FINANCIAL ACCOUNTING AND REPORTING 2

ORGANIZATION
AND
FORMATION OF
CORPORATIONS
(DISCUSSION
QUESTIONS)

PRESENTED BY GROUP
5, 6, & 7
 1. A, B, & C ARE PARTNERS OPERATING A SMALL STORE FOR TWO YEARS. THE PARTNERS ARE
CONSIDERING THE POSSIBLE INCORPORATION OF THE PARTNERSHIP. WHAT ARE THE
ADVANTAGES AND DISADVANTAGES OF SUCH CHANGE?

ADVANTAGES DISADVANTAGES
The corporation enjoys continuous existence It is not easy to organize

The corporation has the ability to obtain a strong The limited liability of its shareholders may weaken
credit line its credit capacity
Larger scale business undertakings are made It is subjected to rigid governmental control
possible
It is subject to more taxes
The liability of its investors or shareholders is
Its centralized management restricts a more active
limited to the extent of their investment in the
participation by shareholders in the conduct of
corporation
corporate affairs
The transfer of shares can be effected without the
need for prior consent of other shareholders
Its smooth operation is guaranteed because of
centralized management
2. DIFFERENTIATE:
(A) STOCK FROM NON-STOCK CORP.

Stock Corporations Non-Stock Corporations

a private corporation in which the a private corporation in which
capital is divided into shares of stock capital comes from fees paid by
and is authorized to ditribute corporate
individuals composing it. The
earnings to holders on the basis of
owners of a non-stock corporation
shares held. The owners of a stock
corporations are called stockholders
are called members.
or shareholders.
2. DIFFERENTIATE:
(B) PRIVATE FROM PUBLIC CORP.

Private Corporations Public Corporations

a corporation that is organized a corporation that is organized
for a private benefit, aim or end. to govern a portion of the state.
2. DIFFERENTIATE:
(C) DE JURE AND DE FACTO CORP.

De Jure Corporations
De Facto Corporations
a corporation which exists in
a corporation which exists only
both law and fact. It exists in law
in fact but not in law. It does not
because it has complied with all
exist in law because of non-
the legal requirements; it exists
compliance with certain legal
in fact because it actually
requirements.
operates as a corporation

3. WHAT ARE THE
STAGES IN
ORGANIZING A
CORPORATION?
The process or organizing a
corporation generally
consists of three stages
which normally require the
aid of legal, competent
advisers.
P ROM OT ION
- the incorporators make preliminary
arrangements to set up a tentative working
organization and to solicit subscriptions to
raise sufficient capital for the business
IN C ORP ORAT ION
- the process of formalizing the organization of the
corporation.This stage includes:
a. Drafting of the article of incorporation
b. Filing of the articles of incorporation with the
Securities and Exchange Commission (SEC)
c. After payment, issuance of Certificate of Incorporation
COMMENCEMENT OF THE BUSINESS
- the business should start its operationd
within two years from the date of
incorporation. Failure to do so will
automatically dissolve the corporation
without the need for a hearing
 Voting Power on Major Issues

The Right to Transfer Ownership

4. What are the

basic rights of a An Entitlement to Dividends

shareholder?
Opportunity to Inspect Corporate
Books and Records

The Right to Sue for Wrongful Acts

5. WHAT ARE THE CONSIDERATIONS THAT MAY BE
RECEIVED IN EXCHANGE FOR SHARE CAPITAL?
WHAT ARE THE MEASUREMENT BASES FOR SUCH
EXCHANGE?

(a) CASH (b) Non-Cash (c) Services

Assets
 is issued for cash, the share capital is measured by the

WHEN A amount of cash received.

is issued in exchange for non-cash assets, the assets

received is recorded at its fair value (also known as direct
measurement), unless the fair value cannot be estimated
reliably. If the fair value of the asset received cannot be
estimated reliably, it will be recorded at the fair value of
the share capital issued, also known as indirect
measurement (PFRS 2, par. 10).
is issued in exchange for services rendered, the services
received is recorded at its fair value (also known as direct

SHARE
measurement), unless the fair value cannot be estimated
reliably. If the fair value of the services received cannot be

CAPITAL... estimated reliably, it will be recorded at the fair value of

the share capital issued, also known as indirect
measurement. (PFRS 2, par. 10)
 6. DIFFERENTIATE AN
ORDINARY SHARE CAPITAL
FROM A PREFERENCE SHARE
CORPORATIONS

CAPITAL
- Ordinary Share Capital or Common Stock entitles the holder to an
equal or pro-rata division of profits without any preference or
advantage over any class of shares. Hence, they enjoy no preferences
over each other. While the preference share capital or preferred stock,
it entitles the holder to enjoy priority as to distribution of dividends and
disyribution of assets upon corporate liquidation.
7. What are the different classes of preference share capital?
CUMU L A T IVE
PREF E R E NCE SHARE
which any undeclared dividends are
accumulated each year until paid.
NON- C U M ULATIVE
PREF E R E NCE SHARE
which the right to receive dividends is
forfeited when dividend is not declared in a
particular year.
PART I C I P A TING
PREF E R E NCE SHARE
which is entitled to receive dividends in
excess of the basic or fixed dividend rate. It
can be fully participating or participating
only to a certain amount of percentage.
NONP A R T ICIPATING
PREF E R E NCE SHARE
which is entitled to receive only the dividends equal
to the fixed rate or up to the current period only and
the extra dividends are given to the holders of
ordinary shares.
CONV E R T IBLE PREFE RENCE
SHAR E
which the holders are entitled for the option to
exchange the shares for some other securities of the
issuing corporation, normally ordinary shares.
REDE E M A BLE PREFE RENCE
SHAR E S
which entitles the issuing corporation the option to
redeem or call the shares at a certain call price.
8. WHEN DOES A - a share capital
becomes outstanding
SHARE CAPITAL when it is issued and is
BECOME in possession of a
OUTSTANDING? shareholder.
9. THE DEF CORPORATION WAS ORGANIZED ON OCT. 1, 2013 WITH AUTHORIZED ORDINARY SHARE
CAPITAL OF 1,000 SHARES, P5 PAR VALUE.
(A) HOW MANY SHARES MUST BE SUBSCRIBED AT THE TIME OF INCORPORATION?
(B) ASSUMING THAT THE MINIMUM REQUIRED SUBSCRIPTION WAS RECEIVED AT P12, HOW MUCH
SUBSCRIPTION MUST BE PAID UP?

(A)
The subscribed share capital must be
P250 which is 25% of 1000 authorized
share capital.
(B)
- The paid up capital will only amount
to P62.5 which is 25% of P250
subscribed share capital.
- The paid up capital must be P5000
which is the minimum paid up capital
required by law.
 10. What are the steps to be followed in
incorporating a partnership?

BOOKS OF THE OLD PARTNERSHIP

ARE RETAINED
1. Revalue the net assets of the partnership
2. Recognize Goodwill

SNOITAROPROC
3. (In case a revaluation account is used) Close
the balance of the Capital Adjustment Account
4. Record authorized share capital of the new
corporation
5. record the issuance of share capital to the
partners
6. Record any necessary distribution of cash to
the partners
7. Record the issuance of share capital to other
incorporators or shareholders (stockholders)
 NEW BOOKS ARE OPENED FOR THE
CORPORATION

The following shall be recorded:

1. authorized share capital
2. issuance of share capital for the net assets transferred
SNOITAROPROC

by the partnership
3. issuance of share capital to other incorporators
Entries are also prepared on the partnership books to
record the following:
1. revaluation of net assets
2. recognition of goodwill, if any
3. closing the balance of Capital Adjustment Account to
partners capital accounts
4. receipt of share capital from the new corporation
5. distribution of share capital to partners
6. distribution of cash to partners, if there is any
 T H A N K Y O U

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