ACCOUNTING FOR CORPORATION

CHAPTER 6: CORPORATION FORMATION

AND SHAREHOLDER’S EQUITY

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.
➔ (Section 2 of the Revised Corporation Code of the Philippines) revised February 2019 under
Republic Act 11232.
➔ These laws describe the requirements for: Incorporation, Issuance of shares, limitations on
dividends, Definition of legal capital, and procedures for retirement of stocks, among others.

Attributes of a Corporation:

❏ Artificial Being
❏ Legal Personality
❏ Perpetual Existence
❏ Corporation Ownership
❏ Limited Liability -
❏ Transferability of Interest

(PS: kindly read the ADVANTAGES AND DISADVANTAGES OF CORPO, pages 142-143.)

● SHAREHOLDERS - owners of a corporation, or corporators in a stock corporation. It may be

a natural person, or a juridical entity like a partnership or a corporation. An investor buys shares
of stock to become a shareholder
● BOARD OF DIRECTORS - responsible for the overall supervision of the firm. Has the final
authority on policy making and control of corporate activities.
● PRESIDENT - usually called the Chief Executive Officer or CEO and the other officer.
● VICE PRESIDENT - who are given specific areas of responsibility as managers of the
following department: production, finance, marketing and human resources.

Kinds of Corporation:

● PRIVATE CORPORATION - is one owned and organized for a private purpose or

objective.
❖ Stock Corporation
❖ Non - stock Corporation
➔ Corporation Code of the Philippines is the general law by and under whose authority
private corporations are created.
● PUBLIC CORPORATION - is a government corpo. organized for the accomplishment
of its public functions such as the national gov’t, provincial, city pr municipal gov’t.

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● CLOSE CORPORATION - is a family corporation or one which stock is held by a

selected few and not open to any person.
● OPEN CORPORATION - is one where the stock is listed in the stock market available
for purchase by any one person or entity.

Kinds of Stocks:

● AS TO VALUE:
❖ Par Value Stock - fixed value and minimum basis for the amount of contribution
of a shareholder. (Stock can be issued at par and above par)
❖ No Par Value Stock - one without a designated value in stock certificate but it
cannot be sold less than P5.00.

● AS TO RIGHT:
❖ Ordinary Share/Common Stock - this entitles the owner to a pro rata dividend
without any priority or preference over any other stockholders.
➔ The rate of dividend is not fixed and depends upon the availability of net
profit.
➔ Dividend on equity shares is paid only after the preference dividend has
been paid.
➔ Equity share capital cannot be paid before preference capital.
➔ The bonus shares and rights shares can be issued to existing equity
shares.
➔ Any equity shareholder can vote on all matters.
➔ These shares cannot be converted.
➔ There is no provision to pay arrears of dividend.
➔ Equity shareholders have the right to participate in management.
❖ Preference Stock/Preferred Stock - class of stock with preferential rights or
claims over the common stock.
➔ Entitled to a fixed rate of dividend
➔ Dividend on preference shares is paid in priority to the equity shares.
➔ Have preference as regards to refund of capital over equity capital.
➔ Redeemable Pre. share are redeemed by the company on expiry of the
stipulated period.
➔ A company cannot issue bonus shares and rights shares to preference
shareholders.
➔ Voting right of preference shares is restricted.
➔ These shares can be converted.
➔ Arrears of dividend may accumulate in certain cases.
➔ No right to participate in management.

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● LEGAL CAPITAL - or minimum permanent, represents the minimum assets of the corpo which
cannot be distributed to the shareholders in the lifetime of the corpo.
➔ Investment at PAR VALUE represents legal capital. All proceeds from the issue of no par
value shares are treated as legal capital.
➔ A doctrine holding that corporate assets are held as a trust fund for the benefit of
shareholders and creditors and that corporate officers have a fiduciary duty to deal with
them properly.

(PS: kindly read RIGHTS OF SHAREHOLDERS, INCORPORATION REQUIREMENT.

ARTICLES OF INCORPORATION and CORPORATE RECORDS, pages 145-146.)

● AUTHORIZED SHARE CAPITAL - represents the maximum number of shares or amounts the
corporation is allowed to issue.

● STOCK SUBSCRIPTION - it is an agreement to purchase shares of stock and states the

number of shares being subscribed, the sub. price, and the terms of payment and call dates.
➔ In the absence of FIXED CALL DATES, payment is made upon call by the BOD.

● SHARE CAPITAL - this represents the amount paid in by the shareholders whether in cash,
property or service and for which a certificate of stock is issued as evidence of stock ownership.

● CERTIFICATE OF STOCK - written acknowledgment by the corporation of the shareholder’s

interest in the corpo and its net assets.

● ORGANIZATION EXPENSES - these are called organization costs or pre-incorporation costs

and are to be recorded as organization expenses.
➔ Shares of stocks may be sold directly to the shareholders or indirectly through a
brokerage firm or stock barrier.

SHAREHOLDER’S EQUITY

Assets = Liabilities + Shareholder’s Equity

Parts of Shareholder’s Equity:

❏ Contributed/Paid in Capital - represents total contributions made by the shareholders.
➔ The “capital” (needed investment) of the corporation is divided into units called
shares of stocks.
➔ The shareholder’s equity over the corporation is called Share Capital or Capital
Stock.
❏ Accumulated Earnings/Retained Earnings - represents accumulated profit earned or
losses incurred in the operation of the business.
➔ Against which dividends are drawn.

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➔ Distribution of profit (dividends) to all shareholders can only be made upon

declaration by the Board of directors.

(PS: kindly read the MOVEMENT OF STOCKS and the ACCOUNTING FOR SHARES OF
STOCKS, pages 153-154.)

ACCOUNT TITLES used for Stock Transactions:

❏ Share Capital - for a par value stock, credited at the par value when shares sold or
subscribed have been fully collected.
➔ Credited for the total amount collected
❏ Subscription Receivable - debited at the subscription price based on the number of
shares subscribed and credited to decrease when it is collected.
➔ If there is no call date, it is treated as a contra shareholder’s equity account
deducted from Subscribed Share Capital to arrive at Paid In or Contributed
Capital.
❏ Subscribed Share Capital - credited for the total par value of the shares subscribed and
debited when subscription has been fully collected.
➔ If no par, it is credited for the total subscription price, similar to Share Capital.
❏ Paid in Capital In Excess of Par - credited for contribution in excess of the par value.
❏ Treasury Shares - debited for the shares purchased by the corporation from the shares it
has originally issued out.

➢ The first section of the shareholder’s equity will appear as follows for par value shares:

Paid In Capital
Share Capital PXX
Subscribed Share Capital XX PXX
Additional Paid in Capital
Paid in Capital in Excess of Par XX
Total Contributed Capital PXX

TAKE NOTE:
➔ Asset contribution may be in the form of cash, property or service.
➔ Following the COST PRINCIPLE, properties must be recorded at its fair market value or
the FMV of the shares to be issued whichever is more clearly determinable.
➔ Services must be recorded at its billed price.
➔ For par value stock, Share Capital and Subscribed Share Capital must be recorded at the
PAR VALUE. Share Capital is CREDITED when stock certificate is issued otherwise the
title should be Subscribed Share Capital.
➔ Stock Certificate is issued ONLY when the shares are fully paid.

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 ACCOUNTING FOR CORPORATION

➔ Excess contribution is recorded as an ADDITIONAL PAID IN CAPITAL account, Paid

in Excess of Par or Share Premium.
➔ Organization Expense, being a NOMINAL account, is charged against
ACCUMULATED PROFIT or RETAINED EARNINGS.
➔ Subscription Receivable is a CURRENT ASSET when it is callable within “n” days. If
callable LONGER THAN ONE YEAR, it is presented as a NON CURRENT ASSET
account.
➔ When a subscription is NOT ON CALL, it would be as CONTRA SHAREHOLDER’S
EQUITY account decreasing the subscribed share capital stock.
➔ All contributions are considered Legal Capital for no par value stock.

(PS: Check page 159 for further discussion.In addition, read STOCK TRANSFER, STOCK AND
TRANSFER BOOK, page 167)

_____________________________________________________________________________________

ACCOUNTING RULES

❏ In Recording Share Capital Transactions, always use the point of view of the Corpo.

Transaction: ABC Corporation issued 1000 shares , P100 par at P120,000 to Mr. Cerdena.
Books of Shareholder (Mr. Cerdena):
Investment in ABC Corp. 120,000
Cash 120,000

Books in Issuing Corp (ABC):

Cash 120,000
Share Capital 100,000
Share Premium 20,000

❏ There are Two Methods of Accounting for Par Value Share Capital
➔ Memorandum Entry Method
➔ Journal Entry Method

❏ When shares of stock are issued, it should always be recorded at PAR VALUE. The par
value is the minimum amount by which the share can be issued to prospective shareholders.

Transaction: ABC Corporation issued 10 shares at P100 par.

Cash 1,000
Share Capital (10 sh x P100 par.) 1,000

❏ When shares of stock are issued above the par, recognize a SHARE PREMIUM for excess
of par value.

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 ACCOUNTING FOR CORPORATION

Transaction: ABC Corporation issued 10 shares at P110 par.

Cash 1,100
Share Capital (10 sh x P100 par) 1,000
Share Premium (10 sh x 10 par) 100

❏ Properties must be recorded at FAIR MARKET VALUE (fmv) or FMV of the shares to be
issued whichever is determinable.

Transaction: Aug. 1 - ABC Corporation bought equipment with a FMV of P52,000 by issuing
shares of stock, 1000 shares, P50 par value.
Equipment 52,000
Share Capital (1000 sh x P50) 50,000
Share Premium 2,000

Aug. 5 - Rendered architectural service billed at P75,000 in exchange for 1000

shares, P50 par value.
Architectural Service Expense 75,000
Share Capital (1000 sh x P50) 50,000
Share Premium 25,000

Aug.10 - Issued 400 shares of ordinary shares, P100 par, with an FMV of P50,000, in
exchange for an equipment.

Equipment 50,000
Ordinary Shares (400 sh x P100) 40,000
Share Premium 10,000

❏ If there are two or more classes of stock issued, namely: PREFERENCE SHARES and
ORDINARY SHARES, these have to be recorded separately.
Transaction: ABC Corporation issued for cash, P23,000, Preference, P20 par, 1000 shares;
Ordinary, P15 par, 100 shares.
Cash 23,000
Preference Shares (1000sh x 20) 20,000
Ordinary Shares (100sh x 15) 1,500
Share Premium (23,000-21,500) 1,500

❏ Subscription Receivable is recognized at subscription price (sp) which may be at par or above par,
and broken down into preference and ordinary subscriptions.

Transaction: June 2 - Moreno subscribed to 100 preference shares, P100 par for P110 and to 50 ordinary
shares, P80 par for P82, payable on June 30.
June 30 - Moreno paid in full the above subscription and issued stock certificate)
Entry: 6/2- Subscription Receivable- Preference (100shx P110sp ) P11,000

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 ACCOUNTING FOR CORPORATION

Subscription Receivable-Ordinary (50shxP 82 sp). 4,100

Subscribed Preference Share (100shxP100par) 10,000
Subscribed Ordinary Share (50shx P80par). 4,000
Share Premium(P15,100- P14,000) 1,100
June 30 -
Cash. 15,100
Subscription Receivable-Preference 11,000
Subscription Receivable-Ordinary 4,100
to record collection of payment of subscribers.

Subscribed Preference Share 10,000

Subscribed Ordinary Share. 4,000
Preference Share 10,000
Ordinary Share 4,000

to issue stock certificates.

❏ Subscription Receivable and Subscribed Share Capital

➔ If there is no NO CALL DATE

Subscribed Share Capital P 40,000

Less: Subscription Receivable 2,000
Subscribed Share Capital- net P 38,000

❏ Only 2 Difference of Memorandum Entry and Journal Entry (Recording of

Authorization of Issuance of stocks and Issuance of stock certificate)

Transaction: ABC Corporation is authorized to issue: Preference Shares, P100 par, 5000
shares and Ordinary Shares, P10 par, 1000 shares.
MEMORANDUM ENTRY:
➔ Authorized to issue Preference, P100 par, 5000 shares, P500,000 and ordinary
shares P10 par, P10,000.
JOURNAL ENTRY:
Unissued Preference Share 500,000
Unissued Ordinary Share 10,000
Authorized Preference Share 500,000

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 ACCOUNTING FOR CORPORATION

Authorized Ordinary Share 10,000

Transaction: Subscribed to 3,000 Preference at P100 and 600 ordinary at P11.

MEMORANDUM ENTRY:
Subscription Receivable - Preference 300,000
Subscription Receivable - Ordinary 6,600
Subscribed Preference Share 300,000
Subscribed Ordinary Share 6,000
Share Premium 600
JOURNAL ENTRY:
Subscription Receivable - Preference 300,000
Subscription Receivable - Ordinary 6,600
Subscribed Preference Share 300,000
Subscribed Ordinary Share 6,000
Share Premium 600

Transaction: Collected in full the above subscriptions and issued corresponding stock
certificates.

MEMORANDUM ENTRY:
Cash 306,000
Subscription Receivable - Preference 300,000
Subscription Receivable - Ordinary 6,600

Subscribed Preference Share 300,000

Subscribed Ordinary Share 6,000
Preference Share 300,000
Ordinary Share 6,000
JOURNAL ENTRY:
Cash 306,000
Subscription Receivable - Preference 300,000
Subscription Receivable - Ordinary 6,600

Subscribed Preference Share 300,000

Subscribed Ordinary Share 6,000
Unissued Preference Share 300,000
Unissued Ordinary Share 6,000
For stock issuance.

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 ACCOUNTING FOR CORPORATION

______________________________________________________________________________

CHAPTER 7: ADDITIONAL EQUITY TRANSACTIONS

INCORPORATION A PARTNERSHIP

● Partnership → Dissolve → Corporation (further discussed in partnership accounting)

● (Revised Corporation Code of the Philippines) It permits that an individual may now form a
ONE-PERSON corporation- REASON: to make it easier for small to medium-sized business
owners to incorporate, thus providing a viable alternative to sole proprietors. EXEMPTIONS:
natural persons must be of legal age and the majority must be residents of the philippines (Sec. 10
of the Corporation Code).
● The revised code took out the minimum capital stock requirement for stock corporations, unless
specifically provided by special law, to make it easy for small to medium-sized businesses to
incorporate. It is stated that at least 25% of the authorized capital stock must be subscribed and at
least 25% of these subscriptions must be paid. The Corporation Code does not mention any
minimum authorized number of shares for as long as the paid up capital is not less than P5,000.
● The assets and liabilities of a partnership have to be adjusted and revalued before these are
transferred to the corporate book.

Pro-Forma Illustration for Incorporation:

1. To record authorization Authorized to issue 100,000 common shares with a par

value of P50.

2. To record the assets and liabilities

transferred to the corporation and
Cash 350,000
the issuance of common shares
Accounts Receivable 500,000
with par value of P50 to the
Inventories 675,000
incorporators
Furniture and Equipment 350,000
Allowance for Bad Debts 25,000
Accounts Payable 100,000
Notes Payable 200,000
Share Capital 1,500,000

3. To record the cash received from

the other incorporators for 20,000
Cash 1,000,000
more shares issued at par
Share Capital 1,000,000

TWO CLASSES OF STOCK WERE ISSUED

LEGAL CAPITAL

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 ACCOUNTING FOR CORPORATION

DELINQUENT SHARES

TREASURY SHARES
● These are the corporation’s own shares
● These have been issued to shareholders as fully paid with corresponding stock certificates.
● These have been reacquired by the issuing corporation from shareholders.
● These shares will not be retired
● These shares have no voting rights and no dividend rights.

COST METHOD-TREASURY SHARES

PAR VALUE METHOD

RETIRED SHARES

DONATED SHARES

SHAREHOLDERS EQUITY SECTION OF A CORPORATION BALANCE SHEET (FORMAT)

18% Preference Share Capital, par value of p100 authorized 10,000 shares, P800,000
issued and outstanding 8,000 shares.
Ordinary Share Capital, no par authorized 25,000 shares stated value of p100, 1,500,000
issued 15,000 shares of which 1,000 shares are in the treasury.

Subscribed Preference Share Capital 100,000

Subscribed Ordinary Share Capital 50,000
Subscription Receivable –Preference Share Capital 40,000
Subscription Receivable –Ordinary Share Capital 20,000
Preference Share Premium 10,000
Ordinary Share Premium 15,000
Donated Capital –Land 75,000
Treasury Shares (at cost) 1,000 ordinary shares 120,000
Retained Earnings 45,000
Appropriation Reserve for Treasury Shares 120,000

Shareholder’s Equity
PAID IN CAPITAL
18% Preference Share Capital, par value of P800,000
p100 authorized 10,000 shares, issued and
outstanding 8,000 shares.
Subscribed Preference Share Capital P100,000
Less: Subscription Receivable –Preference 40,000 60,000 P860,000

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 ACCOUNTING FOR CORPORATION

Share Capital

Ordinary Share Capital, no par authorized 1,500,000

25,000 shares stated value of p100, issued
15,000 shares of which 1,000 shares are in
the treasury.
Subscribed Ordinary Share Capital 50,000
Less: Subscription Receivable –Ordinary 20,000 30,000 1,530,000
Share Capital
ADDITIONAL PAID IN CAPITAL
Preference Share Premium 10,000
Ordinary Share Premium 15,000
Donated Capital –Land 75,000
TOTAL PAID IN CAPITAL P2,490,000
RETAINED EARNINGS
Unappropriated 45,000
Appropriation 120,000 165,000
TOTAL P2,655,000
LESS: Treasury Shares (1,000 shares at 120,000
cost)
TOTAL SHAREHOLDER’S EQUITY P2,535,000

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