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and a partner's acts can bind the business Unlimited Liability – each partner except for limited partners is liable to outside creditors outside of his capital contribution Limited Life – since a partnership is easily dissolved, it can be assumed that the legal life of the partnership easily ends. Business life may continue even if old partnership is terminated and the formation of a new one occurs *Kinds of Partnerships as to object Universal partnership of all present properties – assets contributed to the partnership becomes jointly owned by the partners. Profits earned by certain assets invested are also shared among partners Universal partnership of profits – ownership is retained by the investing partner. Only profits are shared among partnership *Kinds of Partnerships as to Liability General Partnership – all partners are general partners who are liable beyond their capital contribution Limited Partnership – requires at least 1 general partner and 1 limited partner. Limited partners are liable only up to their capital contributions *Kinds of Partners General Partner – liable beyond capital contribution Limited Partner – liable up to his capital contribution. He cannot contribute mere service or industry Capitalist Partner – a partner who contributes money or property to the partnership Industrial Partner – a partner who contributes service or industry. Managing Partner – one who manages the affairs of the partnership Liquidating Partner – one who liquidates the partnership Secret Partner – one who acts like a partner but is not known to be a partner Silent Partner – one who doesn't act but is known to be a partner Dormant Partner – one who is not known to be a partner and doesn't act Nominal Partner – one who is a partner by name only *Advantages and Disadvantages of a Partnership Easily organized (compared to Corporations) + More people create better choices because of experience and combined knowledge You can share resources such as money and equipment You have to consult your partner and negotiate more as you cannot take decisions by yourself. The duration of the partnership is always uncertain. Delay may take place in decision-making process.
NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!
Unit 2 - Accounting for Partnership Formation Case 1 – Both partners are ordinary people (do not intend on investing his business) Illustration: A and B decides to form a partnership. A will contribute P100,000 while B will contribute a piece of land which costs P150,000 and has a Fair Market Value of P175,000 Opening Entries Cash 100000 A, Capital 100000 Cash Contribution of A 175000 B, Capital 175000 Contribution of B *note that non-current assets are recorder at Fair Market Value and not at cost. Case 2 – At least one partner decides to contribute his business to the partnership Illustration: A and B decides to form a partnership called A & B partnership. A decides to contribute his business which has the following ledger accounts after closing entries: Cash P50,000 Accounts Receivable P30,000 Merchandise Inventory 20,000 Office Equipment P10,000 Allowance for doubtful Accounts P2,000 Accumulated Depreciation P3,000 Accounts Payable P7,000. B will contribute enough cash so that he gets 50% of partnership equity. B tells A that he needs to revalue his assets. Revaluation of assets are as follows: Accounts Receivable P25,000 Merchandise inventory P28,000 Office Equipment P8,000 Step 1 – Revalue the accounts Entries A, Capital Allowance for doubtful accounts Revaluation Merchandise Inventory A, Capital Revaluation Accumulated Depreciation A, Capital Revaluation Land
*note accounts with contra accounts will decrease or increase by adjusting their respective contra accounts.
NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!
Step 2- Close the Sole Proprietor's books Entries A, Capital Accounts Payable Allowance for doubtful Accounts Accumulated Depreciation Cash Accounts Receivable Merchandise Inventory Office Equipment Closing Sole Proprietor's books Step 3 – Opening Partnership Books
104000 7000 5000 2000 50000 30000 28000 10000
Opening Entries Cash Accounts Receivable Merchandise Inventory Office Equipment A, Capital Accounts Payable Allowance for doubtful Accounts Accumulated Depreciation Opening Entries Cash B, Capital Opening Entries
50000 30000 28000 10000 104000 7000 5000 2000
NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!
Unit 3 - Accounting for DIVISION OF PROFITS AND LOSSES Much difference only lies in the distribution of profits and losses. Each partner has his own capital account, drawing account. Net income is closed up to drawing accounts only. This is to protect the profit sharing ratio between partners. Case 1 – Profit and loss will be shared based on Beginning capital contributions Net income P1,500,000 A, Capital P300,000 B, Capital P200,000 C, Capital P500,000 Capital ratio 300,000/1,000,000 200,000/1,000,000 500,000/1,000,000 3 2 5 Profit Distributed (1,500,000)*(3/10) (1,500,000)*(2/10) (1,500,000)*(5/10)
Case 2 – Profit and loss will be shared based on an arbitrary ratio Illustration: A,B and C formed a partnership. They decided to share the profits and losses in the ratio 4:5:1 respectively. business operations were favorable and showed a Net income of P1,500,000. Net income P1,500,000 Arbitrary ratio 4 5 1 Profit Distributed (1,500,000)*(4/10) (1,500,000)*(5/10) (1,500,000)*(1/10)
Case 3 – Profit and loss will be shared on an arbitrary ratio and it will allow salary to industrial partners. Illustration: A,B and C formed a partnership. They decided to share the profits and losses in the ratio 4:5:1 respectively. business operations were favorable and showed a Net income of P1,500,000. Partner C will receive an annual salary of P300,000 A Salary Allowance remaining distributed Total Distribution P480,000 P480,000 B P600,000 P600,000 C P300,000 120,000 P420,000 Total 300,000 1,200,000 P 1,500,000 P
*Note Salary Allowance will be applied first before arbitrary distribution. 1,500,000 less 300,000 is 1,200,000. this amount will be divided amongst partners based on their profit and loss ratio
500.000.000 is 1.000 C P50.000 A.500. Illustration: A.000 950. Partner C will receive an annual salary of P300.000 Interest allowed Bonus Given to A Salary Allowance remaining distributed Total Distribution A P30. 1. They decided to share the profits and losses in the ratio 4:5:1 respectively.500.000 B.000 150.B and C formed a partnership. Partner C will receive an annual salary of P300.000 P1.000 less 450.000 B P20.000 300.000 C.000 105.000 Total 150.000 less 550. UNOFFICIAL ACTPACO REVIEWER. They decided to share the profits and losses in the ratio 4:5:1 respectively. A P150. this amount will be divided amongst partners based on their profit and loss ratio Case 5 – Profit and loss will be shared on an arbitrary ratio and will allow interest. business operations were favorable and showed a Net income of P1.000 B C P P525.Case 4 – Profit and loss will be shared on an arbitrary ratio and will allow bonus to managing partner and allowances. bonus. being the managing partner.000 is 950.000 95. Bonus given and Interest will be applied first before arbitrary distribution or capital ratio distribution. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000 Bonus Given to A Salary Allowance remaining distributed Total Distribution *Note Salary Allowance and Bonus given will be applied first before arbitrary distribution.500.000 300.000 P560.000 *Note Salary Allowance. 1.000 P1. this amount will be divided amongst partners based on their profit and loss ratio NOTE: PROPERTY OF BMS. business operations were favorable and showed a Net income of P1.000. being the managing partner.050.000 300. will receive a 10% bonus on Net income. A. 5% Interest is allowed to each partner based on his capital balance Net income P1.000 P525.500.000 P405. Illustration: A.050.000 P570..000 Total P 100.B and C formed a partnership. A.000. Capital P200.000 P300.000 P445.000.000.000 380. and salary to the partners.000 1.000.000 P495.000 475. Capital P500.500. will receive a 10% bonus on Net income.000 420.500. Capital P300.000 150.
000 300.000 Total P100.000) (P330. 5% Interest is allowed to each partner based on his capital balance Net Loss (P500.000) (P500.B and C formed a partnership.Case 6 – Net Loss or insufficient income to pay for interest. will receive a 10% bonus on Net income. UNOFFICIAL ACTPACO REVIEWER.000 (90.000) A P30. They decided to share the profits and losses in the ratio 4:5:1 respectively. Bonus does not apply to Net loss situations.000).000. (500.000 (900. Partner C will receive an annual salary of P300. business operations were unfavorable and showed a Net loss of P500.000) (450.000) *Note Salary Allowance and Interest will be applied first before arbitrary distribution or capital ratio distribution. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000. being the managing partner.000 is (900.000 C P50.000) (P430.000) P260.000) less 400.000) Interest allowed Bonus Given to A Salary Allowance remaining distributed Total Distribution (360.000 300. bonus and salary Illustration: A.000 B P20. this amount will be divided amongst partners based on their profit and loss ratio NOTE: PROPERTY OF BMS. A.
. . Admission of new partner Withdrawal.The newly formed partnership may continue to use either the books of the old partnership or an entirely new set of books. Revaluation of assets and liabilities Cases of Accounting for Dissolution 1. . Operation of law a. the partners are dissociated to continue the business as a going concern.Brings about a new association of individuals even if the partnership will not liquidate. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . Admission of a new partner 5. Withdrawal of an existing partner Requirements of Accounting for Dissolution 1. Death or insanity of any of the partners b. • Dissolution does not always lead to liquidation while liquidation is always a result of dissolution.Unit 4 – Partnership Dissolution without Liquidation Dissolution . Assets and liabilities should be at fair market value 3. Agreement among the partners 2. UNOFFICIAL ACTPACO REVIEWER. When the partnership is dissolved. . Nominal and temporary accounts must be closed to the partners’ capital accounts 2. (Mutual Agency) .does not necessarily mean an automatic termination of the business activities.terminates all authority of any partner to act for the partnership. retirement or death of a partner Insolvency of a partnership or a partner Conversion of the partnership to a corporation Admission of New Partner . 2. Partnership activities become unlawful 3.Two cases: o By purchase of interest of existing partners o By investment to partnership NOTE: PROPERTY OF BMS. Causes of Dissolution 1. It may continue until the winding up or liquidation of partnership affairs is completed.Should be with the consent of all the partners. 4.is the change in the relation of the partners cased by any partner ceasing to be associated in the carrying on of the business. Bankruptcy of any of the partners c. Partners’ capital accounts shall be updated a. 3. Express will in the case of partnership at will 4.
Capital 200.000 Case 5: AB and C sold 20% of their respective interest in the partnership to D for P200.000/50%) A. Capital D.000 300. Goodwill (100.000.000 40.000 P&L Ratio 20% 30% 50% The following are independent cases: Case 1: C sold his interest in the partnership to D for 300.000 400. C. Capital D. C. Capital C.000 120.000 300. Capital C. UNOFFICIAL ACTPACO REVIEWER.000.000 40. Capital D. Capital B.000 300.By purchase of interest of existing partners Partners A B C Capital Balances 100.000 60. They agreed that there would be no goodwill to be recognized.000 60.000 200.000 Case 4: C sold 100% of his interest in the partnership to D for P400. Capital D.000.000 400. A. Capital D.000 150.000.000 Case 3: C sold 100% of his interest in the partnership to D for P350. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . Capital 300. C. Capital 300. Capital B. Capital C. The partners agreed that the excess payment represents goodwill to recognize the true worth of the partnership because of its established name. Capital 150.000 100.000.000 NOTE: PROPERTY OF BMS.000 Case 2: C sold 50% of his interest in the partnership for P100. Capital 20.
Capital 200.000. D is admitted by investing cash of P200.1: Bonus to the new partner. Investment equals capital credits Case 1.000 150.000 for 20% interest in the partnership.000 150. P50.000 240. Capital 2. The partners agreed that any difference between capital contributed by the new partner and his capital credit should be treated under the bonus method. Capital B. Capital B.By investment to the partnership 1.1: Partners approved the admission of D provided that the latter will contribute to the partnership equipment with a fair value of P100.000 160.000 240. Cash A. Capital C.000 240.000 P&L Ratio 20% 40% 40% Capital Balances 150. Bonus Method Partners A B C Capital Balances 120.000 and cash.000 150. They further agreed that they would receive capital interest equal to their actual contributions to the partnership.000 100.000 16.33% Case 2. Capital D. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000 Case 2.000 50. Capital C.000 16.000 P&L Ratio 33.2: Bonus to the old partners.33% 33.000 for 30% interest in the partnership. The partners agreed that any discrepancy in the partners’ actual contributions and their respective capital credits should be treated under the bonus method. D is admitted by investing cash of P200.000 8.000 8.33% 33.000 16. Capital D.000 16. Capital 200. Cash A. Partners A B C Cash Equipment D.000 NOTE: PROPERTY OF BMS.
000.000 + 200.000 200.000 = P200.000 80.000. Capital C.000 200. Goodwill Method Partners A B C Capital Balances 120. It is also agreed that the investment should be recorded under goodwill method and it shall be given to D. Capital D.000 – 800.000 40.000 200. Cash Goodwill D. D is admitted by investing cash of P200. Total Agreed Capital = 200. It is also agreed that the investment should be recorded under goodwill method.000 240.000/20% = P 1.2: Goodwill to new partner.000 400. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000 = P800.000 for 20% interest in the partnership.000 240.000 Total Contributed Capital = 600. Capital B.000 Goodwill = 1.1: Goodwill to the old partners.000 P&L Ratio 20% 40% 40% Case 3. Capital 200.3.000 Case 3. Capital 200.000 for 40% interest in the partnership.000 Cash Goodwill A.000 NOTE: PROPERTY OF BMS. the new partner.000 80. UNOFFICIAL ACTPACO REVIEWER. D is admitted by investing cash of P200.
D is admitted into the partnership by investing P200.000 Withdrawal.000 P&L Ratio 15% 30% 30% 25% NOTE: PROPERTY OF BMS.000 Goodwill = 900.000 = P100.3: Goodwill to all partners.000 Total Contributed Capital = 600.000 48.000 = P800.000 225.000 = P100. Total Agreed Capital = P 900.000 Cash Goodwill A.000 Agreed capital credit to D = 900.000 15. D is admitted into the partnership by investing P200.4: Goodwill and Bonus.000 = P20. Capital D.000 for 20% interest in the total agreed capitalization of P900.000 Case 3.000 – 800. Total Agreed Capital = P 900.000 100.000 – 180.000 for 25% interest in the total agreed capitalization of P900. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000 270. Capital 200.Three cases: o Sale to outside party o Sale to one or all partners o Sale to the partnership Partners A B C D Capital Balances 135.000 Total Contributed Capital = 600.000 Bonus to old partners = P200. Capital 200. Retirement or Death of a Partner .000 = P800.000 + 200.000 – 800. Capital D. Capital B. Capital C.000 Cash Goodwill A.000 180.Case 3. Capital B.000 24.000 + 200.000 30.000.000 100. UNOFFICIAL ACTPACO REVIEWER.000 x 20% = P180.000 270.000 30.000 225. Capital C.000.000 48.000 Goodwill = 900.
He agreed to be paid P225. Capital A.000 P&L Ratio 20% 30% 50% 200. Capital B.000.000 250. B. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000 C. Capital E. Capital 25. B.The following are independent cases: Sale to outside party Case 1: All of the remaining partners consented that B will sell his entire capital interest to an outside person named E for P250.000 B.000 400.000 10. The partners agreed to revalue the inventory before Jonah’s withdrawal. Capital A. The payment is based on the agreed revaluation of inventory believer to be overstated.000 cash for his total interest in the partnership.000 225.000 NOTE: PROPERTY OF BMS. Capital Sale to one or all partners Case 1: A agrees to buy the interest of B for P200.000 225. Capital Sale to partnership Partners A B C Merchandise Inventory Capital Balances 100.000 200. C.000 250.000 50. Capital Cash 250.000 250.000 15.000 Case 2: The underpayment is agreed as bonus given by C to the continuing partners. A.000.000 Case 1: Less than book value. C is withdrawing from the partnership. Capital 15. UNOFFICIAL ACTPACO REVIEWER.000 150. Capital Cash 225. Capital 10.000 Merchandise Inventory C.
who is withdrawing. Capital Cash Inventory 250.000 150.000 General Partners Assets Liabilities Accounts Payable Cash Cash NOTE: PROPERTY OF BMS.000 Credit 500. In this case.000 100. C. the over-extension of credit to customers.000 100.000 100. Capital C. C is considered out of the partnership and he now becomes a creditor to the partnership. Case 1: Partnership Cash Accounts Payable A (20%) B (30%) C (50%) Debit 50. Capital Accounts Payable Cash 450. or excessive investments in inventories or in plant assets. Capital Cash Notes Payable 250. be paid P100.000 250.000 B. C. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .commonly a result of excessive losses from operations. UNOFFICIAL ACTPACO REVIEWER.000 450.000 notes payable with 12% interest per year.000 Case 4: Partners agreed to pay C P100.Case 3: Partners agreed that C.000 Insolvency of a Partnership or a Partner Insolvency .000 450.000 500.000 200.000 150.000 50.000 cash and P150.000 250.000 50.000 300.000 300.000 50.000 worth of inventory.000 500.000 cash and P150.
NOTE: PROPERTY OF BMS. Transfer all assets (debit) and liabilities (credit) of the partnership in the books of the corporation and credit the appropriate capital stock accounts to the equity. In the books of the corporation: 1. 3. Close the books of a partnership by closing all real accounts. Adjust the assets and liabilities directly to the partners’ capital accounts. Adjust the assets and liabilities directly to the capital accounts. Using new sets of books In the partnership books: 1. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . 2. Close all nominal accounts to the capital accounts. UNOFFICIAL ACTPACO REVIEWER.Conversion of Partnership to Corporation Using partnership books 1. Close (debit) the partners’ capital accounts and credit the appropriate capital stock accounts corresponding to the amount of the partners’ capital accounts which have been closed. 2.
000 (2.000 Balances before realization Assets realization Balances Payments of Liabilities Balances Right of Offset Balances B’s Cash Investment Balances Payment of Loans from A 5.000) 6. 2.000) (4. UNOFFICIAL ACTPACO REVIEWER.all noncash assets of the partnership are converted first into cash before payments are made first to the creditors.000 (3. cash payments to creditors and partners are on installment basis as the cash becomes available.000 195.000) (235. and liquidation expenses.000 A.000 3.000 NOTE: PROPERTY OF BMS.Unit V – Partnership Dissolution with Liquidation Liquidation . The payment to the partners is made only once in a lump sum amount after all the outside creditors are paid.000 Acconts Payable 195. Lump Sum Liquidation Case 1: Solvent General Partners. . THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000) 3.000 0 5. Capital (2/5) 12. must be allocated to the partners before actual cash payments are made to the individual partners.the process of converting all assets of the business into cash (realization).000) (16.000 5. Capital (2/5) 22. if any.Involves selling of the noncash assets on a gradual basis because the complete liquidation process might take several months.000) (4.000) 0 195. then to the partners.000) (2.000) 4.000) 2. Capital (1/5) 6.000 200. Lump Sum Liquidation (Total Liquidation) .000) 6.000 0 (4. Activities Cash Noncash Assets 235.000 (3. Consequently.000 (8. Payments to creditors and partners may not be postponed. Kinds of Liquidation 1.000 (195.000 0 6.000 9.000 B.000 Loans from A 5.000 C.000 5.000 4.000) (16.000 (195. followed y the final payments of creditors’ claims and the partners’ capital balances in the partnership (liquidation).000) 5.Gains or losses.000) 6.000 (2. Installment Liquidation (Piecemeal Liquidation) .
000 200.000 4. Capital Cash Case 2: B is an insolvent.000) 5. Capital Loss on Realization Accounts Payable Cash Loans payable to A A.000) (235. Capital Loans payabe to A Cash 3.000 B.000 (2. Capital B.000 C.667) NOTE: PROPERTY OF BMS. Capital (2/5) 22.000) (2. Activities Cash Noncash Assets 235.Balances Cash to Partner C Balances 6.000 6.000 195.000 5.000 6.000) 0 Cash 195.000 195.000 195.000) (16.000 6.000 (8. Capital Cash B.000 4.000 16.000 2.000 16.000 0 5.000 A.333) (4. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000) 4.000) 0 195.000 195.000 Balances before realization Assets realization Balances Payments of Liabilities Balances Absorption 5. Capital C. Capital (1/5) 6.000) (16.000 (2.000 5.000 80.000 2.000) (4.000 C.000 0 6.000 Loss on Realization 40.000) (1.000 3.000 Acconts Payable Loans from A 5.000) 0 150.000 (195. Capital (2/5) 12.000 8.000 (6.000 Accounts Receivable Merchandise Inventory Unused Supplies A.000 (6.000 (195. UNOFFICIAL ACTPACO REVIEWER.000) 6.000 40.
333) 0 150.333) 1. Capital Cash 8. Capital Loans payable from A A.000 1.000 5.000 0 3.333) 3.000 Accounts Receivable Merchandise Inventory Unused Supplies A. Capital (1/5) B.333 5. Capital C. Capital B. Capital Loans payabe from A Cash C.333 1.667 4.Activities Cash Noncash Assets Acconts Payable Loans from A A.000 5.000 Loss on Realization 40.333 3.000 40. Capital C.667) (3. Capital (2/5) C.667 3.000 16.667 (1. UNOFFICIAL ACTPACO REVIEWER.000 16.333 3.333 3. Capital (2/5) deficit of B Balances Right of Offset Balances Payment of Loans from A Balances Cash to Partner C Balances 5.333) 0 Cash 195.333 NOTE: PROPERTY OF BMS. Capital Loss on Realization Accounts Payable Cash A.000 80.667) 3.333 (3.333 (3. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .333 2.667 1.000 195.000 195.333 0 0 3.000 (3.000 3.000 (1. Capital B.
000 16.000 (1.000) (2.000 0 5. UNOFFICIAL ACTPACO REVIEWER.000) (4.000 Accounts Payable 140.000) 85.800 (15. Capital (40%) 35.000 3.000) 2.000) 85.000 31.600 (30.000 5.000 74. Capital (40%) 40.000 77. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000 74.000 18.200 (800) 2.000) 5.600 (400) 1.200) 31.000) 5.000 (140.400) 33.200) 1.000 J.000 (1.000 (5.000 18.000 (1.000 NOTE: PROPERTY OF BMS.000 140.000 (2.000) 3. Capital (20%) 20.000) 0 5.000 H.000 36.200 (800) 2.000) 3.000 (2.000 36.000 (2.000 Loans from H 5.400 (400) 36.000 (150.000) 1.400) 3.000 (2.000) 145.000 Balances before realization Collection of receivables Balances Payments of Liabilities Balances Cash to A Cash Balance Sale of Inventory Balances Payment to partners Balances Sale of supplies Balances Payment of liability and expenses Balances Final Payment to partners Balances 5.000) 0 Cash Loss on Realization Accounts Receivable 140.400) 28.000 6.000 (5.000 (3.000 0 0 0 150.Installment Liquidation Case 1: Activities Cash Noncash Assets 235.000) 2.000 85.000 31.000 (2.000 I.000 (80.000) 0 3.400) 3.000 18.200 (200) 5.000 3.000 140.000 10.000 (140.000) (4.000 (2.400 (400) 3.600 (25.
000 2.000 5. Capital J. Capital I.000 2. Capital I.000 400 800 800 2.400 30.400 74. Capital Loss on Realization H.000 Merchandise Inventory H.400 80. Capital I.000 4.200 2. Capital J.000 1.000 Cash 74. Capital J.H. Capital J. Capital Loss on Realization 1.000 140.200 25. Capital I. UNOFFICIAL ACTPACO REVIEWER.000 NOTE: PROPERTY OF BMS.000 10.000 6. Capital Loss on Realization Loans from H H.000 3.400 2.000 15.000 Loss on Realization 6.000 2. Capital I.000 2. Capital Loss on Realization H.000 2.000 200 400 400 1.000 4. Capital I.000 5. Capital J. Capital Loss on Realization Accounts Payable Cash Loans from H Cash 2.000 3.000 140. Capital Cash Cash Loss on Realization Unused Supplies H. Capital J. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .
Created by operation of law – generated by law. According to membership holdings a. Public – formed to render government service b. Board of Directors – decision making body of the corporation 7. Closely held or family – 50% or more of the stock is owned by 5 persons or less NOTE: PROPERTY OF BMS. According to purpose a. Private – formed for private purpose. According to the Extent of Membership a. aim or benefit c. Easy to obtain capital through issuance of stock 9. profit are used for improvement. Subject to numerous government regulations 10. Stockholders have limited liability 8. Ownership divided into shares – proprietorship is divided into units known as shares of stocks 6. death. Quasi-public – privately owned corporation 2.Unit 6 – Accounting for corporate formation and operation 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. Domestic – organized under Philippine Laws b. UNOFFICIAL ACTPACO REVIEWER. contracts cannot give rise to a corporation 3. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . non-profit in nature 4. attributes. Separate legal entity – a corporation’s personality is separate from its owners 2. Stock – capital is divided into shares of stock and has the authorization to distribute dividends to the shareholders who own stock certificates. Powers. Characteristics of a corporation 1. insolvency or incapacity of the owners or the changes in the ownership structure do not dissolve the corporation 4. Open – many investors b. Right of succession – the withdrawal. properties expressly authorized by law – exercise powers provided by law and powers which are incidental to existence 5. Double taxation: income tax for earnings and dividend taxes for stockholders Distinction between partnership and corporation Partnership Formed by at least 2 persons Starts with an agreement with partners may be written or oral Unlimited liability Limited life Transfer of equity needs consent Partner is an agent Corporation Formed by at least 5 persons Starts from issuance of a certificate of incorporation issued by SEC Limited liability Unlimited life Transfer of stocks may be without consent Stockholders don’t act as agent Types of Corporation 1. Non-stock – capital comes from fees or contributions. Foreign – organized by Laws of other countries 3. According to Law of Creation a. profit-oriented b.
Stockholders or shareholders – owners of stock corporation 3. all the power and limitations of the corporation shall be based in this article 1. Corporators – compose the corporation whether stockholders or members 5. Incorporation – submitting necessary documents such as Articles of Incorporation and treasurer’s affidavit to SEC. At least 25% of total subscription must be paid upon subscription 2. SEC issues a certificate of incorporation. Filing an application with Securities and Exchange Commission 2. UNOFFICIAL ACTPACO REVIEWER. Term of existence. not exceeding 50 years 5. Name of directors who will serve until their successors are elected and qualified in accordance to by-laws NOTE: PROPERTY OF BMS. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . Subscribers – buy share of stocks but pay on a later date 7.Components of a corporation 1. Promoters – undertake procedures to organize the corporation 6. Names. Underwriters – sell their shares to the public Advantages and disadvantages of corporate form of business Advantages Disadvantages Unlimited life Difficulty in formation – legal requirements Obtain strong credit line Limited liability of the stockholders limits credit capacity Bigger source of capital Government control Stockholders enjoy limited liability Abuse of power by BOD Ownership transferrable Activities are limited by Articles of Incorporation Act as legal entity More taxes Centralized management Forming a corporation 1. Place of the principal office 4. Develop By-laws Legal requirements 1. Commencement of the business – business operations should start within 2 years Pre-operating costs/ organization expense/ organization cost – costs incurred in the formation of the corporation such as filing fees. cost of printing stock certificates. Name of the corporation 2. promoter’s commission and legal fees Articles of Incorporation – filed with SEC. At least 25% of the authorized capital stock stated in the Articles of Incorporation must be subscribed b. 3. Incorporators – the people who formed the corporation usually consisting of 5 but not more than 15 persons and whose names appear in the Articles for Incorporation 2. the date shall be considered as the date of incorporation. Promotion – makes preliminary arrangements and solicits subscription to raise sufficient capital. addresses and nationalities of incorporators 6. Members – gave fees or contributions to non-stock corporation 4. upon approval. Paying an incorporation fee 3. Receive the Articles of Incorporation 4. Purpose/s for which the corporation is formed 3. Requirements a.
5. Manner of conducting meetings 3. shall be submitted a month after the date of issuance of Articles of Incorporation 1. 3. Share in dividends 3. Circumstances which may permit the calling of special meetings of the stockholders 4. 2. Journal and Ledgers 2. Authorized shares – maximum number of shares which may be issued Issued shares – shares issued to the stockholders in the past but may or may not be in the their hands at present Unissued shares – shares available for issuance in the future Outstanding shares – total of issued and subscribed shares. Manner of electing directors 6. Term of office of the directors 7. Total amount paid on subscriptions and the amount paid by each subscriber on his subscription By-Laws – contain provisions of internal administration. Procedures for amending the Articles of Incorporation and by-laws Corporate books and records maintained by the corporation 1. Manner of voting and using proxies 5. proceeds are considered legal capital. Distribution of assets upon liquidation Terms 1. When there is no stated value. 4. Authorized capital. Minute books for meetings of stockholders 3. may not be issued for less than 5 pesos.contains record of all stock. Preferred stock – specific preference over common stock Rights exercised by preference shareholders 1. Date. No Par value – share of stock with no fixed value. Stock and transfer book . Manner of selecting the corporate officers 9. BOD can assign stated value which becomes the basis for legal capital per share. Purchase additional shares if the corporation increases its capital stock 4. Common stock – ordinary shares Rights exercised by ordinary share holders 1. the installment paid and unpaid on all stocks. Minute books for meetings of Board of Directors 4.7. the names of stockholders or members alphabetically arranged. whether fully or partially paid except treasury shares Treasury shares – reacquired shares by issuance or donation NOTE: PROPERTY OF BMS. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . Vote in stockholders’ meeting 2. Payment of dividends 2. place and manner of calling the annual stockholders’ meeting 2. any sale or transfer of stock Classes of stocks 1. Par value – a share of stock with a fixed value stated in the Articles of Incorporation. classes of stocks to be issued and the number of each class of stock indicating their par value if there is 8. Amount of subscription to the capital stock. the names of subscribers and the number of shares subscribed by each 9. for which subscription has been made. UNOFFICIAL ACTPACO REVIEWER. legal capital retained for protection of corporate creditors 2. 3. Share in corporate profits upon liquidation 4. Authority and duties of the directors 8.
Pre-emptive right – right to purchase stocks when new capital is issued NOTE: PROPERTY OF BMS. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .6. Paid in capital in excess of par value/ stated value – excess contribution above par value or stated value 10. Certificate of stock – legal document that certifies the ownership of stocks 9. UNOFFICIAL ACTPACO REVIEWER. Subscription – contract wherein a subscriber(buyer of stock) purchase stocks with payment in a later date from the corporation(issuer of stock) 8. Subscribed shares – shares that are acquired or contracted 7.
Par value of the shares of stock 3. Authorized Shares – amount of stock the corporation is allowed to sell stated in the Articles of Incorporation a. Authorized share of stock – issued shares = UNISSUED SHARES 2. Maintain the distinction between paid-in capital and retained earnings Basic capital stock transactions 1. Cash 2. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . NOTE: PROPERTY OF BMS. Fair value of the shares of stock c. At premium – amount more than the par value. At par 2. Sale of stocks – full payment of stocks immediately 3. Identify specific sources of paid-in capital 2.Unit 7 – Accounting for share capital transactions Corporation may issue stocks directly to investors (closely held companies) and indirectly through investing-banking firm (public held corporation). UNOFFICIAL ACTPACO REVIEWER. stock certificate is issued to subscriber Capital stock Payment of capital stock 1. Issuance of certificate – if fully paid. the par value is credited to common stock and the proceeds above or below par will be recorded in a separate account title called paid-in capital or premium. Collection – subscriber pays partially or full 5. Labor or services – record cost labor services rendered Note: when shares of capital are issued for services or non-cash assets. Fair value of the property b. Primary objectives of issuance of common stock 1. Capital stock may be issued 1. cost is either fair market value of the consideration given up or received. paid in capital Note: Capital stock cannot be issued at a discount or an amount less than par Watered stock – stock issued less than par value Accounting methods to record capital stock transactions When a par value common stock is issued for cash. Authorization of stock does not require formal entry b. Subscription – subscriber enters in a contract for acquisition of shares 4. Property – record by value using a.
Cash xxx Capital stock xxx Subscriptions receivable Subscribed capital stock Cash Subscriptions receivable Subscribed capital stock Capital stock xxx Journal entry method Unissued capital stock xxx Authorized capital stock xxx Cash xxx Unissued capital stock xxx xxx xxx xxx xxx xxx xxx Subscription Collection Issuance of certificate Subscriptions receivable Subscribed capital stock xxx Cash xxx Subscriptions receivable xxx Subscribed capital stock xxx Unissued capital stock xxx Pro-forma entries – par value stock subscribed or sold at premium Transaction Authorization Sale Memo entry method Authorized to issue_____ shares with a par value of P___. Cash xxx Capital stock xxx Additional paid in capital xxx Subscriptions receivable xxx Subscribed capital stock xxx Additional paid in capital xxx Cash xxx Subscriptions receivable xxx Subscribed capital stock xxx Capital stock xxx Journal entry method Unissued capital stock xxx Authorized capital stock xxx Cash xxx Unissued capital stock xxx Additional paid in capital xxx Subscriptions receivable xxx Subscribed capital stock xxx Additional paid in capital xxx Cash xxx Subscriptions receivable xxx Subscribed capital stock xxx Unissued capital stock xxx Subscription Collection Issuance of certificate NOTES: 1. Subscription receivable is recorded at subscription prices (subscription receivable = subscribed shares x subscription price). 3. 2. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . Subscribed capital stock and capital stock are credited at par value. Paid in capital in excess of par is recorded at an amount above par (Paid in capital in excess of par = (subscription price – par value)(subscribed shares)) Accounting of two classes of stock Common/Ordinary shares Subscription receivable – ordinary Subscribed ordinary capital Share premium/additional paid in capital – ordinary Ordinary shares Preference/Preferred shares Subscription receivable – preference Subscribed preference capital Share premium/additional paid in capital – preference Preference share NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER.Pro-forma entries – par value stock subscribed or sold at par Transaction Authorization Sale Memo entry method Authorized to issue_____ shares with a par value of P___.
000 25.000.000 1.000. A corporation is authorized to issue 10.000.000. Memo entry method Cash 1.000 10.000 500.000 Preference share Ordinary share Share premium – preference Share premium – ordinary Sale of stock 500. One-half of each class of authorized shares is issued at par for cash.000 25.000 10. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000.000 1.500.535.535. Memo. and 10.000 shares of preferred shares.500.000 1.000.000 Authorized preference share Authorized ordinary share Authorization 1. Cash Preference share Ordinary share Sale of stock Journal.000 1.000 ordinary shares with a par value of $20.000 Journal entry method Cash 1.entry method Authorized to issue 10.000 1.000 Cash 1.Case 1: a. $20 par.000 NOTE: PROPERTY OF BMS.000 ordinary shares.000 b.000 Unissued preference share Unissued ordinary share Share premium – preference Share premium – ordinary Sale of stock 500.000 Unissued preference share Unissued ordinary share Sale of stock 500.000 preference shares with par value of $100 and 10. $100 par.000 500. The other half of each class of authorized shares is issued at $2 above par for ordinary share and $5 above par for preference share in cash.entry method Unissued preference share 500.000 Unissued ordinary share 1.
000 2.000 2. 1) Full payment of subscription Memo entry method Cash Subscribed share capital – ordinary Subscription Receivable .00 each. 1) 500 shares are sold on subscription for $20.500 10.500 Memo entry method and Journal entry method Cash Subscription Receivable .500 10.00 each. The subscriber plans to pay $22 per share.000 10.ordinary Share premium – ordinary Subscription of ordinary shares b. 50% is due as initial payment.500 10.ordinary Subscribed share capital . 50% is due as initial payment.ordinary Unissued ordinary share 2.Case 2: a. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000 a.000 2.000 5.ordinary Ordinary share capital Journal entry method Cash Subscribed share capital – ordinary Subscription Receivable .ordinary Subscribed share capital .500 2.000 NOTE: PROPERTY OF BMS.500 5.ordinary Subscription of ordinary shares 5.000 1.500 10. UNOFFICIAL ACTPACO REVIEWER.000 6.000 10. Memo entry and journal entry method Cash Subscription Receivable . Partial payment of 2.000 2. 2) 500 shares are sold on subscription for $20.ordinary Partial payment c. Memo entry method and Journal entry method Cash Subscription Receivable .
Cannot be issued less than P5 5.500 10. no par with stated value of P____. Selling price may be assigned(stated value) but not less than P5 Pro-forma entries: No par value stock (memo entry method) Transactions Authorization Sale No stated value Authorized to issue ______ shares. no par xxx Paid in capital in excess of stated value xxx Subscription receivable xxx Subscribed capital stock xxx Paid in capital – Pxx stated value xxx Cash xxx Subscription receivable xxx Subscribed capital stock xxx Capital stock. Cash xxx Capital stock.000 3. no par at $15 per share.000 3.c.000 NOTE: PROPERTY OF BMS.000 shares. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . Cash Ordinary share. no par xxx With stated value Authorized to issue ______ shares.500 10.000 Accounting for No Par shares – do not have fixed values 1.ordinary Ordinary share capital Journal entry method Cash Subscribed share capital – ordinary Subscription Receivable . a. 3. no par xxx Subscription Collection Issuance of stock Case: 1. Recorded using memo entry method only 2. 2) Memo entry method Cash Subscribed share capital – ordinary Subscription Receivable . Preferred shares can only be recorded with par value 4. Bradley Corporation issues 10.000 150. UNOFFICIAL ACTPACO REVIEWER. Cash xxx Capital stock.500 10. no par. no par 150.000 3.500 10.ordinary Unissued ordinary share 3. no par xxx Subscription receivable xxx Subscribed capital stock xxx Cash xxx Subscription receivable xxx Subscribed capital stock xxx Capital stock. The entire consideration received by the corporation for its no par value shares shall be treated capital and shall not be liable as dividends.
b. The subscriber gave an initial down payment of 50%. no par at $15 per share with $10 stated value. Bradley Corporation issues 10.500 100. Record the transfer of the assets and liabilities of the partnership to the corporation.500 150.000 shares. 75.000 Books of the corporation 1. Bradley Corporation issues 10. Record the subscription of incorporators.000 50. Cash 150.000 37. no par 100. a.500 100. Finish the accounting cycle 2.000 b. Cash Subscribed share capital Subscription receivable Ordinary share. Cash Subscription receivable Subscribed share capital Share premium 3. Revalue the assets using capital adjustment account 3. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . Full payment Cash Subscribed share capital Subscription receivable Ordinary share. no par b.000 37. Record authorized capital stock 2.000 100. The subscriber gave an initial down payment of 50%. no par at $15 per share with $10 stated value.000 37.000 Ordinary share. Bradley Corporation issues 10. Close the balance of the Capital Adjustment account to the partners’ capital accounts in accordance with their profit and loss ratio. UNOFFICIAL ACTPACO REVIEWER. NOTE: PROPERTY OF BMS.500 150. a.500 37500 37.000 Subscribed share capital 150.000 37. 50% down payment of the balance Cash Subscription receivable 4.000 75.000 shares. no par Incorporating a Partnership Steps in converting partnership to corporation Books of the partnership 1. 3.000 Share premium – $10 stated value 50.000 2.000 shares.000 Subscription receivable 75.This serves as the payment of the subscription of the partners who became incorporators. no par at $15 per share. Cash 75.
Close capital adjustment account with debit balance Partner1.• • 4. Depreciable assets are transferred at net carrying amount. Decrease in the asset with contra asset account Capital adjustment xxxx Contra asset xxxx e. Record the receipt of stocks. Close capital adjustment account balance with credit balance Capital adjustment xxxx Partner1. 4. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . capital xxxx 2. UNOFFICIAL ACTPACO REVIEWER. Record the distribution of stocks Accounts receivable is transferred at gross amount together with theallowance for bad debts. Decrease in the asset value with no contra asset account Capital Adjustment xxxx Asset xxxx c. Increase in the asset with contra asset account Contra asset xxxx Capital adjustment xxxx d. capital xxxx Partner2. Adjust the existing partnership books a. 6. Increase in the asset value with no contra asset account Asset xxxx Capital Adjustment xxxx b. Record the issuance of stocks Pro-forma entries: books of the partnership 1. 5. Close the accounts for partnership except the capital accounts. Close all the ledger accounts with balances except the partners’ capital account and debit “Receivable from name of corporation” Receivable from name of corporation xxxx Liabilities xxxx Allowance for bad debts xxxx Accumulated depreciation – PPE xxxx Assets xxxx To record the transfer of assets and liabilities to the newly formed corporation NOTE: PROPERTY OF BMS. capital xxxx Capital adjustment xxxx f. capital xxxx Partner2.
When the subscription is fully paid. 5. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . If payment is still not being delivered. Record the receipt of stocks from the newly formed corporation Stocks of name of corporation Receivable from name of corporation To record receipt of stock certificates xxxx xxxx 4. Highest will be chosen during the auction sale. Delinquent stocks are offered for sale in public a public auction.3. Highest bidder is willing to pay for all the unpaid balance of subscription plus all sale related expenses but willing to receive the least shares. Issuance of stocks certificates Subscribed capital xxxx Capital stock xxxx Accounting for delinquent subscription – If subscriber cannot pay in full the amount he subscribed to. all delinquent shares shall be given to the corporation under the account title treasury stocks. capital xxxx Patrner2. Subscription Subscriptions receivable xxxx Subscribed capital xxxx 3. Delinquent subscriptions will be issued to the highest bidder. 3. The defaulting subscriber shall receive none of the shares. all subscribed shares are issued first to the highest bidder then the excess will be for the defaulting subscriber. Transfer of partnership assets and liabilities Assets xxxx Liabilities xxxx Allowance for bad debts xxxx Subscriptions receivable xxxx 4. 4. capital xxxx Stocks of name of corporation To record receipt of stock certificates xxxx NOTE: Debit balances of partners’ capital are their final balances. All expenses incurred including advertising and the unpaid balance of subscription will be charge to the account title Receivable from Highest Bidder which will be collected from the highest bidder. 6. Delinquent stocks are advertised to have bidders. UNOFFICIAL ACTPACO REVIEWER. NOTE: PROPERTY OF BMS. 2. 1. Authorization Authorized to issue ____ shares with a par value of P____ 2. Record the distribution of stocks to the partners Partner1. his subscription shall be declared as delinquent subscriptions and the subscriber is called a defaulting subscriber. If there is no bidder. he will receive several notices from the corporation. Pro-forma entries: books of the corporation 1.
The highest bidder pays and corresponding stock certificates are issued Cash xxx Subscribed capital stock xxx Receivable from highest bidder xxx Subscriptions receivable xxx Capital stock xxx 6. UNOFFICIAL ACTPACO REVIEWER. The corporation incurred costs related to the selling of delinquent shares Receivable from highest bidder xxx Cash xxx 5.Pro-forma entries for delinquent stocks 1. Record partial collection Cash Subscription receivable xxx xxx xxx 3. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . If there is no bidder at all Treasury stock xxx Subscribed capital stock Receivable from highest bidder Subscriptions receivable Capital stock Case: xxx xxx xxx xxx NOTE: PROPERTY OF BMS. Corporation sends several notices but no payment was paid by the subscriber No entry 4. Record the subscription Subscription receivable xxx Subscribed capital stock 2.
Accounting for treasury stocks . Treasury stock – ordinary 50. it may be issued again. To increase the ration of liability from stockholders’ equity 6.000 b.000 Cash 50. To improve earnings per share by reducing the number of shares outstanding 3.stock that is basically from the corporation which is issued originally and reacquired but not canceled.000 shares of its ordinary shares from the market worth $50 per share. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . When treasury stocks are reissued or sold below cost. To invest excess cash temporarily 4. When treasury stocks are reissued or sold at more than cost. the excess shall be called “Additional Paid in capital . Cash Treasury stock Share premium – treasury stock 30. the indicated loss will be debited to the following account titles: 1) Additional Paid in Capital – treasury stock – the balance in this account shall be used until there is no more remaining balance 2) Retained Earnings – will only be used if there is no more balance for additional paid in capital NOTE: PROPERTY OF BMS. Pro-forma entry: Treasury Stock xxx Cash xxx Re-acquired own stocks at P__ per share. Cost method – used for local accounting standards 2.treasury stock” or “share premium – treasury stock”.000 c. Reasons for acquiring treasury stocks 1. Treasury stocks are recorded at cost. UNOFFICIAL ACTPACO REVIEWER.000 25. To support the market price of the stock 5. Reacquisition by purchase – under cost method a. To obtain stock for the acquisition of plant assets 2. Caprock Corporation purchased 1.000 5. Pro-forma entry: Cash xxx Treasury Stock xxx Additional Paid in Capital-treasury stock xxx Re-issued treasury stocks at above cost Case: b. To obtain shares for conversion of other securities such as preferred stock Two accounting methods to record treasury stock 1. Case: a. Caprock sold 500 treasury shares for $60 per share. Par value method Two kinds of treasury stocks 1.
Case: a. Case: c. Cash 9.000 Case: e.000 Retained Earnings 2.200 4.treasury stock Retained Earnings Treasury Stock Or Cash Retained Earnings Treasury Stock xxx xxx xxx xxx xxx xxx xxx 5.000 Treasury Stock 5. Cash 3.600 Additional Paid in Capital. may be reissued without discount liability.treasury stock xxx Treasury Stock xxx Re-issued treasury stocks below cost. liabilities and stockholders’ equity. Donation of 25 shares by BMG Corporation. increase premiums through sale with the account title “Additional Paid in Capital – Donated stocks. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .treasury stock Retained Earnings Treasury Stock Re-issued treasury stocks below cost. NOTE: PROPERTY OF BMS. Memorandum entry: Received 25 shares from BMG Corporation as donation.Pro-forma entry: Cash xxx Additional Paid in Capital. 100 treasury shares were sold for $30 per share.000 2.treasury stock 400 Treasury Stock 10.600 200 10. Cash Additional Paid in Capital. Reacquisition by donation – stocks received from donation. UNOFFICIAL ACTPACO REVIEWER.” Pro-forma entry: receipt for donation Memorandum entry: Received ___ shares from _____ as donation.000 Or Cash Additional Paid in Capital. Case: d. does not affect the entity’s assets. 200 treasury stocks were sold for $48 per share. 200 treasury stocks were sold for $26 per share.
15 Issued 3. 2. Sold all treasury stock for $25. they are a decrease in stockholders’ equity. Its charter authorized the corporation to issue 1. Here are the transactions that related to the company’s stock during 20x1.000.600. $20 par value cumulative convertible preference shares. The services were billed to the company at $3.000 shares of ordinary shares for accounting and legal services. 3. therefore. Case: The Beta Corporation was organized in 20x1 in the state of Arizona.000. Treasury shares are not assets. Feb. 1 Issued 100.donated stocks xxx xxx 625 625 NOTES: 1. Cash Additional Paid in Capital.donated stocks Re-issuance of stocks received as donation Case: b. NOTE: PROPERTY OF BMS. A portion of retained earnings is restricted equal to the cost of treasury for the sake of creditors. the former is not entitled to dividends. Treasury shares are not outstanding shares.Pro-forma entry: sale of donated stocks Cash Additional Paid in Capital.000 shares.000 shares of ordinary shares for $125. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . Treasury shares are not entitled of the rights of stockholders.000 shares of $1 par value ordinary shares and an additional 25. instead. UNOFFICIAL ACTPACO REVIEWER. 4.
000 preference shares for $500.000 shares of ordinary shares to Edward Jackson in exchange for a building and land that had appraised values of $100.000.000 25. Issued 25. 2 25.Mar.000 100.600 3.000 and $25.50 per share. 15 2 July 1 Sept.000.500 2. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .000 of the shares in the treasury for $1. Apr.000 25. 30 Feb.000 5. 30 Cash Treasury Stock – ordinary Share Premium – treasury stock Sale of treasury shares 15. Cash Ordinary Shares Share premium – ordinary Sale of ordinary stocks 125.000 Sept.000 July 1 500. Sold 10.500 NOTE: PROPERTY OF BMS. 1 Issued 120.000 ordinary shares for the treasury at $1.000 12. UNOFFICIAL ACTPACO REVIEWER. Purchased 20. 15 100.000 120.000 Apr. respectively.25 per share from an individual who changed his mind about investing in the company.000 15 Organization Costs Ordinary Shares Share premium – ordinary Sale of ordinary stocks Building Land Ordinary Share Share premium – ordinary Sale of ordinary stocks Treasury Stock – ordinary Cash Acquisition of treasury stocks Cash Preference Share Sale of Preference share 3.000 25.000 500.000 600 Mar.
........... An appropriation for an amount equal to the cost of treasury stock should be made..........XXX dividends Pro Forma Entry Retained Earnings....Unit 8 ........ NOTE: PROPERTY OF BMS. liquidated and the creditors of the corporation have been paid......... take it as part of theory..... Retained earnings is affected by: periodic income or loss Pro Forma Entry Income summary...XXX prior period adjustments Retained Earnings. adjustments of prior period earnings and other capital adjustments....... plant expansions.....XXX Cash Dividends Payable.......... the terms bond and preferred share issue imposes restrictions on the payment of dividends..........XXX *recapitalizations *quasi-reorganization *these will be discussed in higher accounting...... Appropriation of retained earnings retained earnings is said to be appropriated when it is set aside for a specific purpose...........Accounting for Accumulated Profit/Loss (Retained Earnings) Retained Earnings represent the cumulative balance of periodic income or losses............................... The appropriation of retained earnings may be made in the following cases: Discretionary Appropriation – the management of the corporation may deem it necessary to retain the assets of the corporation for some particular purpose or contingency like pending lawsuits.....XXX Retained Earnings..... Retained earnings are increased by periodic net income and decreased by periodic net losses and distribution of earnings called dividends to stock holders..................... For now........................... It is appropriated in order to retain assets in the business for some particular purpose or some general contingency..........XXX Appropriation for Treasury Shares........ Contractual Requirements – when a corporation issues a bond or redeemable preferred share................... THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! ... UNOFFICIAL ACTPACO REVIEWER..... dividend distribution... Legal requirements – the legal capital of the corporation cannot be returned to the stockholders until the corporation is dissolved........ increase in working capital etc.
...................................................000.................. non-cash assets or the corporation's own stock among the stockholders.......Income summary is closed to the Retained earnings accounting Pro forma entry for net income Income Summary............ payable on January 15............. Journal entry on December 30 Retained Earnings....................................000 NOTE: PROPERTY OF BMS....................................... 2011 to stockholders of record on December 31.......................... It may be either a distribution of profits earned by the corporation or a return of the capital investments of the stockholders. UNOFFICIAL ACTPACO REVIEWER...000 shares of common stock issued and outstanding.. 3 important dates regarding Dividends Date of declaration – at this date. This would cancel the previous liability the corporation has.................. the board of directors declared an annual dividend of P10................ the corporation becomes liable for the dividends Pro forma entry during date of declaration Retained Earnings....00 per share on 100.............. 2010.....1.................000........XXX Retained Earnings......1.....000...XXX Pro forma entry for Net Loss Retained Earnings...XXX Date of record – a list of the stockholders who are entitled to receive dividends is prepared No Entry during this date Date of Payment – date when dividends are to be paid.....................................XXX Income Summary...........1...XXX Dividends A Dividend is a distribution of cash............................000 Journal entry on January 15 Cash Dividends Payable....................000 Cash.... Kinds of dividends Cash Dividends Illustration: Assume that on December 1..........XXX Dividends Payable...000................................2010....................................1....000 Cash Dividends Payable.... THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! ......
...........3000........000 was declared and paid as dividends Journal entry for declaration Retained Earnings..000 Journal entry on payment date Property Dividends Payable.............................000 Cash...........300......... NOTE: PROPERTY OF BMS.............000..300.......... Illustration: ASSUME THAT THE CAPITAL ACCOUNTS OF XYZ CORPORATION ARE CAPITAL STOCK OF P100 PAR VALUE.... Pro Forma Entries Retained earnings........... THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .................000 Share dividends payable..........000 Share Dividends Share Dividends are divided into Small Share and Large Share Dividends................ large share dividends are dividends declared that are 20% or higher............... Small share Dividends are dividends declared that are less than 20%......000 Case -2 Large share Dividends Shares are recorded at their par value assume that 40% share dividends are declared and the market value on the date of declaration was P125 per share.................000................ SHARE PREMIUM P600.........300...............000 with a selling price of P360.. UNOFFICIAL ACTPACO REVIEWER..............25........ 20.Property Dividends Illustration: assume that merchandise costing P300..000 Property Dividends Payable....20................000SHARES AUTHORIZED...000 AND RETAINED EARNINGS OF P800............000 SHARES ISSUED AND OUTSTANDING AMOUNTING TO P2...........000 Case 1 – Small Share Dividends shares are recorded at their Fair Market Values assume 10% share dividends are declared and the market value on the date of declaration was P125 per share.................................000 Share Premiums.............5......... 30..........
. it is known as nonparticipating preferred stock.. the amount of any dividends in arrears must be disclosed in the financial statements..80. preferred stockholders only receive their stated dividends and nothing more. it is prudent to assume that all preferred stock is nonparticipating unless it is clearly stated otherwise........ the past... Although not a liability..... NOTE: PROPERTY OF BMS. For example. If a preferred stock is described as 10% preferred stock with a par value of $100.......80..... before common stockholders are paid any dividends. Occasionally a corporation issues participating preferred stock... This means that the preferred stockholders will receive a larger dividend if the authorized dividend exceeds the total of the 5% dividend for the preferred stockholder and a 5% dividend to the common stockholders.. (A corporation might omit its dividends because it is suffering operating losses and has little cash available.. its holders must receive any past dividends that had been omitted on the preferred stock and its current year dividend. It occurs only after the common stockholders have received the same rate of return on their shares as the preferred stockholders...000shares x 40% x P100 per share A cumulative dividend means if dividends are declared.. UNOFFICIAL ACTPACO REVIEWER.. The participating dividend feature provides the opportunity for the preferred stockholders to receive dividends above the stated rate.... Since this feature is unusual.... Noncumulative If a preferred stock is designated as cumulative.. preferred stockholders will receive their current-year dividend plus any dividends not paid in prior years before the common stockholders receive a dividend... Nonparticipating vs. the company has dividends in arrears.............. Participating preferred stock allows for dividends greater than the stated dividend. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! ... If a company has issued cumulative preferred stock and does not declare a dividend.) If a corporation omits a dividend on its cumulative preferred stock.....Pro Forma Entries Retained earnings... Having cumulative preferred stock simply reinforces the preference preferred stockholders receive when a dividend is declared.. Owning a share of preferred stock that includes a cumulative dividend still does not guarantee the preferred stockholder a dividend because the company is not liable to pay dividends until they are declared. • Cumulative vs.... Participating Generally speaking.. say the preferred dividend rate is 5% and the preferred stock has a participating feature..000 computation: 2....000 Share dividends payable........... omitted dividends are said to be "in arrears" and this must be disclosed in the notes to the financial statements. Preferred stock that earns no more than its stated dividend is the norm. then its dividend will be $10 per year (whether the corporation's earnings were $10 million or $10 billion)....
000. That is. its outstanding common stock has a par value of $400.000 as cash dividends.000 as cash dividends.000. its outstanding common stock has a par value of $400. the corporation need not make up any omitted dividends on noncumulative preferred stock before declaring dividends. However. and Mason Company did not pay dividends on the preferred stock in the preceding two years: NOTE: PROPERTY OF BMS. Mason Company is to distribute $50. If the preferred stock is cumulative and nonparticipating. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . Illustration: Assume that in 2010. and its 6 percent preferred stock has a par value of $100. the noncumulative preferred stock must be given its current year dividend before the common stock can get a dividend.If a preferred stock is noncumulative.000.000. Mason Company is to distribute $50. and its 6 percent preferred stock has a par value of $100. its dividends will not be in arrears if a corporation omits dividends. Illustration: Assume that in 2010.
If the preferred stock is noncumulative and is fully participating: Illustration: Assume that in 2010. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . UNOFFICIAL ACTPACO REVIEWER.000 as cash dividends. its outstanding common stock has a par value of $400.000. and its 6 percent preferred stock has a par value of $100.000. and Mason Company did not pay dividends on the preferred stock in the preceding two years: NOTE: PROPERTY OF BMS. If the preferred stock is cumulative and is fully participating. Mason Company is to distribute $50.
THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! .Preparation of Shareholder's equity. NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER.
UNOFFICIAL ACTPACO REVIEWER. 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. FORMULAS IN COMPUTING BVPS 1. 3. An amount equal to the par or stated value is allocated to the preference share and ordinary share 2. Book value per share is not synonymous with the value of the stock in liquidation and does not generally equal market value per share. For book value purposes. One class of stock BVPS Two classes of stock = Total Shareholders’ Equity Number of shares outstanding 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. Apportionment of Total Shareholders’ Equity into Its Preference and Ordinary Components 1.Unit 9 . THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . following are assumed to be available for dividends: • Accumulated Profit • Share Premium • Revaluation Reserve NOTE: PROPERTY OF BMS.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.
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. 2. It can be more than the par value. In the absence of specific designation. Dividends in arrears include current dividends. Treasury share shall be treated as a retired share. In the absence of liquidation values.4. Liquidation value – amount to be received upon the liquidation of the corporation. the preference share is preference as to dividends. 9. Preference as to dividends • Non-cumulative • Cumulative • Non-participating • Participating 7. the preference shareholders shall receive and amount equal to the par or stated value. Where there are treasury share and subscribed share capital. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . 6. The preference share call price or redemption price is ignored for book value computation. 5. If there is a deficit. and loss on retirement is charged first to Share Premium and then to Accumulated Profit. If there are two classes of preference share with different dividend rates - NOTE: PROPERTY OF BMS. 4. 3. In the absence of any statement to the contrary. 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. 8. preference share is assumed to be non-cumulative and non-participating. 10. SPECIAL NOTES 1. the preference shareholders would share on a pro-rata basis with ordinary shareholders.
When a corporation has both preference and ordinary stocks outstanding. Diluted earnings per share NOTE: PROPERTY OF BMS. Two presentations of earnings per share: 1. If the preference stock is cumulative. 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. When the income statement contains any of the sections for material non-typical items.a. the dividend for the current year is deducted whether or not it is declared. Basic earnings per share 2. the lower rate is the basis for ordinary share allocation b. Earnings per share (EPS) indicates the net income earned by each share of outstanding ordinary stock. The formula for computing earnings per share is: b. dividends declared on preference stock are subtracted from net income in determining earnings per share. d. UNOFFICIAL ACTPACO REVIEWER. It is not necessary to compute EPS for preference shares because there is a definite rate of return for such share. if both are participating. When there has been a change in the number of shares outstanding during the year. 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. if only one is participating. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . earnings per share should be disclosed for each component. c. Most companies are required to report earnings per share on the income statement. the denominator in the formula becomes the weighted average shares outstanding. a. In computing for share outstanding. the Subscriptions Receivable balance is NOT deducted from Subscribed Share Capital. the basis for ordinary share allocation is the rate of the participating preference share. 11.
It is a “measure of performance”. UNOFFICIAL ACTPACO REVIEWER. Uses of earning per share: a. The presentation of earnings per share is required for enterprises whose ordinary shares or potential ordinary shares are publicly traded and By enterprises that are in the process of issuing ordinary shares or potential ordinary shares in the public securities market. It is a determinant of the market price of ordinary share. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . BASIC 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. b. Simple Capital Structure VS Complex Capital Structure 1. It is the basis of dividend policies of the company. Basic EPS – considers only ordinary shares issued and outstanding. Simple Capital Structure – means that the corporation has only ordinary and nonconvertible preference share. 2. The Basic Equation: Net Income Ordinary Shares Outstanding or Net Income – Dividend on Preference Share Weighted Average Ordinary Shares Outstanding NOTE: PROPERTY OF BMS. 2.Enterprises required disclosing earnings per share: 1. Complex Capital Structure – means that the corporation has one or more instruments outstanding that could result in issuance of additional ordinary shares. c. 2.
UNOFFICIAL ACTPACO REVIEWER. meaning. the preference dividend for the current year is deducted from the net income only if there is a declaration. If the preference share is cumulative.Notes: The net income is equal to the amount after deducting dividends on preference stock. the preference dividend for the current year only is deducted from the net income. Pro forma computations of Weighted Average Shares: 1. Stock dividend is recognized retroactively.) Date Total .month shares 12 Month-shares Shares Stock Dividend Months outstanding NOTE: PROPERTY OF BMS. it is treated as a change from the date. the original shares are issued. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . whether such dividend is declared or not.) Date Shares Months outstanding Month-shares Weighted average = 2. If the preference share is non-cumulative.
D.. Accounting (19th Ed). (2005). Auditing Problems: CPA Examination Reviewer: Based on Philippine Accounting Standards (PAS) Philippine Financial Reporting Standards (PERS). • Weygandt. S. F. (1999). T.com/doc/8284337/NO-PAR-Delinquent-And-Treasury-Stocks-Lecture-Notes NOTE: PROPERTY OF BMS. Philippines: National Bookstore. • Valix. T. D. P. UNOFFICIAL ACTPACO REVIEWER. 2 • Roque. • http://www. & Fess. M. (2009). C. Fundamentals of Accounting Principles (Theory and Applications) on Partnership Corporation and Other Related Accounting Topics. T. • Wareen.A: Houghton Mifflin Company. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!! . & Warfield. Theory of accounts. & Villariña. Powers. Kieso. (2006). J. • PFRS compilation vol. C. G. & Mills.References • Chua. M. Ohio: South-Western College Publishing. C. Arenas. Principles of Accounting (7th Ed). • Needles. (1999).S.scribd. • Valix. (2006). C. J. New York : Wiley. T. Practical Accounting I. U. Cincinnati... Inc. Principles of financial accounting.. et al. M. E. Reeve.