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3 Actpaco PDF
3 Actpaco PDF
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.
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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
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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.
2.
3.
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.
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4.
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.
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PARTNERSHIP FORMATION
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.
P/R
D E B I T
C R E D I
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
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P/R
DEBIT
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
Note: These adjusting entries are similar to year-end adjustments. The only difference is that the Capital account
replaces all the nominal accounts .
b.
Date
c.
P/R
DEBIT
X X X X
X X X X
X X X X
CREDIT
X X X X X
Record the investment of all the partners in the new set of partnership books.
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, Capital
DEBIT
CREDIT
X X X X X
X X X
X X X X
X X X X X
Note 1: If the sole proprietor assets includes Accounts Receivable, 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.
Note 2: Depreciable assets are recorded in the new set of partnership books at their net cvarrying value, i.e.,
accumulated depreciation account is not recorded in the partnership books .
Note 3: Other partners' investment are recorded in the same way as in No. 1 (Formed by individulas)
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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. For example, Purchase of supplies is debited either to Supplies or Supplies
Expense account and when merchandise are sold on account, 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 the business transactions
2. Posting to ledgers
3. Preparing a trial balance
4. Preparing the worksheet
5. Recording adjusting entries
6. Prepare financial statements
7. Recording and posting closing entries
8. Preparing a post-closing trial balance
9. Recording and posting reversing entries
However, problems distinctive only to partnership operations are encountered in the
following:
1. Recording of partners loan account when a partner lends money to a partnership.
Date
PARTICULARS
July 1 Cash
Partner, loan or Loan Payable to Partner
P/R
DEBIT
X X X X
CREDIT
X X X X
P/R
DEBIT
X X X X
CREDIT
X X X X
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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
Partnership net income or net loss is shared according to the partners capital ratio unless the
partnership contract specifically indicates otherwise.
a.
A partner's share of net income or net loss is recognized in the accounts through
closing entries.
b.
Closing entries for a partnership are identical to the entries made for a proprietorship,
except for the use of multiple capital and drawing accounts.
b.
A ratio based either on capital balances at the beginning of the year or on average
capital balances during the year.
c.
d.
e.
Salaries to partners, interest on partners' capitals, and the remainder on a fixed ratio.
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.
Provisions for salaries and interest must be applied before the remainder of net income
or net loss is allocated on the specified fixed ratio. Detailed information concerning the division
of net income or net loss should be shown at the bottom of the income statement.
4. Preparation of financial statements - the financial statements prepared for a partnership form of
business is basically the same as sole proprietorship except for the following:
a. Statement of Financial Position the owners equity section is labeled Partners Equity
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RGem Trading
Statement of Financial Position
December 31, 20X5
Assets
Note
Current assets
Cash
Investment in Trading Securities
Trade and other receivables
Merchandise Inventory
Prepaid expenses
Property, Plant and Equipment
Total Assets
P
3
78,000
80,000
154,000
120,000
63,000
495,000
505,000
1,000,000
178,000
314,000
Total liabilities
Partners' Equity
Rose, Capital
Guada, Capital
Total Labilities and Partners' Equity
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492,000
508,000
1,000,000
208,875
299,125
b.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.
RGem Trading
Income Statement
For the year ended December 31, 20X5
Note
1
2
880,000
475,000
405,000
217,000
188,000
114,500
102,500
Guada
P
25,000
49,125
74,125
Total
60,000
40,000
9,400
78,600
188,000
c. Statement of Partners Equity a statement that reports the changes that have taken place in
the partners equity during the period. Each partner is provided a column heading which
explains details of the changes in his/her equity account.
RGem Trading
Statement of Changes in Partners' Equity
For the year ended December 31, 20X5
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P
P
P
Rose
150,000
113,875
263,875
55,000
208,875
P
P
P
Guada
250,000
74,125
324,125
25,000
299,125
P
P
P
Total
400,000
188,000
588,000
80,000
508,000
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Unit 4
PARTNERSHIP DISSOLUTION WITHOUT LIQUIDATION
A partnership depends upon the contractual agreement between or among partners;
therefore, the existence of the partnership business may be somewhat uncertain since it depends
on the personalities, moods, relationships of partners, etc. Any events or happenings that cause
the technical termination of a partnership may lead to a permanent dissolution or liquidation, if
the partners decide. Dissolution and liquidation in relation to partnerships are not synonymous.
A partnership is said to be dissolved when the original association for purposes of carrying on
activities has ended. A partnership is said to be liquidated when the business is terminated.
Dissolution
1. 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, Civil Code of the Philippines).
2. The termination of the life of an existing partnership.
Dissolution of an old partnership may be followed by:
1. the formation of a new partnership new partnership continues the business activities of
the dissolved partnership without interruption.
2. liquidation termination of business activities and winding up of partnership affairs
preparatory to going out of business.
Reasons why a partnership may be dissolved
1. Admission of a new partner
2. Retirement or withdrawal of a partner
3. Death, incapacity or insolvency of a partner
4. Incorporation of a partnership
Admission of a New Partner
1. The consent of all the partners is necessary.
2. There is a need to update the capital balances of the partners by
a. determining profit share of each partner from the last balance sheet date to
dissolution date.
b. revaluing/ adjusting partnership assets and liabilities using a temporary account
called the Capital Adjustment account.
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P/R
DEBIT
X X X X
CREDIT
X X X X
X X X X
Rose, drawing
Guada, drawing
Rose, capital
Guada, capital
X X X X
X X X X
X X X X
X X X X
DEBIT
X X X X
DEBIT
X X X X
DEBIT
X X X X
DEBIT
X X X X
DEBIT
X X X X
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P/R
CREDIT
X X X X
CREDIT
X X X X
CREDIT
X X X X
CREDIT
X X X X
CREDIT
X X X X
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. The only difference is that, nominal accounts are being replaced
by the Capital Adjustment account.
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
P/R
DEBIT
X X X X
CREDIT
X X X X
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The transaction is a personal one between one or more existing partners and the new
partner.
Any money or other consideration exchanged is the property of the participants and not the
property of the partnership.
Each partner's capital account is debited for the ownership claims that have been
relinquished, and the new partner's capital account is credited with the capital equity
purchased.
Total assets, total liabilities, and total capital remain unchanged.
2. By investment or asset contributions to the partnership
A new partner may be admitted to the firm by investing directly to the partnership.
This method of admission of a new partner in the partnership implies the following:
a. It is a transaction between the partnership and the incoming partner.
b. It involves the investment of assets by new partner into the partnership.
c. Total assets and total partners equity will increase.
Pro-forma entry
Date
PARTICULARS
July 1 Cash
Non-cash asset
New partner, 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, both the total net assets and
the total capital of the partnership increase. This is done by debiting Cash/Non Cash assets
and crediting the new partner's capital account. When the capital credit does not equal the
investment of assets in the partnership, the difference is considered either a bonus or
goodwill either to the existing partners or the new partner.
Bonus
1. It is an amount partners are willing to allow as additional credit to a partners capital in
excess of his actual capital contribution.
2. 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. The procedure for determining the
new partner's capital credit and the bonus to the old partners is as follows:
a.
Determine the total capital of the new partnership by adding the new partner's
investment to the total capital of the old partnership.
b.
Determine the new partner's capital credit by multiplying the total capital of the new
partnership by the new partner's ownership interest.
c.
Determine the amount of bonus by subtracting the new partner's capital credit from the
new partner's investment.
d.
Allocate the bonus to the old partners on the basis of their income ratios.
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. 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.
Bonus to old partners
Date
PARTICULARS
July 1 New partner, capital
Old partner 1, Capital
Old partner 2, Capital
Bonus to new partner
Date
PARTICULARS
July 1 Old partner 1, capital
Old partner 2, capital
New 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.
Withdrawal of a Partner
As in the case of the admission of a partner, the withdrawal of a partner legally dissolves
the partnership. The withdrawal of a partner may be accomplished by (a) payment from partners'
personal assets or (b) payment from partnership assets. The former affects only the partners'
capital accounts, whereas the latter decreases total net assets and total capital of the partnership.
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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.
a. Payment from partners' personal assets is a personal transaction between the partners.
b. Partnership assets are not involved and total capital does not change.
c. The effect on the partnership is limited to a realignment of the partners' capital balances.
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. Payment from partnership assets is a transaction that involves the partnership.
b. Both partnership net assets and total capitals are decreased.
c. There are instances where asset revaluations may be recorded.
When the partnership assets paid are in excess of the withdrawing partner's capital interest,
a bonus to the retiring partner results. The bonus is deducted from the remaining partners'
capital balances on the basis of their income ratios at the time of the withdrawal.
When the partnership assets paid are less than the withdrawing partner's capital interest, a
bonus to the remaining partners results. The bonus is allocated to the capital accounts of the
remaining partners on the basis of their income ratios.
In a withdrawal of a partner
1. There is a need to update the capital balances of the partners by
a. determining profit share of each partner from the last balance sheet date to
dissolution date.
b. revaluing/ adjusting partnership assets and liabilities using a temporary account
called the Capital Adjustment account.
Types of Withdrawal of a Partner
1. Purchase of interest by another partner or an outsider
a. It is considered a personal transaction between the buying and selling partners.
b. It involves the transfer of the withdrawing partners capital to the capital account
of the buying partner.
2. Purchase of interest by the partnership
a. It is considered a transaction between the partnership and the outgoing partner.
b. It involves a decrease in capital with the corresponding decrease in partnership
assets or increase in partnership liabilities.
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DEBIT
X X X X
CREDIT
X X X X
By purchase of interest by the partnership - Amount paid is equal to the withdrawing partner's capital
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 - Amount paid is less than the withdrawing partner's capital
Bonus to the remaining partners
Date
PARTICULARS
July 1 Withdrawing partner, capital
Remaining partner 1, capital
Remaining partner 2, 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 - Amount paid is more than the withdrawing partner's capital
Bonus to the withdrawing partner
Date
PARTICULARS
July 1 Withdrawing partner, capital
Remaining partner 1, 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, but provision generally is made for the
surviving partners to continue operations. When a partner dies it is necessary to determine the
partner's equity at the date of death.
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Unit 5
PARTNERSHIP DISSOLUTION WITH LIQUIDATION
Liquidation of a partnership means winding up the business usually by selling the
assets, paying the liabilities, and distributing the remaining cash to partners. A business
which is in the process of converting its assets into cash and making settlement with
creditors is said to be in liquidation.
In this unit, emphasis will be placed on the accounting problems and procedures
involved in the winding up (liquidation) of the partnership affairs. When the business is
to be liquidated, the account must be adjusted and closed, and the resulting income or
loss in the final period is transferred to the capital accounts of the partners.
The basic objectives of a partnership during liquidation process are to convert the
partnership assets to cash, to pay off partnership obligations and to distribute cash and
any unrealized assets to the individual partners.
Dissolution with Liquidation
1. A partnership is liquidated when its business operations are completely terminated
or ended.
2. It may be caused by any of the following factors:
a. The purpose for which the partnership was organized has been
accomplished.
b. The term/period covered by the partnership contract has terminated.
c. The firm became bankrupt.
d. The partners mutually agree to close the business.
3. Partnership assets are sold.
4. Partnership creditors are paid.
5. Remaining assets are distributed to the partners as a return of their investments.
Definition of Terms
1. Dissolution the termination of the life of the partnership.
2. Liquidation the process of winding up a business which normally consists of
conversion of assets into cash, payment of liabilities and distribution of remaining
among the partners.
3. Realization the process of converting non-cash assets into cash.
4. Gain on realization the excess of the selling price over the carrying amount of
the non cash assets sold through realization.
5. Loss on realization the excess of the carrying amount over the selling price of
the non cash assets sold through realization.
6. Capital deficiency the excess of a partners share on losses over his capital
balance resulting to a debit balance in the capital account.
7. Deficient partner a partner with a debit balance in his capital account.
8. 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.
9. Partners interest the sum of a partners capital, loan balance and advances to
the partnership.
10. Solvent partner personal assets of the partner exceed his personal liabilities.
11. Insolvent partner personal assets of the partner are less than his personal
liabilities.
12. Statement of Liquidation an accounting statement summarizing the winding up
of the business affairs of the partnership.
Types of Liquidation
1. Lump-sum liquidation a liquidation method whereby all assets are converted
into cash, all liabilities are paid, and all profits or losses are charged to the
partners followed by a single liquidating distribution to the partners.
2. Installment method involves the selling of some assets, paying the liabilities of
the partnership, dividing the available cash to the partners, selling additional
assets and making further payments to partners. This process continues until all
the assets have been sold and all cash has been distributed to the creditors and to
the partners.
Procedures in Lump Sum Liquidation
1. Finish the accounting cycle.
a. Adjust the books.
b. Determine the net income/net loss and close the net income/net loss to
partners capital accounts.
c. Close all nominal accounts.
d. Close all drawing accounts to their respective capital accounts.
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2. Sell non-cash assets and distribute gain or loss on realization among partners
using profit and loss ratio.
a. 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.
b. The Gain or Loss on Realization account shall be closed to the partners
capital accounts using profit and loss ratio.
3. If partners capital balance results in a debit balance (deficient balance), the
following may happen:
a. If a partner has a loan balance exercise the right of offset (apply the loan
balance against the debit balance).
b. If there is no loan or if capital balance still results in a debit balance:
b.1 If partner is solvent and a general partner deficient partner makes
additional cash investment to remove his capital deficiency.
b.2 If partner is insolvent and general partner or if limited partner
deficient partner is unable to pay; the remaining solvent partners will
absorb the deficiency.
4. Cash is to be distributed in the following order of priority:
a. First, to outside partnership creditors.
b. Second, to partners for loan accounts.
c. Third, to partners for capital accounts.
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.
5. When cash is not sufficient to pay creditors, the solvent general partners shall
contribute the difference using their loss ratio.
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Rose,
Loan
Rose,
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
C R E D I
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
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.
This means that gains are directly credited to the partner's individual capital accounts
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DATE
P AR T IC UL AR S
P/R
D E B I T
C R E D I
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.
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
Important note:
Return of partners' capital is based on their final capital balances and not based on P & L ratio.
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, Capital
Rose, capital
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X X X X X
X X X X X
X X X X X
X X X X X
Special Notes
1. Make sure that the balances before liquidation show equality of debits and credits.
This will always be true after each liquidation transaction.
2. Maintain two columns for the debits one for cash and one for non-cash assets.
3. Maintain separate columns for liabilities to outside creditors and liabilities to
partners.
4. Gain on realization increases capital while loss on realization decreases capital.
5. Figures in parentheses represent reduction in the account.
6. Double rule all columns when all columns are brought to zero balance.
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the amounts due to them in a series of installments rather than wait until all assets have
been converted to cash. 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.
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Characteristics of a Corporation
The characteristics that distinguish a corporation from proprietorships and partnerships
are:
1. Separate legal entity A corporation is an artificial being with a personality
separate from that of its individual owners (i.e., the corporation has separate legal
existence from its owners).
2. Created by operation of law A corporation is generally created by operation of
law. The mere agreement of the parties cannot give rise to a corporation.
3. Right of succession A corporation continues to exist notwithstanding the
withdrawal, death, insolvency or incapacity of the individual owners. Changes in
the ownership structure do not dissolve a corporation this means that the
corporation can have a continuous life.
4. Powers, attributes, properties expressly authorized by law Being a creation of
law, a corporation can only exercise powers provided by law and powers which
are incidental to its existence.
5. Ownership divided into shares Proprietorship in a corporation is divided into
units known as shares of stocks. Ownership is shown in shares of share capital,
which are transferable units.
6. Board of Directors (BOD) Management of the business is vested in a board of
directors elected by the stockholders. The BOD is the governing body or decisionmaking body of the corporation.
7. The stockholders have limited liability.
8. It is relatively easy for a corporation to obtain capital through the issuance of
stock.
9. The corporation is subject to numerous government regulations.
10. The corporation must pay an income tax on its earnings, and the stockholders are
required to pay taxes on the dividends they receive: the result is double taxation.
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Corporation
Initially formed by at least five persons.
3. Unlimited liability
Limited liability
4. Limited life
Unlimited life
Classes of Corporation
A. According to Purpose
1. Public a corporation formed to render government service
2. Private a corporation formed for a private purpose, aim or benefit.
3. Quasi-public a private corporation which is given a franchise to perform
functions of a public character.
B. According to Law of Creation
1. Domestic a corporation that is organized under Philippine laws.
2. Foreign -- a corporation that is organized under the laws of other countries.
C. According to Membership Holdings
1. 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. Stock corporations are
generally profit-oriented.
2. Non-stock - a corporation in which capital comes from fees or contributions
given by individuals. No part of its income is distributed as dividends and any
profit shall be used to further the purpose(s) of the corporation. Non-stock
corporations are generally non-profit in nature.
D. According to the Extent of Membership
1. Open a corporation whose ownership is widely held by many investors.
2. Closely held or family a corporation in which 50% or more of its stock is
owned by five persons or less.
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Components of a Corporation
1. Incorporators persons who originally formed the corporation and whose names
appear in the Articles of Incorporation. They must be 5 but not more than 15
natural persons. They should not artificial persons.
2. Stockholders or shareholders owners of a stock corporation.
3. Members persons who gave fees or contributions to a non-stock corporation.
4. Corporators persons who compose the corporation whether as stockholders or
members.
5. Promoters persons who undertake the necessary steps and procedures to
organize the corporation.
6. Subscribers persons who agreed to buy shares of stock but will pay at a later
date.
7. Underwriters persons who undertake to sell the shares of stocks to the general
public.
Advantages of a Corporate Form of Business
1. Unlimited life. The corporations power of succession enables it to enjoy a
continuous existence.
2. The continuity of corporate existence enables it to obtain a strong credit line.
3. Bigger source of capital may be raised because many individuals invest funds in
the corporation.
4. Stockholders enjoy limited liability. Liability of stockholders is limited to the
extent of their investment in the corporation.
5. Ease of ownership transferability - shares of stocks may be transferred without the
consent of the other stockholders.
6. The corporation has the capacity to act as a legal entity.
7. Centralized management under the Board of Directors.
Disadvantages of a Corporate Form of Business
1. Difficulty in formation. It is not easy to form because of complicated legal
requirements and high costs in its organization.
2. The limited liability of the stockholders weakens or limits its credit capacity.
3. It is subject to more governmental control.
4. 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.
5. Corporations activities are limited by the articles of incorporation.
6. It is subject to more taxes.
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By-Laws
The by-laws of a corporation contain provisions for the internal administration of the
corporation. The by-laws should be filed within one month from the date of issuance of
the certificate of incorporation. The by-laws normally include the following:
1. The date, place and manner of calling the annual stockholders meeting;
2. The manner of conducting meetings;
3. The circumstances which may permit the calling of special meetings of the
stockholders;
4. The manner of voting and the use of proxies;
5. The manner of electing the directors;
6. The term of office of the directors;
7. The authority and duties of the directors;
8. The manner of selecting the corporate officers;
9. The procedures for amending the articles of incorporation and by-laws.
Corporate Books and Records
The corporation generally maintains the following books of accounts and records:
1. Journals and Ledgers;
2. Minute books for meetings of stockholders;
3. Minute books for meetings of Board of Directors;
4. Stock and Transfer book - contains record of all stock, the names of stockholders
or members alphabetically arranged; the installment paid and unpaid on all stocks,
for which subscription has been made, any sale or transfer of stock.
Classes of Stock
1. Par value a share of stock that is given a definite or fixed value in the articles of
incorporation.
2. No par value a share of stock that has no fixed value; it may not be issued for
less than P5.00.
3. Ordinary share the basic issue or ordinary/common type of shares. The ordinary
share entitles the holder to the following basic rights:
a. Right to vote in stockholders meeting;
b. Right to share in corporate profits (dividends);
c. Right to share in corporate profits upon liquidation;
d. Right to purchase additional shares of stocks in the event that the
corporation increases its share capital (pre-emptive right).
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4. Preference share - entitles the holder to some specific preferences over the
ordinary share such as
a. Preference as to payment of dividends;
b. Preference as to distribution of assets upon liquidation.
Terms Commonly Used in Corporation Accounting
1. Authorized shares - refer to the maximum number of shares which may be
issued by a corporation as set forth in the articles of incorporation.
2. 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.
3. Unissued shares shares which have never been issued and are available for
issuance in the future.
4. Outstanding shares the total shares of stocks issued to subscribers or
stockholders, whether or not fully or partially paid (as long as there is a binding
subscription agreement) except treasury shares.
5. Treasury shares - shares which have been issued and fully paid for but
subsequently reacquired by the issuing corporation by purchase or by donation..
6. Subscribed shares shares which investors have contracted to acquire.
7. 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.
8. Certificate of stock - a written acknowledgment by the corporation of the
stockholders interest in the corporation and its
net assets.
9. Share Premium/Paid in capital in excess of par value/stated value - this account is
credited for contribution in excess of par or stated value.
10. Pre-emptive right - the right of a stockholder to maintain his ownership interest in
the corporation trough purchase of additional shares when new capital is issued.
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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), (b) paying an incorporation fee, (c)
receiving a charter (articles of incorporation), and (d) developing by-laws.
a. Costs incurred in forming a corporation are called organization costs.
b. These costs include fees to underwriters, legal fees, state incorporation fees,
and promotional expenditures.
c. Organization costs are expensed as incurred.
Ownership Rights of Stockholders
When chartered, the corporation may begin selling ownership rights in the form
of shares of stock. Each share of ordinary share gives the stockholder the following
ownership rights:
a. To vote for the board of directors and in corporate actions that require
stockholder approval.
b. To share in corporate earnings through the receipt of dividends.
c. To maintain the same percentage ownership when additional shares of ordinary
share are issued (preemptive right).
d. To share in assets upon liquidation (residual claim).
Stock Issue Considerations
Authorized stock/share is the amount of stock/share a corporation is allowed to sell as
indicated by its charter.
a. The authorization of share capital does not result in a formal accounting entry.
b. 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.
A corporation has the choice of issuing ordinary share directly to investors or
indirectly through an investment-banking firm (brokerage house). Direct issue is typical
in closely held companies, whereas indirect issue is customary for a publicly held
corporation.
Par value share/stock is share capital that has been assigned a value per share in
the corporate charter. It represents the legal capital per share that must be retained in the
business for the protection of corporate creditors.
No-par share/stock is share capital that has not been assigned a value in the
corporate charter. In many states the board of directors can assign a stated value to the
shares, which becomes the legal capital per share. When there is no assigned stated
value, the entire proceeds are considered to be legal capital.
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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.
When par value ordinary share is issued for cash, 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.
When no-par ordinary share has a stated value, the stated value is credited to
Ordinary share. When the selling price exceeds the stated value, the excess is credited to
Paid-in Capital in Excess of Stated Value. When no-par stock does not have a stated
value, the entire proceeds are credited to Ordinary share.
Basic Share capital Transactions
There are 5 basic share capital transactions:
1. Authorization records the maximum number of shares a corporation is
authorized to issue.
2. Sale of stocks a stockholder buys stocks and pays immediately in full. Stock
certificate is issued to the stockholder.
3. Subscription a subscriber enters into a contract to buy shares of stock.
4. Collection a subscriber pays his subscription either partially or in full.
5. Issuance of certificate if a subscription is fully paid; a stock certificate is issued
to the subscriber.
Share capital
Share capital may be paid by the stockholder or subscriber in the form of
1. money/cash
2. property record the value of the property using the following amounts:
a. fair value of the property received
b. fair value of the shares of stock, whichever is clearly determinable;
c. par value of the shares of stock
3. labor or services record the cost of the labor or services using the fair value of
the services rendered.
Important:
When shares of stock are issued for services or non-cash assets, cost
is either the fair market value of the consideration given up or the
consideration received, whichever is more clearly determinable (Weygant, et
al, 2006).
Share capital may be issued
1. at par
2. at a premium at an amount more than the par value. The amount in excess of
par value is treated as share premium.
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Share capital cannot be issued at a discount or an amount less than par under the
Philippine setting.
When the value assigned to the asset received is greater than the par value times the
number of shares issued, such issuance is called watered stock. 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. When the value of the asset received is understated, the stock is said to
contain secret reserves.
Accounting Methods to Record Share capital Transactions
1. Memo entry method
2. Journal entry method
Pro-forma Entries Par Value Stock Subscribed or Sold at Par
Transaction
Authorization
Sale
Cash
Share capital
Cash
Unissued share capital
xxx
xxx
xxx
xxx
Subscription
Collection
Cash
xxx
Subscriptions receivable
xxx
Cash
xxx
Subscriptions receivable
xxx
Issuance of
certificate
xxx
xxx
Sale
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
Collection
Cash
xxx
Subscriptions receivable
xxx
Cash
xxx
Subscriptions receivable
xxx
Issuance of
certificate
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xxx
xxx
Special Notes:
1. The Subscription Receivable account title is always recorded at subscription prices
computed as follows:
Subscriptions receivable = subscribed shares x subscription price
2. Subscribed Share capital and Share capital accounts are always recorded/credited
at par value.
3. 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)
Preference
Subscriptions receivable preference
Subscribed preference share
Share premium-preference
Preference share
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10
No Stated Value
With Stated Value
Authorized to issue _____ shares, no Authorized to issue _____ shares, no
par.
par with a stated value of P___.
Sale
Cash
xxx
Share capital , no par
xxx
Cash
xxx
Share capital, no par
xxx
Share premium stated value xxx
Subscription
xxx
xxx
Collection
Cash
xxx
Subscriptions receivable
xxx
Cash
xxx
Subscriptions receivable
xxx
Issuance of
certificate
Incorporating a Partnership
A partnership may incorporate after considering the many advantages of a corporate form of
business. It is advisable that new set of books is used by the newly formed corporation.
Steps or procedures in converting a partnership into corporate form of business
Books of the Partnership
1. Finish the accounting cycle.
2. Revalue the assets and liabilities using
the Capital Adjustment account.
3. Close the balance of the Capital
Adjustment account to the partners
capital accounts in accordance with
their profit and loss ratio.
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11
P/R
DEBIT
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
X X X X
X X X X
Close Capital adjustment account with credit balance
Capital adustment
X X X X
Rose, Capital
X X X X
Guada, Capital
X X X X
Note: These adjusting entries are similar to year-end adjustments. The only difference is that the
Capital Adjustment account replaces all the nominal accounts which is eventually
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12
b. Close all the ledger accounts with balances except the partners'
capital account and debit "Receivable from Name of Corporation
Date
PARTICULARS
P/R
DEBIT
X
X
X
X
X
X
X
X
CREDIT
X
X
X
X
X
X
X
X
X X X X
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
PARTICULARS
Rose, Capital
Guada, 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
Subscription
Subscriptions receivable
Subscribed share capital
xxx
Assets
xxx
Collection/Transfer of
partnership assets and liabilities
xxx
Liabilities
Allowance for bad debts
Subscriptions receivable
Issuance of stock
certificates
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xxx
xxx
xxx
xxx
xxx
13
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14
Pro-forma Entries using the Short Method of accounting for delinquent stocks
a. Record the subscription
Date
PARTICULARS
P/R
DEBIT
Subscription receivable
Suscribed share capital
CREDIT
X X X X
X X X X
b. Record partial collection
Cash
Subscription receivable
X X X X
X X X X
c. Corporation sends several notices but no payment was made by the subscriber
No entry
d. 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. 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. 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 (P20.00 is
the par value). After paying 50% on his subscriptions, he defaulted. Due process was
taken and the shares were declared delinquent. Advertising and other cost including
those advances made by the corporation amounted to P500.00
At the public auction, bids from Mary, Clare and Luisa were received. Mary bid
230 shares; Clare for 240; and Luisa for 245 shares. The highest bidder paid the
amount due and stock certificate was issued by the corporation.
REQUIRED: Record the above transactions.
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15
Unit 8
Accounting for Changes in Shareholders Equity
Corporate Capital
Owner's equity in a corporation is identified as stockholders' equity, shareholders'
equity, or corporate capital. The stockholders' equity section of a corporation's balance
sheet consists of: (a) paid-in (contributed) capital, and (b) retained earnings (earned capital).
Paid-in or contributed capital is the investment of cash and other assets in the
corporation by stockholders in exchange for capital stock.
Retained earnings account is net income retained in a corporation and is part of the
stockholders claim on the total assets of the 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. Net income is recorded in Retained Earnings by a closing entry with a debit to
Income Summary and a credit to Retained Earnings.
Pro-forma entry:
Income Summary
Retained Earnings
To close net income for the period.
xxx
xxx
xxx
xxx
c. The retained earnings (earned capital) account is part of the stockholders' equity
section of a corporation.
d. A debit balance in Retained Earnings is identified as a deficit and is reported as a
deduction in the stockholders equity section.
2.
b.
xxx
xxx
c.
xxx
xxx
xxx
xxx
3. Retained earnings restrictions are generally disclosed in the notes to the financial
statements.
The retained earnings account has a normal credit balance. A debit balance in
the retained earnings account is called a deficit.
4. When the cause for restriction no longer exists, the appropriation is not necessary
anymore. A reversing entry is prepared restoring the amount of appropriation back
to the unrestricted balance.
Pro-forma entry:
Retained earnings appropriated for plant expansion
xxx
Retained Earnings
To record reversal of the appropriation for future plant expansion.
xxx
In Summary:
Debit
Retained Earnings
Credit
Net loss
Net income
Reversal of appropriations
xxx
xxx
b. When treasury stocks are reissued or sold at more than cost, the indicated gain
is credited to an account called Share premium - treasury shares.
Pro-forma entry:
Cash
xxx
Treasury Stock
xxx
Share premium - treasury shares
xxx
Re-issued treasury stocks at above cost.
c. When treasury stocks are reissued or sold below cost, the indicated loss is
debited to 1) Share premium - 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 - treasury
shares account has been fully exhausted.
Pro-forma entry:
Cash
xxx
Share premium - treasury shares
xxx
Treasury Stock
xxx
Re-issued treasury stocks below cost.
Or
Pro-forma entry:
Cash
Share premium - treasury shares
Retained Earnings
Treasury Stock
Re-issued treasury stocks below cost.
xxx
xxx
xxx
xxx
Or
Pro-forma entry:
Cash
Retained Earnings
Treasury Stock
Re-issued treasury stocks below cost.
xxx
xxx
xxx
xxx
xxx
Important Notes
1. Treasury shares do not have the status of outstanding shares, therefore, these shares
are not entitled for dividends.
2. Treasury shares do not entitle the holder to the rights of a stockholder.
3. Treasury stock is not viewed as an asset (i.e., Investments in Trading Securities) but
as a reduction to total stockholders equity.
4. To protect creditors, a portion of retained earnings shall be restricted equal to the cost
of the treasury stock.
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. Dividends may be in the form of cash, property, scrip, or stock.
The power to declare dividends is vested upon the board of directors. Dividends shall
be paid out of unrestricted or free retained earnings.
The following shares are entitled to receive dividends:
a. all issued and outstanding shares
b. all subscribed par value shares
The following shares are not entitles to receive dividends:
a. unissued shares
b. subscribed no par shares
c. treasury stock
Forms of dividends
A cash dividend is a pro rata distribution of cash to stockholders. For a
corporation to pay a cash dividend, it must have (a) retained earnings, (b) adequate
cash, and (c) declared dividends.
A scrip dividend is a deferred cash dividend. This is consisting of a written
promise to pay certain amounts at some future date. A scrip dividend is declared when
the corporation has sufficient retained earnings balance but not sufficient funds at the
time for a cash dividend. The payment normally includes the principal amount and an
interest at a specified rate.
A property dividend is a dividend distributable in the form of non cash assets.
This type of dividend reduces retained earnings by the cost or carrying value of the
property on the date of declaration. Property distributed normally takes the form of
assets that can be easily divided or allocated among stockholders, for example, the
stocks of other corporation owned by the company (Lupisan and Baysa, 2007).
A stock dividend is a distribution of dividends in the form of corporations own
stock.
b.
Record datethe date that marks the time when ownership of outstanding
shares is determined from the stockholders' records maintained by the
corporation.
c.
Payment datethe date dividend checks are mailed to the stockholders and
the payment of the dividend is recorded.
b.
When preferred stock is not cumulative, only the current year's dividend
must be paid to preferred stockholders before paying any dividends to
common stockholders.
Stock Dividend
1.
2.
3.
A stock dividend results in a decrease in retained earnings and an increase in paidin capital. Unlike a cash dividend, a stock dividend does not decrease total
stockholders equity or total assets. It only involves transfer of amount from
retained earnings to contributed capital.
4.
For small stock dividends (less than 20%) the accounting profession recommends
that the board of directors assign the fair market value per share. Par or stated
value per share is normally assigned for large stock dividends (greater than 20%).
5.
Stock dividends have no effect on the par or stated value per share, but the
number of shares outstanding increases, and the book value per share
decreases.
xxx
xxx
xxx
2. Large stock dividends a stock dividend representing 20% or more of the outstanding
shares. The account Retained earnings is debited for the par or stated value of the stock.
Date of Declaration: Pro-forma Entry
Retained Earnings ........................................................................ xxx
Stock Dividends Distributable ..................................................
xxx
xxx
xxx
Cash Dividends
1.
2.
3.
The declaration date: the date the board of directors formally declares
(authorizes) the cash dividend and announces it to stockholders. An entry is
required to recognize the decrease in retained earnings, and the increase in
the liability dividends payable.
Date of Declaration: Pro-forma Entry
Retained Earnings ..................................................... xxx
Dividends Payable...............................................
b.
xxx
The record date: the date when ownership of the outstanding shares is
determined for dividend purposes. The records maintained by the
corporation supply this information.
Date of Record: No Entry
c.
The payment date: the date the dividend checks are mailed to the
stockholders and the payment of the dividend is recorded.
Date of Payment: Pro-forma entry
Dividends Payable................................................ xxx
Cash...xxx
4.
Preferred stock has priority over common stock in regard to dividends. Preferred
stockholders must be paid any unpaid prior-year dividends before common
stockholders receive dividends if the preferred stock is cumulative.
Income statements for corporations are the same as the statements for
proprietorships or partnerships except for the reporting of income taxes. Income
tax expense is reported in a separate section of the corporation income statement
before net income.
2.
BVPS
=
(Preference Share
BVPS
(Ordinary Share)
Book value per share represents the equity an ordinary stockholder has in the
net assets of the corporation from owning one share of stock. Book value per
share is not synonymous with the value of the stock in liquidation and does not
generally equal market value per share.
Shares
xx
xx
xx
xx
xx
Amount
P xx
xx
P xx
xx
P xx
The earnings per share figure is the amount attributable to every share of
ordinary share outstanding during the period.
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.
It is not necessary to compute EPS for preference shares because there is a
definite rate of return for such share.
Earnings per share (EPS) indicates the net income earned by each share of
outstanding ordinary stock.
a. The formula for computing earnings per share is:
Net income
b.
c.
d.
Weighted
Average
Ordinary Shares
Outstanding
Earnings
per Share
1. Simple Capital Structure means that the corporation has only ordinary and
nonconvertible preference share.
2. Complex Capital Structure means that the corporation has one or more
instruments outstanding that could result in issuance of additional ordinary
shares.
Notes:
Months
Monthoutstanding
shares
Total - month shares
Weighted average =
12
2.)
Date Shares
Stock
Dividend
Months
outstanding
Month-shares