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Introduction to Corporation Accounting

CORPORATION - 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 (New Corporation Code of the Philippines). A corporation is an
entity created by law that is separate and distinct from its owners and its continued
existence is dependent upon the corporate statutes of the state in which it is incorporated.

Characteristics of a Corporation
The characteristics that distinguish a corporation from proprietorships and partnerships
are:

1. Separate legal entity – A corporation is an artificial being with a personality


separate from that of its individual owners (i.e., the corporation has separate legal
existence from its owners).
2. Created by operation of law – A corporation is generally created by operation of
law. The mere agreement of the parties cannot give rise to a corporation.
3. Right of succession – A corporation continues to exist notwithstanding the
withdrawal, death, insolvency or incapacity of the individual owners. Changes in
the ownership structure do not dissolve a corporation this means that the
corporation can have a continuous life.
4. Powers, attributes, properties expressly authorized by law – Being a creation of
law, a corporation can only exercise powers provided by law and powers which
are incidental to its existence.
5. Ownership divided into shares – Proprietorship in a corporation is divided into
units known as shares of stocks. Ownership is shown in shares of capital stock,
which are transferable units.
6. Board of Directors (BOD) – Management of the business is vested in a board of
directors elected by the stockholders. The BOD is the governing body or decision-
making body of the corporation.
7. The stockholders have limited liability.
8. It is relatively easy for a corporation to obtain capital through the issuance of
stock.
9. The corporation is subject to numerous government regulations.
10. The corporation must pay an income tax on its earnings, and the stockholders are
required to pay taxes on the dividends they receive: the result is double taxation.

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Distinction between Partnerships and Corporations

Partnership Corporation
1. Formed by at least two persons. Initially formed by at least five persons.

2. Starts with agreement among partners; may Starts with the issuance of a certificate of
be formed orally. incorporation issued by SEC

3. Unlimited liability Limited liability

4. Limited life Unlimited life

5. Transfer of equity of a partner needs the Stocks can be transferred from one
consent of all the partners. stockholder to another without getting the
consent of the other stockholders.

6. Partner is an agent of the partnership. Stockholders do not act as agents of the


corporation.
Classes of Corporation
A. According to Purpose
1. Public – a corporation formed to render government service
2. Private – a corporation formed for a private purpose, aim or
benefit.
3. Quasi-public – a private corporation which is given a
franchise to perform functions of a public character.
B. According to Law of Creation
1. Domestic – a corporation that is organized under Philippine laws.
2. Foreign – a corporation that is organized under the laws of other countries.
C. According to Membership Holdings
1. Stock – a corporation in which the capital is divided into shares of stock and is
authorized to distribute dividends to the holders of such shares. A stock
certificate is a physical evidence of the shares of stock. Stock corporations are
generally profit-oriented.
2. Non-stock - a corporation in which capital comes from fees or contributions
given by individuals. No part of its income is distributed as dividends and any
profit shall be used to further the purpose(s) of the corporation. Non-stock
corporations are generally non-profit in nature.
D. According to the Extent of Membership
1. Open – a corporation whose ownership is widely held by many investors.

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2. Closely held or family – a corporation in which 50% or more of its stock is
owned by five persons or less.
Components of a Corporation
1. Incorporators – persons who
originally formed the corporation and whose names appear in the Articles of
Incorporation. They must be 5 but not more than 15 natural persons. They
should not artificial persons.
2. Stockholders or shareholders –
owners of a stock corporation.
3. Members – persons who gave fees or
contributions to a non-stock corporation.
4. Corporators – persons who compose
the corporation whether as stockholders or members.
5. Promoters – persons who undertake
the necessary steps and procedures to organize the corporation.
6. Subscribers – persons who agreed to
buy shares of stock but will pay at a later date.
7. Underwriters – persons who
undertake to sell the shares of stocks to the general public.

Advantages of a Corporate Form of Business


1. Unlimited life. The corporation’s power of succession enables it to enjoy a
continuous existence.
2. The continuity of corporate existence enables it to obtain a strong credit line.
3. Bigger source of capital may be raised because many individuals invest funds in
the corporation.
4. Stockholders enjoy limited liability. Liability of stockholders is limited to the
extent of their investment in the corporation.
5. Ease of ownership transferability - shares of stocks may be transferred without the
consent of the other stockholders.
6. The corporation has the capacity to act as a legal entity.
7. Centralized management under the Board of Directors.

Disadvantages of a Corporate Form of Business


1. Difficulty in formation. It is not easy to form because of complicated legal
requirements and high costs in its organization.
2. The limited liability of the stockholders weakens or limits its credit capacity.

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3. It is subject to more governmental control.
4. There is possibility of abuse of power by the Board of Directors because
centralized management restricts active participation by stockholders in the
conduct of corporate affairs.
5. Corporation’s activities are limited by the articles of incorporation.
6. It is subject to more taxes.

Legal Requirements in Organizing a Corporation


The process of organizing a corporation consists of three stages:
1. Promotion – makes preliminary arrangements and solicits
subscription to raise sufficient capital for the business. The following are the pre-
incorporation requirements:
a. At least 25% of the authorized capital stock as stated in the articles of
incorporation must be subscribed.
b. At least 25% of total subscriptions must be paid upon subscription.
2. Incorporation – formalizes organization of the corporation by filing with SEC the
necessary documentary requirements such as articles of incorporation and
treasurer’s affidavit attesting compliance to the pre-incorporation requirements.
Upon approval, SEC issues a certificate of incorporation, the date of which is
considered as the date of registration or incorporation.
3. Commencement of the business – the business should start its business within two
years from the date of incorporation.
Costs incurred in connection with the formation of the corporation are recorded as
an expense. Examples of organization costs are filing fees, cost of printing stock
certificates, promoters’ commission and legal fees. Any one of the following account
titles may be used in recording organization costs:
1. Pre-operating Costs
2. Organization Expense
3. Organization Costs

Articles of Incorporation
The Articles of Incorporation enumerates the powers and limitations conferred upon the
corporation by the government. It includes the following information:
1. The name of the corporation;
2. The purpose or purposes for which the corporation is formed;
3. The place of the principal office of the corporation;
4. The term of existence of the corporation, not exceeding 50 years;

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5. The names, nationalities and addresses of the incorporators;
6. The names of the directors who will serve until their successors are duly elected
and qualified in accordance with the by-laws;
7. The authorized capital stock, the classes of stocks to be issued and the number of
each class of stock indicating the par value if there is any;
8. The amount of subscription to the capital stock, the names of the subscribers and
the number of shares subscribed by each;
9. The total amount paid on the subscriptions and the amount paid by each
subscriber on his subscription.

By-Laws
The by-laws of a corporation contain provisions for the internal administration of the
corporation. The by-laws should be filed within one month from the date of issuance of
the certificate of incorporation. The by-laws normally include the following:
1. The date, place and manner of calling the annual stockholders’ meeting;
2. The manner of conducting meetings;
3. The circumstances which may permit the calling of special meetings of the
stockholders;
4. The manner of voting and the use of proxies;
5. The manner of electing the directors;
6. The term of office of the directors;
7. The authority and duties of the directors;
8. The manner of selecting the corporate officers;
9. The procedures for amending the articles of incorporation and by-laws.

Corporate Books and Records


The corporation generally maintains the following books of accounts and records:
1. Journals and Ledgers;
2. Minute books for meetings of stockholders;
3. Minute books for meetings of Board of Directors;
4. Stock and Transfer book - contains record of all stock, the names of stockholders
or members alphabetically arranged; the installment paid and unpaid on all stocks,
for which subscription has been made, any sale or transfer of stock.

Classes of Stock

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1. Par value –a share of stock that is given a definite or fixed value in the articles of
incorporation.
2. No par value – a share of stock that has no fixed value; it may not be issued for
less than P5.00.
3. Common stock –the basic issue or ordinary type of shares. The common stock
entitles the holder to the following basic rights:
a. Right to vote in stockholders’ meeting;
b. Right to share in corporate profits (dividends);
c. Right to share in corporate profits upon liquidation;
d. Right to purchase additional shares of stocks in the event that the
corporation increases its capital stock (pre-emptive right).
4. Preferred stock - entitles the holder to some specific preferences over the common
stock such as:
a. Preference as to payment of dividends;
b. Preference as to distribution of assets upon liquidation.

Terms Commonly Used in Corporation Accounting


1. Authorized shares – - refer to the maximum number of shares which may be
issued by a corporation as set forth in the articles of incorporation.
2. Issued shares – represent shares which were issued to stockholders in the past
which at present may or may not be in the hands of stockholders.
3. Unissued shares – shares which have never been issued and are available for
issuance in the future.
4. Outstanding shares – the total shares of stocks issued to subscribers or
stockholders, whether or not fully or partially paid (as long as there is a binding
subscription agreement) except treasury shares.
5. Treasury shares - shares which have been issued and fully paid for but
subsequently reacquired by the issuing corporation by purchase or by donation..
6. Subscribed shares – shares which investors have contracted to acquire.
7. Subscription -is a contract between a subscriber (buyer of stock) and a corporation
(issuer of stock) whereby the former purchases shares of stocks of the latter with
the payment to be made at the later date.
8. Certificate of stock - a written acknowledgment by the corporation of the
stockholder’s interest in the corporation and its net assets.
9. Paid in capital in excess of par value/stated value - this account is credited for
contribution in excess of par or stated value.

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10. Pre-emptive right - the right of a stockholder to maintain his ownership interest in
the corporation trough purchase of additional shares when new capital is issued.

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Unit 7
ACCOUNTING FOR CORPORATION FORMATION
Accounting for Share Capital/Transactions

Forming a Corporation
The formation of a corporation involves (a) filing an application with the
Securities and Exchange Commission (SEC), (b) paying an incorporation fee, (c)
receiving a charter (articles of incorporation), and (d) developing by-laws.
a. Costs incurred in forming a corporation are called organization costs.
b. These costs include fees to underwriters, legal fees, state incorporation fees,
and promotional expenditures.
c. Organization costs are expensed as incurred.

Ownership Rights of Stockholders


When chartered, the corporation may begin selling ownership rights in the form
of shares of stock. Each share of common stock gives the stockholder the following
ownership rights:
a. To vote for the board of directors and in corporate actions that require
stockholder approval.
b. To share in corporate earnings through the receipt of dividends.
c. To maintain the same percentage ownership when additional shares of
common stock are issued (preemptive right).
d. To share in assets upon liquidation (residual claim).

Stock Issue Considerations


Authorized stock is the amount of stock a corporation is allowed to sell as indicated by
its charter.
a. The authorization of capital stock does not result in a formal accounting entry.
b. The difference between the shares of stock authorized and the shares issued is
the number of unissued shares that can be issued without amending the charter.

A corporation has the choice of issuing common stock directly to investors or


indirectly through an investment-banking firm (brokerage house). Direct issue is typical
in closely held companies, whereas indirect issue is customary for a publicly held
corporation.

Par value stock is 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.

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

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The primary objectives in accounting for the issuance of common stock are to (a)
identify the specific sources of paid-in capital and (b) maintain the distinction between
paid-in capital and retained earnings.

When par value common stock is issued for cash, the par value of the shares is
credited to Common Stock and the portion of the proceeds that is above or below par
value is recorded in a separate paid-in capital account.

When no-par common stock has a stated value, the stated value is credited to
Common Stock. When the selling price exceeds the stated value, the excess is credited to
Paid-in Capital in Excess of Stated Value. When no-par stock does not have a stated
value, the entire proceeds are credited to Common Stock.

Basic Capital Stock Transactions


There are 5 basic capital stock transactions:
1. Authorization –records the maximum number of shares a corporation is
authorized to issue.
2. Sale of stocks – a stockholder buys stocks and pays immediately in full. Stock
certificate is issued to the stockholder.
3. Subscription –a subscriber enters into a contract to buy shares of stock.
4. Collection – a subscriber pays his subscription either partially or in full.
5. Issuance of certificate – if a subscription is fully paid, a stock certificate is issued
to the subscriber.

Capital Stock
Capital stock may be paid by the stockholder or subscriber in the form of:
1. money/cash
2. property – record the value of the property using the following amounts:
a. fair value of the property received
b. fair value of the shares of stock, whichever is clearly determinable;
c. par value of the shares of stock
3. labor or services – record the cost of the labor or services using the fair value of
the services rendered.
Important:
When shares of stock are issued for services or non-cash assets, cost
is either the fair market value of the consideration given up or the
consideration received, whichever is more clearly determinable (Weygant, et
al, 2006).

Capital stock may be issued


1. at par
2. at a premium – at an amount more than the par value. The amount in excess of par
value is treated as additional paid in capital.

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Capital stock cannot be issued at a discount or an amount less than par under the
Philippine setting.
When the value assigned to the asset received is greater than the par value times the
number of shares issued, such issuance is called watered stock. The overstatement is
done to comply with the requirement of the law that the stock should not be issued at less
than its par value. When the value of the asset received is understated, the stock is said to
contain secret reserves.

Accounting Methods to Record Capital Stock Transactions


1. Memo entry method
2. Journal entry method

Pro-forma Entries – Par Value Stock Subscribed or Sold at Par


Transaction Memo Entry Method Journal Entry Method
Authorization Authorized to issue _____ shares with a Unissued capital stock xxx
par value of P___. Authorized capital stock xxx

Sale Cash xxx Cash xxx


Capital stock xxx Unissued capital stock xxx

Subscription Subscriptions receivable xxx Subscriptions receivable xxx


Subscribed capital stock xxx Subscribed capital stock xxx

Collection Cash xxx Cash xxx


Subscriptions receivable xxx Subscriptions receivable xxx

Issuance of Subscribed capital stock xxx Subscribed capital stock xxx


certificate Capital stock xxx Unissued capital stock xxx

Pro-forma Entries – Par Value Stock Subscribed or Sold at a Premium


Transaction Memo Entry Method Journal Entry Method
Authorization Authorized to issue _____ shares with Unissued capital stock xxx
a par value of P___. Authorized capital stock xxx

Sale Cash xxx Cash xxx


Capital stock xxx Unissued capital stock xxx
Additional paid in capital xxx Additional paid in capital xxx

Subscription Subscriptions receivable xxx Subscriptions receivable xxx


Subscribed capital stock xxx Subscribed capital stock xxx
Additional paid in capital xxx Additional paid in capital xxx

Collection Cash xxx Cash xxx


Subscriptions receivable xxx Subscriptions receivable xxx

Issuance of Subscribed capital stock xxx Subscribed capital stock xxx


certificate Capital stock xxx Unissued capital stock xxx

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Special Notes:

1. The Subscription Receivable account title is always recorded at subscription prices


computed as follows:
Subscriptions receivable = subscribed shares x subscription price
2. Subscribed Capital Stock and Capital Stock accounts are always recorded/credited
at par value.
3. Paid in Capital in Excess of Par is recorded/credited at amount in excess of par
computed as follows:
Paid in capital in excess of par = (Subscription price – par value) (subscribed shares)

Accounting for Two Classes of Stock


The two classes of stock are common stock and preferred stock. Common stock entitles
the holder to the four basic rights of a stockholder. Preferred stock is generally issued
with par value and with a dividend rate. Voting right is frequently given exclusively to
common stockholders. The pro-forma entries to record capital stock transactions for two
classes of stock are the same. However, the account titles must be labeled as to whether
they are common or preferred. The following account titles may be used.

Common Preferred

Subscriptions receivable – common Subscriptions receivable – preferred


Subscribed common stock Subscribed preferred stock
Additional paid-in capital – common Additional paid-in capital – preferred
Common stock Preferred Stock

Accounting for No Par Shares


No par shares do not have a definite or fixed value.
1. No par shares are recorded using the memo entry method only.
2. The entire consideration received by the corporation for its no par value shares
shall be treated as capital and shall not be liable for distribution as dividends.
3. Preferred shares which are preferred as to assets can be issued only with par
value.
4. Banks, trust companies, public utilities, buildings and loan associations, insurance
companies cannot issue no-par stocks.
5. No par value shares may not be issued at an amount less than P5 per share.
6. While no par value shares do not carry a nominal value in the certificate, a selling
price may be assigned. This value is called stated value. Stated value should not
be less than P5 per share.

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Pro-forma Entries: No Par Value Stock (Memo Entry Method)

Transaction No Stated Value With Stated Value


Authorization Authorized to issue _____ shares, no Authorized to issue _____ shares, no
par. par with a stated value of P___.

Sale Cash xxx Cash xxx


Capital stock, no par xxx Capital stock, no par xxx
Paid in capital in excess
of stated value xxx

Subscription Subscriptions receivable xxx Subscriptions receivable xxx


Subscribed capital stock xxx Subscribed capital stock xxx
Additional Paid in capital-
Pxx stated value xxx
Collection Cash xxx Cash xxx
Subscriptions receivable xxx Subscriptions receivable xxx

Issuance of Subscribed capital stock xxx Subscribed capital stock xxx


certificate Capital stock, no par xxx Capital stock, no par xxx

Incorporating a Partnership
A partnership may incorporate after considering the many advantages of a corporate form of
business. It is advisable that new set of books is used by the newly formed corporation.

Steps or procedures in converting a partnership into corporate form of business


Books of the Partnership Books of the Corporation
1. Finish the accounting cycle. 1. Record authorized capital sock.
2. Revalue the assets and liabilities using 2. Record the subscription of incorporators.
the Capital Adjustment account.
3. Close the balance of the Capital 3. Record the transfer of the assets and
Adjustment account to the partners’ liabilities of the partnership to the
capital accounts in accordance with corporation. This serves as the payment
their profit and loss ratio. of the subscription of the partners who
became incorporators.
 Accounts receivable is transferred
at gross amount together with the
allowance for bad debts.
 Depreciable assets are transferred at
net carrying amount.
4. Close the accounts of the partnership 4. Record the issuance of stocks to
except the capital accounts. incorporators.
5. Record the receipt of stocks.

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6. Record the distribution of stocks.
Pro-forma Entries: Books of the Partnership
a. Adjust the existing partnership books
Date P AR T IC UL AR S P/R DEBIT CREDIT
Increase in the asset value with no contra-asset account
Asset X X X X
Capital Adjustment X X X X

Decrease in the asset value with no contra-asset account


Capital Adjustment X X X X
Asset X X X X

Increase in the asset value with contra-asset account


Contra-asset X X X X
Capital Adjustment X X X X

Decrease in the asset value with contra-asset account


Capital Adjustment X X X X
Contra-asset X X X X

Close Capital adjustment account withdedit balance


Rose, Capital X X X X
Guada, Capital X X X X
Cpital Adjustment
X X X X
Close Capital adjustment account with credit balance
Capital Adjustment X X X X
Rose, Capital X X X X
Guada, Capital X X X X
Note: These adjusting entries are similar to year-end adjustments. The only difference is that the
Capital Adjustment account replaces all the nominal accounts which is eventually
closed to the individual capital accounts of the partners.

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b. Close all the ledger accounts with balances except the partners'
capital account and debit "Receivable from Name of Corporation
Date PAR TIC ULAR S P/R DEBIT CREDIT

Receivable fron Name of Corporation X X X X


Liabilities X X X X
Allowance for bad debts X X X X
Accumulated depreciation - PPE X X X X
Assets X X X X
To record the transfer of assets and liabilities
to the newly formed corporation.

c. Record the recipt of stocks from the newly formed corporation


Date PAR TIC ULAR S P/R DEBIT CREDIT
Stocks of Name of Corporation X X X X
Receivable from Name of Corporation X X X X
To record receipt of stock certificates

d. Record the distribution of stocks to the partners.


Date PAR TIC ULAR S P/R DEBIT CREDIT
Rose, Capital X X X
Guada, Capital X X X X
Stocks of Name of Corporation X X X X
To record receipt of stock certificates

Note: The debits to the partners’ capital accounts represent their final capital balances

Pro-forma Entries: Books of the New Corporation

Authorization Authorized to issue _____ shares with


a par value of P ___.

Subscription Subscriptions receivable xxx


Subscribed capital stock xxx

Transfer of partnership Assets xxx


assets and liabilities Liabilities xxx
Allowance for bad debts xxx
Subscriptions receivable xxx

Issuance of stock Subscribed capital stock xxx


certificates Capital stock xxx

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Accounting for Delinquent Subscription

There are instances when a subscriber cannot pay in full the amount he subscribed
to. Payment of the balance on subscription may either be specified in the contract of
subscription or in lieu thereof may be subject to call by the Board of Directors.

According to the Corporation Code of the Philippines, if


within thirty (30) days from the said date, no payment is
made; all stocks covered by said subscription shall thereupon
become delinquent and shall be subject to sale.

When a subscriber fails to pay his subscription on the call date, the corporation sends
several notices to remind him of his obligation. If no payment was made by the
subscriber, his subscription is declared as delinquent subscriptions and the subscriber is
called a defaulting subscriber. And these delinquent stocks are offered for sale in a
public auction.

1. The sale of the delinquent stocks is advertised to have possible buyers/bidders.


All expenses incurred relating to the sale of the delinquent shares will be charged
or debited to Receivable from Highest Bidder account since this amount will
eventually be collected to the highest bidder together with the unpaid balance of
the subscription.
2. An auction sale is conducted where a highest bidder is chosen.
3. The sale of the delinquent subscription is issued to the highest bidder.
4. The highest bidder is the one who is willing to pay the unpaid balance of the
subscription plus accrued interest plus all expenses related to the sale and who is
willing to receive the least/smallest number of shares.
5. Once the subscription is fully paid, all subscribed shares are issued. Shares are
first given to the highest bidder. The excess shares are given to the defaulting
subscriber.
6. If there is no bidder, all of the delinquent shares will be issued in the name of the
corporation. Such shares are considered treasury shares. The defaulting
subscriber does not get any share of stock.

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Pro-forma Entries using the Short Method of accounting for delinquent stocks

a. Record the subscription

Date P A RTIC UL A RS P/R DEBIT CREDIT

Subscription receivable X X X X
Suscribed capital stock X X X X

b. Record partial collection


Cash X X X X
Subscription receivable X X X X

c. Corporation sends several notices but no payment was made by the subscriber
No entry

d. The corporation incurred costs related to the selling of the delinquent shares
Receivable from highest bidder X X X X
Cash X X X X

e. The highest bidder pays and corresponding stock certificates are issued
Cash X X X X
Subscribed capital stock X X X X
Receivable from highest bidder X X X X
Subscriptions receivable X X X X
Capital stock X X X X

OR
f. If there is no bidder at all
Treasury stock X X X X
Subscribed capital stock X X X X
Receivable from highest bidder X X X X
Subscriptions receivable X X X X
Capital stock X X X X

Illustrative problem:

Assume that Joseph subscribed 250 shares of Common Stock at P25.00 (P20.00 is
the par value). After paying 50% on his subscriptions, he defaulted. Due process was
taken and the shares were declared delinquent. Advertising and other cost including
those advances made by the corporation amounted to P500.00

At the public auction, bids from Mary, Clare and Luisa were received. Mary bid
230 shares; Clare for 240; and Luisa for 245 shares. The highest bidder paid the
amount due and stock certificate was issued by the corporation.

REQUIRED: Record the above transactions.

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