Fundamentals of Accounting 2 Draft PDF

FUNDAMENTAL OF
ACCOUNTING 2
2015 EDITION
LEEMON LOPEZ ARAZA DYCI - COA AC102

TABLE OF CONTENTS
Session 1: Basic Accounting Review
Session 2: Partnership: Basic Concepts and Considerations
Session 3: Accounting for Partnership Formation
Session 4: Accounting for Partnership Operations and Financial Reporting
Session 5: Accounting for Partnership Dissolutions
Session 6: Accounting for Partnership Liquidation
Session 7: Corporation Accounting: Basic Considerations
Session 8: Share Capital
Session 9: Retained Earnings

AC 102 – Partnership &
Corporation
Session 1 – Basic Accounting Review
Understand the course objective, grading

system, course methodologies, and
requirements; Go over with the previous topics
from basic accounting for the students to
recall the concepts, principles learned on how
accounting has been used in the modern
society; Explain what accounting is and why
accounting information is considered a means
to an end, and; Apply the accounting
processing cycle to regular business
transactions.
Mr. Leemon L. Araza

Instructor
A C C O U N T I N G
Accounting is a service activity which function is to provide
quantitative information, primarily financial in nature, about economic
entities that is intended to be useful in making economic decisions. It
identifies, records, and processes business activities to come up with
financial reports that are measured in monetary terms to show the financial
condition of the business.
ACTIVITIES IN BUSINESS ORGANIZATIONS
Financing Activities. Are activities that result in changes in the size and
composition of the contributed equity and borrowings of the enterprise.
Operating Activities. Are activities are the principal activities of the

enterprise. They are the transactions and events that enter into the
determination of profit or loss.
Investing Activities. Are the acquisition and disposal of long-term assets

and other investments.
FORMS OF BUSINESS ORGANIZATION
Sole Proprietorship
Partnership
Corporation
PURPOSE OF BUSINESS ORGANIZATION
Service. Companies that performs services for a fee. (e.g. law firms,
accounting and the like)
Merchandising. Companies that purchase goods that are ready for sale and then
sell these to customers.
Manufacturing. Companies buy raw materials, convert them into products and
then sell the products to other companies.
The Accounting Equation
All accounting entries in the books of account for an organization have a

relationship based on the ‘accounting equation’:
Assets = Liabilities + Owner’s equity

Assets
Assets are tangible and intangible items of value which the business owns.
Examples of assets are:
· Cash · Cars
1|Basic Accounting Review S. 1.

· Buildings · Debtors (money owed from
· Machinery customers)
· Furniture · Stock / Inventory
Liabilities
Liabilities are those items which are owed by the business to bodies outside
of the business. Examples of liabilities are:
· Loans to banks
· Creditors (money owed to suppliers)
· Bank overdrafts
Owner’s Equity
The simplest way to understand the accounting equation is to understand what
makes up ‘owner’s equity’.
Revenues
It correspond to the increases in fund balance from the sale of goods or
delivery of services (when the accrual principle of accounting is used, this
is recorded when the revenue is earned which is not necessarily the same as
when it is collected)
Expenses
Costs incurred by a business to provide goods or services that reduce fund
balance (under the accrual principle of accounting, this is recorded when the
assets are used to provide the good or service, not necessarily when they are
paid for)
Net income: the difference between revenue and expense
BASIC FINANCIAL STATEMENTS OF BUSINESS ORGANIZATION
1. Statement of Financial Performance/Income Statement/Statement of Profit

or Loss/ Statement of Receipts and Disbursements

2. Statement of Change’s in Owner’s Equity
3. Statement of Financial Position/Balance Sheet
4. Statement of Cash Flows
Debits and Credits

These are the backbone of any accounting system. Every accounting entry
in the general ledger contains both a debit and a credit. Further, all debits
must equal all credits.
Depending on what type of account you are dealing with, a debit (+) or
credit (-) will either increase or decrease the account balance. (This can be
the most confusing part of accounting for most non-accountants.) Figure 1
illustrates the entries that increase or decrease each type of account.
Figure 1 Debits and Credits vs. Account Types
Account Debit Credit

A Assets + -
L Liabilities - + ( + ) = increase
C Capital - + ( - ) = decrease
R Revenue - +
E Expenses + -
The Account
The basic summary device of accounting is the account. A separate account is

maintained for each element that appears in the balance sheet and in the
income statement.
Account Title
Left side or Right side or
DEBIT side CREDIT side
ACCOUNTING CYCLE
Step 1. Identification of Events to be recorded

Step 2. Transactions are recorded in the journal
Step 3. Journal entries are posted to the ledger
Step 4. Preparation of a Trial Balance
Step 5. Preparation of the worksheet including adjusting entries
Step 6. Preparation of Financial Statement
Step 7. Adjusting journal entries are journalized and posted
Step 8. Closing journal entries are journalized and posted
Step 9. Preparation of post-closing trial balance
Step 10. Reversing journal entries are journalized and posted
*** End of Session 1 ***

References:
Ballada, Win & Susan Ballada. (2009). Basic Accounting. 14th Edition. Manila:
Domdane Publishers.

Asset, Liability, Owner’s Equity,
1 Revenue, and Expense Accounts
DEMONSTRATION PROBLEM
During November of this year, James Kirk opened an accounting practice called James Kirk,
CPA. The following transactions were completed during the first month:
a. Deposited $13,500 in a bank account in the name of James Kirk, CPA.
b. Paid rent for the month, $1,600 (Rent Expense).
c. Bought office equipment, including a computer and a printer, for $9,500 from Bingham
Company. Paid $6,700 in cash, with the balance due in thirty days.
d. Purchased office supplies and announcements for $970 from City Stationers. Payment is due
in thirty days.
e. Billed clients $5,500 for services rendered (Client Fees).
f. Paid $1,450 salary to secretary/assistant for the month.
g. Paid telephone bill of $210 (Telephone Expense).
h. Received cash from clients previously billed on account, $2,450.
i. Paid Bingham Company $970 to apply on account.
j. Paid $275 for continuing education course (Miscellaneous Expense).
k. Kirk withdrew $2,200 for personal use.
Instructions
1. Record the transactions and the balance after each transaction, using the following
headings:
Assets = Liabilities + Owner’s Equity

Cash + Accts. Rec. + Equip. Accounts J. Kirk, + Revenue – Expenses
Payable Capital
2. Demonstrate that the total of one side of the equation equals the total of the other side of
the equation.
Copyright © Houghton Mifflin Company. All rights reserved. 1

CHAPTER 1 Assets, Liability, Owner’s Equity, Revenue, and Expense Accounts
SOLUTION
Assets = Liabilities + Owner's Equity
Accts. Accounts J. Kirk,
Cash + + Equip. + Revenue – Expenses
Rec. Payable Capital
(a) + 13,500 = + 13,500
(b) – 1,600 + 1,600
(Rent Expense)
Bal. 11,900 + = + 13,500 + – 1,600
(c) – 6,700 + 9,500 + 2,800
Bal. 5,200 + + 9,500 = 2,800 + 13,500 + – 1,600
(d) + 970 + 970
(Supplies Expense)
Bal. 5,200 + + 9,500 = 3,770 + 13,500 – 2,570
(e) + 5,500 + 5,500
(Client Fees)
Bal. 5,200 + 5,500 + 9,500 = 3,770 + 13,500 + 5,500 – 2,570
(f) – 1,450 + 1,450
(Salary Expense)
Bal. 3,750 + 5,500 + 9,500 = 3,770 + 13,500 + 5,500 – 4,020
(g) – 210 + 210
(Telephone
Expense)
Bal. 3,540 + 5,500 + 9,500 = 3,770 + 13,500 + 5,500 – 4,230
(h) + 2,450 – 2,450
Bal. 5,990 + 3,050 + 9,500 = 3,770 + 13,500 + 5,500 – 4,230
(i) – 970 – 970
Bal. 5,020 + 3,050 + 9,500 = 2,800 + 13,500 + 5,500 – 4,230
(j) – 275 + 275
(Misc. Expense)
Bal. 4,745 + 3,050 + 9,500 = 2,800 + 13,500 + 5,500 – 4,505
(k) – 2,200 – 2,200
(Drawing)
Bal. 2,545 + 3,050 + 9,500 = 2,800 + 11,300 + 5,500 – 4,505
Left Side of Equals Sign Right Side of Equals Sign

Cash $ 2,545 Accts. Payable $ 2,800
Accts. Rec. 3,050 J. Kirk, Capital 11,300
Equip. 9,500 Revenue 5,500
$15,095 $19,600
Expenses – 4,505
$15,095
2 Copyright © Houghton Mifflin Company. All rights reserved.

T Accounts, Debits and Credits,
2 Trial Balance, and Financial
Statements
Dr. Christy Russo maintains an office for the practice of veterinary medicine. The account bal-
ances as of September 1 are given below. All are normal balances.
Assets Revenue
Cash $ 2,459 Professional Fees $72,118
Accounts Receivable 18,120
Prepaid Insurance 980 Expenses
Automobile 20,650 Salary Expense 14,380
Furniture and Equipment 5,963 Rent Expense 10,320
Liabilities Automobile Expense 859
Accounts Payable 1,590 Utilities Expense 1,213
Owner's Equity Supplies Expense 840
C. Russo, Capital 42,076
C. Russo, Drawing 40,000
The following transactions occurred during September of this year.

a. Paid rent for the month, $1,290.
b. Paid $1,800 for one year’s coverage of liability insurance.
c. Bought medical equipment on account from Bennett Surgical Supply, $849, paying $200
down with the balance due in thirty days.
d. Billed patients for services performed, $9,015.
e. Paid employee salaries, $1,797.
f. Received and paid gas and electric bill, $112.
g. Received cash from patients previously billed, $11,060.
h. Received bill for gasoline for car, used only in the professional practice, from Garza Fuel
Company, $116.
i. Paid creditors on account, $1,590.
j. Dr. Russo withdrew cash for personal use, $5,000.
Instructions
1. Correctly place plus and minus signs under each T account and label the sides of the T ac-
counts as either debit or credit in the fundamental accounting equation. Record the account
balances as of September 1.
2. Record the September transactions in the T accounts. Key each transaction to the letter
that identifies the transaction.
3. Foot the columns.
4. Prepare a trial balance dated September 30.
5. Prepare an income statement for month ending September 30, 20–.
6. Prepare a statement of owner’s equity for month ending September 30, 20–.

7. Prepare a balance sheet as of September 30, 20–.

T Accounts, Debits and Credits, Trial Balance, and Financial Statements CHAPTER 2
Assets = Liabilities + Owner's Equity + Revenue – Expenses

+ – – + – + – + + –
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash Accounts Payable C. Russo, Capital Professional Fees Salary Expense

+ – – + – + – + + –
Bal. 2,459 (a) 1,290 Bal. 1,590 Bal. 42,076 Bal. 72,118 Bal. 14,380
(g) 11,060 (b) 1,800 (i) 1,590 (c) 649 (d) 9,015 (e) 1,797
13,519 (c) 200 (h) 116 C. Russo, Drawing Bal. 81,133 Bal. 16,177
(e) 1,797 2,355 + –
(f) 112 Bal. 765 Bal. 40,000 Rent Expense
(i) 1,590 (j) 5,000 + –
(j) 5,000 Bal. 45,000 Bal. 10,320
11,789 (a) 1,290
Bal. 1,730 Bal. 11,610
Accounts Receivable Dr. Christy Russo Automobile Expense

+ – Trial Balance + –
Bal. 18,120 (g) 11,060 September 30, 20– Bal. 859
(d) 9,015 ACCOUNT NAME DEBIT CREDIT (h) 116
27,135 Cash 1,730.00 Bal. 975
Bal. 16,075 Accounts Receivable 16,075.00
Prepaid Insurance 2,780.00 Utilities Expense
Prepaid Insurance Automobile 20,650.00 + –
+ – Furniture and Equipment 6,812.00 Bal. 1,213
Bal. 980 Accounts Payable 765.00 (f) 112
(b) 1,800 C. Russo, Capital 42,076.00 Bal. 1,325
Bal. 2,780 C. Russo, Drawing 45,000.00
Professional Fees 81,133.00 Supplies Expense
Furniture and Salary Expense 16,177.00 + –
Equipment Rent Expense 11,610.00 Bal. 840
+ – Automobile Expense 975.00
Bal. 5,963 Utilities Expense 1,325.00
(c) 849 Supplies Expense 840.00
Bal. 6,812 123,974.00 123,974.00
Automobile
+ –
Bal. 20,650

CHAPTER 2 T Accounts, Debits and Credits, Trial Balance, and Financial Statements
Dr. Christy Russo

Income Statement
For the Month Ending September 30, 20—
Revenue:
Professional Fees $81,133.00
Expenses:
Salary Expense $16,177.00
Rent Expense 11,610.00
Automobile Expense 975.00
Utilities Expense 1,325.00
Supplies Expense 840.00
Total Expenses 30,927.00
Net Income $50,206.00
Dr. Christy Russo

Statement of Owner's Equity
For the Month Ending September 30, 20—
C. Russo, Capital, September 1, 20— $42,076.00

Net Income for September $50,206.00
Less Withdrawals for September 45,000.00
Increase in Capital 5,206.00
C. Russo, Capital, September 30, 20 — $47,282.00
Dr. Christy Russo

Balance Sheet
September 30, 20—
Assets
Cash $ 1,730.00
Accounts Receivable 16,075.00
Prepaid Insurance 2,780.00
Automobile 20,650.00
Furniture and Equipment 6,812.00
$48,047.00
Liabilities
Accounts Payable $ 765.00
Owner's Equity
C. Russo, Capital 47,282.00
$48,047.00

T Accounts, Debits and Credits, Trial Balance, and Financial Statements CHAPTER 2

The General Journal
3 and the General Ledger
G. Bell, a fitness enthusiast, buys an existing exercise center, Body Firm. The following
chart of accounts now applies:
Assets Revenue
111 Cash 411 Income from Services
124 Land
126 Building Expenses
128 Equipment 511 Wages Expense
512 Utilities Expense
Liabilities 513 Advertising Expense
221 Accounts Payable 514 Repair Expense
223 Mortgage Payable 519 Miscellaneous Expense
Owner's Equity
311 G. Bell, Capital
312 G. Bell, Drawing
Apr. 16 Bell deposited $100,000 in a bank account for the purpose of buying Body Firm.
17 Bought the assets of Body Firm for a total price of $188,000. The assets include
equipment, $28,000; building, $96,000; and land, $64,000. Made a down payment
of $89,000 and signed a mortgage note for the remainder.
17 Bought additional equipment from Fitness Supply Co. on account for $3,550, pay-
ing $710 down, with balance due in thirty days.
29 Celebrated the grand opening of Body Firm. Advertising expenses were paid in
cash for the following:
Advertising in newspaper $314
Announcements mailed to local residents 85
Postage 125
Balloons, ribbons, flowers 126
Food and refreshments 58
30 Received fees for daily use of the facilities, $1,152.
30 Paid wages for the period April 17 through April 30, $833.
30 Received and paid electric bill, $129.
30 Received and paid repair bill, $96.
30 Bell withdrew $600 for personal use.

Instructions
1. Record the transactions in the general journal.
2. Post the transactions to the general ledger.
3. Prepare a trial balance as of April 30.

SOLUTION
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20 — 1
2 Apr. 16 Cash 111 100,000.00 2
3 G. Bell, Capital 311 100,000.00 3
4 Invested cash in the business. 4
5 5
6 17 Equipment 128 28,000.00 6
7 Building 126 96,000.00 7
8 Land 124 64,000.00 8
9 Cash 111 89,000.00 9
10 Mortgage Payable 223 99,000.00 10
11 Bought Body Firm. 11
12 12
13 17 Equipment 128 3,550.00 13
14 Cash 111 710.00 14
15 Accounts Payable 221 2,840.00 15
16 Bought equipment on account from 16
17 Fitness Supply Co., with balance 17
18 due in 30 days. 18
19 19
20 29 Advertising Expense 513 708.00 20
21 Cash 111 708.00 21
22 Grand opening expenses. 22
23 23
24 30 Cash 111 1,152.00 24
25 Income from Services 411 1,152.00 25
26 Received fees. 26
27 27
28 30 Wages Expense 511 833.00 28
29 Cash 111 833.00 29
30 Paid wages for period 30
31 April 17 through April 30. 31
32 32
33 30 Utilities Expense 512 129.00 33
34 Cash 111 129.00 34
35 Paid electric bill. 35
36 36
37 30 Repair Expense 514 96.00 37
38 Cash 111 96.00 38
39 Paid repair bill. 39
40 40
41 30 G. Bell, Drawing 312 600.00 41
42 Cash 111 600.00 42
43 Withdrawal for personal use. 43
44 44

GENERAL LEDGER
ACCOUNT Cash ACCOUNT NO. 111
POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
20 —
Apr. 16 1 100,000.00 100,000.00
17 1 89,000.00 11,000.00
17 1 710.00 10,290.00
29 1 708.00 9,582.00
30 1 1,152.00 10,734.00
30 1 833.00 9,901.00
30 1 129.00 9,772.00
30 1 96.00 9,676.00
30 1 600.00 9,076.00
ACCOUNT Land ACCOUNT NO. 124
POST. BALANCE
20 —
Apr. 17 1 64,000.00 64,000.00
ACCOUNT Building ACCOUNT NO. 126
POST. BALANCE
20 —
Apr. 17 1 96,000.00 96,000.00
ACCOUNT Equipment ACCOUNT NO. 128
POST. BALANCE
20 —
Apr. 17 1 28,000.00 28,000.00
17 1 3,550.00 31,550.00

ACCOUNT Accounts Payable ACCOUNT NO. 221
POST. BALANCE
20 —
Apr. 17 1 2,840.00 2,840.00
ACCOUNT Mortgage Payable ACCOUNT NO. 223
POST. BALANCE
20 —
Apr. 17 1 99,000.00 99,000.00
ACCOUNT G. Bell, Capital ACCOUNT NO. 311
POST. BALANCE
20 —
Apr. 16 1 100,000.00 100,000.00
ACCOUNT G. Bell, Drawing ACCOUNT NO. 312
POST. BALANCE
20 —
Apr. 30 1 600.00 600.00
ACCOUNT Income from Services ACCOUNT NO. 411
POST. BALANCE
20 —
Apr. 30 1 1,152.00 1,152.00

ACCOUNT Wages Expense ACCOUNT NO. 511
POST. BALANCE
20 —
Apr. 30 1 833.00 833.00
ACCOUNT Utilities Expense ACCOUNT NO. 512
POST. BALANCE
20 —
Apr. 30 1 129.00 129.00
ACCOUNT Adveritising Expense ACCOUNT NO. 513
POST. BALANCE
20 —
Apr. 29 1 708.00 708.00
ACCOUNT Repair Expense ACCOUNT NO. 514
POST. BALANCE
20 —
Apr. 30 1 96.00 96.00
ACCOUNT Miscellaneous Expense ACCOUNT NO. 519
POST. BALANCE

Body Firm
Trial Balance
April 30, 20 —
ACCOUNT NAM E DEBIT CREDIT
Cash 9,076.00
Land 64,000.00
Building 96,000.00
Equipment 31,550.00
Accounts Payable 2,840.00
Mortgage Payable 99,000.00
G. Bell, Capital 100,000.00
G. Bell, Drawing 600.00
Income from Services 1,152.00
Wages Expense 833.00
Utilities Expense 129.00
Advertising Ex pense 708.00
Repair Expense 96.00
202,992.00 202,992.00

Adjusting Entries
4 and the Work Sheet
The general ledger of Ross Carpenters contains the following account balances for the year ended
December 31.
Cash $ 2,560 H. Ross, Capital $31,314
Accounts Receivable 7,428 H. Ross, Drawing 60,000
Prepaid Insurance 960 Income from Services 89,845
Equipment 4,270 Wages Expense 21,500
Accumulated Depreciation, Rent Expense 4,800
Equipment 1,230 Supplies Expense 1,218
Utilities Expense 1,344 Advertising Expense 1,216
Truck 21,550 Insurance Expense 0
Accumulated Depreciation, Truck 4,310 Depreciation Expense, Equipment 0
Accounts Payable 426 Depreciation Expense, Truck 0
Wages Payable 0 Miscellaneous Expense 279
Since the firm has been in operation for longer than a year, Accumulated Depreciation, Equip-
ment, and Accumulated Depreciation, Truck, have balances that should be included on the trial
balance.
Data for the year-end adjustments are as follows:
a. Wages accrued at December 31, $448.
b. Insurance expired during the year, $768.
c. Depreciation of equipment during the year, $854.
d. Depreciation of truck during the year, $4,310.
Instructions
Complete the work sheet for the year.

SOLUTION
Ross Carpenters
Work Sheet
For the Year Ended December 31, 20—
TRIAL BALANCE ADJUSTMENTS

ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT
1 Cash 2,560.00
2 Accounts Receivable 7,428.00
3 Prepaid Insurance 960.00 (b) 768.00
4 Equipment 4,270.00
5 Accumulated Depreciation, Equipment 1,230.00 (c) 854.00
6 Truck 21,550.00
7 Accumulated Depreciation, Truck 4,310.00 (d) 4,310.00
8 Accounts Payable 426.00
9 H. Ross, Capital 31,314.00
10 H. Ross, Drawing 60,000.00
11 Income from Services 89,845.00
12 Wages Expense 21,500.00 (a) 448.00
13 Rent Expense 4,800.00
14 Supplies Expense 1,218.00
15 Advertising Expense 1,216.00
16 Utilities Expense 1,344.00
17 Miscellaneous Expense 279.00
18 127,125.00 127,125.00
19 Wages Payable (a) 448.00
20 Insurance Expense (b) 768.00
21 Depreciation Expense, Equipment (c) 854.00
22 Depreciation Expense, Truck (d) 4,310.00
23 6,380.00 6,380.00
24
25 Net Income
26
27
28
29
30
31
32
33
34
35

SOLUTION (continued)
ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
2,560.00 2,560.00 1
7,428.00 7,428.00 2
192.00 192.00 3
4,270.00 4,270.00 4
2,084.00 2,084.00 5
21,550.00 21,550.00 6
8,620.00 8,620.00 7
426.00 426.00 8
31,314.00 31,314.00 9
60,000.00 60,000.00 10
89,845.00 89,845.00 11
21,948.00 21,948.00 12
4,800.00 4,800.00 13
1,218.00 1,218.00 14
1,216.00 1,216.00 15
1,344.00 1,344.00 16
279.00 279.00 17
18
448.00 448.00 19
768.00 768.00 20
854.00 854.00 21
4,310.00 4,310.00 22
132,737.00 132,737.00 36,737.00 89,845.00 96,000.00 42,892.00 23
53,108.00 53,108.00 24
89,845.00 89,845.00 96,000.00 96,000.00 25
26
27
28
29
30
31
32
33
34
35

CHAPTER 1 Assets, Liability, Owner’s Equity, Revenue, and Expense Accounts
Closing Entries and the

5 Post-Closing Trial Balance
After the adjusting entries have been posted, the ledger of C. Pitts, a financial planner, con-
tains the following account balances as of December 31:
Cash $ 3,064
Equipment 10,500
Accumulated Depreciation, Equipment 4,200
Accounts Payable 756
C. Pitts, Capital 18,378
C. Pitts, Drawing 80,000
Income Summary —
Commissions Earned 92,824
Income from Services 23,050
Salary Expense 21,600
Rent Expense 11,200
Supplies Expense 1,635
Depreciation Expense, Equipment 2,100
Miscellaneous Expense 659
Instructions
Record the closing entries in general journal form.
185 Copyright © Houghton Mifflin Company. All rights reserved.

SOLUTION
1 20— Closing Entries 1

2 Dec. 31 Commissions Earned 92,824.00 2
3 Income from Services 23,050.00 3
4 Income Summary 115,874.00 4
5 5
6 31 Income Summary 37,194.00 6
7 Salary Expense 21,600.00 7
8 Rent Expense 11,200.00 8
9 Supplies Expense 1,635.00 9
10 Depreciation Expense, Equipment 2,100.00 10
11 Miscellaenous Expense 659.00 11
12 12
13 31 Income Summary 78,680.00 13
14 C. Pitts, Capital 78,680.00 14
15 15
16 31 C. Pitts, Capital 80,000.00 16
17 C. Pitts, Drawing 80,000.00 17
18 18
Corporation
Session 2 – Partnership: Basic Concepts and
Considerations
Relate the concept of partnership in real

setting; Understand the definition of
partnership, its characteristics,
classifications and kinds of partners; Explain
the advantages and disadvantages; Distinguish
the differences between a partnership, a sole
proprietorship and a corporation; Articles of
Partnership; And other legal concerns in
partnership
Mr. Leemon L. Araza

Instructor
PARTNERSHIP – has a juridical personality with two or more persons bind
themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profit among themselves (Civil code of the
Philippines, Art. 1767)
CHARACTERISTICS OF A PARTNERSHIP
Mutual Contribution – There cannot be a partnership without
contribution of money, property or industry to a common fund.
Division of profits or Loses – The essence of partnership is that each

partner must share in the profits or losses of the venture.
Co-Ownership of Contributed Assets- All assets contributed into the

partnership are owned by the partnership by virtue of its separate and
district juridical personality if one partner contributes an asset to
the business, all partners jointly own it in a special sense.
Mutual Agency – Any partner can bind the other partners to a contract
if he is acting within his express or implied authority.
Limited Life- A partnership has a limited life. It may be dissolved by

the admission, death, insolvency, and incapacity, withdrawal of a
partner or expiration of the term specified in the partnership
agreement.
Unlimited liability – All partners (except limited partners), including

industrial partners, are personally liable for all debts incurred by
the partnership. If the partnership cannot settle its obligations,
creditor’s claims will be satisfied from the personal assets of the
partners without prejudice to the rights of the separate creditors of
the partners.
Income taxes – partnerships, except general professional partnerships,

are subject to tax rate of 30% of taxable income.
Partners’ Equity Accounts – Accounting for partnerships are much like

accounting for sole proprietorships. The difference lies in the number
of partners’ equity accounts. Each partner has a capital account and a
withdrawal account that serves similar functions as the related
accounts for sole proprietorships.
CLASSIFICATIONS OF PARTNERSHIPS
1. According to OBJECT:
a. Universal partnership of all present property. All contributions
become part of the partnership fund.
b. Universal partnership of profits. All that the partners may
acquire by their industry or work during the existence of the
partnership and the use of whatever the partners contributed at
1|partnership: basic concepts and considerations S.2.

the time of the institution of the contract belong to the
partnership.
c. Particular partnership. The object of the partnership is
determinate – its use or fruit, specific undertaking, or the
exercise of a profession or vocation.
2. According to LIABILITY:
a. General. All partners are liable to the extent of their separate
properties.
b. Limited. The limited partners are liable only to the extent of
their personal contributions. In a limited partnership, the law
states that there shall be at least one general partner.
3. According to DURATION:
a. Partnership with a fixed term or for a particular undertaking.
b. Partnership at will. One in which no term is specified and is not
formed for any particular undertaking.
c.
4. According to PURPOSE:
a. Commercial or trading partnership.
b. Professional or non-trading partnership.
5. According to LEGALITY OF EXISTENCE:

a. De jure partnership
b. De facto partnership
ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP
From Proprietorship From Corporation

Advantages
*Brings greater financial capability *Easier and less expensive to
to the business organize.
*Combines special skills, expertise *More personal and informal
and experience of the partners.
*Offers relative freedom and
flexibility of action in decision-
making.
Disadvantages
*Easily dissolved and thus unstable compared to a corporation.
*Mutual agency and unlimited liability may create personal obligations to
partners.
*Less effective than a corporation in raising large amounts of capital.
KINDS OF PARTNERS
1. General partner. One who is liable to the extent of his separate
property after all the assets of the partnership are exhausted.
2. Limited partner. One who is liable only to the extent of his capital
contribution.

3. Capitalist partner. One who contributes his knowledge or personal
service to the partnership.
4. Industrial partner. One who contributes money or property to the common

fund of the partnership.
5. Managing partner. One whom the partners have appointed as manager of

the partnership.
6. Liquidating partner. one who is designated to wind up or settle the

affairs of the partnership and is not known as a partner.
7. Dormant partner. one who does not take active part in the business of
the partnership and is not known as a partner.
8. Silent partner. one who not take active part in the business of the
partnership though may be known as a partner.
9. Secret partner. one who takes active part in the business but is not
known to be a partner by outside parties.
10. Nominate partner or partner by estoppel. One who is actually not a

partner but who represents himself as one.
PARTNERSHIP DISTINGUISHED FROM CORPORATION

Category Partnership Corporation
Manner of creation By mere agreement By operation of law
Number of persons Two or more persons 5–15incorporators (persons)
Commencement of From the execution of From the issuance of
juridical the articles of certificate of incorporation
personality partnership by SEC.
Every partner is an
agent if the partners Vested on Board of
Management
did not appoint a Directors/Trustees
managing partner.
Liable up to their
Liable only up to their
Extent of Liability personal assets except
interest or investment.
for limited partners
Has right of succession,
has the capacity of continued
existence regardless of
Right of succession No right of succession
death, withdrawal, insolvency
or incapacity of its
directors/stockholders.
Any period stipulated Not to exceed 50 years but
Terms of Existence
by the partners subject to extension.
Articles of Partnership
A partnership may be constituted orally or in writing. But still,

partnerships should still need to be embodied by legal documents, Articles of
Partnership. It contained the following provisions; (an example format)

www.sec.gov.ph
ARTICLES OF PARTNERSHIP
OF
KNOW ALL MEN BY THESE PRESENTS:
That we the undersigned, all of legal age and residents of the

Republic of the Philippines have agreed to amend a general partnership under
the terms and conditions herein after set forth and subject to the provisions
of existing laws of the Republic of the Philippines.
AND WE HEREBY CERTIFY:
ARTICLE I. That the name of the partnership shall be
ARTICLE II. That the principal office of the Partnership shall be

located .
ARTICLE III. That the names, citizenship and residence of the partners
of the said partnership are as follows.
Name Citizenship Residence
ARTICLE IV. That the term for which said is to exist is ( )

years from the original recording of the said partnership by the Securities
and Exchange Commission.
ARTICLE V. That the purposes for which said partnership is formed are
as follows:

ARTICLE VI. That the capital of this partnership shall be One Hundred
Thousand Pesos, Philippine Currency contributed in cash by the partners as
follows:
Name Amount Contributed
TOTAL
That no transfer which will reduce the ownership of Filipino citizens
to less than the required percentage of capital shall be recorded in the
proper books of the partnership.
ARTICLE VII. That the profits and losses shall be divided pro-rata
among the partners;
ARTICLE VIII. That the firm shall be under the management of

as General Manager and as much he/she shall have charge of
the management of the affairs of the partnership.
ARTICLE IX. That the partners undertake to change the name of the
partnership immediately upon receipt of notice or directive from the
Securities and Exchange Commission that another partnership, corporation or
person has acquired a prior right to the use of that name or that the name
has been declared misleading, deceptive, confusingly similar to a registered
name, or contrary to public morals, good customs or public policy.
IN WITNESS WHEREOF, we have hereunto set our hands this day

of 20xx , Philippines.
TIN TIN
Signed the presence of:

ACKNOWLEDGEMENT
Republic of the Philippines}

S.S
}
BEFORE ME, a Notary Public for and in

Philippines, this of , personally came and
appeared the following persons with their Community tax Certificates as
follows:
Name CTC. # Date/Place Issued
Known to me and to me known to be the same persons who executed the

Foregoing Articles of Partnership, and they acknowledged to me that the same
is their voluntary act and deed.
WITNESS MY HAND AND SEAL on the date first above written.

PARTNERSHIP, HOW FORMED; REGISTRATION REQUIREMENT:
Partnerships are required to be registered with the Securities and Exchange

Commission [SEC]. Registration is done by filing the Articles of Partnership
with the SEC. The Articles of Partnership set forth all the terms and
conditions mutually agreed by the partners thereto.
More specifically, the documents required are as follows:
[1] Proposed Articles of Partnership;

[2] Name Verification Slip;
[3] Bank Certificate of Deposit;
[4] Alien Certificate of Registration, Special Investors Resident Visa or
proof of other types of visa [in case of foreigner];
[5] Proof of Inward Remittance [in case of non-resident aliens].
It bears noting that corporations are not allowed by law to become

partners in a partnership.
IMPORTANT ISSUES INCLUDED IN THE WRITTEN PARTNERSHIP CONTRACT
1. The partnership's nature and rationale – these terms guarantee that the
partners involved in the agreement will not turn away from the
significant intentions of their business.
2. Each partner's capital contributions – this provision ensures that no

person or entity could dispute one or more partner's capital
contribution to the business being established. The contributions
indicated also involve contributions that are not monetary in nature
like time, services or goods.
3. Allocations with regards to profits and losses – some partnership may

have equal allocation in profits and losses but others also have other
terms of provision.
4. Authority given for each partner – determining the partner/partners who

will have the task of regularly running the partnership, how the
decisions for the partnership will be completed and how the duties and
obligations.
5. Guidelines in admitting new partners – how the partners would vote in

order to allow in new partners in the business.
6. What to do in case one of the partners dies – coming up with a

resolution on what happens to the partnership once one of the partners
dies. Some partnerships normally resolve to automatically dissolve and
liquidate the partnership. However, it would still depend on every one
of the partners' decision.

7. Buying one of the partners' share – the contract must outline several
circumstances like illegal activity, death or divorce wherein anyone of
the partners could buy out another partner's share. They must also
include the terms and conditions in executing the shares buyout.
8. The signature authority to be used in the partnership's bank accounts –

whose signature among the partners would be used or would all the
partners signatures be required.
9. Ways and means of resolving conflicts in the partnership and business

– legal solutions and actions in order to resolve disputes in the
partnership.
*** End of Session 2 ***
References:
Ballada, Win & Susan Ballada. (2010). Partnership and Corporation. 14th
Edition. Manila: Domdane Publishers.
www.sec.gov.ph/articlesofpartnership
www.startupguide.com/samplearticlesofpartnership
www.chanrobles.com/partnership

Corporation
Session 3 – Accounting for Partnership
Formation
Understand the Capital and Drawing accounts

of partners; Explain the Partnership Formation
Scenarios and their Accounting Treatment as;
Individuals with no existing business form a
partnershipb. A sole proprietor and an
individual form a partnershipc. Two or more
sole proprietors form a partnerships;
Partnership formation using bonus method.
Mr. Leemon L. Araza

Instructor
PARTNERS’ ACCOUNTS
Traditionally, partnership accounting records contain three accounts

for each partner. A capital account records the partner’s equity investment
at any point in time. It is credited initially with the fair market value of
the assets contributed by the partner at the time of formation of the
partnership; subsequent changes reflect the partner’s share of net income
earned, additional assets invested, and assets withdrawn. A partner’s loan
account would be used to record amounts borrowed from or loaned to the
partner. Finally, a drawings account is used to record cash withdrawals in
anticipation of yearly profits. This account is similar to the dividend
account used by corporations and is closed to the partners’ capital accounts
at the end of the accounting period.
Partner’s Capital Account

Debit Credit
1. Permanent withdrawals. 1. Original investment
2. Debit balance of the 2. Additional investment
drawing account at the end 3. Credit balance of the
of the period. drawing account at the
end of the period.
Partner’s Drawing Account

Debit Credit
1. Temporary withdrawals 1. Share in profit(this may
be credited directly to
Capital)
The distribution of net income to the partners’ equity accounts is made

in accordance with the partnership agreement. An important component of any
distribution plan is the profit and loss sharing ratio. If the partnership
agreement does not contain such a ratio, the acts state that the ratio is one
that will provide an equal distribution to each partner.
VALUATION OF INVESTMENTS BY PARTNERS

Partners may invest cash or non-cash assets in the partnership. When a
partner invests non-cash assets, they are to be recorded at a values agreed
upon by the partners. In the values at the date of transfer to the
partnership.
The fair market value of an asset is the estimated amount that a

willing seller would receive from a financially capable buyer for the sale of
the asset in a free market.
Suppose for example, a partnership is formed between two people,

partner A and partner B, typical partnership bookkeeping entries would be as
follows:
INTRODUCTION OF CASH INTO A PARTNERSHIP

Partner A invests £10,000 by way of cash. The following double entry
bookkeeping journal would be posted:
1|Accounting for Partnership Formation S.3

Partnership Formation Accounting – Cash Introduced
Cash 10,000
Capital – Partner A 10,000
Total 10,000 10,000
INTRODUCTION OF A LONG TERM (FIXED) ASSETS INTO A PARTNERSHIP

Partner B introduces a piece of machinery whose fair value is £20,000
(non-cash assets are always accounted for at fair market value when
introduced to the partnership). The following double entry bookkeeping
journal would be posted:
Partnership Formation Accounting – Long Term Asset Introduced

Long term assets – machinery 20,000
Capital – Partner B 20,000
Total 20,000 20,000
INTRODUCTION OF ACCOUNTS RECEIVABLE INTO A PARTNERSHIP

Partner A also introduces accounts receivable of £12,000, of which the
partnership expects to be able to collect £10,000. In this case the gross
value of the accounts receivable needs to be recorded (to reflect the total
amount receivable from the customers), and the reduction to fair value is
accounted for by changing the value on the allowance for doubtful debts
account.
The bookkeeping entries of the partnership are as follows:
Partnership Formation Accounting – Accounts Receivable

Accounts receivable 12,000
Allowance for doubtful debts 2,000
Total 12,000 12,000
At the end of these partnership formation accounting entries, the

balance sheet of the of the partnership would be as follows:
Partnership Formation Accounting – Balance Sheet

Fixed assets – machinery 20,000
Accounts receivable 12,000
Allowance for doubtful debts (2,000)
Cash 10,000
Total Assets 40,000

Capital – Partner B 20,000
Total Capital 40,000

In this partnership formation, the capital invested by each partner is
£20,000 giving a ratio of 1:1 for capital introduced.
ADJUSTMENT OF ACCOUNTS PRIOR TO FORMATION

In case when the prospective partners have existing businesses, their
respective books will have to be adjusted to reflect the fair market values
of their assets or to correct misstatements in the accounts. If the
adjustments will not be made, the initial capital balances of the partners
may be inequitable.
OPENING ENTRIES OF A PARTNERSHIP UPON FORMATION
A partnership may be in any of the following ways:
 Individuals with no existing business form a partnership

The opening of entry to recognize the contributions of each
partner into the partnership is simply to debit the assets cotributed,
and to credit the liabilities assumed and the capital account of each
partner.
 Coversion of a sole proprietorship to a partnership

A sole proprietor may consider forming a partnership with an
individual who has no existing business. Under this type of formation,
the assets and the liabilities of the proprietorship will be
transferred to the newly formed partnership at values agreed upon by
all the partners or at their current fair prices.
It is define into two different ways:
o A sole proprietor and an individual without an existing business
form a partnership.
o Two or more sole proprietors form a partnership.
 Admission or retirement of a partner
References:
Ballada, Win & Susan Ballada. (2010). Partnership and Corporation. 14th

Corporation
Operations and Financial Reporting
Understand the Profit and loss ratio.

Explain the divisions of profits and losses
as; Equally ;Based on contributions; By
allowing salaries, interest on capital, and
bonus to partners; Explain the special profit
allocations methods; Preparation of the
Partnership Financial Statements.
Mr. Leemon L. Araza

Instructor
RULES FOR THE DISTRIBUTION OF PROFITS AND LOSSES
The profit or losses shall be distributed in conformity with the

agreement. If only the share of each partner in the profits has been agreed
upon, the share of each in the losses shall be in the same proportion.
1. Profits
a. According to partner’s agreement
b. If there’s no agreement:
i. As to capitalist partners, according to capital
contributions.
ii. As to industrial partner, share must be just and equitable
under the circumstances, provided, that the industrial
partner shall receive such share before the capital
partners shall divide the profits.
2. Losses
a. According to partner’s agreement
b. If there is no agreement as to contribution of losses but there
is an agreement as to profits, the losses shall be distributed
according to profit sharing ratio.
c. If there’s no agreement:
i. As to capitalist partners, according to capital
contribution.
ii. As to Purely industrial partner, shall not be liable for
any losses.
The ratio in which the profits and losses from partnership operations
are distributed is recognized as the profit and loss ratio. The partners may
agree on any of the following scheme in distributing profits or losses.
1. Based on partner’s capital contribution
a. Ratio of original capital investments
b. Ratio of capital balances at the beginning of the year
c. Ratio of capital balances at the end of the year
d. Ratio of average capital balances
2. Equally or in other agreed ratio
3. By allowing interest on partner’s capital and the balance in an
agreed ratio.
4. By allowing salaries to partners and the balance in an agreed
ratio.
5. By allowing bonus to the managing partner based on profit and the
balance in an agreed ratio.
6. By allowing salaries, interest on partners’ capital, bonus to the
managing partner and the balance in an agreed ratio (comb. 3-5).
ILLUSTRATION:
Chi Ta E invested P400,000 on Jan. 1 2014 and an additional P100,000 on
April 1. Ganda Ba Bae invested P800,000 on Jan. 1 and withdrew P50,000 on
July 1. The partnership had a profit of P300,000 for the year ended Dec. 31,
2014, the first year of operations.
1|Accounting for Partnership Operations & F.S. S.4

EQUALLY OR IN OTHER AGREED RATIO
 The partners agreed the share the profit or loss equally.

Income Summary 300,000
Chi Ta E, Capital 150,000
Ganda Ba Bae, Capital 150,000
To record the division of profits
 In case the partnership incurred a loss instead of profit worth

P200,000.
To record the division of losses
 Assume partners decided to have a P/L ratio of 60:40 in their profit of

P300,000.
Computation:
Chi Ta E, Capital (60% x 300,000) 180,000
Ganda Ba Bae, Capital (40% X 300,000) 120,000
300,000
BASED ON PARTNERS’ CAPITAL CONTRIBUTION
 Ratio of Original capital investment

Just a recap, the original investment of Chi Ta E and Ganda Ba
Bae is 400,000 and 800,000 respectively. Thus, based on this, the ratio
will be 33.33% (400k/1,200k) and 66.67% (800k / 1,200k).
 Ratio of Capital Balances at the Beginning of the Year

In this case, the capital balances at the beginning of the year
is also the original capital investment since the partnership is only
on its first year of operations. But on the succeeding years of
operations, the capital beginning will be change prospectively apart
from the original investment.

 Ratio of Capital Balances at the End of the Year
The Ending balances at the end of the year before the
distribution of profit. Thus,
Date Chi Ta E, Capital Ganda Ba Bae, Capital Total

Jan. 1 400,000 800,000 1,200,000
Apr. 1 100,000 100,000
July 1 (50,000) (50,000)
Total 500,000 750,000 1,250,000
The ratio on this will be 40% for Chi Ta E (500k/1,250k) and 60%
for Ganda Ba Bae (750k/1,250k).
 Ratio on Average Capital Balances
Chi Ta E and Ganda Ba Bae

Computation of the Average Capita Balances
For the year ended Dec. 31, 2014
Chi Ta E, Capital
Date Capital Accnt. Portion * of the Ave. Capital
Balances year unchanged Balances
Jan. 1 400,000 X 3/12 = P100,000
Apr. 1 500,000 X 9/12 = 375,000
= 475,000
Ganda Ba Bae, Capital
Date Capital Accnt. Portion * of the Ave. Capital
Balances year unchanged Balances
Jan. 1 800,000 X 6/12 = P400,000
July 1 750,000 X 6/12 = 375,000
= 775,000
Total Average Capital Bal. = P 1,250,000
* The fractions for each partner should add up to 12/12 or 1. This conversion will
help minimize counting of errors as to the number of months the capital balance went
unchanged. To state the obvious, there are only 12 months in a year. For e.g.for partner
Chi Ta E, the fraction will total 12/12 (3/12 + 9/12) or in simple terms, 1.
The ratio on this would be 38% (475k/1,250k) and 62%

(775k/1,250k) respectively. Thus, the entry would be,

 By Allowing Interest on Capital and Balance in a Agreed Ratio
To allow interest on partner’s capital account balances is almost
similar to dividing part of profits in the ratio og partner’s capital
balances. If the partners agree to allow interest on capital as a first
step in the division of profit, they should specify the interest rate
to be used. It should also state whether interest is to be computed on
capital balances on specific dates or on average capital balances
during the year.
To illustrate,Chi Ta E and Ganda Ba Bae Partnership with a profit

of 300,000 assumed an agreement for a 15% interest on average capital
account balances, with the balance to be divided equally.
Chi Ta E Ganda Ba Bae Total

15% interest on Ave. Capital
Chi Ta E: 475k x 15% 71,250
Ganda Ba Bae: 775k x 15% 116,250
Subtotal 187,500
Balance to be divided Equally
(300k–187,500=P112,500 x 50%) 56,250 56,250 112,500
Share of Partners in profits 127,500 172,500 300,000
The journal entry would be:

 By Allowing Salaries to Partners and the Balance in an Agreed Ratio

To acknowledge the harder working or more suitable valuable
partner, the profit-sharing plan may provide for salary allowances.
The partnership agreement should be clear on the treatment of
salary allowances when losses are incurred. In the absence of an
agreement to govern this situation, salary allowances will be provided
even when operations resulted losses.
To illustrate, assume that the agreement provided for an annual

salary of P100,000 to Chi Ta E and P60,000 to Ganda Ba Bae, and the
balance to be divided equally.
Salary Allowances 100,000 60,000 160,000
(300k–160k = P140,000 x 50%) 70,000 70,000 140,000


Salaries to partners and interest on partners’ capital are
not expenses of the partnership. Therefore, these items do not
enter into the matching of expenses with revenues and the
determination of net income or net loss. For a partnership, as for
other entities, salaries expense pertains to the cost of services
performed by employees. Likewise, interest expense relates to the
cost of borrowing from creditors. But partners, as owners, are not
considered either employees or creditors. Note that the provisions
for salaries and interest in the partnership agreement are called
allowances. These allowances are not reported in the statement of
recognized income and expense as salaries and interest expense,
they are merely means of allocating profit to the partners.
 By Allowing Bonus to the Salaries of Managing Partner Based on Profit

and the Balance in an Agreed Ratio.
A partnership contract may provide for a special compensation in
the form of BONUS to the managing partner when the results of
operations are favorable. The bonus is computed based on agreement
whether before or after bonus. To illustrate:
Assume the partnership agreement provided for a bonus of 25% of

profit before bonus.
Bonus (25% of P300,000) 75,000 75,000
(300k – 75k = P225,000 x 50%) 112,500 112,500 225,000

Assume the partnership agreement provided for a bonus of 25% of

profit after bonus. Here the P300,000 profit still includes the bonus.
The difference between this profit and bonus shall be the basis for the
25% bonus rate. Hence, profit after bonus represents 100% while the
profit of P300,000 before bonus represents 125%.

Bonus ** 60,000 60,000
(300k – 60k = P240,000 x 50%) 120,000 120,000 240,000
** Profit before Bonus 300,000 125%

Profit after Bonus 240,000 100%
Bonus 60,000 25%

 By Allowing Salaries, Interest on Capital, Bonus to the Managing

Partner and the Balance in an Agreed Ratio
Assume that the profit for the year is P400,000 and the
partnership agreement for he Chi Ta E and Ganda Ba Bae Partnership
provided the following:
1. Bonus to Chi Ta E of 25% of profit after salaries and interest
but before bonus;
2. Annual salaries of P100,000 to Chi Ta E and P60,000 to Ganda Ba
Bae;
3. Interest on average capital balances of P71,250 and P116,250 to
Chi Ta E and Ganda Ba Bae, respectively;
4. Balance to be divided in a ratio of 40:60.

Interest on Ave. Cap. Bal. 71,250 116,250 187,500
Bonus (25% of Balance)
Profit P400,000
Salary (160,000)
Interest (187,500)
Balance P 52,500 13,125 13,125
Balance to be divided 40:60
Balance P 52,500
Bonus ( 13,125)
P 39,375 15,750 23,625 39,375

Assume instead that the bonus to Chi ta E is 25% of profit after

salaries, interest and after bonus. The computation of the bonus will
be:**
Profit 400,000
Less: Salaries 160,000
Interest 187,500347,500
Profit after Sal. & Int. but before bonus 52,500 125%
Profit after Sal. & Int. &after bonus 42,000 100%
Bonus 10,500 25%

Interest on Ave. Cap. Bal. 71,250 116,250 187,500
Bonus ** 10,500 10,500
Balance to be divided 40:60
Profit P400,000
Salary (160,000)
Interest (187,500)
Bonus ( 10,500)
Balance P 39,375 16,800 25,200 42,000

PARTNERSHIP FINANCIAL STATEMENTS
The financial statements of a partnership are much like those of a

proprietorship. However, partnership statement of comprehensive income
includes a section showing the division of net income to the partners and the
statement of financial position has a capital account for each partners.
The complete set of financial statements as per revised international

accounting standards (IAS) No. 1, Presentation of Financial Statements, a
complete set of financial statements comprises:
a. A statement of financial position as at the end of the period;
b. A statement of comprehensive income for the period;
c. A statement of changes in equity for the period;
d. A statement of cash flows for the period;
e. Notes, comprising a summary significant accounting policies and other
explanatory information.
Note: When preparing financial statements by hand the Income Statement would
usually be prepared first because the net income or loss becomes part of the
Statement of Partners’ Capital. The Statement of Partners’ Capital is usually
prepared second because the ending partners’ capital balances become part of
the Balance Sheet.
Note: Owner’s equity statements of corporations are called Statement of

Retained Earnings, those of sole proprietorships are called Statement of
Capital and those of partnerships are called Statement of Partners’ Capital.

Income Statement (single-step format):
HANSON RETAIL FOOD STORE

Income Statement
Year Ended December 31, 2013
Net Sales $262,000

Cost of Goods Sold 159,000
Gross Profit 103,000
Rent revenue 6,900
Interest revenue 1,400
Total Revenue 111,300
Expenses:
Salaries and wages 45,000
Advertising 12,400
Freight out 4,000
Depreciation 5,000
Taxes and licenses 3,000
Rent 6,300
Interest expense 350
Loss on sale of assets 250
Property taxes 2,000
--------
Total expense 78,300
--------
Net Income (loss) $ 33,000
========
Statement of Partners’ Capital:
HANSEN RETAIL FOOD STORE

Statement of Partner’s Capital
John Soo Mary Doe Totals

Beginning balance $ 20,000 $ 30,000 $ 50,000
Additional Investment 4,000 3,000 7,000
Net income (loss) 16,500 16,500 33,000
40,500 49,500 90,000
Withdrawals 500 1,500 2,000
Ending balance $ 40,000 $ 48,000 $ 88,000
=========== =========== ===========

Note: Balance Sheets of corporations have a Shareholders’ Equity section
whereas sole proprietorships have an Owner’s Capital section and partnerships
have a Partners’ Capital section. Otherwise the Balance Sheets would be
identical.
Balance Sheet:
HANSEN RETAIL FOOD STORE

Balance Sheet
December 31, 2013
ASSETS
Current Assets:
Cash $ 3,000
Short-term investments/marketable securities 6,000
Accounts receivable, net 5,000
Inventory 10,000
Prepaid rent 2,000
Office supplies on hand 1,000
Total current assets 27,000
Long-Lived Assets:
Long-term investments $ 10,000
Land 35,000
Building 86,000
Machinery & equipment 50,000
Less accumulated depreciation ( 23,000)
Patents 4,000
Total long-lived assets 162,000
Total Assets $189,000
========
LIABILITIES
Current Liabilities:
Accounts payable $ 4,200
Notes payable 15,000
Interest payable 1,000
Wages payable 800
Total current liabilities 21,000
Long-Term Liabilities:
Mortgage payable $ 30,000
Bonds payable 50,000
Total long-term liabilities 80,000
Total Liabilities 101,000
PARTNERS’ CAPITAL
John Soo, Capital 40,000
Mary Doe, Captial 48,000
Total Partners’ Capital 88,000
Total Liabilities and Owner’s Equity $189,000
========

Statement of Cash Flows:
HANSON RETAIL FOOD STORE

Statement of Cash Flows
Cash Flows from Operating Activities

Cash received from clients 240,050
Payment to suppliers ( 150,000)
Payment for salaries and wages ( 45,000)
Payment for advertising ( 12,400)
Payment for Freight out ( 4,000)
Payment for taxes and licenses ( 3,000)
Payment for rent ( 8,300)
Payment for Interest ( 350)
Payment for Propertytaxes ( 2,000)
Net cash provided by (used in) operating act. 15,000
Cash Flows from Investing Activities
Payments to acquire machinery P (10,000)
Payments to acquire equipment (5,000)
Net cash provided by (used in) operating act. (15,000)
Cash Flows from Financing Activities
Cash received as investment by owners P 7,000
Payments for withdrawals by owners ( 2,000)
Net cash provided by (used in) financing act. 5,000
Net increase (decrease) in cash 5,000
Cash at the beginning of the period ( 2,000)
Cash at the end of the period 3,000
References:
Ballada, Win & Susan Ballada.(2010). Partnership and Corporation.14th Edition.
Manila: Domdane Publishers.
Burgage, Gregory M. BASIC FINANCIAL STATEMENT FORMAT – PARTNERSHIP
©.stmts3.doc.
10 | A c c o u n t i n g f o r P a r t n e r s h i p O p e r a t i o n s & F . S . S.4
ACTIVITY NO. 1
Rules for Distribution of Profit or Losses
Luka Toh and Care Moh form a partnership, investing P40,000 and P70,000,
respectively. Determine their shares of net income or net loss for each of
the following situations.
a. Net loss is P44,000, and the partners have no written partnership
agreement.
b. Net income is P66,000 and the partnership agreement states that the
partners shares profits and losses on the basis of their capital
contributions.
c. Net loss is P77,000, and the partnership agreement states that the
partners share profits on the basis of their capital contributions.
d. Net income is P125,000. The first P60,000 is shared on the basis of
partner capital contributions. The next P 45,000 is based on partner
service, with Luka Toh receiving 30% and Care moh receiving 70%. The
remainder is shared equally.
ACTIVITY NO. 2
Distribution of Profits or Losses based on partner’s agreement
Toto, Tata, and Tete are partners in TTT Company, with average capital
balances for the year of 300,000, 400,000 and 200,000, respectively. They
share remaining profits and losses in a 2:5:3 respectively, after each
receives a P150,000 salary and 10% interest on his average capital balances.
Required:
Prepare the journal entries to close the income summary, assuming a:
a. Profit of P740,000
b. Profit of P140,000
c. Loss of P60,000
ACTIVITY NO. 3
Distribution of Profits or Losses based on partner’s agreement
Puti, Pula and Itim are partners who shares profits and losses 40:40:20,
respectively, after Pula, who manages the partnership, receives a bonus of
10% of income after deducting the bonus. Partnership income for the year is
P506,000.
Required:
Prepare a schedule to allocate partnership income to Puti, Pula anf Itim.
ACTIVITY NO. 4
Profit Distribution Schedule
The partnership contract of Eje, Wiwi and Pupu provided for the distribution
of profit or loss in the following manner:
1. Bonus of 25% of profit before the bonus to Eje.
2. Interest at 15% on average capital balances to each partner
3. Residual profit or losses are divided equally.
Profit of Eje, Wiwi and Pupu for 2013 was P900,000, and the average capital
acount balances for the year were Eje, P1,000,000; Wiwi, P 2,000,000; and
Pupu, P3,000,000.
Required:
Prepare the profit distribution schedule.
ACTIVITY NO. 5
Preparation of Financial Statements
The following are the adjusted account balances of Maria, Leonora and Teresa
as at Dec. 31, 2013. They share profits in the ratio of 30:20:50.
Cash 110,000
Merchandise Inventory 800,000
Prepaid Rent 20,000
Prepaid Insurance 15,000
Accounts Payable 50,000
Notes Payable 115,000
Maria, Capital 125,000
Leonora, Capital 275,000
Teresa, Capital 110,000
Sales 2,500,000
Cost of Sales 1,450,000
Salaries Expense 450,000
Rent Expense 200,000
Insurance Expense 30,000
Utilities Expense 20,000
Totals 3,175,000 3,175,000
Required:
1. Prepare the 2013 statement of comprehensive income. Show the division
of profit at the lower portion of the statement.
2. Prepare the statement of changes in partner’s equity for 2013. Assume
the following additional information.
Capital Accounts, Investments Withdrawals

Jan. 1, 2013 during the year during the year
Maria P 75,000 P 50,000 -
Leonora 300,000 25,000 50,000
Teresa 150,000 - 40,000
3. Prepare the statement of financial position as at Dec. 31, 2013.
Corporation
Dissolutions
Understand the definition and causes of

partnership dissolution. Explain the
accounting for the admission of new partner in
an existing partnership; Through purchase;
Through investment. Understand the withdrawal
or retirement of a partner and the death or
incapacity of a partner
Mr. Leemon L. Araza

Instructor
DEFINITION
The dissolution of a partnership is the change in the relation of the

partners caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business of the partnership.
On dissolution, the partnership is not terminated, but continues until the

winding up of partnership affairs is completed.
Termination – is the time when all partnership affairs are completed,
and is the end of the partnership life.
Winding up – is the process of settling the business or partnership
affairs after dissolution.
* A partnership may be dissolved without being terminated but liquidation is

always preceded by dissolution; a partnership is said to be liquidated when
the business is terminated.
*When partnership dissolution occurs, a new accounting entity is formed. The

old partnership should first adjust its books so that all accounts are
properly stated at the date of dissolution.
Partnership dissolution due to changes in ownership interests occurs for

variety of reasons. These can be summarized as follows:
1. Admission of a partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of the partnership
ADMISSION OF OF A NEW PARTNER

(The admission of new partner may occur in either of two ways.)
1. Purchase of all or part of the interest of one or more of the existing

partners.
When an incoming partner purchases a portion or all of the interests of
one or more of the original partners, the patnership assets remain
unchanged and no cash or other assets flow from the new partner to the
partnership. This transaction is recorded by opening a new capital account
for the new partner and decreasing the capital account/s of the selling
partners by the same amount.
Illustration: Carmelita Budoy and Crispina Cayna are partners with capital
balances of P400,000 and P200,000, respectively. They share profits in the
ratio of 3:1. Their business has been very successful.
Case 1. Purchase from one partner. Assume s. Cayna received an offer from
Mr. Go to purchase one-half of her interest. the entry will be
1|Accounting for Partnership Dissolutions S.5

Case 2. Purchase from all the partners. Assume the following:
1. Payment to old partners is equal to interest purchased. Partners
Budoy and Cayna received an offer from Go to purchase directly one-
fourth of each of their interest in the partnership for P150,000.
The partnership agreed to admit Mr. Go as a member of the firm.
The entry will be
The computation will be
2. Payment to old partners is less than the interest purchased. Assume

that Mr. Go directly pruchased one-third of each partner’s interest
in the business. Mr. Go paid P160,000 for 1/3 of each partner’s
capital.
The entry will be
3. Payment to old partners is more than the interest purchased.

Partners Budoy and Cayna received an offer from Mr. Go to purchase
directly 30% of each of their interest in the partnership for
P200,000. The partners agree to admit Mr. Go as a member of the
firm.
The entry will be
2. Investment of assets in the partnership by the incoming partner. Here, the

assets are invested into the partnership and not given to the individual
partners. The investment will increase the total assets and the total
partners’ equity.

DEFINITION OF TERMS:
Total Contributed Capital. It is the sum of the capital balances of
the old partner’s and the actual investment of the new partner.
Total Agreed Capital. It is the total capital of the partnership
after considering capital credits given to each of the partners.
Under the bonus method, total agreed capital is equal to the total
contributed capital though the capital credits to each partner may
be equal to, greater than or less than his capital contributions.
Bonus. It is the amount of capital or equity transferred by one
partner to another partner.
Capital credit. It is the equity of a partner in the new partnership
and is obtained by multiplying the total agreed capital by the
applicable percentage interest of the partner.
Illustration: Zenaida Rivadelo and Janet Matuguinas are partners with capital
balances of P400,000 and P200,000, respectively. They share profits in the
ratio of 3:1. The partners agreed to admit Samuel Barbo as a member of the
firm. The foregoing information will be the basis of the following cases.
BONUS TO OLD PARTNERS

Case 1. Total Agreed capital is stated. Assume that Samuel Barbo invested
P250,000 for a ¼ interest in the business. The partners decided not
to revalue the assets of the partnership and that the total agreed
capital is P850,000.
Total Total
Contributed Bonus Agreed
Capital Capital
Z.Rivadelo 400,000 28,125 428,125
J.Matuguinas 200,000 9,375 209,375
Total 600,000 37,500 637,500
¼ of total
S.Barbo 250,000 (37,500) 212,500 agreed capital
Total 850,000 0 850,000
Distribution of Bonus:
Z.Rivadelo 37,500 x ¾ = P28,125
Matuguinas 37,500 x ¼ = P 9,375
The entry will be:

(1)
Cash 250,000
S. Barbo Capital 250,000
(2)
Z. Rivadelo Capital 28,125
J. Matuguinas Capital 9,375

Case 2. Total Agreed capital is not explicitly stated. Assume that Samuel
Barbo invested P400,000 in the business. Out of the total cash
investment, P100,000 is considered as a bonus to partners Z.
Rivadelo and J. Matuguinas.
The investment of Barbo resulted to a bonus as stated. Under the
bonus method, the total contributed capital is equal to the total
agreed capital. It is also clearly specified that the old partners
will receive the bonus.
T.C.C. Bonus T.A.C.

Z.Rivadelo 400,000
J.Matuguinas 200,000
Total 600,000
S.Barbo
Total
The entry will be:
BONUS TO NEW PARTNERS

Case 1. Total Agreed capital is stated. Assume that Samuel Barbo invested
P240,000 for a 1/3 interest in the business. The total agreed
capital is P840,000. The investment of Barbo resulted to a business
as shown below.
Total Total
Contributed Bonus Agreed
Capital Capital
Z.Rivadelo 400,000 (30,000) 370,000
J.Matuguinas 200,000 (10,000) 190,000
Total 600,000 (40,000) 560,000
1/3 of total
S.Barbo 240,000* 40,000 280,000 agreed capital
Total 840,000 0 840,000
*P840,000 x 1/3 = P280,000
Z.Rivadelo 40,000 x ¾ = P 30,000
Matuguinas 40,000 x ¼ = P 10,000

The entry will be:
(1)
Cash 240,000
(2)
Z. Rivadelo Capital 30,000
J. Matuguinas Capital 10,000
Case 1. Total Agreed capital is not explicitly stated. Assume that Samuel
Barbo invested P300,000 for a 50% interest in the business. Z.
Rivadelo and J. Matuguinas transferred part of their capital balance
to that of S. Barbo as a bonus.
The investment of Barbo resulted to a bonus as stated. Under the
bonus method, the total contributed capital is equal to the total
agreed capital. It is also clearly specified that the old partners
will receive the bonus.
T.C.C. Bonus T.A.C.

Z.Rivadelo 400,000
J.Matuguinas 200,000
Total 600,000
S.Barbo
Total
The entry will be:
WITHDRAWAL OR RETIREMENT OF A PARTNER

This type of dissolution may be accomplished by either of the following ways:
By selling his equity interest to one or more of the remaining
partners.
By selling his equity to an outsider
By selling his equity interest to the partnership
1. Sale of interest to partner or an outsider. Accounting for this sale is

similar to admission by purchase of interest. The total assets of the
partnership are not affected by the consideration involved.

2. Sale of Interest to the Partnership.
Illustration: Suppose that Virgie Dal is retiring in midyear from the
partnership of Selisana, Yacapin, and Dal because of family relocation.
Physical distance will prevent her from coping with the daily rigors of
their fashion and beauty consulting business. After the books have been
adjusted for the semi-annual profits but before revaluation, their
capital balances are as follows:
Jessica Selisana, Capital P540,000

Virginia Ycapin, Capital 430,000
Virgie Dal, Capital 210,000
An independent appraiser revalue their cosmetics inventory to P380,000

(a decrease of P60,000) and their land to P1,010,000 (an increase of
P460,000). The profit or loss ratio of the partners is 1:2:1.
The entries to record the revaluation of assets follow:
For cosmetic inventory

The entry will be
For Land
The entry will be
After revaluation, the capital balances of the partners will be:
Jessica Selisana, Capital

Virginia Yacapin, Capital
Virgie Dal, Capital

Case 1. Withdrawal at book value. Assume that Virgie Dal agreed to
accept payment equal to her interest.
Case 2. Withdrawal at more than book value. Assume that Virgie Dal
demanded a P400,000 settlement for her interest because she firmly
believed that she has contributed so much to the success of the
business. The remaining partners agreed for old time’s sake.
The computation will be:
Case 3. Withdrawal at less than book value. Assume that Virgie Dal is
very eager to retire and is willing to accept settlement at P280,000.
The computation will be:
DEATH OF A PARTNER
When the death of a partner does not result to liquidation, the accounting
procedures to be followed are similar to those discussed in the withdrawal of
a partner. The deceased partner may be considered to have retired from the
partnership and his hiersor estate can expect to receive the amount of his
interest from the business. If the amount cannot be made immediately, a
liability account, payable to the estate, will be established until the
payment to the hiers is made.
INCORPORATION OF A PARTNERSHIP
After evaluating the various advantages of having a corporate form of
business organization. After the necessary adjusting and closing entries, the
assets and liabilities of the partnership are transferred to the corporation
in exchange for shares of stock. The shares received by the partnership are
distributed to the partners based on their equity interests.
(*further discussion on this topic will be made on the succeeding sessions.)
References:
Ballada, Win & Susan Ballada.(2010). Partnership and Corporation.14th Edition. Manila: Domdane Publishers.

NAME: Course & Major:
(Kindly dettach & include to the papers you will submit as your assignment)
TRUE OR FALSE
1. A partnership may be dissolved without being liquidated.
2. The withdrawal of a partner from a partnership is a type of
dissolution.
3. A new partner must have the consent of all the partners before being
admitted into the partnership.
4. When a partner withdraws assets greater than his capital balance, the
excess is treated as a bonus to the remaining partners.
5. When the existing partners pay a bonus to a newly admitted partner, the
existing partner’s accounts are debited.
6. When a bonus is allowed to a new partner, part of the entry to record
his admission to a business reduces the capital accounts of the old
partners.
7. A partnership is dissolved when a new partner is admitted to the
partnership.
8. A partner who withdraws from a partnership is always entitled to the
balance in his capital account.
9. Nelson Daganta purchased directly from Antonio Lao, Jr.’s P30,000
partnership interest for P50,000. The entry to record the transaction
is for P30,000.
10. Li Lao directly purchased Mi Mao P250,000 partnership interest
for P300,000. The entry record the transaction is for P300,000.
ACTIVITY NO. 1
The capital accounts of the Guerrero and Alajar partnership on Sept. 30, 2013
were:
Guerrero, Capital (75% profit percentage) 140,000

Alajar, Capital (25% profit percentage) 56,000
Total capital 196,000
On Oct.1, Franco was admitted to a 35% interest in the partnership when he

purchased 35% of each existing partner’s capital for P100,000, paid directly
to Guerrero and Alajar.
Required: Determine the capital balances of Guerrero, Alajar, and Franco

after Franco’s admission to the partnership. Show your computations.
ACTIVITY NO. 2
Alcantara, Budoy and Dinoy have equities in a partnership of P600,000,
P900,000 and P500,000, respectively, and share profits and losses in a ratio
of 2:1:2, respectively. The partners have agreed to admit Ledda to the
partnership.

Required: Prepare the journal entries to record the admission of Ledda to the
partnership under each of the following assumptions. Show your computations.
1. Ledda invested P500,000 for a 30% interest, and bonus is recorded for
Ledda.
2. Ledda invested P750,000 for a 1/5 interest, and bonus is recorded for
the old partners.
ACTIVITY NO. 3
Partners Gonzaga and Denajeba have capital account balances of P30,000 and
P20,000, respectively, and they share profits and losses in a 3:1 ratio.
Required: Prepare the journal entries to record the admission of Ortiz under
each of the following conditions:
1. Ortiz invested P30,000 for a ¼ interest in net assets, the total
partnership capital after Ortiz’s admission will be P80,000.
2. Ortiz invested P30,000, of which P10,000 is a bonus to Gonzaga and
Denajeba. In conjunction with the admission of Ortiz, the carrying
amount of the inventories is increased by P16,000. Ortiz’s capital
account is credited for P20,000.

Corporation
Session 6 – Accounting for Partnerships
Liquidation
Understand the definition and causes of

partnership liquidation. Rules and accounting
for the settling of accounts after
dissolution;(a)Under lump sum liquidation
(b)Under installment liquidation.
Mr. Leemon L. Araza

Instructor
DEFINITION
The liquidation of a partnership is the winding up of its business

activities characterized by sale of all non-cash assets, settlement of all
liabilities and distribution of the remaining cash to the partners. The
conversion of non-cash assets into cash is referred to as realization. This
may either result to a gain or loss on realization and shall be divided in
the profit and loss ratio of the partners. In some cases, a substantial loss
on realization may yield for a partner a capital deficiency, which is the
excess of a partner’s share in losses over the partner’s capital credit
balance.This deficiency will certainly affect the partner’s interest the sum
of his capital and loan accounts – in the partnership.
RULES IN SETTLING ACCOUNTS AFTER DISSOLUTION

Order of Preference
The assets of a general partnersip shall be applied in the following order:
1. First, those owing to outside creditors.
2. Second, those owing to inside creditors in the form of loans or
advances for business expenses by the partners. It gives the partner
the option to exercise his right of offset. This privilege is the legal
right of a partner to apply part or all of his loan account balance
against capital deficiency.
3. Third, those owing to the partners with respect to their capital
contribution.
4. Lastly, those owing to the partners with respect to their share of the
profits.
Insufficient Partnership Assets

In cases when the partnership assets are insufficient to settle all outside
liabilities, the partners should make additional contributions in the
partnership. Any partner who contributed in excess of his share in this
liability has a right to collect the supposed additional contributions from
the other partners.
Preference of Partnership creditors and partner’s separate creditors

The creditors of the partnership shall have priority in payments over those
of the partners’ separate creditors as regards the partnership properties. On
the otherhand, the creditors of the partners are preferred with respect to
the separrate or personal properties of the partners.
DISTRIBUTION OF SEPARATE PROPERTIES OF AN INSOLVENT PARTNER

1. Those owing to separate creditors,
2. Those owing to partnership creditors,
3. Those owing to the partners by way of additional contributions when the
assets of the partnership were insufficient to settle all obligations.
1|Accounting for Partnership Liquidation S.6

ENTRIES RELATED TO LIQUIDATION
1. Sale of Non-cash Assets

a. At book value
Cash XX
Non-cash assets XX
b. Above book value
Cash XX
Non-cash assets XX
Gain on realization XX
c. Below book value
Cash XX
Los on realization XX
Non-cash assets XX
2. Distribution of Gain or loss on realization based on Partners’ P/L
ratio.
a. Distribution of Gain on Realization
Gain on Realization XX
A, Capital XX
B, Capital XX
C, Capital XX
b. Distribution of Loss on Realization
A, Capital XX
B, Capital XX
C, Capital XX
Loss on realization XX
3. Payment of Liabilities
Liabilities XX
Cash XX
4. Exercise of right of offset
A, Loan XX
A, Capital XX
5. Additional Investment by deficient partner
Cash XX
A, Capital XX
6. Deficiency Absorbed by solvent partner
B, Capital XX
A, Capital XX
7. Distribution of cash to partners
A, Capital XX
B, Capital XX
C, Capital XX
Cash XX

METHODS OF PARTNERSHIP LIQUIDATION
(the two methods that may be used when a partnership is liquidated)
1. Lump-sum Liquidation--a liquidation in which all the assets of the

partnership are converted into cash within a very short time, creditors
are paid, and a single payment is made to the partners for their
capital interests.
a. Accounting Treatment
i. Realization of Assets--any gains or losses realized from the
sale of partnership assets are allocated to the partners using
their profit-and-loss sharing ratios
ii. Distribution of Realization Proceeds
1. Solvent Partnership--the claims against the assets of the
partnership are satisfied in the following order:
a. Creditors--amount owed to partnership creditors other
than partners
b. Liabilities to Partners--amounts owed to partners other
than for their capital balance
i. Right of Offset--a deficit balance in a partner's
capital account is offset against any loan payable
to that partner
c. Capital Balances--amounts owed to partners for their
capital balances to the extent of credit balances in
their capital accounts
i. Right of Offset--a loan receivable from a partner is
offset against any credit balance in that partner's
capital account
ii. Capital Deficiency--a debit balance in a partner's
capital account represents a claim of the
partnership against that partner
1. Cash Contribution--if a partner with a debit
balance in his capital account contributes cash
to the partnership to make up his capital
deficiency, the debit balance in his capital
account is reduced for the amount of cash
contributed.
2. No Contribution--if a partner with a debit
balance in his capital account does not
contribute cash to the partnership to make up his
capital deficiency or contributes insufficient
cash to the partnership to make up his capital
deficiency, the debit balance in his capital
deficiency is allocated to the other partners in
their relative profit-and-loss sharing ratios
2. Insolvent Partnership--the claims against the personal
assets of the individual partners of the partnership are
satisfied in the following order:
a. Personal Creditors--personal creditors of the individual
partners

b. Partnership Creditors--partnership creditors for unpaid
liabilities, regardless of the individual partner's
capital balance.
ILLUSTRATION 1
A, B, and C are partners with profit-and-loss sharing ratios of 20%, 60%, and
20%, respectively; the partnership balance sheet consisted of cash of 20,000,
noncash assets of 270,000, liabilities of 40,000, and capital balances of
140,000 for A, 60,000 for B, and 50,000 for C; the partnership was liquidated
by selling the noncash assets for 310,000; the partners have sufficient cash
to make up any capital deficiencies.
A, B & C Partnership
Statement of Partnership Liquidation
December 31, 20xx
Noncash A B C
Cash Assets Payables Capital Capital Capital
Balances before liq. 20,000 270,000 40,000 140,000 60,000 50,000
Sale of non-cash assets310,000 (270,000) __ 8,000_ 24,000_ 8,000
Balances 330,000 _ --- _ 40,000 148,000 84,000 58,000
Payment of liab. (40,000) (40,000) _ __ __
Balances 290,000 _ --- _ 148,000 84,000 58,000
Balances to partners (290,000) (148,000)( 84,000( 58,000)
_ --- __ --- _ _ --- _ _ --- _
Gain Allocation:
A = 20% x (310,000 – 270,000) = 8,000
B = 60% x 40,000 = 24,000
C = 20% x 40,000 = 8,000
ILLUSTRATION 2
December 31, 20xx
Noncash A B C
_ Cash_ _Assets Payables Capital Capital Capital
20,000 270,000 40,000 140,000 60,000 50,000
220,000 (270,000) _ (_10,000) (_30,000) (_10,000)
240,000 _ --- _ 40,000 130,000 30,000 40,000
(40,000) (_40,000) _ __ __ _
200,000 _ --- _ 130,000 30,000 40,000
(200,000) (130,000) (30,000) (40,000)
_ --- __ --- _ _ --- _ _ --- _

Loss Allocation:
A = 20% x (220,000 – 270,000) = (10,000)
B = 60% x (50,000) = (30,000)
C = 20% x (50,000) = (10,000)
ILLUSTRATION 3
December 31, 20xx
Noncash A B C
20,000 270,000 40,000 140,000 60,000 50,000
160,000 (270,000) _ (_22,000) (_66,000) (_22,000)
180,000 _ --- _ 40,000 118,000 ( 6,000) 28,000
( 40,000) (_40,000) _ __ __
140,000 _ --- _ 118,000 ( 6,000) 28,000
_ 6,000_ 6,000
146,000 _ --- _
(146,000) (118,000) (28,000)
_ --- __ --- __ --- _
Loss Allocation:
A = 20% x (160,000 – 270,000) = (22,000)
B = 60% x (110,000) = (66,000)
C = 20% x (110,000) = (22,000)
ILLUSTRATION 4
by selling the noncash assets for 160,000; the partners are personally
insolvent.
December 31, 20xx
Noncash A B C
20,000 270,000 40,000 140,000 60,000 50,000
160,000 (270,000) _ (_22,000) (_66,000) (_22,000)
180,000 _ --- _ 40,000 118,000 ( 6,000) 28,000
( 40,000) (_40,000) _ __ __ _
140,000 _ --- _ 118,000 ( 6,000) 28,000
( 3,000) _ 6,000 ( 3,000)
140,000 115,000 _ --- _ 25,000
(140,000) (115,000) (25,000)
_ --- __ --- _ _ --- _

Loss Allocation:
A = 20% x (160,000 – 270,000) = (22,000)
B = 60% x (110,000) = (66,000)
C = 20% x (110,000) = (22,000)
B’s Deficit Allocation:

A = 20% / (20% + 20%) x (6,000) = (3,000)
C = 20% / 40% x (6,000) = (3,000)
INSTALLMENT LIQUIDATION
Frequently, partnership assets are not realized through an instantaneous sale
but in a piecemeal fashion. In other words, the liquidation of some business
may extend over several months. When this happens the partners may prefer to
receive the amounts due to them in a series of installments rather than wait
until all assets have been converted to cash.
Installment Liquidations--a liquidation in which all the assets of the
partnership are converted into cash over a longer period of time, outside
creditors are paid, and periodic payments are made to the partners for their
capital interests.
Procedures for Liquidation by Installment

1. Realization of non-cash assets and distribution of gain or loss on
realization among the partners based on their profit and loss ratio.
2. Payment of liquidation expenses and adjustment for unrecorded
liabilities; both of these items will be distributed among the partners
in their profit and loss ratio.
3. Payment of liabilities to outsiders.
4. Distribution of available cash based on a schedule of safe payments
which assumes possible losses due to inability of the partnership to
dispose of part or all the remaining non-cash assets and failure of the
partners with capital deficiencies to make additional contributions.
Payments to partners can also be made based on a cash priority program.
References:
Ballada, Win & Susan Ballada.(2010). Partnership and Corporation.14th
www.google.com

TRUE or FALSE
1. When a partnership goes out of business, all the remaining non-cash
assts will be declared as a total loss. This loss on liquidation shall
be divided among the partners in their P/L ratio.
2. The creditors of the partnership shall have priority in payments over
those of the partner’s separate creditors as regards the partnership
properties.
3. A partnership liquidation is the same as partnership dissolution.
4. The cash settlement of all liabilities is referred to as realization.
5. Gains or losses on the sale of assets in liquidation are divided
equally among partners.
6. In liquidation, partners are given back the assets that they originally
invested.
7. Liquidation of a partnership is the process of ending the business.
8. In partnership liquidation, one partner may have to make up for the
deficit in another partner’s account.
9. A partnership is said to be dissolved when the business is terminated.
10. The liquidation of a partnership is the winding up of its
business activities characterized by sale of all non-cash assets,
settlement of all liabilities and distribution of the remaining cash to
the partners.
ACTIVITY NO. 1
Villanueva and Ho are about to liquidate their partnership. They each have
P200,000 capital balances, and they share profit and losses in a 3:1 ratio,
respectively. In addition, the partnership has P250,000 in cash, P450,000 in
non-cash assets, and P300,000 in accounts payable. Assuming that the non-cash
assets are sold for P170,000 and the both partners are personally solvent.
REQUIRED: Prepare all the liquidation entries.
ACTIVITY NO. 2
After several years of operations, the partnership of Arenas, Reyes an
Laurente is to be liquidated. After making the closing entries on June 30,
2009, the following accounts remained open:
Account title Account balance

Dr Cr
Cash 50,000
Non-cash assets 2,350,000
Liabilities 400,000
Arenas, Capital 900,000
Reyes, Capital 500,000
Laurente, Capital 600,000

The non-cash assets are sold for P 2,650,000. Profits and losses are shared
equally.
REQUIRED: Prepare a statement of partnership liquidation and the entries to

record the following:
1. Sale of all non-cash assets
2. Distribution of gain on realization to the partners
3. Payment of the liabilities
4. Distribution of cash to the partners
ACTIVITY NO. 3
The NPC partnership has suffered financially due to poor result of operations
for the past three years. Narvaez, Pascual and Corleto shares profits and
losses in the ratio of 1:3:6, respectively. Disillusioned by the setback, the
partners are considering the liquidation of their partnership. The following
is the condensed partnership statement of financial position as at November
30, 2014, the end of fiscal year.
Cash P 270,000 Liabilities P1,310,000

Non-cash assets 2,020,000 Narvaez, Capital 210,000
Pascual, Capital 390,000
Corleto, Capital 380,000
Total Assets P 2,290,000 Total Liab. & Equit. P 2,290,000
REQUIRED:Prepare liquidation schedules assuming that the non-cash assets will
be sold for:
1. P 2,120,000
2. P 1,820,000
ACTIVITY NO. 4
20%, respectively; the partnership balance sheet consisted of cash of $0,
liabilities of 50,000, and capital balances of 15,000 for A, (55,000) for B,
and(10,000) for C; the partnership was being liquidated; A is personally
insolvent; B and C are personally solvent in the amount of 35,000 and
$80,000, respectively; the creditors obtained judgment against C for 50,000.
REQUIRED: Prepare the statement of partnership liquidation.

Corporation
Session 7 – Corporation Accounting: Basic
Considerations
Understand the classes or classifications

of a corporation. Explain the process of
incorporation and its initial documents such
as:(a)Articles of incorporation. (b)By-laws.
(c)Rights of shareholders. Components of a
corporation. Minimum subscription and paid-in
capital. Corporate organizational structure.
Corporate books and records.
Mr. Leemon L. Araza

Instructor
DEFINITION
A Corporation is an artificial being created by operation of law, having the

right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence. (The Corporation Code of the
Philippines, Sec 2)
The Corporate Form of Organization
Attributes of a Corporation
o Entity created by law It cannot come into existence by mere agreement

of the parties as in the case of business partnerships. Corporations
require special authority or grant from the State, either by a special
incorporation law that directly creates the corporation or by means of
a general corporation law.
o An Artificial being with personality separate and apart from its

individual shareholders or members.
o Right of Succession A corporation has the capacity of Continued

existence that is dependent upon the statutes of the state in which it
is incorporated.
o Has the power,attributes and properties expressly authorized by law

or incident to its existence.
o Limited Liability of stockholders
o Capital stocks Ownership held in shares of capital stock that

consider as transferable units. Ability to acquire capital through the
issuance of stock.
Advantages of a Corporation
 The corporation has the legal capacity to act as a legal entity.
 Shareholders have limited liability.
 It has continuity of existence.
 Shares of stock can be transferred without the consent of the other
shareholders.
 Its management is centralized in the board of directors.
 Shareholders are not general agents of the business.
 Greater ability to acquire funds.
Disadvantages of a Corporation
 A corporation is relatively complicated in formation and management.
 There is a greater degree of government control and supervision.
 It requires a relatively high cost of formation and operation.
1|Corporation Accounting : Basic Considerations S.7

 It is subject to heavier taxation than other forms of business
organizations.
 Minority shareholders are compliant to the wishes of the majority.
 In large corporations, management and control have been separated from
ownership.
 Transferability of shares permits the uniting of incompatible and
conflicting elements in one venture.
CLASSES OF CORPORATIONS
1. Stock Corporation have share capital divided into shares and are
authorized to distribute profits as dividends among the shareholders.
2. Non-stock Corporation is one where no part of its income is distributed
as dividends to its members. It may be formed for charitable,
religious, educational, professional, cultural, fraternal, literacy,
scientific, social, civil service, or similar purposes.(Sec. 88)
OTHER CLASSIFICATIONS OF CORPORATIONS
1. According to number of persons:

a. Corporate aggregate a corporation cosisting of more than one
corporator.
b. Corporate Sole or a special form of corporation usually
associated with the clergy. It is a corporation which consists of
only one member or corporator and his successors such as bishop.
2. According to nationality:
a. Domestic Corporation organized under Philippine Laws.
b. Foreign Corporation organized under foreign law.
3. According to whether for public or private purpose:

a. Public Corporation formed or organized for the government of a
protion of the states.
b. Private Corporation created for private aim, benefit or purpose.
4. According to whether for charitable purpose or not:

a. Ecclesiastical Corporation organized for religious purposes.
b. Eleemosynary Corporation Those established for public charity.
c. Civil corporation Those established for business or profit.
5. According to their legal right to corporate existence

a. De jure corporation existing in fact and in law. It is organized
in strict conformity with the law.
b. De facto corporation existing in fact but not in law.
6. According to degree of public participation with regard to share

ownership
a. Close Corporation whose share ownership is limited to selected
persons or members of a family not exceeding 20 persons.

b. Open Corporation where the share is available for subscription or
purchase by any person.
7. According to their relation to another corporation

a. Parent or holding corporation has the power to either directly or
indirectly elect the majority of the directors of a subsidiary
corporation.
b. Subsidiary corporation corporation controlled by another
corporation known as a parent corporation.
COMPONENTS OF A CORPORATION
1. Corporators are those who compose a corporation whether as

shareholders or members, at any time.
Note: A corporation or a partnership can be a corporator, but cannot
be an incorporator. A partnership can be a corporator in a
corporation but a corporation cannot be a general partner in a
partnership.
2. Incorporators are shareholders or members, mentioned in the articles
of incorporation as originally forming and composing the corporation
and are signatories o said articles.
3. Shareholders or stockholders are corporators in an stock coporation.
Maybe natural and juridical persons.
4. Members are corporators of a non-stock corporations.
5. Subscribers are persons who have agreed to take and pay for
original, unissued shares of a corporation formed or to be formed.
Note: All incorporators are subscribers but a subscribers need not
be an incorporator.
6. Promoters are persons who bring about or cause to bring about the
formation and organization of a corporation.
7. Underwriters a person or company that underwrites a share issue or
an insurance.
Note: Underwrite means to accept responsibility for something, to
insure, to cover a risk.
ClASSES OF SHARES IN GENERAL
1. Par value shares

Capital stock 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
2. No-par shares
Capital stock 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 then becomes the legal capital per share.
When there is no assigned stated value, the entire proceeds are
considered to be legal capital.

Relationship Of Par And No-Par Value Stock To Legal Capital
3. However, the minimum stated value of a non-par value share is five

pesos (P5,00)per share (Sec. 6)
4. Voting Shares Those issued with the right to vote.
5. Non-voting shares those issued without the right to vote.
6. Ordinary shares these shares entitle the holder to an equal pro-rata
division of profits without any preference.
7. Preference shares these shares entitle the holder to certain advantages
or benefits over the holders of ordinary shares.
8. Promotion shares those issued to promoters as compensation in promoting
the incorporation of a corporation, or for services rendered in
launching or promoting the welfare of the corporation.
9. Treasury shares A stock that has been issued by the corporation as
fully paid and later reacquired but not retired.
10. Convertible shares stock which is convertible or changeable from
one class to another class.
CORPORATE ORGANIZATIONAL STRUCTURE

The ultimate control of the corporation rests with the shareholders.
They are the owners of the corporation. The shareholders elect the members of
the board of directors. The designation of the professional management team
or administrative officers is entrusted to the board. These officers
implement the policies of the B.O.D. and actively manage the day-to-day
affairs of the corporation.
 Board of Directors is responsible for the formulation of the overall

policies for the corporation and for the exercise of corporate powers.
The board also elects a chairman of the board.
 The President of a corporation must be a director, but he cannot act as

president and secretary or president and treasurer at the same time.
The president is only required by law to be a director.
 Corporate Secretary must be a resident and citizen of the Philippines.

He need not be a director unless required by the corporate by-laws. His
duty is to make and keep records and to make proper entries of the
votes, resolutions and proceedings of the shareholders and directors in
the management of the corporation.
 Corporate Treasurer is the proper officer entrusted with the authority

to receive and keep the money of the corporation and to disburse them
as he may be authorized.

CORPORATION, HOW ORGANIZED:
Philippine corporate entities are organized as follows:

 Number of incorporators: Incorporators are required to be not less than
five [5] but not more than fifteen [15].
 Residency requirement: Majority of the incorporators are required to be
residents of the Philippines.
 Qualifications:
All incorporators:
 must be natural persons
 must be of legal age
A corporation or a partnership cannot be incorporators of a
Philippine corporate entity. The only way a corporation or a
partnership may become stockholder of a Philippine corporation is by
acquiring a stock thereof but only after it shall have been duly
incorporated.
 Subscription requirement: All incorporators must subscribe to at least
one (1) share of stock of the corporation being organized.
Corporation, minimum subscription:

The law requires that the total capital stock to be subscribed at the
time of incorporation should at least be twenty five percent [25%] of the
authorized capital stock of the corporation being organized.
Corporation, minimum paid-up capital:

The paid-up capital of a Philippine corporation must not be less than
PhP5,000.00. Thus, it is required that at least twenty five percent [25%] of
the subscribed capital stock should be fully paid up but the amount of which
should not be less than said PhP5,000.00.
Corporation, incorporation documents:

The following incorporation documents are required:

 Articles of Incorporation;
 By-laws;
 Treasurer's Affidavit which should state compliance with the authorized
subscribed and paid-up capital stock requirements.
 Bank Certificate that the paid-up capital portion of the authorized
capital stock has been deposited with the issuing bank.
There are "express lane" forms available at the Securities and Exchange
Commission [SEC] for certain specified corporate business organizations.
Corporation, where filed:

The incorporation documents should be filed with the Securities and
Exchange Commission [SEC] of the Philippines.
Corporation, what should be stated:

 the name of the corporation which must not be identical or deceptively
or confusingly similar to any existing corporation;
 the purpose of the corporation;
 principal office of the corporation;
 the term or life of the corporation which should not exceed fifty [50]
years. This corporate lifetime may, however, be extended for another
fifty [50] years but the extension must not be effected earlier than
five [5] years before the expiration of its term.
CORPORATE BOOKS AND RECORDS
Every private corporation, stock or non-stock, is required to keep books nd

records at its principal office of the following:
 Minutes Book It contains the minutes of the meeting of the directors
and shareholders.
 Stock and transfer books It is a record of the names and shareholders,
installments paid and unpaid by stockholders and dates of payment, any
transfer of stock and dates thereof, by whom and to whom made.
 Books of accounts these represent the record of all business
transactions. The books of accounts normally include the journal and
the ledger.
 Subscription book It is a book of printed blank subscription.
 Shareholders’ ledger It is a ledger which details the number of shares
issued to each shareholder.
 Subscribers’ book It is a subsidiary ledger for the subscriptions
receivable account; it reports the individual subscriptions of the
subscribers.
 Stock certificate book It is a book of printed blank certificates of
stock.
References:
*Ballada, Win & Susan Ballada.(2010). Partnership and Corporation.14th Edition. Manila: Domdane
Publishers.
*http://www.chanrobles.com/legal5cc1a.htm
*Weigandt, Kieso, and Kimmel. (2005). Accounting Principles, 6th Ed. Canada: John Wiley and Sons.

*Reeve, James M, Caarl S. Waren and Jonathan E. Duchac. Principles of Accounting. Singapore:
Cengage Learning Asia Pte Ltd. (R)

TRUE or FALSE
1. A corporation is an artificial being with a personality separate and
apart from its individual shareholders or members.
2. A corporation can come into existence by mere agreement of the parties
as in the case of partnerships.
3. A corporation has continuity of existence which permits the business to
continue regardless of changes in ownership or the death of a
shareholders.
4. A corporation is created by agreement of the shareholders.
5. Any individual shareholders in a corporation may personally be held
liable for all debts incurred by the corporation.
6. A corporation can be held liable for personal indebtedness of a
shareholder.
7. The liability of the shareholders for the payment of corporate debts is
limited to the value of their shares.
8. Death of shareholder will not dissolve the corporation.
9. All corporations issue shares of stock and are either public or
private.
10. All incorporators are subscribers but a subscribers need not be
an incorporator.
11. All incorporators are corporators of a corporation.
12. A corportation or a partnership can be a incorporator but not a
corporator.
13. Corporate Secretary must be a resident and citizen of the
Philippines.
14. The Corporate Treasurer of a corporation must be a director.
15. The paid-up capital of a Philippine corporation must not be less
than Php 500.00.
Fill in the blanks
1. The incorporation documents should be filed with the

of the Philippines.
2. Board of Directors is responsible for the formulation of the overall
policies for the corporation and for the exercise of corporate powers.
The board also elects a .
3. Complete the table that shows the minimum requirement of the law to
capital formation.
Authorized Capital Subscribed Capital Paid-in capital
100,000 6,250
12,500
3,125
150,000

ARTICLES OF INCORPORATION
OF
____________________________________________________________________
KNOW ALL MEN BY THESE PRESENTS:
That we, all of legal age, citizens and residents of the Republic of the Philippines,
have this day voluntarily associated ourselves together for the purpose of forming a
corporation under the laws of the Philippines.
AND WE HEREBY CERTIFY:
FIRST: That the name of the said corporation shall be:
________________________________________________________________________
_
SECOND: That the purposes for which said corporation is formed are:
B. That the corporation shall have all the express powers of a corporation as
provided for under section 36 of the Corporation Code of the Philippines.
THIRD. That the place where the principal office of the corporation is to be
established is at:
___________________________
____________________________
FOURTH. That the term of for which the corporation is to exist is FIFTY (50)
years from and after the date of issuance of the certificate of incorporation.
1
FIFTH. That the names, nationalities, and residences of the incorporators are as
follows;
Name Nationality Address
SIXTH: That the number of directors of the corporation is five (5) who are also the
incorporators.
SEVENTH: That the authorized capital stock of the corporation is

__________________________( )pesos in lawful money of the Philippines, divided
into ________________________shares with a par value of
____________________pesos per share.
EIGHT: That the subscribers to the capital stock and the amount paid-in to their
subscription are as follows.
Name Nationality No. of shares Amount Amount Paid

subscribed subscribed
TOTAL
2
NINTH. That no transfer of stock or interest which would reduce the ownership
of Filipino citizens to less than the required percentage of the capital stock as provided by
existing laws shall be allowed or permitted to be recorded in the proper books of the
corporation and this restriction shall be indicated in all the stock certificates issued by the
corporation.
TENTH: That _______________________ has been elected by the subscribers

as treasurer of the corporation to act as such until his successor is duly elected and
qualified in accordance with the by-laws; and that as such Treasurer, he/she has been
authorized to receive for and in the name and for the benefit of the corporation, all
subscriptions paid in by the subscribers.
ELEVENTH. That the incorporators undertake to change the name of the

corporation immediately upon receipt of notice or directive from the Securities and
Exchange Commission that another corporation, partnership or person has acquired a
prior right to the use of that name or that the name has been declared misleading,
deceptive, confusingly similar to a registered name, or contrary to public morals, good
customs or public policy.
In witness whereof, we have set our hands this __________ of ___________,

200__ at ___________________________.
________________________ ________________________
TIN TIN
___________________________ ___________________________
TIN TIN
__________________________
TIN
WITNESSES:
_______________________ ______________________
3
ACKNOWLEDGEMENT
S.S.
BEFORE ME, a Notary Public in and for ___________________, Philippines,

this __________ day of __________________ personally appeared:
NAME COMMUNITY TAX CERTIFICATE # DATE & PLACE ISSUED
All known to me and to me known to be the same persons who executed the foregoing Articles of
Incorporation and they acknowledged to me that the same is their free and voluntary act and deed.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my notarial seal on the
date and at the place first above written.
NOTARY PUBLIC
Until December 31, 20__
Doc. No. ________;
Page No. ________;
Book No. _______;
Series of ________;
4
TREASURER’S AFFIDAVIT
City of } S.S.
Province of }
I, _______________________________, being duly sworn, depose and say:
That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such
until my successor has been duly elected and qualified in accordance with the by-laws of the corporation,
and that as such Treasurer, I hereby certify under oath that at least 25% of the authorized capital stock of
the corporation has been subscribed and at least 25% of the subscription has been paid, and received by me
in cash for the benefit and credit of the corporation.
This is also to authorize the Securities and Exchange Commission and Bangko Sentral ng Pilipinas
to examine and verify the deposit in the ________________________, __________________ in my name
as treasurer in trust for ________________________________________________________in the amount
of __________________________________(________________)representing the paid up capital of the
corporation which is in the process of incorporation. This authority is valid and inspection of said deposit
may be made even after the issuance of the Certificate of Incorporation to the corporation. Should the
deposit be transferred to another bank prior to or after incorporation, this will serve as authority to verify
and examine the same. The representative of the Securities and Exchange Commission is also authorized to
examine the pertinent books and records of accounts of the corporation as well as all supporting papers to
determine the utilization and disbursement of the said paid up capital.
In case the said paid up capital is not deposited or withdrawn prior to the approval of the articles
of incorporation, I, on behalf of the above named corporation, waive our right to a notice and hearing in the
revocation of our Certificate of Incorporation.
___________________
Treasurer
SUBSCRIBED AND SWORN to before me this ____day of _____at ________, Philippines,
affiant exhibiting to me his Community Tax Certificate No.__________ issued at _______, on
____________.
Doc. No. ________; NOTARY PUBLIC
Page No. ________; Until Dec. 31, 20_______
Book No. _______;
Series of ________
5
BY - LAWS
OF
___________________________________________________________________
ARTICLE I
SUBSCRIPTION, ISSUANCE AND TRANSFER OF SHARES
Section 1. Subscriptions - Subscribers to the capital stock of the corporation

shall pay the value of the stock in accordance with the terms and conditions prescribed by
the Board of Directors. Unpaid subscriptions shall not earn interest unless determined
by the Board of Directors.
Section 2. Certificate - The stockholder shall be entitled to one or more

certificates for fully paid stock subscription in his name in the books of the corporation.
The certificates shall contain the matters required by law and the Articles of
Incorporation. They shall be in such form and design as may be determined by the
Board of Directors and numbered consecutively. The certificate shall be signed by the
President, countersigned by the Secretary or Assistant Secretary, and sealed with the
corporate seal.
Section 3. Transfer of Shares - Subject to the restrictions, terms and conditions

contained in the Articles of Incorporation, shares may be transferred, sold, assigned or
pledged by delivery of the certificates duly indorsed by the stockholder, his attorney-in-
fact, or other legally authorized person. The transfer shall be valid and binding on the
corporation only upon record thereof in the books of the corporation. The Secretary
shall cancel the stock certificates and issue new certificates to the transferee.
No share of stock against which the corporation holds unpaid claim shall be
transferable in the books of the corporation.
All certificates surrendered for transfer shall be stamped “Cancelled” on the face
thereof, together with the date of cancellation, and attached to the corresponding stub
with the certificate book.
Section 4. Lost Certificates - In case any stock certificate is lost, stolen, or

destroyed, a new certificate may be issued in lieu thereof in accordance with the
procedure prescribed under Section 73 of the Corporation Code.
6
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Annual / Regular Meetings - The annual / regular meetings of

stockholders shall be held at the principal office on ____________of each year, if a
legal holiday, then on the day following.
Section 2. Special Meeting - The special meetings of stockholders, for any

purpose or purposes, may at any time be called by any of the following: (a) Board of
Directors, at its own instance, or at the written request of stockholders representing a
majority of the outstanding capital stock, (b) President.
Section 3. Place of Meeting - Stockholders meetings, whether regular or

special, shall be held in the principal office of the corporation or at any place designated
by the Board of Directors in the city or municipality where the principal office of the
corporation is located.
Section 4. Notice of Meeting - Notices for regular or special meetings of

stockholders may be sent by the Secretary by personal delivery or by mail at least two (2)
weeks prior to the date of the meeting to each stockholder of record at his last known
address. The notice shall state the place, date and hour of the meeting, and the purpose
or purposes for which the meeting is called.
When the meeting of stockholders is adjourned to another time or place, it shall

not be necessary to give any notice of the adjourned meeting if the time and place to
which the meeting is adjourned are announced at the meeting at which the adjournment is
taken. At the reconvened meeting, any business may be transacted that might have been
transacted on the original date of the meeting.
Section 5. Quorum - Unless otherwise provided by law, in all regular or

special meeting of stockholders, a majority of the outstanding capital stock must be
present or represented in order to constitute a quorum. If no quorum is constituted, the
meeting shall be adjourned until the requisite amount of stock shall be present.
Section 6. Conduct of Meeting - Meeting of the stockholders shall be presided

over by the President, or in his absence, by a chairman to be chosen by the stockholders.
The Secretary, shall act as Secretary of every meetings, but if not present, the chairman
of the meeting shall appoint a secretary of the meeting.
7
Section 7. Manner of Voting - At all meetings of stockholders, a stockholder
may vote in person or by proxy. Unless otherwise provided in the proxy, it shall be
valid only for the meeting at which it has been presented to the Secretary. All proxies
must be in the hands of the Secretary before the time set for the meeting. Proxies filed
with the Secretary may be revoked by the stockholders either in an instrument in writing
duly presented and recorded with the Secretary, prior to a scheduled meeting or by their
personal presence at the meeting.
Section 8. Closing of Transfer Books or Fixing of Record Date - For the

purpose of determining the stockholders entitled to notice of, or to vote at, any meeting
of stockholders or any adjournment thereof or to receive payment of any dividend, the
Board of Directors may provide that the stock and transfer books be closed for ten (10)
working days immediately preceding such meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers of the Board - Unless otherwise provided by law, the

corporate powers of the corporation shall be exercised, all business conducted and all
property of the corporation controlled and held by the Board of Directors to be elected by
and from among the stockholders. Without prejudice to such powers as may be granted
by law, the Board of Directors shall also have the following powers:
a.) From time to time, to make and change rules and regulations not
inconsistent with these by-laws for the management of the corporation’s
business and affairs;
b.) To purchase, receive, take or otherwise acquire for and in the name of the
corporation, any and all properties, rights, or privileges, including securities
and bonds of other corporations, for such consideration and upon such terms
and conditions as the Board may deem proper or convenient;
c.) To invest the funds of the corporation in other corporations or for

purposes other than those for which the corporation was organized, subject to
such stockholders’ approval as may be required by law;
8
d.) To incur such indebtedness as the Board may deem necessary, to issue
evidence of indebtedness including without limitation, notes, deeds of trust,
bonds, debentures, or securities, subject to such stockholders approval as may
be required by law, and/or pledge, mortgage, or otherwise encumber all or
part of the properties of the corporation;
e.) To establish pension, retirement, bonus, or other types of incentives or

compensation plans for the employees, including officers and directors of the
corporation;
f.) To prosecute, maintain, defend, compromise or abandon any lawsuit in

which the corporation or its officer are either plaintiffs or defendants in
connection with the business of the corporation;
g.) To delegate, from time to time, any of the powers of the Board which
may lawfully be delegated in the course of the current business of the
corporation to any standing or special committee or to any officer or agent and
to appoint any person to be agent of the corporation with such powers and
upon such terms as may be deemed fit;
h.) To implement these by-laws and to act on any matter not covered by
these by-laws, provided such matter does not require the approval or consent
of the stockholders under the Corporation Code.
Section 2. Election and Term - The Board of Directors shall be elected during
each regular meeting of stockholders and shall hold office for one (1) year and until their
successors are elected and qualified.
Section 3. Vacancies - Any vacancy occurring in the Board of Directors other

than by removal by the stockholders or by expiration of term, may be filled by the vote
of at least a majority of the remaining directors, if still constituting a quorum; otherwise,
the vacancy must be filled by the stockholders at a regular or at any special meeting of
stockholders called for the purpose. A director so elected to fill a vacancy shall be
elected only for the unexpired term of his predecessor in office.
The vacancy resulting from the removal of a director by the stockholders in the
manner provided by law may be filled by election at the same meeting of stockholders
without further notice, or at any regular or at any special meeting of stockholders called
for the purpose, after giving notice as prescribed in these by-laws.
Section 4. Meetings - Regular meetings of the Board of Directors shall be held

once a month on such dates and at places as may be called by the Chairman of the Board,
or upon the request of a majority of the Directors.
9
Section 5. Notice - Notice of the regular or special meeting of the Board,
specifying the date, time and place of the meeting, shall be communicated by the
Secretary to each director personally, or by telephone, telegram, or by written message.
A director may waive this requirement, either expressly or impliedly.
Section 6. Quorum - A majority of the number of directors as fixed in the

Articles of Incorporation shall constitute a quorum for the transaction of corporate
business and every decision of at least a majority of the directors present at a meeting at
which there is a quorum shall be valid as a corporate act, except for the election of
officers which shall require the vote of a majority of all the members of the Board.
Section 7. Conduct of the Meetings - Meetings of the Board of Directors shall

be presided over by the Chairman of the Board, or in his absence, by any other director
chosen by the Board. The Secretary, shall act as secretary of every meeting, if not
present, the Chairman of the meeting, shall appoint a secretary of the meeting.
Section 8. Compensation - By- resolution of the Board, each director shall

receive a reasonable per diem allowance for his attendance at each meeting of the Board.
As compensation, the Board shall receive and allocate an amount of not more than ten
percent (10%) of the net income before income tax of the corporation during the
preceding year. Such compensation shall be determined and apportioned among the
directors in such manner as the Board may deem proper, subject to the approval of
stockholders representing at least a majority of the outstanding capital stock at a regular
or special meeting of the stockholders.
ARTICLE IV
OFFICER
Section 1. Election / Appointment - Immediately after their election, the Board

of Directors shall formally organize by electing the President, the Vice-President, the
Treasurer, and the Secretary at said meeting.
The Board may, from time to time, appoint such other officers as it may
determine to be necessary or proper. Any two (2) or more positions may be held
concurrently by the same person, except that no one shall act as President and Treasurer
or Secretary at the same time.
10
Section 2. President - The President shall be the Chief Executive Officer of the
corporation and shall exercise the following functions:
a.) To preside at the meetings of the stockholders;
b.) To initiate and develop corporate objectives and policies and formulate
long range projects, plans and programs for the approval of the Board of
Directors, including those for executive training, development and
compensation;
c.) To supervise and manage the business affairs of the corporation upon the
direction of the Board of Directors;
d.) To implement the administrative and operational policies of the

corporation under his supervision and control;
e.) To appoint, remove, suspend or discipline employees of the corporation,

prescribe their duties, and determine their salaries;
f.) To oversee the preparation of the budgets and the statements of accounts
of the corporation;
g.) To represent the corporation at all functions and proceedings;
h.) To execute on behalf of the corporation all contracts, agreements and

other instruments affecting the interests of the corporation which require the
approval of the Board of Directors.
i.) To make reports to the Board of Directors and stockholders;
j.) To sign certificates of stock;
k.) To perform such other duties as are incident to his office or are entrusted
to him by the Board of Directors.
Section 4. The Vice-President - He shall, if qualified, act as President in the

absence of the latter. He shall have such other powers and duties as may from time to
time be assigned to him by the Board of Directors or by the President.
11
Section 5. The Secretary - The Secretary must be a resident and a citizen of the
Philippines. He shall have the following specific powers and duties:
a.) To record the minutes and transactions of all meetings of the directors and
the stockholders and to maintain minute books of such meetings in the form
and manner required by law;
b.) To keep record books showing the details required by law with respect to
the stock certificates of the corporation, including ledgers and transfer books
showing all shares of the corporation subscribed, issued and transferred;
c.) To keep the corporate seal and affix it to all papers and documents
requiring a seal, and to attest by his signature all corporate documents
requiring the same;
d.) To attend to the giving and serving of all notices of the corporation
required by law or these by-laws to be given;
e.) To certify to such corporate acts, countersign corporate documents or

certificates, and make reports or statements as may be required of him by law
or by government rules and regulations.
f.) To act as inspector at the election of directors and, as such, to determine

the number of shares of stock outstanding and entitled to vote, the shares of
stock represented at the meeting, the existence of a quorum, the validity and
effect of proxies, and to receive votes, ballots or consents, hear and determine
questions in connection with the right to vote, count and tabulate all votes,
determine the result, and do such acts as are proper to conduct the election.
g.) To perform such other duties as are incident to his office or as may be
assigned to him by the Board of Directors or the President.
Section 6. The Treasurer - The Treasurer of the corporation shall have the
following duties:
a.) To keep full and accurate accounts of receipts and disbursements in the
books of the corporation;
b.) To have custody of, and be responsible for, all the funds, securities and
bonds of the corporation;
c.) To deposit in the name and to the credit of the corporation, in such bank
as may be designated from time to time by the Board of Directors, all the
moneys, funds, securities, bonds, and similar valuable effects belonging to the
corporation which may come under his control;
12
d.) To render an annual statements showing the financial condition of the
corporation and such other financial reports as the Board of Directors, or the
President may, from time to time require;
e.) To prepare such financial reports, statements, certifications and other

documents which may, from time to time, be required by government rules
and regulations and to submit the same to the proper government agencies;
f.) To exercise such powers and perform such duties and functions as may be
assigned to him by the President.
Section 7. Term of Office - The term of office of all officers shall be one (1) year
and until their successors are duly elected and qualified.
Section 8. Vacancies - If any position of the officers becomes vacant by reason

of death, resignation, disqualification or for any other cause, the Board of Directors, by
majority vote may elect a successor who shall hold office for the unexpired term.
Section 9. Compensation - The officers shall receive such renumeration as the

Board of Directors may determine. A director shall not be precluded from serving the
corporation in any other capacity as an officer, agent or otherwise, and receiving
compensation therefor.
ARTICLE V
OFFICES
Section 1. The principal office of the corporation shall be located at the place
stated in Article III of the Articles of Incorporation. The corporation may have such
other branch offices, either within or outside the Philippines as the Board of Directors
may designate.
13
ARTICLE VI
AUDIT OF BOOKS, FISCAL YEAR AND DIVIDENDS
Section 1. External Auditor - At the regular stockholders’ meeting, the

external auditor of the corporation for the ensuing year shall be appointed. The external
auditor shall examine, verify and report on the earnings and expenses of the corporation.
Section 2. Fiscal Year - The fiscal year of the corporation shall begin on the
first day of January and end on the last day of December of each year.
Section 3. Dividends - Dividends shall be declared and paid out of the

unrestricted retained earnings which shall be payable in cash, property, or stock to all
stockholders on the basis of outstanding stock held by them, as often and at such times as
the Board of Directors may determine and in accordance with law.
ARTICLE VII
SEAL
Section 1. Form and Inscriptions - The corporate seal shall be determined by

the Board of Directors.
ARTICLE VIII
AMENDMENTS
Section 1. These by-laws may be amended or repealed by the affirmative vote of

at least a majority of the Board of Directors and the stockholders representing a majority
of the outstanding capital stock at any stockholders’ meeting called for that purpose.
However, the power to amend, modify, repeal or adopt new by-laws may be delegated
to the Board of Directors by the affirmative vote of stockholders representing not less
than two-thirds of the outstanding capital stock; provided, however, that any such
delegation of powers to the Board of Directors to amend, repeal or adopt new by-laws
may be revoked only by the vote of stockholders representing a majority of the
outstanding capital stock at a regular or special meeting.
14
IN WITNESS WHEREOF, we, the undersigned stockholders have adopted the
foregoing by-laws and hereunto affixed our signatures this ________day of
____________, 20______ at ____________, ____________.
___________________ ______________________
___________________ ______________________
_______________________________
15
Corporation
Session 8 – Share Capital
Explain the difference of Share Capital

from the owner’s and partner’s
capital.Understand Share Capital including
the related terms and its two
composition:(a)Legal capital (b)Share premium
Explain the types of shares (a)Ordinary
(b)Preference. Accounting for issuance of
share capital. (a)With Par value (b)Without
Par value
Mr. Leemon L. Araza

Instructor
OVERVIEW
The owners’ equity section of a corporation’s statement of financial position

is called shareholders’ equity. Shareholders’ equity has two major components
– share capital (contributed or paid-in capital) and retained earnings. Share
Capital reflects the amount of resources received by a corporation as a
result of investment by shareholders, donations or other share capital
transactions. Retained earnings (or accumulated profits/losses) is the amount
of capital accumulated and retained through the profitable operations of the
business.
Share Capital
It is the shares to be subscribed and paid in or secured to be paid in by the

shareholders, either in money, property or service, at th time of
organization of the corporation or afterwards, and upon which it is to
conduct its operations. The share, contributed or paid-in capital is further
divided into the following:
Legal Capital. Capital contributed by shareholders comes from the sale of

shares of stock. The shares of stock issued are generally referred to as
share capital. Legal capital, which must remain in the corporation for the
protection of corporate creditors.
Share Premium. It is the portion of the paid-in capital representing amounts

paid by the shareholders in excess of par. It may also result from
transactions involving treasury stocks, retirement of shares, donated
capital, share dividends and any other “gain” on the corporation’s own stock
transactions.
COMPARISON OF OWNERS’ EQUITY ACCOUNT
1|Corpor ation Ac countin g: Share Capital S.8

Illustration: Let's look at the stockholders' equity section of a balance
sheet. We'll assume that a corporation only issues common stock. The stock
has a par value of $0.10 per share. There are 10,000 authorized shares, and
of those, 2,000 shares have been issued for $50,000. At the balance sheet
date, the corporation had cumulative net income after income taxes of $40,000
and had paid cumulative dividends of $12,000, resulting in retained earnings
of $28,000.
TWO BASIC TYPES OF SHARES
Share capital is divided into transferrable share of stock. A share of stock

represents the interest or right of a shareholder in a corporation and is
evidenced by a certificate of stock. Share capital includes all types of
ownership shares in a corporation. Shareholders acquire either of the
following basic types of share capital.
Ordinary share. This share reprensents basic ownership class of the

corporation. When only one class of share is issued, it must be ordinary
share Ordinary shares are the entity’s residual equity.
Preference Share. This share gives its owners certain advantages over
ordinary shareholders. These special benefits relate either to the receipt of
dividends when declared before the ordinary shareholders (preferrred as to
dividends) or to priority claims on assets in the event of corporate
liquidation.
TERMS RELATED TO SHARE CAPITAL
Authorized Share Capital. The number of authorized shares indicates the

maximum number of shares the corporation can issue as specified in the
articles of incorporation. When a business applies for incorporation, its
approved application will specify the classes (or types) of stock, the par
value of the stock, and the number of shares it is authorized to issue.
(Shares are often issued in exchange for cash. However, shares of stock can
be issued in exchange for services or plant assets.)
To illustrate, assume that the organizers of a new corporation need to issue

1,000 shares of common stock to get their corporation up and running. They

keep in mind, however, that in one year they will need to issue additional
shares to fund a planned factory expansion. Five years from now they foresee
buying out another company and realize they will need to issue more shares at
that time for the acquisition. As a result, they decide that their articles
of incorporation should authorize 100,000 shares of common stock, even though
only 1,000 shares will be issued at the time that the corporation is formed.
Issued Share Capital. These are shares which have been sold and paid for in
full. When a corporation sells some of its authorized shares, the shares are
described as "issued." The number of issued shares is often considerably less
than the number of authorized shares.
Corporations issue (or sell) shares of stock to obtain cash from investors,
to acquire another company (the new shares are given to the owners of the
other company in exchange for their ownership interest), to acquire certain
assets or services, and as an incentive/reward for key officers of the
corporation. The "par value" of a share of stock is sometimes defined as the
legal capital of a corporation. The par value of common stock is usually a
very small insignificant amount that was required by state laws many years
ago.
Subscribed Share Capital. It is the portion of the authorized share capital

that has been subscribed but not yet fully paid.
Outstanding Share Capital. These are issued shares, which are in the hands of
the shareholders. The number of outstanding shares will equal the difference
between the issued shares and the treasury shares.
Treasury Stocks. These are issued shares acquired by the corporation but not
retired and are therefore, awaiting to be reissued at a later date.
CONSIDERATIONS FOR ISSUANCE OF SHARES
Share capital may be issued in exchange for any of the following

considerations:
1. Actual cash paid to the corporation
2. Tangible or intangible properties actually received by the corporation.
3. Labor already performed for or services actually rendered to the
corporation.
4. Previously incurred indebtedness by the corporation.
SHARE ISSUANCES FOR CASH
When the issuance of ordinary share for cash is recorded, and the issue
price is the same as the par value of the share, the par value of the shares
is credited to Ordinary shares and debited to Cash.

** With Par Value **
Issuing Share Capital at Par
Illustration: Cloud9 Co. is authorized to issue P1,000,000 ordinary shares

divided into 10,000 shares, with a par value of P100 per share. The
diversified company issued on cash basis 2,000 shares at par. The share
issuance entry will be:
Cash 200,000
Ordinary Shares 200,000
The amount of P200,000 invested in the corporation is called paid-in capital

or contributed capital. The credit to Ordinary Shares increases the share
capital of the corporation.
Issuing Share Capital Above Par
Illustration: Suppose the 2,000 shares were sold at P150 per share, the entry
follows:
Cash 300,000
Share Premium 100,000
The excess of 100,000 is not a gain. The company can neither earn a profit
nor incur loss when it issues shares to or acquires shares from its
shareholders.
** Without Par Value **
Issuing No-Par Share Capital
Illustration: Suppose Cloud9 Co. has two classes of shares – preference

shares and no-par ordinary shares. 5,000 ordinary shares were issued for
P85,000. The entry to record the issue of these no-par shares will be:
Cash 85,000
Note: When shares without par value are sold, the proceeds should be credited
to the Ordinary Shares account. Accounting for issuance of preference shares
is basically the same as that of ordinary shares. Note, however, that Section
6 of the Corporation Code of the Philippines prohibits the issue of no-par
value preference shares.

Issuing No-Par Share Capital with Stated value
Illustration: Suppose that Cloud9 Co.’s no-par ordinary shares have a stated
value of P20. The company issued 5,000 shares at P25 per share. The entry
will be:
Cash 125,000
If the no-par stock has a stated value, the excess proceeds over stated value
– in this case, P5 per share, may alternatively be credited to share premium.
Cash 125,000
WHY WOULD A STOCK HAVE NO PAR VALUE?

You might be asking yourself why a company would issue shares with no par value. Corporations do this
because it helps them avoid a liability to stockholders should the stock price take a turn for the worse. For
example, if a stock was trading at Php5 per share and the par value on the stock was Php10, theoretically, the
company would have a Php5-per-share liability.
Par value has no relation to the market value of a stock. A no par value stock can still trade for tens or
hundreds of dollars - it all depends on what the market feels the company is worth.
© 2015, Investopedia, LLC
SUBSCRIPTION OF SHARES
There are times when a corporation sells its shares directly to investors on
a subscription basis. The subscription contract is a legally binding cotract
which provides for the number of shares subscribed, the subscription price,
the terms of payment and other conditions of the transaction. A subscriber
becomes a shareholder upon subscription but the stock certificates evidencing
ownership over shares of stocks are not issued until the full collection of
the subscription.
Illustration: Assume that 5,000 shares of P10 par value ordinary share of
Cloud9 Co. were sold on subscription at P12 per share on Sept. 1, 2008 to Ms.
San Diego. Subscription installments of P24,000 and P36,000 will be due on
Sept. 16 and 30, respectively.
The related entries follow:
Subscription Receivable 60,000

Subscribed Ordinary Shares* 50,000
To record subscriptions above par.
Cash 24,000
Subscription Receivable 24,000

To record initial installment
Cash 36,000
Subscriptions Receivable 36,000
To record final installment
Subscribed Ordinary Shares* 50,000

To record issuance of stock certificates.
*The subscribed ordinary shares account represents the par value of the
subscribed shares.
Subscriptions Receivable is a shareholders’ equity account. It is presented

in the statement of financial position as a deduction from the related
subscribed ordinary shares; however, when it is collectible within one year,
this may be shown as a current asset. It is debited for the total proceeds of
the subscriptions to the ordinary shares and credited for the collections on
the subscriptions.
There are instances when a subscriber fails to settle the subscriptions in

full on the date specified in the subscription contract or in the call made
by the board of directors. In such case, the subscribed shares are declared
delinquent shares. The usual remedy is to dispose of these shares in a public
auction for the account of the delinquent subscriber. These shares will be
sold to the person who is willing to pay the “offer price” which includes the
full amount of the subscription balance plus accrued interest, cost of
advertisement and expenses of auction sale in exchange of for the smallest
number of shares. This person is referred to as the highest bidder.
Illustration: Assuming the same facts as above except that the subscriber
failed to settle part of his subscriptions in the amount of P48,000. After
complying with the legal procedures pertaining to delinquency sale, a public
auction was held. The offer price is P56,000 including P3,000 accrued
interest and P5,000 expenses of sale. Three binders are willing to pay the
offer price, namely:
Big Bang 4,300 shares

Choco Mucho 4,500 shares
Beng Beng 4,700 shares
Big Bang is the highest bidder. The 5,000 shares are deemed fully paid. Ms.
San Diego, the original subscriber, gets 700 shares and Big Bang receives
4,300 shares.

Subscribed Ordinary Shares 50,000
To record subscriptions above par

Cash 12,000
To record partial initial installment
Receivable from Highest Bidder 3,000

Interest revenue 3,000
To record accrued interest on delinquent shares

Cash 5,000
To record auction expenses
Cash 56,000
To record sale at public auction

If there is no bidder, the corporation may bid for the delinquent shares and
the total amount due shall be credited as paid in full in the books of the
corporation. These shares shall be considered as treasury shares. All the
other entries will be the same except for the following:
Treasury stock 56,000

To record purchase of own shares
SHARE ISSUANCE FOR NON-CASH CONSIDERATIONS
Issuing Shares for Assets

If share capital is issued for a non-cash consideration such as tangible
property, intangible property and services, the proceeds is recorded at an
amount equal to the following in the order of priority:
1. Fair market value of the non-cash consideration received.
2. Fair market value of the share capital issued.
3. Par or stated value of the share capital issued.
The term “fair market value” is the estimated amount that awilling seller
would receive from a financially capable buyer for the sale or exchange of
the asset in a free market. It should be determined by referring to estimated

realizable value in cash transactions of the same or similar assets, quoted
stock market prices, independent appraisals and other available evidence.
Illustration: Cloud9 Research Inc. is a publicly held corporation. Its Php5

par value is actively traded at Php8 per share. The company issues 10,000
shares of stock to acquire land recently advertised for sale at Php 90,000.
The most clearly evident value is the FAIR MARKET VALUE of the consideration
given, which is Php 80,000.
Land 80,000
To record issuance of 10,000 shares of stock in exchange for land.
Note: The first priority is fair market value of the non-cash consideration
received. However, if only the fair market value of the ordinary shares
issued is objectively determinable, then it will be the basis for recording
the acquisition of the land.
Issuing Shares for Services or Outstanding Liabilities
A corporation may issue shares in exchange for legal, accounting or other

services. These costs, which are incurred before the corporation begins
operations, include incorporation fees, legal fees, for the preparation of
the articles of incorporation, share issuance costs, underwriting fees and
commissions, cost of advertising the issue, and other expenditures necessary
for the formation of the corporation. In such case, the account Organization
Expense may be debited at an amount equal to the fair market value of such
services. Shares shall not be issued for future services.
Illustration: Cloud9, Inc. issued 800 shares of P100 par value ordinary
shares for the services. The fair market value of such services is P100,000.
The entry will be:
Organization Expense 100,000

To record issuance of 800 shares of stock in exchange for services.
TREASURY STOCKS
Corporation's own stock that has been issued, fully paid for, and reacquired
but not retired. Why???
1. To reissue the shares to officers or employees

2. To increase trading thereby enhancing market value
3. To have additional shares available for use in acquisitions of other
companies

4. To reduce the number of shares outstanding and thereby increase
earnings per share
5. To rid the company of disgruntled investors, perhaps to avoid a
takeover
Treasury stock is not an asset because the corporation may not own shares of
itself; instead, it is reported as a deduction from the total shareholders’
equity. There are two methods of accounting for treasury stocks transactions,
namely: (1) par or stated value method and (2) cost method. The cost method
is the preferred method of accounting for treasury stocks by the Accounting
Standards Council.
Stockholders’ Equity with No Treasury Stock

Before the purchase of the treasury stock, the stockholders’ equity is as
follows:
Purchase of Treasury Stock

Under the cost method, Treasury Stock is debited for the price paid for the
shares. The same amount is credited to Treasury Stock when the shares are
disposed of.
Illustration: If Mead, Inc. has 100,000 shares of 5 par value common stock
outstanding (all issued at par value) and it decides to acquire 4,000 shares
of its stock at $8 per share, the entry is:
Treasury Stock 32,000

Cash 32,0000
To record purchase of 4,000 shares of treasury stock at 8 per share.
Stockholders’ Equity With Treasury Stock

The stockholders’ equity section of Mead, Inc. after purchase of treasury
stock is as follows:

The acquisition of treasury stock REDUCES stockholders’ equity.
Disposal of Treasury Stock

Treasury stock resold
 Selling price of the shares is greater than cost

o The difference is credited to paid-in capital from treasury stock
 Selling price is less than cost
o The excess of cost over selling price is usually debited to paid-
in capital from treasury stock
 When there is no remaining balance in paid-in capital from treasury
stock, the remainder is debited to retained earnings.
Sale/Reissuance of Treasury Stock at Cost

Assume that 1,000 shares of treasury stock of Mead, Inc., previously acquired
at 8 per share, at cost on July 1. The entry is:
Cash 10,000
Tresury Stock 10,000
To record sale of P1,000 shares of treasury stock above cost.
Sale/Reissuance of Treasury Stock Above Cost

Assume that 1,000 shares of treasury stock of Mead, Inc., previously acquired
at 8 per share, are sold at 10 per share on July 1. The entry is:
Cash 10,000
Tresury Stock 8,000
Share Premium-Treasury 2,000
Note: The 2,000 credit in the entry would not be considered a Gain on Sale of
Treasury Stock but as a component of share premium.
Sale/Reissuance of Treasury Stock Below Cost

Assume instead that Mead, Inc. sells an additional 800 shares of treasury
stock on October 1 at $7 per share, the entry is:
Cash 5,600
10 | C o r p o r a t i o n A c c o u n t i n g : S h a r e C a p i t a l S.8
Share Premium-Treasury 800
Tresury Stock 6,400
Note: When treasury stock is sold below its cost, the excess of cost over
selling price is usually debited to share premium-treasury. In the absence of
any balance in this account, the “loss” is debited to retained earnings.
Retirement of Treasury Stock
The shares purchased may be subsequently retired. The Ordinary shaes account
is reduced by its par value. The number of shares issued is reduced by the
stock retired. The treasury stock account is credited at cost. Retirement may
result in a “gain” or “loss”.
With Gain on Retirement. Assume that Mead, Inc. purchased the treasury shares
for 4 per share. Observe that there is a “gain” on retirement if the cost of
treasury shares is less than par value.
Common Stock(4,000shrs.xP5 par) 20,000

Share Premium 4,000
Treasury Stock (4,000 shrs.xP4 cost) 16,000
To record retirement of treasury shares.
With Loss on Retirement. Assume that Mead, Inc. purchased the treasury shares
for 6 per share. Observe that there is a “loss” on retirement if the cost of
treasury shares is greater than par value.
Common Stock (4,000shrs.xP5 par) 20,000

Share Premium 4,000
Treasury Stock (4,000shrs.xP6 cost) 24,000
To record retirement of treasury shares.
DONATED CAPITAL
Contributions, including shares of the corporation, received from

shareholders should be recorded at the fair market value of the items
received, with the credit going to share premium.
If the donation is in the form of shares of the corporation, the account

shares premium or donated capital is credited at the time the shares are
reissued.
Illustration. Cloud9’s Food Industries received a new service car from its
major shareholder as a gift.The donated asset has a cash price of P350,000.
The entry will be as follows:
Service Vehicle 350,000

Donated Capital 350,000
To record receipt of the donated service car.
Note: Donated Capital is shown as part of share premium.
References:
*Ballada, Win & Susan Ballada.(2010). Partnership and Corporation.14th
*Weigandt, Kieso, and Kimmel. (2005). Accounting Principles, 6th Ed. Canada:
John Wiley and Sons.
*Reeve, James M, Caarl S. Waren and Jonathan E. Duchac. Principles of
Accounting. Singapore: Cengage Learning Asia Pte Ltd. (R)
*http://www.investopedia.com
(Kindly dettach & include to the papers you will submit as your seatwork)
Seatwork # 1
Roa Corporation’s articles authorized the issuance of 100,000 ordinary
shares. Roa sold the following ordinary shares during 2014.
Feb. 12 Sold 1,000 shares for P100,000

July 10 Sold 5,000 shares for P630,000
Nov. 5 Sold 7,500 shares for P1,050,000
Required: Prepare journal entries to record each issuance, assuming that:

1. The ordinary shares has a P100 par value
2. The ordinary shares has a P10 stated value
3. The ordinary shares has no-par or stated value
Seatwork # 2
Briones Inc. has the following stock outstanding on Dec. 31, 2013:
Ordinary Shares, P100 par, 100,000 shares authorized, P 4,500,000

45,000 shares issued and outstanding
Share Premium 3,600,000
The following are the transactions that took place in 2014.

March 10 Briones purchased 1,000 shares for P195 per share.
June 19 Briones sold 600 of the shares purchased on Mar. 10 for P210 per share.
Oct. 2 Briones sold the 200 shares purchased on Mar. 10 for P190 per share.
Oct. 15 Briones retired the remaining 200 shares.
Seatwork # 3
The shareholder’s equity section of Nazario Freight Express, Inc. as at Dec.
31, 2014 appeared as follows:
6% Preference Shares, P 75 par, 200,000 shares P ?

authorized, 70,000 shares issued
Ordinary Shares, P5 stated value, 500,000 shares
authorized, share issued and shares
outstanding 500,000
Share Premium-Ordinary 600,000
Retained Earnings 1,000,000
Less: Treasury Stock – Ordinary, 10,000 shares, at cost 40,000
Total Shareholders’ Equity P ?
Required:
Provide the answers to each of the following questions:
1. What is the total issue of the preference shares?
2. How may ordinary shares were issued?
3. How many ordinary shares are outstanding?
4. What was the total issue price of the ordinary shares?
5. What is the total legal capital of the corporation?
6. What is the total contributed capital of the corporation?
7. What is the total shareholders’ equity?
8. For how much per share was the treasury stock pruchased?
9. What is the amount of the required preference dividends?
ASSIGNMENT
True or False
1. The interest or right of the owner in the management of the
corporation, in its surplus profits,and upon dissolution, in the
balance of its assets after the payment of debts is share of stock.
2. When treasury stock is sold at a price below its cost, the entry record
the sale has the effect of reducing total shareholders’ equity.
3. Treasury Stock usually is recorded at par value when purchased.
4. Retained earnings is a fund of cash accumulated from profitable
operations of the business.
5. A certificate of stock is a written acknowledgment by the corporation
of an interest of a shareholder in the corporate property and
franchise.
6. When ordinary shares with par value are sold, the proceeds should be
credited to the ordinary shares account in full.
7. The par value of a share of share capital is an indication of the book
value of the share of stock.
8. When ordinary shares without par value are sold, the proceeds should be
credited to the ordinary share account.
9. The liability of a shareholder is usually limited to the shareholder’s
investment in the corporation.
10. When ordinary shares with par value are sold, the proceeds should
be credited to the ordinary shares account to the extent of the par
value of the shares.
11. Ordinary shares may be issued at a price lower than its par
value.
12. When no-par ordinary shares have a stated value, the stated value
of the shares issued normally is considered the legal capital of the
corporation.
13. The entry to record the purchase of treasury stock will cause
total shareholders’ equity to decrease by the amount of the cost of the
treasury shares.
14. The entire consideration received by the corporation for its no-
par value shares shall be treated as capital and shall not be available
for distribution as dividends.
15. Treasury stock may be either ordinary or preference share.
16. The par value of share refers to its value on the open market.
17. Preference share is considered the residual equity of a
corporation.
18. Organization cost is an asset and is usually amortized over 5
years.
19. Organization cost is a liability and is usually amortized over 3
years.
20. The sale of shares in a corporation by one shareholder to another
affects the total capital of the corporation.
21. The death of a shareholder results in the dissolution of the
corporation.
22. If share capital is issued for an outstanding liability, the fair
market value of the share capital issued should be the measure for
recording.
23. Treasury stock refer to shares reacquired by the issuing
corporation.
24. Corporations are subject to less government control and
regulation than are other forms of business.
25. The purchase of treasury stocks reduces both total assets and
total shareholders’ equity.
Problem
The account below appeared in the Dec. 31, 2014 trial balance of the Banzon
Company:
Ordinary Shares, P15 par, 20,000 shares P 270,000

authorized, 18,000 shares issued
Retained Earnings 200,000
Treasury Stock, 1,000 shares, at cost 25,000
Required: From these accounts determine the following:

1. Total authorized ordinary shares
2. Total unissued ordinary shares
3. Total issued ordinary shares
4. Ordinary shares subscribed
5. Total shareholders’ equity
6. Number of shares issued
7. Number of shares subscribed
8. Number of shares in treasury
9. Number of outstanding shares
Corporation
Session 9 – Retained Earnings
Understand the dividends in

general. Understand the different types
of dividends; Cash dividends, Property
dividends, Share dividends, Liquidating
dividends. Explain the Share splits and
summary of the effects of dividends and
share splits. Understand the dividends on
preference and ordinary shares. Prior
period errors. Retained earnings
appropriations and unappropriations.
Presentation of Statement of Retained
Earnings and Statement of Shareholders’
Equity. Understand the book value per
share.
Mr. Leemon L. Araza

Instructor
OVERVIEW
Retained Earnings represent the component of the shareholders’ equity

arising from the retention of assets generated from the profit-directed
activities of the corporation. The retained earnings account is credited with
the corporation’s profit or debited with the loss. The basic source of
retained earnings is profit. Distribution to shareholder of cash, property
and stocks from unrestricted retained earnings on the basis of all issued and
fully paid shares, and all subscribed par value shares except treasury shares
are called dividends. Dividends declarations reduce retained earnings.
The declaration and payment of dividends involve three important dates and
they are:
Date of Declaration
On the dare of declaration, the board of directors will adopt a
resolution declaring that a dividend is to be paid. The resolution will
specify the amount, type, and date of payment of this dividend. It will also
set a date of record. Cash dividends are declared solely by the board of
directors while share dividends will necessitate the concurrence of at least
2/3 of the outstanding shareholders. Journal entry is required on this date.
Retained Earnings xxx

Dividend Payable/Share Distributable xxx
Date of Record
A list of shareholders entitled to the declared dividends is prepared
at the end of record. If an investor buys a share of stock after this date,
he will not receive the dividend. The share is said to be traded ex-dividend.
No entry is required on this date.
Date of Payment
The corporation settles its liability on this date. Journal entry is
required on this date.
Dividend Payable/Share Distributable xxx

Cash/Property/Share Capital xxx
CASH DIVIDENDS
Majority of dividends distributed by corporations is paid in cash. In

declaring cash dividends, a company must have both an appropriate amount of
retained earnings and the necessary amount of cash.
Illustration: Cloud9 Inc. declared a cash dividend of P12 per share of

ordinary shares on July 1. The dividends are payable on August 1 to
shareholders of record on July 21. The company has 10,000 ordinary shares
issued of which 700 shares are held in treasury. The entries to record the
dividend declaration and payment are as follows:
1|Corporation Accountin g: Retained Earnings S.9

Cash Dividends Payable 111,600
*P12 per share (10,000 issued shares – 700 treasury shares)= P111,600
The account, cash dividends declared, may be used in place of the debit to
Retained Earnings. At the end of the accounting period, this temporary
shareholders’ equity account will be closed by debiting Retained Earnings and
crediting cash dividends declared.
Cash dividends payable 111,600

Cash 111,600
To record payment of dividend.
Cash dividends payable are reported as current liabilities in the statement

of financial position.
With the exception of treasury shares, all issued and fully paid shares, and
all subscribed par value shares are entitled to dividends when declared.
Unissued shares, subscribed no-par shares and treasury shares are not
entitled to dividends.
PROPERTY DIVIDENDS
A distribution to shareholders that is payable in non-cash assets is

generally referred to as property dividends or dividends in kind. Property
dividends should be charged to retained earnings at cost or book value of the
non-cash assets distributed.
Illustration: Cloud9 Food Industries based in Bulacan has 1,000 souvenir

items in inventory acquired at a cost of 500,000. The fair market value of
these items is 600,000. This growing food company declared as property
dividends all of these items to be distributed to its outstanding par values.

Property dividends payable 500,000
To record declaration of dividend.
Property dividends payable 500,000

Investment in stocks 500,000
To record distribution of dividend
The fair market value of the assets declared as property dividends was
ignored. Note that both cash and property dividends decrease total assets and
total shareholders’ equity.

SHARE DIVIDENDS
A corporation ay distribute to shareholders additional shares of the

company’s own share dividends. Share dividends are fundamentally different
from the cash or property dividends because share dividends do not transfer
assets to the shareholders. This type of dividend affects only the accounts
within the shareholders’ equity. Share dividends increase the total share
capital and decrease the retained earnings account.
A share dividend does not change the percentage of interest in the

corporation although total outstanding shares have increased.
Small Share Dividends

Small share dividends are dividends in which the additional shares
issued are less than 20% of the previous outstanding shares. These share
dividends are recorded by transferring from retained earnings to share
capital (ordinary shares and share premium) the fair market value of the
additional shares to be issued. In cases when the fair market value is lower
than the par or stated value, the par or stated value will be the basis for
recording.
Illustration: Cloud9 Foods is blessed with years of profitable operations for

its commitment to serve affordable and healthy food favourites.
The declaration of a 10% share dividend will require the issuance of an

additional 2,000 shares. Assume that the company’s share is being traded at
the stock exchange and that the stock market price per share is P110. The
fair market value of the shares to be distributed is P 220,000. The entries
will be:

Share Distributable 100,000
To record declaration of 10% share dividends

To record issuance of share dividends.
Retained Earnings (or the temporary account, Share Dividends Declared) is

debited for the fair market value of the share dividends. Share Distributable
is credited for the par value of the shares to be distributed and Share
Premium for the balance.
If a statement of financial position is prepared between the declaration date

and the distribution date of a share dividend, the Share Distributable
account will be shown in the shareholders’ equity immediately after the
Ordinary Shares account.

A comparison of the shareholders’ equity and outstanding shares before and
after the share dividend appears below:
Before After Increase

Dividends Dividends (Decrease)
Ordinary Shares, P50 par, 20,000 P 1,000,000 P 1,100,000 P 100,000
Shares issued and outstanding
Share Premium 200,000 320,000 120,000
Total Share Capital P 1,200,000 P 1,420,000 220,000
Retained Earnings 650,000 430,000 (220,000)
Total Shareholders’ Equity P 1,850,000 P 1,850,000 -
Shares issued and outstanding 20,000 22,000 2,000
The receipt of a share dividend does not alter the relative position of a
shareholder. If a 10% share dividend is distributed, all shareholders
increase their proportionate holdings by 10% and the total share outstanding
is increased by the same proportion. No profit is realized by the
shareholders.
Large Share Dividends

If the share dividend is 20% or more of the previously outstanding
shares such that the effect is to reduce materially the market value per
share, then only the par and stated value is credited to ordinary shares with
a corresponding debit to retained earnings.
Illustration: Assume instead Cloud9 Foods declared 20% share dividend on its
20,000 issued and outstanding P50 par value share. The company will issue
additional 4,000 shares due to the share dividend. The entries wil

To record declaration of 20% share dividends

To record issuance of share dividends
The account titles used to record a large share dividend are the same as
those for small share dividends. Note though that the balance in the account
– Share Premium remained the same; this is because large share dividends are
recorded at par value.
Before After Increase

Dividends Dividends (Decrease)
Ordinary Shares, P50 par, 20,000 P 1,000,000 P 1,200,000 P 200,000
Shares issued and outstanding
Share Premium 200,000 200,000 0
Total Share Capital P 1,200,000 P 1,400,000 200,000
Retained Earnings 650,000 450,000 (200,000)

Total Shareholders’ Equity P 1,850,000 P 1,850,000 -
Shares issued and outstanding 20,000 24,000 4,000
LIQUIDATING DIVIDENDS
Liquidating dividends are not distributions of earnings but rather returns of

capital to the investing shareholders. This type of dividend can be legally
paid only under either of the following circumstances:
1. When the corporation is under dissolution and liquidation
2. When the corporation is engaged in the exploration of natural
resources.
SHARE SPLITS
Corporations reduce the par or stated value of its share capital and issues
additional shares to its shareholders through the practice referred to as
share splits. The par or stated value per share will decrease with a
corresponding increase in the number of authorized, issued and outstanding
shares. In effect, there is no change in the balances of the shareholders’
equity accounts.
When shares are selling below a desired price or when management wishes to
take control of the company, the corporation may consider a reverse split
that can be accomplished by increasing the par or stated value of its share
and reducing the shares outstanding. There will be no journal entry required;
a memo entry is sufficient.
Illustration: Cloud9 Inc. has 10,000 P100 par value ordinary shares issued
and outstanding. The Board of Directors decided to split the share of 5-for-
1. This means that a shareholder would receive five (5) shares with a new par
value of P20 for each share held. Ordinary shares will remain unchanged at P
1,000,000. The issue and outstanding shares will now be 50,000 and the par
value reduced to P20 per share.
SUMMARY OF THE EFFECTS OF DIVIDENDS AND SHARE SPLITS

Declaration Payment of Declaration and Distribution of
of Cash Cash Small Share Large Share
Share Split
Effect On Dividends Dividends Dividends Dividends
Retained Earnings D1ecrease - Decrease Decrease -
Ordinary Shares - - Increase Increase -
Share Premium - - Increase - -
Total Shareholders’ Decrease - - - -
Equity
Total liabilities Increase Decrease - - -

Total Assets - Decrease - - -
Shares outstanding - - Increase Increase Increase
DIVIDENDS ON PREFERENCE AND ORDINARY SHARES

Preference shares enjoy preference as to dividends. When the B.O.D. declares
cash dividends, preference shareholders are entitled to dividends before
ordinary shareholders receive any distribution.
The dividend is stated as a percentage of the par value preference shares.

Thus, holders of 7% preference shares with a par value of P100 are entitled
to an annual dividend of P7 per share before any distribution is made to the
ordinary shareholders.
The corporation is not obliged to declare dividends annually. When the board
does not declare dividends, the dividends for cumulative preference shares
accumulate; these are called dividends in arrears. Preference shares may
contain one of the following combinations of features:
Beforehand, we should first define the following:
o Non-cumulative preference shares. These shares entitle the holders only

to the payment of current dividends, if when dividends are declared, to
the extent of the preference rate, before the ordinary shareholders are
paid.
o Cumulative preference shares. These shares entitle the holders to
payment not only of current dividends but also back dividends or
dividends in arrears, if when dividends are declared, to the extent of
the preference rate, before the ordinary shareholders are paid.
o Non-participating preference shares. These shares entitle the holders
only to the extent of the stipulate preference dividend.
o Participating preference shares. These shares entitle the holders to
participate with the holders of ordinary shares pro-rata in the
remainder after the ordinary shareholders have received their initial
share based on the preference rate.
Illustration: Cloud9 Inc. has the following selected accounts in its

shareholders’ equity:
12% Preference Shares, P100 par, authorized

4,000 shares, 2,000 shares issued and
Outstanding P 200,000
Ordinary Shares, P100 par, authorized 6,000
Shares, 3,000 shares issued and outstanding 300,000
The board failed to declare dividends for the past 2 years. The current
year’s results of operations gave the board reasons to declare cash dividends
of P200,000.

CASE 1. Non-cumulative and non-participating Preference Shares
Preference Ordinary Total

Outstanding Share Capital P200,000 P300,000 P500,000
Current Preference dividends:

P200,000 x 12% P 24,000 P 24,000
Remainder to Ordinary:
P200,000-24,000 = 176,000 P176,000 P176,000
Total P 24,000 P176,000 P200,000
Dividends per share P 12.00 P 58.67
In the absence of agreement, preference shares are assumed to be non-

cumulative and non-participating. This is in accordance with the provision
that each share shall be equal in all respects to every other share except as
otherwise provided by the articles of incorporation and stated in the
certificate of stock.
CASE 2. Non-cumulative and participating Preference Shares


P200,000 x 12% P 24,000 P 24,000
Current ordinary dividends
at Preference rate:
P300,000 x 12% P 36,000 P 36,000
Remainder for participation:
P200,000-24,000-36,000=140,000
Preference: 2/5 x P140,000 56,000
Ordinary: 3/5 x P 140,000 P 84,000 P140,000
Total P 80,000 P120,000 P200,000
CASE 3. Cumulative and participating Preference Shares

Preference dividends in arrears:

P200,000 x 12% x 2years P 48,000 P 48,000
P200,000 x 12% P 24,000 P 24,000
P200,000-24,000-48,000=128,000 P128,000 P128,000
Total P 72,000 P128,000 P200,000

Case 4: Cumulative and Participating preference shares.
Preference dividends in arrears:

P200,000 x 12% x 2years P 48,000 P 48,000
P200,000 x 12% P 24,000 P 24,000
Current ordinary dividends
at Preference rate:
P300,000 x 12% P 36,000 P 36,000
P200,000-24,000-36,000-48,000=140,000
Preference: 2/5 x P140,000 36,800
Ordinary: 3/5 x P 140,000 P 55,200 P 92,000
Total P 108,800 P 91,200 P200,000
PRIOR PERIOD ERRORS
Prior period errors are omissions from the other misstatements of the
entity’s financial statements for one or more prior periods that are
discovered in the current period. Errors may occur as a result of
mathematical mistakes, mistakes in applying accounting policies,
misinterpretation of facts, fraud or oversight. Examples include errors in
the estimation of depreciation, errors in inventory valuation, and omission
of accruals of revenue and expenses.
The amount of the correction of a prior period error that relates to prior
periods should be reported by adjusting the opening balances of retained
earnings and affected assets and liabilities. The correction of a prior
period is excluded from profit or loss for the period in which the error is
discovered.
If an error resulted in an understatement of profit in previous periods, a

correcting entry would be needed to increase retained earnings. If an error
overstated profit in prior periods, then retained earnings would have to be
decreased.
Illustration: In 2013, Cloud9 Inc. debited Advertising Expense and credited

Cash to record the purchase of a small parcel of land worth P250,000 to be
used as the company’s sales training venue.
Entry made: Should be:

Advertising Expense 250,000 Land 250,000
Cash 250,000 Cash 250,000
The effect of this prior period error is to overstate 2013 advertising

expense and ultimately, understate 2013 profit by the same amount. Land is

also understated by 250,000. The external auditors discovered the prior
period error in 2014. The correcting entry will be:
Land 250,000
This entry increased assets and shareholder’s equity by 250,000. Note that
the advertising expense, a temporary account, is closed to income summary and
income summary is turning in closed to retained earnings;
Advertising expense –closed to- income summary –closed to- retained earnings
Therefore, any corrections to income or expenses of the prior periods should

be made directly to the retained earnings account. The preceding analysis
purposely did not include the income tax effects of the error.
RESTRICTIONS ON RETAINED EARNINGS
A corporation may be required by law or contractual arrangements to set

aside a portion of the retained earnings for specified purposes. In addition,
the board of directors may voluntarily designate a portion of retained
earnings for future expenses, contingencies or other purposes. This portion
of the retained earnings is referred to as restricted or appropriated
retained earnings.
Illustration: Cloud9 Inc. bought 1,000 of its shares at P150,000. A portion

of the retained earnings is restricted for the cost of treasury purchased.

Appropriated Retained Earnings 150,000
To restrict retained earnings for the cost of treasury
shares purchased.
The preceding appropriation of retained earnings has no effect on assets,

total retained earnings or total shareholders’ equity. It simply communicates
that the restricted portion is not available for dividend declarations. Once
the purpose of the restriction has been served, the appropriated retained
earnings should be reversed to unappropriated retained earnings. Thus,
foregoing illustration, if the treasury stocks are subsequently reissued, the
restricted balance is reversed as follows:
Appropriated Retained Earnings 150,000

To remove restriction on retained earnings.

STATEMENT OF RETAINED EARNINGS
The retained earnings statement is normally divided into two major

sections:
o Appropriated. This section presents the beginning balance of the
retained earnings appropriated account, any additions or deductions
during the period, and ending balance.
o Unappropriated. This section shows the beginning balance of the
retained earnings unappropriated account, correction of prior period
error, profit or loss for the period, dividends, transfer to and from
the appropriated and unappropriated accounts, and the ending balance.
Cloud9 Corporation
Statement of Retained Earnings
For the Year Ended Dec. 31, 2014
Appropriated:
Balance, 1/1/14,as reported:
For plant expansion P180,000
For treasury stocks, 4/8/14 100,000
Retained Earnings Appropriated, 12/31/14 P280,000
Unappropriated:
Balance, 1/1/14, as previously reported P1,414,500
Correction of prior period error 100,000
Balance, 1/1/14,as restated P1,514,500
Add: Profit 480,000
Total P1,994,500
Less: Cash dividends declared P65,000
Share dividends declared 60,000
Transfer to Appr. for T.S. 100,000 225,000
Retained Earnings Unappropriated, 12/31/14 1,769,500
Total Retained Earnings 2,049,500
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
The statement of changes in shareholders’ equity may be prepared in columnar

format, where each column represents a major shareholders’ equity
classification.
10 | C o r p o r a t i o n A c c o u n t i n g : R e t a i n e d E a r n i n g s S.9
Cloud9 Corporation
Statement of Changes in Shareholders’ Equity
For the Year Ended Dec. 31, 2014
Preference Ordinary Share Unapprop. Approp. Treasury

Shares Shares P10 Premium – Retained Retained Preference Total
P100 par par Ordinary Earnings Earnings Shares
Balance, Jan. 1 P500,000 P1,000,000 P300,000 P150,000 - -
P1,950,000
Profit 85,000 85,000
Cash dividends on (25,000) (25,000)
Preference
Cash dividends on (40,000) (40,000)
Ordinary
Issue of Ordinary, 50,000 5,000 55,000
5,000 shares
5% Share dividend 52,500 26,250 (78,750)
on ordinary, 5,250
shares*
Purchase of (30,000) (30,000)
treasury stock
Appropriation for (30,000) (30,000)
treasury stock
Balance, Dec. 31 P500,000 P1,102,500 P331,250 P61,250 P30,000 P(30,000) P1,995,000
*The fair market value of the ordinary shares at the date of the declaration is P15 per share.
The ending balances of the accounts are presented at the bottom of the
statement. These accounts and their related balances compose the
shareholders’ equity section of the statement of financial position.
Shareholders’ Equity
Share Capital
Preference Shares – P100 par, 10,000 shares
Authorized, 5,000 shares issued and
4,750 shares outstanding P 500,000
Ordinary Shares – P10 par, 150,000 shares
Authorized, 110,250 shares issued and
Outstanding P1,102,500
Share Premium – Ordinary 331,250 1,433,750
Total Share Capital P1,933,750
Retained Earnings
Unappropriated P 615,000
Appropriated for Treasury stock 30,000 91,250
Total Share Capital and Retained Earnings P2,025,000
Less: Treasury – Preference, 250 shares at cost 30,000
Total Shareholders’ Equity P1,995,000
BOOK VALUE PER SHARE
Book value per share is the amount that would be paid on each share if the
corporation is liquidated. The amount available to shareholders is exactly
the amount reported as shareholders’ equity. When only a single class of
share is outstanding, the book value per share is computed by dividing the
total shareholders’ equity by the number of shares outstanding.
Illustration: Assume that Cloud9 has a total shareholders’ equity of P180,000
and 5,000 shares of ordinary shares outstanding. The book value per share is
P36 (P180,000/5,000 shares)
Liquidation value. The preference shareholders have the right to receive

assets equal to the par value or a larger stated liquidation value per share.
Liquidation value is the cash price or other consideration that can be
received in a forced sale of assets such as that occurring when a firm is in
the process of going out of business. Typically, the liquidation value is
less than what could be received from selling assets in the ordinary course
of business.
Illustration: Cloud9 Inc. is one of the leading firms doing highly creative
tri-media products exposures in Cebu. The shareholders’ equity section of the
company’s statement of financial position is as follows:
6% Cumulative non-participating preference shares
P1,000 par, 5,000 shares authorized, 400 shares
Issued and outstanding P400,000
Ordinary shares, P100 par, 20,000 shares authorized,
5,500 shares issued and outstanding 550,000
Share Premium – Preference 40,000
Share Premium – Ordinary 720,000
Total Shareholders’ Equity 2,560,000
Suppose that the preference shares has a liquidation value of P1,300 and
dividends are in arrears for 3 years. The computation of the preference book
value per share follows:
Preference Shares:
Liquidating value, P1,300 x 400shrs P520,000
Dividends in arrears, 6%xP400,000x3yrs. 72,000
Current dividends, 6% x P400,000 24,000
Preference Shareholders’ Equity P616,000
Book value per share, P616,000/400 shares P1,540
The illustration above showed a cumulative, non-participating preference

shares. The liquidation value of P1,300 was used instead of P1,000 par value.
Also note that the P40,000 share premium – preference, is not assigned to the
preference share equity.
The ordinary book value per share is obtained as follows:
Ordinary Shares:
Total Shareholders’ Equity P2,560,000
Less: Preference Shareholders’ Equity 616,000
Ordinary Shareholders’ Equity P1,944,000
Book value per share, P1,944,000/5,500 shares P 353.45
References:
*Ballada, Win & Susan Ballada.(2010). Partnership and Corporation.14th Edition.
Manila: Domdane Publishers.
(Kindly dettach & include to the papers you will submit as your seatwork)
ASSIGNMENT
ENTRIES FOR SHARE DIVIDENDS

Ruiz Med-care Inc, is a health insurance company. The following account
balances appear on the statement of financial position of Ruiz Med-care Inc.:
Ordinary Shares (50,000 shares authorized), P10 par, P400,000; Share Premium-
ordinary, P42,500; and Retained Earnings, P299,500. The board of directors
declared a 4% share dividend when the market price of the stock was P15 as
share.
Required:
1. Journalize the entries to record
a. The declaration of the dividend
b. The issuance of the shares
2. Determine the following amounts before the share dividend was declared:
a. Total share capital
b. Total retained earnings
c. Total shareholders’ equity
3. Determine the following amounts after the share dividend was declared:
a. Total share capital
b. Total retained earnings
c. Total shareholders’ equity
DIVIDENDS ON PREFERENCE AND ORDINARY SHARES

Rosario Corporation has outstanding 60,000 shares of 5% preference
shares with a P50 par value and 300,000 shares of P30 par ordinary shares.
During the current year, the company declared and paid a total cash dividend
of P900,000.
Required:
For each of the followings independent cases, compute the total dividends to
be received by each class of stock.
1. The preference share is non-cumulative and non-participating

2. The preference share is cumulative and non-participating with one-year
dividends to be arrears.
3. The preference share is non-cumulative and participating.
4. The preference share is cumulative and participating with no dividends
in arrears.
5. The preference share is cumulative and participating with 3 years
dividends in arrears.

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FUNDAMENTAL OF

LEEMON LOPEZ ARAZA DYCI - COA AC102

Session 1: Basic Accounting Review

Session 2: Partnership: Basic Concepts and Considerations

Session 3: Accounting for Partnership Formation

Session 4: Accounting for Partnership Operations and Financial Reporting

Session 5: Accounting for Partnership Dissolutions

Session 6: Accounting for Partnership Liquidation

Session 7: Corporation Accounting: Basic Considerations

Session 8: Share Capital

Session 9: Retained Earnings

Understand the course objective, grading

Mr. Leemon L. Araza

ACTIVITIES IN BUSINESS ORGANIZATIONS

Operating Activities. Are activities are the principal activities of the

Investing Activities. Are the acquisition and disposal of long-term assets

FORMS OF BUSINESS ORGANIZATION

PURPOSE OF BUSINESS ORGANIZATION

The Accounting Equation

All accounting entries in the books of account for an organization have a

Assets = Liabilities + Owner’s equity

1|Basic Accounting Review S. 1.

Net income: the difference between revenue and expense

BASIC FINANCIAL STATEMENTS OF BUSINESS ORGANIZATION

1. Statement of Financial Performance/Income Statement/Statement of Profit

2|Basic Accounting Review S. 1.

Debits and Credits

Figure 1 Debits and Credits vs. Account Types

Account Debit Credit

The basic summary device of accounting is the account. A separate account is

Step 1. Identification of Events to be recorded

*** End of Session 1 ***

3|Basic Accounting Review S. 1.

Assets = Liabilities + Owner’s Equity

Copyright © Houghton Mifflin Company. All rights reserved. 1

Left Side of Equals Sign Right Side of Equals Sign

2 Copyright © Houghton Mifflin Company. All rights reserved.

The following transactions occurred during September of this year.

Copyright © Houghton Mifflin Company. All rights reserved. 1

Copyright © Houghton Mifflin Company. All rights reserved. 2

Assets = Liabilities + Owner's Equity + Revenue – Expenses

Cash Accounts Payable C. Russo, Capital Professional Fees Salary Expense

Accounts Receivable Dr. Christy Russo Automobile Expense

Copyright © Houghton Mifflin Company. All rights reserved. 3

Dr. Christy Russo

Dr. Christy Russo

C. Russo, Capital, September 1, 20— $42,076.00

Dr. Christy Russo

Copyright © Houghton Mifflin Company. All rights reserved. 4

Copyright © Houghton Mifflin Company. All rights reserved. 5

Copyright © Houghton Mifflin Company. All rights reserved. 1

Copyright © Houghton Mifflin Company. All rights reserved. 2

2 Apr. 16 Cash 111 100,000.00 2

3 G. Bell, Capital 311 100,000.00 3

4 Invested cash in the business. 4

6 17 Equipment 128 28,000.00 6

7 Building 126 96,000.00 7

8 Land 124 64,000.00 8

9 Cash 111 89,000.00 9

10 Mortgage Payable 223 99,000.00 10

11 Bought Body Firm. 11

13 17 Equipment 128 3,550.00 13

14 Cash 111 710.00 14

* End of Session 1 *