. b. Sell non-cash assets and distribute gain or loss on realization among partners using profit and loss ratio. Cash is to be distributed in the following order of priority: a. to outside partnership creditors. c. the following may happen: a. the solvent general partners shall contribute the difference using their loss ratio. b. Third.2. Any difference between the selling price and carrying amount of the sold assets shall be recorded in an account called Gain or Loss on Realization. the remaining solvent partners will absorb the deficiency. to partners for loan accounts. 3. b. If partner’s capital balance results in a debit balance (deficient balance). 4.2 If partner is insolvent and general partner or if limited partner – deficient partner is unable to pay. Marivic Valenzuela-Manalo 3 . When cash is not sufficient to pay creditors.
This means that gains are directly credited to the partner's individual capital accounts Marivic Valenzuela-Manalo 4 . Capital Guada. Capital Pro-forma Entries DATE P A R T I C U L A R S Selling/Realization of non-cash asset at a gain July 1 Cash Allowance for doubtful accounts Accummulated depreciatiom Gain on realization Non-cash assets P/R D E B I T C R E D I T X X X X X X X X X X X X X X X X X X X X X X X X X Selling/Realization of non-cash asset at a loss July 1 Cash Allowance for doubtful accounts Accummulated depreciatiom Loss on realization Non-cash assets X X X X X X X X X X X X X X X X X X X X X X X X X Important note: Gain or loss on realization account may not be used when liquidation statement is prepared before actually recording the realization of assets in the general journal.Pro-forma Statement of Liquidation (Lump-Sum Method) Name of Partnership Statement of Liquidation Date Covered by the Liquidation NonLiabilities Cash cash assets Profit & loss ratio Balances before realization Realization and distribution of gain or loss on realization Balances Payment of liabilities Balances Payment of partner’s loan Balances Distribution of cash to partners Rose. Loan Rose.
Capital Guada. Capital Loss on realization X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Important note: Gain or loss on realization account is closed to partners' capital accounts using profit & loss ratio. Capital Guada. capital X X X X X X X X X X Marivic Valenzuela-Manalo 5 . Payment of partnership liabilities Liabilities Cash X X X X X X X X X X Payment of loan to partner/s Rose. Capital OR July 1 Rose. capital X X X X X X X X X X Payment of deficient but solvent partner Cash Guada. capital X X X X X X X X X X Exercise absorption of losses due to capital defiency of an insolvent and deficient partner/s Guada.DATE P AR T IC UL AR S P/R D E B I T C R E D I T Closing the Gain or loss account when used July 1 Gain on realization Rose. Capital Rose. loan Guada. Loan Cash X X X X X X X X X X Return of partners' capital Rose. Exercise right of off set Guada. Capital Cash X X X X X X X X X X X X X X X Important note: Return of partners' capital is based on their final capital balances and not based on P & L ratio. Capital Guada.
Each of the steps must be performed in sequence. the partners with credit balances must absorb the loss as follows: a. 3. c. Sell non-cash assets for cash and recognize a gain or loss on realization. Allocate gain/loss on realization to the partners based on their profit and loss ratios. When this happens. 5. When there is a capital deficiency. 4. the partners with the deficiency may pay the amount owed and the deficiency is eliminated. b. 5.) 4. b. 6. Maintain separate columns for liabilities to outside creditors and liabilities to partners. Maintain two columns for the debits – one for cash and one for non-cash assets. In liquidation. The liquidation of a partnership may result in no capital deficiency (all partners have credit balances in their capital accounts) or in a capital deficiency (at least one partner's capital account has a debit balance. If a partner with a capital deficiency is unable to pay the amount owed to the partnership. d. Figures in parentheses represent reduction in the account. 3. Important notes to remember in lump sum partnership liquidation 1. 2. Partnership Liquidation By Installment Frequently partnership assets are not realized through an instantaneous sale but may extend over several months. The cash distributed to each partner is the difference between the partner's present capital balance and the loss that the partner may have to absorb if the capital deficiency is not paid.Special Notes 1. Gain on realization increases capital while loss on realization decreases capital. Double rule all columns when all columns are brought to zero balance. the partners may prefer to receive Marivic Valenzuela-Manalo 6 . Distribute remaining cash to partners on the basis of their remaining capital balances. Make sure that the balances before liquidation show equality of debits and credits. This will always be true after each liquidation transaction. The allocation is journalized and posted. The allocation of the deficiency is made on the profit and loss ratios that exist between the partners with credit balances. it is necessary to: a. 2. The liquidation of a partnership terminates the business. Pay partnership liabilities in cash.
Remaining unsold assets must be treated as a complete loss. Installment payments to partners are proper provided that measures are taken to insure that all creditors are paid in full and that there is no over distribution to one or more of the partners. Partners’ interests are reduced by cash distributions to a balance proportionate to the partners’ profit and loss ratios. remaining unsold assets. Nature of Installment Liquidation 1. Cash realized is immediately distributed to partners after fully satisfying creditors’ claims or after setting aside sufficient cash for these liabilities. 2.the amounts due to them in a series of installments rather than wait until all assets have been converted to cash. 4. 5. Succeeding cash distributions are then based on the profit and loss ratio. 4. Distribute cash to partners after possible future losses have been apportioned to partners or in accordance with an advance distribution plan. Restricted interest. 7. Cash distribution to partners is considered as if it were the last because total gain or loss on realization is not yet determined. Pay the liabilities to outsiders. 6. Pay liquidation expenses and unrecorded liabilities. 2. 3. Non-cash assets are sold on a piecemeal basis over an extended period of time. Procedures for Liquidation by Installment The following are the accounting procedures that may be followed in liquidating a partnership by installments: 1. Record the realization of assets and distribute the realized gains or losses among the partners using profit and loss ratio. Marivic Valenzuela-Manalo 7 . and distribute these among the partners using the profit and loss ratio. in the accompanying schedule to determine amounts to be paid to partners. if there are any. shall consist of: a. Debit balances in capital and potential capital deficiencies are assumed uncollectible. 3.
Preparation of schedules of safe payments in subsequent periods are no longer necessary because all subsequent payments can be made based solely on the profit and loss ratio. at some point of the liquidation. Cash is. The said expenses and liabilities represent possible loss to the partners because upon payment.. These assets are assumed unrealized. Each partners’ capital is adequate to absorb his share of the maximum remaining possible loss. they are considered loss chargeable to the partners. distributed to a partner only if he has an excess credit balances in his partnership interest (i. Computation of Safe payments to Partners In installment liquidation. the amount paid is to be correspondingly absorbed by the partners. c. According to the schedule. cash distributions to partners are authorized even before all the losses that may be incurred and charged against the partners are known. Total value of remaining non-cash assets. 2. The possible loss consists of the following: 1. The deficiency of any of the partners is absorbed by the other partners as additional possible loss to them because he is presumed unable to pay anything to the firm. The Statement of Partnership Liquidation is usually supported by a schedule of safe installment payments to partners. each installment of cash is distributed as if no more cash is forthcoming. Additional loss may also accrue to the partners when a debit balance in any of the capital account results from the foregoing allocation of possible loss. is therefore. either from sale of assets or from collection of deficiencies from partners. prepared periodically. The absence of any partner’s deficiency after distribution of the possible loss signifies that the ratio of the capital balances are in the profit and loss ratio. Considerable care is therefore. i. cash withheld for possible expenses. required to insure an equitable distribution of cash to partners..b.e. they can not be sold. Cash withheld to pay for anticipated liquidation expenses and unrecorded liabilities that may arise. debit balances in capital.e. Payment to partners based on periodic computation of safe payments bring. Marivic Valenzuela-Manalo 8 . hence. the partners’ capital to the profit and loss ratio. simply called Schedule of Safe Payments. capital account or capital and loan accounts combined)after absorption of his share of the maximum possible loss that may occur.
2. A corporation is an entity created by law that is separate and distinct from its owners and its continued existence is dependent upon the corporate statutes of the state in which it is incorporated. The mere agreement of the parties cannot give rise to a corporation. Powers. 3. attributes. It is relatively easy for a corporation to obtain capital through the issuance of stock. 9. 10. properties expressly authorized by law – Being a creation of law. The stockholders have limited liability. Created by operation of law – A corporation is generally created by operation of law. 6. Changes in the ownership structure do not dissolve a corporation this means that the corporation can have a continuous life. Ownership divided into shares – Proprietorship in a corporation is divided into units known as shares of stocks.. and the stockholders are required to pay taxes on the dividends they receive: the result is double taxation. 8. The BOD is the governing body or decisionmaking body of the corporation. the corporation has separate legal existence from its owners). insolvency or incapacity of the individual owners. death. Separate legal entity – A corporation is an artificial being with a personality separate from that of its individual owners (i. 7. 5. Marivic Valenzuela-Manalo 1 .e. Characteristics of a Corporation The characteristics that distinguish a corporation from proprietorships and partnerships are: 1. having the right of succession and the powers. Right of succession – A corporation continues to exist notwithstanding the withdrawal. attributes and properties expressly authorized by law or incident to its existence (New Corporation Code of the Philippines). The corporation must pay an income tax on its earnings. Board of Directors (BOD) – Management of the business is vested in a board of directors elected by the stockholders. a corporation can only exercise powers provided by law and powers which are incidental to its existence.Introduction to Corporation Accounting CORPORATION . Ownership is shown in shares of share capital. 4.an artificial being created by operation of law. The corporation is subject to numerous government regulations. which are transferable units.
Transfer of equity of a partner needs the consent of all the partners. Starts with agreement among partners. According to Purpose 1. Unlimited liability 4. Private – a corporation formed for a private purpose. Corporation Initially formed by at least five persons. D. 6. Foreign -. Stockholders do not act as agents of the corporation. Quasi-public – a private corporation which is given a franchise to perform functions of a public character. Formed by at least two persons. Closely held or family – a corporation in which 50% or more of its stock is owned by five persons or less. Marivic Valenzuela-Manalo 2 . No part of its income is distributed as dividends and any profit shall be used to further the purpose(s) of the corporation. Domestic – a corporation that is organized under Philippine laws. According to Membership Holdings 1.a corporation in which capital comes from fees or contributions given by individuals. Starts with the issuance of a certificate of incorporation issued by SEC Limited liability Unlimited life Stocks can be transferred from one stockholder to another without getting the consent of the other stockholders. According to Law of Creation 1. aim or benefit. Partner is an agent of the partnership. Non-stock . B. C. 2. 2. According to the Extent of Membership 1.a corporation that is organized under the laws of other countries. may be formed orally. Stock corporations are generally profit-oriented. Classes of Corporation A.Distinction between Partnerships and Corporations Partnership 1. 3. Stock – a corporation in which the capital is divided into shares of stock and is authorized to distribute dividends to the holders of such shares. A stock certificate is a physical evidence of the shares of stock. 3. Limited life 5. 2. 2. Non-stock corporations are generally non-profit in nature. Open – a corporation whose ownership is widely held by many investors. Public – a corporation formed to render government service 2.
Liability of stockholders is limited to the extent of their investment in the corporation. Disadvantages of a Corporate Form of Business 1. 3. Marivic Valenzuela-Manalo 3 . Incorporators – persons who originally formed the corporation and whose names appear in the Articles of Incorporation. There is possibility of abuse of power by the Board of Directors because centralized management restricts active participation by stockholders in the conduct of corporate affairs. 7. Ease of ownership transferability . 4. It is subject to more taxes. The corporation’s power of succession enables it to enjoy a continuous existence. Unlimited life. 6. Stockholders or shareholders – owners of a stock corporation. Centralized management under the Board of Directors. Members – persons who gave fees or contributions to a non-stock corporation. 7. 3. 3. 4. Stockholders enjoy limited liability. 5. Underwriters – persons who undertake to sell the shares of stocks to the general public.shares of stocks may be transferred without the consent of the other stockholders. The limited liability of the stockholders weakens or limits its credit capacity. They must be 5 but not more than 15 natural persons. The corporation has the capacity to act as a legal entity. 4. They should not artificial persons. 2. 5. 2. Corporation’s activities are limited by the articles of incorporation. Promoters – persons who undertake the necessary steps and procedures to organize the corporation. The continuity of corporate existence enables it to obtain a strong credit line. 2. It is not easy to form because of complicated legal requirements and high costs in its organization. Subscribers – persons who agreed to buy shares of stock but will pay at a later date. 6. Difficulty in formation. Corporators – persons who compose the corporation whether as stockholders or members.Components of a Corporation 1. 5. Advantages of a Corporate Form of Business 1. It is subject to more governmental control. 6. Bigger source of capital may be raised because many individuals invest funds in the corporation.
At least 25% of total subscriptions must be paid upon subscription. The authorized share capital. 2. The amount of subscription to the share capital. The names. promoters’ commission and legal fees. Examples of organization costs are filing fees. 3. nationalities and addresses of the incorporators. Promotion – makes preliminary arrangements and solicits subscription to raise sufficient capital for the business. 2. 9. The total amount paid on the subscriptions and the amount paid by each subscriber on his subscription. The place of the principal office of the corporation. not exceeding 50 years. Costs incurred in connection with the formation of the corporation are recorded as an expense.Legal Requirements in Organizing a Corporation The process of organizing a corporation consists of three stages: 1. 3. Upon approval. The purpose or purposes for which the corporation is formed. 1. SEC issues a certificate of incorporation. Any one of the following account titles may be used in recording organization costs: 1. 7. 4. b. the names of the subscribers and the number of shares subscribed by each. The following are the pre-incorporation requirements: a. 5. the classes of stocks to be issued and the number of each class of stock indicating the par value if there is any. Incorporation – formalizes organization of the corporation by filing with SEC the necessary documentary requirements such as articles of incorporation and treasurer’s affidavit attesting compliance to the pre-incorporation requirements. Pre-operating Costs 2. The term of existence of the corporation. Marivic Valenzuela-Manalo 4 . the date of which is considered as the date of registration or incorporation. The names of the directors who will serve until their successors are duly elected and qualified in accordance with the by-laws. At least 25% of the authorized share capital as stated in the articles of incorporation must be subscribed. It includes the following information: The name of the corporation. 8. Commencement of the business – the business should start its business within two years from the date of incorporation. Organization Expense 3. cost of printing stock certificates. 6. Organization Costs Articles of Incorporation The Articles of Incorporation enumerates the powers and limitations conferred upon the corporation by the government.
d. for which subscription has been made. place and manner of calling the annual stockholders’ meeting. The manner of conducting meetings.contains record of all stock. The date. Marivic Valenzuela-Manalo 5 . 3. 8. The manner of selecting the corporate officers. Par value –a share of stock that is given a definite or fixed value in the articles of incorporation. the installment paid and unpaid on all stocks. Journals and Ledgers. c. 5. 3. The authority and duties of the directors. it may not be issued for less than P5. Classes of Stock 1. The circumstances which may permit the calling of special meetings of the stockholders. 7.00. 2. Right to share in corporate profits (dividends). Right to share in corporate profits upon liquidation. 4. Ordinary share –the basic issue or ordinary/common type of shares. 4. Stock and Transfer book . Minute books for meetings of stockholders. the names of stockholders or members alphabetically arranged. 2. The procedures for amending the articles of incorporation and by-laws. The by-laws should be filed within one month from the date of issuance of the certificate of incorporation. Right to vote in stockholders’ meeting. Right to purchase additional shares of stocks in the event that the corporation increases its share capital (pre-emptive right). 2. The manner of electing the directors. The by-laws normally include the following: 1. The term of office of the directors. 3. Minute books for meetings of Board of Directors. 9. The ordinary share entitles the holder to the following basic rights: a. b. Corporate Books and Records The corporation generally maintains the following books of accounts and records: 1. any sale or transfer of stock.By-Laws The by-laws of a corporation contain provisions for the internal administration of the corporation. The manner of voting and the use of proxies. No par value – a share of stock that has no fixed value. 6.
Terms Commonly Used in Corporation Accounting 1. Subscription -is a contract between a subscriber (buyer of stock) and a corporation ( issuer of stock) whereby the former purchases shares of stocks of the latter with the payment to be made at the later date. Outstanding shares – the total shares of stocks issued to subscribers or stockholders. 2. 4.shares which have been issued and fully paid for but subsequently reacquired by the issuing corporation by purchase or by donation. Subscribed shares – shares which investors have contracted to acquire. 8. Treasury shares .entitles the holder to some specific preferences over the ordinary share such as a. Marivic Valenzuela-Manalo 6 .refer to the maximum number of shares which may be issued by a corporation as set forth in the articles of incorporation.this account is credited for contribution in excess of par or stated value. 6. 10. b. Preference share . 3. 5. 9. Preference as to distribution of assets upon liquidation. Authorized shares – . Issued shares – represent shares which were issued to stockholders in the past which at present may or may not be in the hands of stockholders. whether or not fully or partially paid (as long as there is a binding subscription agreement) except treasury shares. Preference as to payment of dividends.4.the right of a stockholder to maintain his ownership interest in the corporation trough purchase of additional shares when new capital is issued. Pre-emptive right . Share Premium/Paid in capital in excess of par value/stated value . Unissued shares – shares which have never been issued and are available for issuance in the future. 7. Certificate of stock ..a written acknowledgment by the corporation of the stockholder’s interest in the corporation and its net assets.
Stock Issue Considerations Authorized stock/share is the amount of stock/share a corporation is allowed to sell as indicated by its charter. a. b. In many states the board of directors can assign a stated value to the shares. (b) paying an incorporation fee. d. Each share of ordinary share gives the stockholder the following ownership rights: a. Direct issue is typical in closely held companies. The authorization of share capital does not result in a formal accounting entry. and (d) developing by-laws. the entire proceeds are considered to be legal capital. b. legal fees. state incorporation fees. and promotional expenditures. A corporation has the choice of issuing ordinary share directly to investors or indirectly through an investment-banking firm (brokerage house). To share in corporate earnings through the receipt of dividends. When there is no assigned stated value. To maintain the same percentage ownership when additional shares of ordinary share are issued (preemptive right). To vote for the board of directors and in corporate actions that require stockholder approval. the corporation may begin selling ownership rights in the form of shares of stock. whereas indirect issue is customary for a publicly held corporation. c. Par value share/stock is share capital that has been assigned a value per share in the corporate charter. Ownership Rights of Stockholders When chartered. Organization costs are expensed as incurred. b. No-par share/stock is share capital that has not been assigned a value in the corporate charter. It represents the legal capital per share that must be retained in the business for the protection of corporate creditors. a. Costs incurred in forming a corporation are called organization costs. (c) receiving a charter (articles of incorporation). These costs include fees to underwriters.Unit 7 ACCOUNTING FOR CORPORATION FORMATION Accounting for Share Capital/Transactions Forming a Corporation The formation of a corporation involves (a) filing an application with the Securities and Exchange Commission (SEC). Marivic Valenzuela-Manalo 7 . which becomes the legal capital per share. The difference between the shares of stock authorized and the shares issued is the number of unissued shares that can be issued without amending the charter. To share in assets upon liquidation (residual claim). c.
Authorization –records the maximum number of shares a corporation is authorized to issue. 4. The amount in excess of par value is treated as share premium. When no-par stock does not have a stated value. fair value of the property received b. the stated value is credited to Ordinary share. 2. par value of the shares of stock 3. a stock certificate is issued to the subscriber. the par value of the shares is credited to Ordinary share and the portion of the proceeds that is above or below par value is recorded in a separate paid-in capital account. at par 2. whichever is clearly determinable. 5. c. et al. 3. When the selling price exceeds the stated value. Important: When shares of stock are issued for services or non-cash assets. Stock certificate is issued to the stockholder.The primary objectives in accounting for the issuance of ordinary share are to (a) identify the specific sources of paid-in capital and (b) maintain the distinction between paid-in capital and retained earnings. Marivic Valenzuela-Manalo 8 . When no-par ordinary share has a stated value. at a premium – at an amount more than the par value. cost is either the fair market value of the consideration given up or the consideration received. fair value of the shares of stock. the excess is credited to Paid-in Capital in Excess of Stated Value. Subscription –a subscriber enters into a contract to buy shares of stock. the entire proceeds are credited to Ordinary share. Basic Share capital Transactions There are 5 basic share capital transactions: 1. property – record the value of the property using the following amounts: a. 2006). Issuance of certificate – if a subscription is fully paid. Share capital may be issued 1. Share capital Share capital may be paid by the stockholder or subscriber in the form of 1. labor or services – record the cost of the labor or services using the fair value of the services rendered. money/cash 2. When par value ordinary share is issued for cash. whichever is more clearly determinable (Weygant. Sale of stocks – a stockholder buys stocks and pays immediately in full. Collection – a subscriber pays his subscription either partially or in full.
such issuance is called watered stock. Authorized share capital xxx Cash Share capital Share premium xxx xxx xxx Cash xxx Unissued share capital xxx Share premium xxx Subscription Subscriptions receivable xxx Subscriptions receivable xxx Subscribed share capital xxx Subscribed share capital xxx Share premium xxx Share premium xxx Cash xxx Subscriptions receivable xxx Subscribed share capital Share capital xxx xxx Cash xxx Subscriptions receivable xxx Subscribed share capital xxx Unissued share capital xxx Collection Issuance of certificate Marivic Valenzuela-Manalo 9 . The overstatement is done to comply with the requirement of the law that the stock should not be issued at less than its par value. Journal entry method Pro-forma Entries – Par Value Stock Subscribed or Sold at Par Transaction Authorization Sale Subscription Collection Issuance of certificate Memo Entry Method Authorized to issue _____ shares with a par value of P___. When the value assigned to the asset received is greater than the par value times the number of shares issued. the stock is said to contain secret reserves. Cash Share capital xxx xxx Journal Entry Method Unissued share capital xxx Authorized share capital xxx Cash Unissued share capital xxx xxx Subscriptions receivable xxx Subscribed share capital xxx Cash xxx Subscriptions receivable xxx Subscribed share capital Share capital xxx xxx Subscriptions receivable xxx Subscribed share capital xxx Cash xxx Subscriptions receivable xxx Subscribed share capital xxx Unissued share capital xxx Pro-forma Entries – Par Value Stock Subscribed or Sold at a Premium Transaction Authorization Sale Memo Entry Method Journal Entry Method Authorized to issue _____ shares with Unissued share capital xxx a par value of P___.Share capital cannot be issued at a discount or an amount less than par under the Philippine setting. Accounting Methods to Record Share capital Transactions 1. Memo entry method 2. When the value of the asset received is understated.
The entire consideration received by the corporation for its no par value shares shall be treated as capital and shall not be liable for distribution as dividends. public utilities.ordinary Ordinary share Preference Subscriptions receivable – preference Subscribed preference share Share premium-preference Preference share Accounting for No Par Shares No par shares do not have a definite or fixed value. This value is called stated value. 4. 6. Preferred shares which are preferred as to assets can be issued only with par value. While no par value shares do not carry a nominal value in the certificate. Ordinary Subscriptions receivable – ordinary Subscribed ordinary share Share premium. No par value shares may not be issued at an amount less than P5 per share. 5. the account titles must be labeled as to whether it is common or preferred. insurance companies cannot issue no-par stocks. 1. Voting right is frequently given exclusively to ordinary shareholders. trust companies. Subscribed Share capital and Share capital accounts are always recorded/credited at par value. a selling price may be assigned. No par shares are recorded using the memo entry method only. The Subscription Receivable account title is always recorded at subscription prices computed as follows: Subscriptions receivable = subscribed shares x subscription price 2. The pro-form entries to record share capital transactions for two classes of stock are the same.Special Notes: 1. Marivic Valenzuela-Manalo 10 . 3. Preference share is generally issued with par value and with a dividend rate. Share Premium/Paid in Capital in Excess of Par is recorded/credited at amount in excess of par computed as follows: Paid in capital in excess of par = (Subscription price – par value) (subscribed shares) Accounting for Two Classes of Stock The two classes of stock are ordinary share and preference share. Ordinary share entitles the holder to the four basic rights of a stockholder. The following account titles may be used. Banks. 3. Stated value should not be less than P5 per share. buildings and loan associations. However. 2.
Close the accounts of the partnership except the capital accounts. Books of the Corporation 1. Record the issuance of stocks to incorporators. no par xxx Share premium stated value xxx Subscriptions receivable xxx Subscribed share capital Share premiumPxx stated value xxx xxx Subscription Collection Issuance of certificate Cash xxx Subscriptions receivable xxx Subscribed share capital xxx Share capital . 3. Record the transfer of the assets and liabilities of the partnership to the corporation. no Authorized to issue _____ shares. Marivic Valenzuela-Manalo 11 . no par xxx Incorporating a Partnership A partnership may incorporate after considering the many advantages of a corporate form of business. 4. Record the distribution of stocks. Steps or procedures in converting a partnership into corporate form of business Books of the Partnership 1. no par xxx Cash xxx Subscriptions receivable xxx Subscribed share capital xxx Share capital. Close the balance of the Capital Adjustment account to the partners’ capital accounts in accordance with their profit and loss ratio. 2. Depreciable assets are transferred at net carrying amount. Record authorized capital sock.Pro-forma Entries: No Par Value Stock (Memo Entry Method) Transaction Authorization Sale No Stated Value With Stated Value Authorized to issue _____ shares. 2. It is advisable that new set of books is used by the newly formed corporation. This serves as the payment of the subscription of the partners who became incorporators. Finish the accounting cycle. Revalue the assets and liabilities using the Capital Adjustment account. no par. par with a stated value of P___. 5. Cash xxx Share capital . 3. 4. Record the subscription of incorporators. no par xxx Subscriptions receivable xxx Subscribed share capital xxx Cash xxx Share capital. Accounts receivable is transferred at gross amount together with the allowance for bad debts. Record the receipt of stocks. 6.
Capital Cpital adjustment P/R DEBIT X X X X X X X X CREDIT X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Close Capital adjustment account with credit balance Capital adustment X X X X Rose. Marivic Valenzuela-Manalo 12 . Cpital Guada. Capital X X X X Note: These adjusting entries are similar to year-end adjustments. Adjust the existing partnership books Date PARTICULARS Increase in the asset value with no contra-asset account Asset Capital adjustment Decrease in the asset value with no contra-asset account Capital Adjustment Asset Increase in the asset value with contra-asset account Contra-asset Capital adjustment Decrease in the asset value with contra-asset account Capital adustment Contra-asset Close Capital adjustment account withdedit balance Rose. Capital X X X X Guada. The only difference is that the Capital Adjustment account replaces all the nominal accounts which is eventually closed to the individual capital accounts of the partners.Pro-forma Entries: Books of the Partnership a.
Close all the ledger accounts with balances except the partners' capital account and debit "Receivable from Name of Corporation Date PARTICULARS Receivable fron Name of Corporation Liabilities Allowance for bad debts Accumulated depreciation . Date PARTICULARS Rose. Record the recipt of stocks from the newly formed corporation Date PARTICULARS Stocks of Name of Corporation Receivable from Name of Corporation To record receipt of stock certificates P/R DEBIT X X X X CREDIT X X X X d. Capital Guada. Record the distribution of stocks to the partners. Capital Stocks of Name of Corporation To record receipt of stock certificates P/R DEBIT X X X X X X X CREDIT X X X X Note: The debits to the partners’ capital accounts represent their final capital balances Pro-forma Entries: Books of the New Corporation Authorization Authorized to issue _____ shares with a par value of P ___.PPE Assets To record the trasnfer of assets and liabilities to the newly formed corporation.b. P/R DEBIT X X X X X X X X X X X X X X X X X X X X CREDIT c. Subscriptions receivable Subscribed share capital Assets Liabilities Allowance for bad debts Subscriptions receivable Issuance of stock certificates Subscribed share capital Share capital xxx xxx xxx xxx xxx xxx xxx xxx Subscription Collection/Transfer of partnership assets and liabilities Marivic Valenzuela-Manalo 13 .
Payment of the balance on subscription may either be specified in the contract of subscription or in lieu thereof may be subject to call by the Board of Directors. 2. And these delinquent stocks are offered for sale in a public auction. If there is no bidder. Once the subscription is fully paid. The sale of the delinquent subscription is issued to the highest bidder. An auction sale is conducted where a highest bidder is chosen. if within thirty (30) days from the said date. If no payment was made by the subscriber. The excess shares are given to the defaulting subscriber. The sale of the delinquent stocks is advertised to have possible buyers/bidders. All expenses incurred relating to the sale of the delinquent shares will be charged or debited to Receivable from Highest Bidder account since this amount will eventually be collected to the highest bidder together with the unpaid balance of the subscription. The highest bidder is the one who is willing to pay the unpaid balance of the subscription plus accrued interest plus all expenses related to the sale and who is willing to receive the least/smallest number of shares. 1. The defaulting subscriber does not get any share of stock. all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale. Marivic Valenzuela-Manalo 14 . When a subscriber fails to pay his subscription on the call date. no payment is made. all subscribed shares are issued. all of the delinquent shares will be issued in the name of the corporation. the corporation sends several notices to remind him of his obligation. 4. Shares are first given to the highest bidder. his subscription is declared as delinquent subscriptions and the subscriber is called a defaulting subscriber. Such shares are considered treasury shares. According to the Corporation Code of the Philippines. 3. 6.Accounting for Delinquent Subscription There are instances when a subscriber cannot pay in full the amount he subscribed to. 5.
he defaulted.00 (P20. The highest bidder paid the amount due and stock certificate was issued by the corporation. If there is no bidder at all Treasury stock X X X X Subscribed share capital X X X X Receivable fro highest bidder Subscriptions receivable Share capital X X X X X X X X X X X X Illustrative problem: Assume that Joseph subscribed 250 shares of Ordinary share at P25.00 is the par value). Record partial collection Cash Subscription receivable X X X X X X X X P/R DEBIT X X X X X X X X CREDIT c. Corporation sends several notices but no payment was made by the subscriber No entry d. Clare for 240. The corporation incurred costs related to the selling of the delinquent shares Receivable from highest bidder X X X X Cash X X X X e. Marivic Valenzuela-Manalo 15 . and Luisa for 245 shares. Record the subscription Date PARTICULARS Subscription receivable Suscribed share capital b. The highest bidder pays and corresponding stock certificates are issued Cash X X X X Subscribed share capital X X X X Receivable fro highest bidder X X X X Subscriptions receivable X X X X Share capital X X X X OR f. Advertising and other cost including those advances made by the corporation amounted to P500. Due process was taken and the shares were declared delinquent.00 At the public auction. Mary bid 230 shares.Pro-forma Entries using the Short Method of accounting for delinquent stocks a. After paying 50% on his subscriptions. bids from Mary. Clare and Luisa were received. REQUIRED: Record the above transactions.
or corporate capital. The retained earnings (earned capital) account is part of the stockholders' equity section of a corporation. The entire amount of retained earnings may be presumed to be unrestricted as to dividend declaration unless restrictions are indicated in the financial statements. a. The stockholders' equity section of a corporation's balance sheet consists of: (a) paid-in (contributed) capital. d. A net loss is debited to Retained Earnings in a closing entry. Pro-forma entry: Income Summary Retained Earnings To close net income for the period. xxx xxx b. .Unit 8 Accounting for Changes in Shareholders’ Equity Corporate Capital Owner's equity in a corporation is identified as stockholders' equity. Retained Earnings Restrictions 1. Net income is recorded in Retained Earnings by a closing entry with a debit to Income Summary and a credit to Retained Earnings. Retained earnings restrictions make a portion of the retained earnings balance currently unavailable for dividends. shareholders' equity. xxx xxx c. Pro-forma entry: Retained Earnings Income Summary To close net loss for the period. A debit balance in Retained Earnings is identified as a deficit and is reported as a deduction in the stockholders’ equity section. Retained earnings account is net income retained in a corporation and is part of the stockholders’ claim on the total assets of the corporation. Paid-in or contributed capital is the investment of cash and other assets in the corporation by stockholders in exchange for capital stock. and (b) retained earnings (earned capital).
xxx xxx c. Pro-forma entry: Retained Earnings Retained earnings appropriated for plant expansion To record appropriation for future plant expansion. Restrictions result from one or more of the following causes: a. Pro-forma entry: Retained Earnings Retained earnings appropriated for cost of treasury stocks To record appropriation for cost of treasury shares. Retained earnings restrictions are generally disclosed in the notes to the financial statements. Many states require a corporation to restrict retained earnings for the cost of treasury stock purchased. Legal restrictions. A debit balance in the retained earnings account is called a deficit. the appropriation is not necessary anymore. b. Pro-forma entry: Retained Earnings Retained earnings appropriated for contingencies To record appropriation for future contingencies. Voluntary restrictions. A reversing entry is prepared restoring the amount of appropriation back to the unrestricted balance. xxx . When the cause for restriction no longer exists. xxx xxx 3.2. 4. The board of directors may voluntarily create retained earnings restrictions for specific purposes (for example. The retained earnings account has a normal credit balance. xxx xxx Contractual restrictions or any future contingencies. Pro-forma entry: Retained earnings appropriated for plant expansion xxx Retained Earnings To record reversal of the appropriation for future plant expansion. Long-term debt contracts may restrict retained earnings as a condition for a loan. future plant expansion).
plant expansion.In Summary: Retained Earnings Credit Net income Reversal of appropriations Debit Net loss Appropriations for treasury shares. contingencies. etc. Losses from sale of treasury stock Declaration of dividends .
To support the market price of the stock. The stock must be the entity’s own stock. the indicated gain is credited to an account called “Share premium . . From this definition. To obtain stock to be used in the acquisition of plant assets. Pro-forma entry: Cash xxx Treasury Stock xxx Share premium . When treasury stocks are reissued or sold at more than cost. 2007) Two Accounting Methods to Record Treasury Stock 1. To obtain shares for conversion of other securities such as preferred stock. three requisites must be present in order that a stock should qualify as treasury stock. To increase the ratio of liabilities to stockholders’ equity. 6. To invest excess cash temporarily. xxx xxx b. 2.treasury shares”. 3. The corporation may reissue these treasury shares at some future date. 4. 5. 3. To improve earnings per share by reducing the number of shares outstanding. (Valix and Peralta. 2006) Reasons for Acquiring Treasury Stock 1. The stock is reacquired but not canceled. 2.ACCOUNTING FOR TREASURY SHARES Treasury stock/shares is an entity’s own stock that has been issued and then reacquired but not canceled.treasury shares xxx Re-issued treasury stocks at above cost. Reacquisition by purchase – under the cost method a. (Baysa and Lupisan. Par value method Two Kinds of Treasury Stock 1. The stock must have been issued originally. Cost method – This is the method to be used under local accounting standards 2. Pro-forma entry: Treasury Stock Cash Re-acquired own stocks at P__ per share. Treasury stocks are recorded at cost. 1.
However. the reissue or resale of donated stock increases assets and additional paid in capital.treasury shares if there is an existing balance for this account until all the amount has been exhausted and 2) Retained Earnings if the entire amount in the Share premium . 2006) Pro-forma entry for the receipt of own shares of stocks as donation Memorandum entry: Received ___ shares from RGM as donation. When treasury stocks are reissued or sold below cost. liabilities and stockholders’ equity. (Valix and Peralta. it does not affect the entity’s assets. xxx xxx xxx xxx xxx xxx xxx 2. including stock of the corporation. Contributions. the indicated loss is debited to 1) Share premium . These stocks are actually treasury stock and may therefore be reissued at any price without any discount liability.c.treasury shares Retained Earnings Treasury Stock Re-issued treasury stocks below cost. Pro-forma entry: Cash xxx Share premium . Donated stock is secured without cost and consequently.treasury shares account has been fully exhausted. Or Pro-forma entry: Cash Share premium . although it reduces outstanding shares.treasury shares xxx Treasury Stock xxx Re-issued treasury stocks below cost. received from shareholders shall be recorded at the fair value of the items received with the credit going to “Additional Paid in Capital – Donated Stocks” account. Reacquisition by donation – Donated stock refers to shares of stock received by the entity from its stockholders by way of donation. Or Pro-forma entry: Cash Retained Earnings Treasury Stock Re-issued treasury stocks below cost. .
2. Investments in Trading Securities) but as a reduction to total stockholders’ equity. . To protect creditors. xxx xxx Important Notes 1.Pro-forma entry for the sale of donated shares Cash Share premium . these shares are not entitled for dividends. therefore. a portion of retained earnings shall be restricted equal to the cost of the treasury stock. Treasury shares do not entitle the holder to the rights of a stockholder. 3. Treasury shares do not have the status of outstanding shares..e. Treasury stock is not viewed as an asset (i. 4.donated stocks Re-issuance of stocks received as donation.
2007). or stock. unissued shares b. A property dividend is a dividend distributable in the form of non cash assets. also known as return on investment. it must have (a) retained earnings. all issued and outstanding shares b. for example. Dividends shall be paid out of unrestricted or free retained earnings. For a corporation to pay a cash dividend. 2. also known as return of investment. This is consisting of a written promise to pay certain amounts at some future date. A stock dividend is a distribution of dividends in the form of corporation’s own stock. Dividends out of earnings – distribution to stockholders of corporate earnings in proportion to the number of shares held by them. subscribed no par shares c. The payment normally includes the principal amount and an interest at a specified rate. Dividends may be in the form of cash. A scrip dividend is declared when the corporation has sufficient retained earnings balance but not sufficient funds at the time for a cash dividend. treasury stock Two Kinds of Dividends 1. The power to declare dividends is vested upon the board of directors. property. The following shares are entitled to receive dividends: a. A scrip dividend is a deferred cash dividend. Dividends out of capital (liquidating dividends) – a return of stockholders’ invested capital. .Unit 9 Accounting for Accumulated Profits/Losses Dividends A dividend is a distribution by a corporation to its stockholders on a pro rata (proportional) basis. Property distributed normally takes the form of assets that can be easily divided or allocated among stockholders. This type of dividend reduces retained earnings by the cost or carrying value of the property on the date of declaration. and (c) declared dividends. scrip. Forms of dividends A cash dividend is a pro rata distribution of cash to stockholders. (b) adequate cash. the stocks of other corporation owned by the company (Lupisan and Baysa. all subscribed par value shares The following shares are not entitles to receive dividends: a.
Declaration datethe date on which the board of directors formally declares a cash dividend and the liability is recorded.Three dates are important in connection with dividends: a. . Record datethe date that marks the time when ownership of outstanding shares is determined from the stockholders' records maintained by the corporation. and the book value per share decreases. b. Stock dividends have no effect on the par or stated value per share. Unlike a cash dividend. but the number of shares outstanding increases. only the current year's dividend must be paid to preferred stockholders before paying any dividends to common stockholders. Preference stockholders must be paid dividends before common stockholders receive dividends. For small stock dividends (less than 20%) the accounting profession recommends that the board of directors assign the fair market value per share. It only involves transfer of amount from retained earnings to contributed capital. any dividends in arrears must be paid to preferred stockholders before allocating any dividends to common stockholders. When preferred stock is not cumulative. a stock dividend does not decrease total stockholders’ equity or total assets. When preferred stock is cumulative. Payment datethe date dividend checks are mailed to the stockholders and the payment of the dividend is recorded. 2. Par or stated value per share is normally assigned for large stock dividends (greater than 20%). 4. A stock dividend is a pro rata distribution to stockholders of the corporation’s own stock. 3. 5. The corporation declares stock dividends when it wishes to declare dividends but at the same time retain the net assets of the business. For a corporation to declare stock dividends there should be unrestricted retained earnings and available original and unissued shares which may be issued as stock dividends A stock dividend results in a decrease in retained earnings and an increase in paidin capital. a. b. Stock Dividend 1. c.
.. Date of Distribution: Pro-forma entry Stock Dividends Distributable …………………………….. ....... xxx Stock Dividends Distributable ..... total stockholders' equity and the par or stated value per share remains the same....... Large stock dividends – a stock dividend representing 20% or more of the outstanding shares.............. Small stock dividends – a stock dividend representing less than 20% of the outstanding shares.................... Share premium – Stock dividend ........................................................... When the fair market value of the stock is used........ This account is not a current liability because it will not be settled through the use of current assets and is shown as an addition to capital stock outstanding........................... Date of Distribution: Pro-forma entry Stock Dividends Distributable ………….....Two Kinds of Stock Dividends 1. the following entry is made at the declaration date: Date of Declaration: Pro-forma Entry Retained Earnings .… xxx Ordinary or Preference share …………………………………..... The account Retained earnings is debited for the fair market value of the stock on the date of declaration...........… xxx xxx Ordinary or Preference share …… ……………………………..........……………........ xxx Stock dividends change the composition of stockholders' equity because a portion of retained earnings is transferred to paid-in capital.. However....... xxx 2. Share premium-Stock dividend account is credited for the excess of the fair market value over its par or stated value......................... The account Retained earnings is debited for the par or stated value of the stock................................ xxx Stock Dividends Distributable ........... This account is credited for the par or stated value of the shares to be distributed regardless of whether the stock dividend is small or large..... Date of Declaration: Pro-forma Entry Retained Earnings .................. xxx xxx Stock Dividends Distributable is reported in paid-in capital as an addition to either common or preferred stock issued...................
............. 2...... 3... it must have: a... A cash dividend is a pro rata distribution of cash to stockholders.... Date of Payment: Pro-forma entry Dividends Payable…........ The records maintained by the corporation supply this information...... xxx The record date: the date when ownership of the outstanding shares is determined for dividend purposes..... xxx Cash………………………………………………....... b.......... Date of Declaration: Pro-forma Entry Retained Earnings ............. Adequate cash.. c.. Date of Record: No Entry c...... many companies prepare a shareholders' equity statement.... b.. Preferred stock has priority over common stock in regard to dividends.............Cash Dividends 1.........………..... Three dates are important in connection with dividends: a. For a corporation to pay a cash dividend........... The declaration date: the date the board of directors formally declares (authorizes) the cash dividend and announces it to stockholders....... A declaration of dividends... Retained earnings.xxx 4... Preferred stockholders must be paid any unpaid prior-year dividends before common stockholders receive dividends if the preferred stock is cumulative................. .. Shareholders' Equity Statement Instead of presenting a detailed stockholders' equity section in the balance sheet and a retained earnings statement.. An entry is required to recognize the decrease in retained earnings... and the increase in the liability dividends payable. xxx Dividends Payable….... The payment date: the date the dividend checks are mailed to the stockholders and the payment of the dividend is recorded.
Income tax expense and the related liability for income taxes payable are recorded as part of the adjusting process. A corporation is considered a separate legal entity for income tax purposes. . Income tax expense is reported in a separate section of the corporation income statement before net income. Income statements for corporations are the same as the statements for proprietorships or partnerships except for the reporting of income taxes.Corporation Income Statement 1. 2.
Special Topics Book Value per Share (Reference: Financial Accounting by Peralta and Valix) BOOK VALUE PER SHARE (BVPS) It is the amount that would be paid on each share assuming the company is liquidated and the amount available to shareholders is exactly the amount reported as shareholders’ equity. One class of stock BVPS = Total Shareholders’ Equity Number of shares outstanding 2. Two classes of stock BVPS = (Preference Share Preference Shareholders’ Equity Number of preference shares outstanding BVPS (Ordinary Share) = Ordinary Shareholders’ Equity Number of ordinary shares outstanding Book value per share represents the equity an ordinary stockholder has in the net assets of the corporation from owning one share of stock. .Unit 9 . Book value per share is not synonymous with the value of the stock in liquidation and does not generally equal market value per share. FORMULAS IN COMPUTING BVPS 1.
the share capital outstanding is computed as follows: Shares xx xx xx xx xx Amount P xx xx P xx xx P xx Share capital issued Add: Share capital subscribed Sub-total Less: Treasury share at par Amount and shares outstanding 5. the preference shareholders would share on a pro-rata basis with ordinary shareholders. If there is a deficit. Any balance of the shareholders’ equity in excess of par is apportioned taking into account the liquidation value and dividend rights of the preference shareholders. 3. An amount equal to the par or stated value is allocated to the preference share and ordinary share 2. following are assumed to be available for dividends: Accumulated Profit Share Premium Revaluation Reserve 4. The preference share call price or redemption price is ignored for book value computation. For book value purposes. Where there are treasury share and subscribed share capital. the preference shareholders shall receive and amount equal to the par or stated value. It can be more than the par value.Apportionment of Total Shareholders’ Equity into Its Preference and Ordinary Components 1. Treasury share shall be treated as a retired share. Liquidation value – amount to be received upon the liquidation of the corporation. Important things to Remember about BVPS 1. 4. 2. In the absence of liquidation values. and loss on retirement is charged first to Share Premium and then to Accumulated Profit. . 3. Any gain on retirement is added to Share Premium.
Preference to assets – preference shareholders are entitled to payment not only for the liquidation value but also for dividends in arrears. preference share is assumed to be non-cumulative and non-participating. the preference share is preference as to dividends. if only one is participating. the lower rate is the basis for ordinary share allocation b. In the absence of any statement to the contrary.5. 8. In the absence of specific designation. Dividends in arrears include current dividends. the Subscriptions Receivable balance is NOT deducted from Subscribed Share Capital. 10. 9. Preference as to dividends Non-cumulative Cumulative Non-participating Participating 7. If there are two classes of preference share with different dividend rates a. the basis for ordinary share allocation is the rate of the participating preference share. . if both are participating. In computing for share outstanding. 6. 11.
d. the dividend for the current year is deducted whether or not it is declared. the denominator in the formula becomes the weighted average shares outstanding. The formula for computing earnings per share is: Weighted Average Ordinary Shares Outstanding Net income = Earnings per Share b. . earnings per share should be disclosed for each component. When a corporation has both preference and ordinary stocks outstanding. c. The objective of the basic earning earnings per share information is to provide a measure of the interest of each ordinary share of a parent entity in the performance of the entity over the reporting period. dividends declared on preference stock are subtracted from net income in determining earnings per share. When the income statement contains any of the sections for material nontypical items. a. Most companies are required to report earnings per share on the income statement. When there has been a change in the number of shares outstanding during the year. Earnings per share (EPS) indicates the net income earned by each share of outstanding ordinary stock.Earnings per Share Reference: Philippine Accounting Standards (PAS 33) The earnings per share figure is the amount attributable to every share of ordinary share outstanding during the period. It is not necessary to compute EPS for preference shares because there is a definite rate of return for such share. If the preference stock is cumulative.
It is a determinant of the market price of ordinary share. c. Uses of earning per share: a. Simple Capital Structure – means that the corporation has only ordinary and nonconvertible preference share.Two presentations of earnings per share: 1. b. By enterprises that are in the process of issuing ordinary shares or potential ordinary shares in the public securities market. . Complex Capital Structure 1. It is a “measure of performance”. Diluted earnings per share Enterprises required disclosing earnings per share: 1. Note: Nonpublic enterprises are not required to present earnings per share but are encouraged to do so in their financial statements. Basic earnings per share 2. Simple Capital Structure VS. The presentation of earnings per share is required for enterprises whose ordinary shares or potential ordinary shares are publicly traded and 2. 2. Complex Capital Structure – means that the corporation has one or more instruments outstanding that could result in issuance of additional ordinary shares. It is the basis of dividend policies of the company.
BASIC EARNINGS PER SHARE 1. If the preference share is cumulative. Basic EPS – considers only ordinary shares issued and outstanding. whether such dividend is declared or not. the preference dividend for the current year only is deducted from the net income.) Date Shares Months Monthoutstanding shares Total . it is treated as a change from the date.month shares Weighted average = 12 Stock Dividend Months outstanding Month-shares 2. Pro forma computations of Weighted Average Shares: 1. the original shares are issued. meaning. the preference dividend for the current year is deducted from the net income only if there is a declaration. 2. The Basic Equation: Net Income Ordinary Shares Outstanding or Net Income – Dividend on Preference Share Weighted Average Ordinary Shares Outstanding Notes: The net income is equal to the amount after deducting dividends on preference stock. If the preference share is non-cumulative. Stock dividend is recognized retroactively.) Date Shares .
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