NOTES For Intermediate Accounting

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.
But some of the corporation are not created by operation of Law,
some are created by Law itself.
By operation of law- mere compliance as to legalities is concern
By law-there is a specific law creating a corporation(special
law)referred to as their Charter: GOCC> sss,gsis
ATTRIBUTES OF A CORPORATION
1. Artificial being with a personality separate and apart from
its individual shareholders or members.
2. Created by operation of law. It cannot come into existence by
mere agreement of the parties as in the case of business
partnerships.
3. Right of succession. It has the capacity of continued
existence regardless of the death, withdrawal, insolvency or
incapacity of the individual shareholders or members. The
transfer of ownership of shares of stock does not dissolve the
corporation
4. It has the powers, attribute and properties expressly
authorized by law or incident to its existence.
ADVANTAGES OF A CORPORATION
1. The corporation has the legal capacity to act as a legal
entity
2. Shareholders have limited liability
3. It has continuity of existence
4. Shares of stock can be transferred without the consent of the
other shareholders
5. Its management is centralized in the board of directors
6. Shareholders are not general agents of the business
7. Greater ability to acquire funds
DISADVANTAGES OF A CORPORATION
1. A corporation is relatively complicated in formation and
management
2. There is a greater degree of government control and
supervision
3. It requires a relatively high cost of formation and operation
4. It is subject to heavier taxation than other forms of business
organizations
5. Minority shareholders are subservient to the wishes of the
majority
6. In large corporations, management and control have been
separated from ownership
7. Transferability of share permits the uniting of incompatible
and conflicting elements in one venture
CLASSES OF CORPORATIONS
1. STOCK – corporations which have share capital divided into
shares and are authorized to distribute to the holders of such
shares dividends or allotments of the surplus profits on the
basis of the shares held
2. NON-STOCK- is one where no part of its income is distributed
as dividends to its members, trustees or officers. Any profit
shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the
corporation was organized
Ex. Charitable, religious, educational, professional,
cultural, recreational, fraternal, literary, scientific,
social, civic service, or similar purpose
3. CORPORATION AGGREGATE-consisting of more than one corporator
4. CORPORATION SOLE- consists of only one member or corporator
5. DOMESTIC- organized under Philippine laws
6. FOREIGN- organized under foreign laws
7. PUBLIC- organized for the government of a portion of the state
8. PRIVATE- created for public aim
9. Ecclesiastical corporation- for religious purpose
10. Eleemosynary- for public charity
11. Civil- for business or profit
12. De jure- existing in fact and in law
13. De facto- existing in fact but not in law
14. Close-share ownership is limited to selected persons or
members of a family not exceeding 20 persons
15. Open- share is available for subscription or purchase by
any person
16. Parent- related to another corporation that has the power
to either directly or indirectly elect the majority of the
directors of a subsidiary corporation
17. Subsidiary- controlled by another corporation known as a
parent corporation.
3 STEPS IN THE CREATION OF A CORPORATION
1. Promotion- process of bringing together the incorporators or
the persons interested in the business, of procuring
subscriptions or capital for the corporation and of setting in
motion the machinery that leads to the incorporation of the
corporation itself.
2. Incorporation
- Verification from the records of the SEC that the proposed
corporate name is not the same or similar to an existing
corporation
- Drafting and execution of the articles of incorporation by
the incorporators
- Deposit by the treasurer of the cash paid for the shares
subscribed in the bank in the name of the treasurer in trust
for and to the credit of the corporation. The bank is
required to issue a certificate of deposit
- Filing of the articles of incorporation with the SEC
together with treasurer’s affidavit, statement of financial
position, certificate of bank deposit, and certificate as to
the name of the corporation
- Payment of the filing and publication fees, and
- Issuance by the SEC of the certificate of incorporation
3. Formal organization and commencement of business operations.
Formal organization requires the adoption of by-laws and the
election of the board of directors and of the and the
administrative officers
If a corporation does not formally organize and commence the

transaction of its business within two years from the date of
its incorporation, its corporate power shall cease and the
corporation shall be deemed dissolved.
If the corporation commenced business but subsequently becomes
continuous inoperative for a period of at least five years,
the same shall be a ground for the suspension or revocation of
its certificate of incorporation.
ARTICLES OF INCORPORATION
The general law which governs the creation of private
corporation is the Corporation Code of the Philippines.
Section 14 provides that all corporations organized under this
Code shall file with the SEC articles of incorporation in any
of the official languages duly signed and acknowledge by all
of the incorporators, containing substantially the ff. matters
except as otherwise prescribed by this Code or by special law:
1. The name of the corporation
2. The specific purpose or purposes for which the corporation
is formed
3. The principal place of business which must within the
Philippines
4. The term of existence
5. The names, nationalities and residences of the incorporators
6. The number of directors or trustees, which shall not be less
than 5 nor more than 15
7. The names, nationalities and residence of the persons who
shall act as directors or trustees until the first regular
directors or trustees are elected and qualified
8. If it be stock corporation:
a. Amount of authorized share capital in pesos
b. Number of shares into which it is divided
c. In case the share are par value shares:
*the par value of each share
*names, nationalities and residences of the original
subscribers,
*the amount subscribed and paid by each subscriber on his
subscription
d. in case of no par value, the articles need only
state such fact, and the number of shares into
which said share capital is divided
9. if it be a non-stock corporation, the amount of its
capital, the names, nationalities and residences of the
contributors and the amount contributed.
BY-LAWS
These are the rules of action adopted by the corporation for
its internal government and for the government of its
officers, shareholders or members. The by-laws shall be
adopted within one month from the issuance of the certificate
of incorporation by the SEC. Failure to file a code of by-laws
shall render the corporation liable for the revocation of its
registration. A private corporation may provide in its by-laws
for:
1. The time, place and manner of calling and conducting regular
or special meeting of the directors or trustees;
2. The time and manner of calling and conducting regular or
special meetings of the shareholders or members;
3. The required quorum in meetings of shareholders or members
and the manner of voting therein;
4. The form for proxies of shareholders and members and manner
of voting them;
5. The qualifications, duties and compensation of directors or
trustees, officers and employees;
6. The time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office
of all officers other than directors or trustees;
8. In the case of stock corporations, the manner of issuing
stock certificates, and
9. Such other matter as may be necessary for the proper or
convenient transaction of its corporate business and
affairs.
10. The penalties for violations of the by-laws
RIGHTS OF A SHAREHOLDER
The ff. are some of the right of a stockholder:
1. Right to be issued certificate of stock or other evidence of
share ownership and to transfer such shares
2. Right to attend and vote in person or by proxy at
shareholder’s meetings
3. Right to elect and remove directors
4. Right to adopt, amend or repeal the by-laws
5. Right to purchase a portion of any new shares issued to
maintain the same percentage of stock ownership. This right is
known as the pre-emptive right. However, this right is not
absolute and may be denied.
6. Right to receive dividends when declared
7. Right to inspect corporate books and records, and to receive
financial reports of the corporation’s operations
8. Right to participate in the distribution of corporate assets
upon dissolution
COMPONENTS OF A CORPORATION
1. Corporators- 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 to said articles of
incorporation. They must be natural persons. The code
specifies that 5 or more persons, not exceeding fifteen, may
form a private corporation provided that they are of legal
age, owners or subscribers to at least one share of capital
stock and that the majority are residents of the Philippines.
(Note: all incorporators ( if they continue to be shareholders
) are corporators of a corporation, but not all corporators
are incorporators.
3. Shareholders or stockholders are corporators in a stock
corporation, may be natural or juridical persons
4. Members are corporators of a non-stock corporation
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
subscriber 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 are usually investment bankers who have-
- Agreed, alone or with others, to buy at stated terms an
entire or a substantial part of an issue of securities; or
- Guaranteed the sale of an issue by agreement to buy from the
issuing corporation any unsold portion at a stated price; or
- Agreed to use his best efforts to market all or part of an
issue; or
- Offered for sale shares he has purchased from a controlling
stockholder.
CLASSES OF SHARES IN GENERAL
1. Par value shares. One in which a specific amount is fixed in
the articles of incorporation and appearing on the certificate
of stock. The par is the minimum issue price of the shares.
2. No-par value share. One without any value appearing on the
face of the certificate of stock. A no-par value share may
have a stated value which may be fixed in the articles of
incorporation or by the board of directors or the
shareholders. Shares issued without par value are deemed fully
paid.
3. Voting shares. Those issued with the right to vote
4. Non-voting shares. Those issued without right to vote
5. Ordinary shares- entitled the holder to an equal pro-rata
division of profits without any preference
6. Preference shares- these shares entitled the holder to certain
advantages or benefits over the holders of ordinary shares.
7. Promotion shares- 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
8. Treasury shares. A stock that has been issued by the
corporation as fully paid and later reacquired but not retired
9. Convertible shares- a stock which is convertible or changeable
from one class to another class.
MINIMUM SUBSCRIPTION AND PAID-IN CAPITAL
- At the time of incorporation, at least 25% of the authorized

capital stock must be subscribed and at least 25% of the
total subscription must be paid upon subscription, the
balance to be payable on a date or dates fixed in the
contract of subscription without need of a call, or in the
absence of a fixed date or dates, upon call for payment by
the BOD. In no case shall the paid-in capital be less than
P5,000.
SHAREHOLDER’S EQUITY
SHAREHOLDERS’ EQUITY
Shareholders’ equity is the residual interest of owners in the net

assets of a corporation measured by the excess of assets over
liabilities. The components of shareholders’ equity are:
Components of shareholders’ equity:

Share capital issued XX
Subscribed share capital XX
Less: Subscriptions receivable XX XX
Share premium:
Share premium excess over par XX
Share premium – Treasury shares XX
Share premium conversion option – convertible bonds XX
payable
Donated capital XX
Share premium warrants outstanding XX
Share premium options outstanding XX XX
Total paid in capital XX
Retained earnings – unappropriated XX
Retained earnings – appropriated XX XX
Other comprehensive income (cumulative balance)
Revaluation surplus XX
Unrealized gain or (loss) on FVTOCI XX
Remeasurement gain or (loss) under PAS 19 XX
Translation gain or (loss) XX
Effective portion of cash flow hedge XX
Change in fair value due to credit risk of designated XX XX
FL@TPL
Total XX
Less: Treasury shares XX
Total shareholders’ equity XX
Terms used by the Corporation IAS and IFRS terms

Code of the Philippines
Capital stock Share capital
Subscribed capital stock Subscribed share capital
Common share Ordinary share
Preferred share Preference share
Additional paid in capital Share premium
Retained earnings Accumulated profits
Revaluation surplus Revaluation surplus
Treasury stock Treasury share
SHARE CAPITAL
Share capital refers to the paid-in capital representing the amount

of the total par or stated value of the shares issued. It represents
the portion of authorized capital stock that has been fully paid.
Classes of share capital include the following:
a. Ordinary share capital. An ordinary share is an equity

instrument that is subordinate to all other classes of equity
instruments.
b. Preference share capital. A preference share is an equity
instruments that give the holder certain preferences over
ordinary shareholders. Such preferences may include preference
over dividends and preference over assets.
TWO METHODS OF ACCOUNTING FOR SHARE CAPITAL
a. Memorandum Method – Under the memorandum method, memorandum

entry is to be made when the corporation is authorized to
issue shares of stocks. The company credits the share capital
when shares are issued
b. Journal entry Method – Under the journal entry method, a
journal entry debiting Unissued Share capital and crediting
Authorized Share capital is made when the corporation is
authorized to issue shares of stocks. When shares are issued,
the Unissued Share capital account is then credited.
The summarized differences in the journal entries follow:
Memorandum Method Journal Entry Method

Authorization of Shares
Memo entry Unissued share capital xxx
(in the general ledger) Authorized share capital xxx
Subscriptions
Subscriptions xxx Subscriptions xxx
receivable receivable
Subscribed share capital xxx Subscribed share capital xxx
Issuance of Certificate
Subscribed share xxx Subscribed share xxx
capital capital
Share capital xxx Unissued share capital xxx
Reacquisition
Treasury share xxx Treasury share xxx
Cash/Appropriate account xxx Cash/Appropriate account xxx
Retirement of Treasury Stock*
Share capital xxx Unissued share capital xxx
Treasury share xxx Treasury share xxx
1. Subscribed share capital. This is the portion of the share
capital that an investor agreed to purchase. This portion of
capital stock is not yet issued because it may only be
partially paid. This item is added to the Share capital.
2. Subscriptions receivable. This refers to the unpaid portion of

the subscription price. Under the Securities and Exchange
Commission of the United States of America (USA) and IFRS for
SME, subscriptions receivable must be netted against the
Subscribed Share Capital. However, under the old Statement of
Financial Standards of the Philippines (SFAS), it is presented
as current assets if collectible currently, otherwise it is
deducted from subscribed share capital.
The authors still believe the latter treatment under SFAS will
be used until the Financial Reporting Standards Council
addresses this matter.
3. Reserves. The caption “Reserves” generally includes

stockholders’ equity items other than the total par or stated
value of the capital stock and the unrestricted retained
earnings. Specifically, it includes the following
shareholders’ equity items:
A. Share premium reserve. It is otherwise known as “Additional
Paid-in Capital” representing the paid-in capital in excess
of the par value or stated value, excess of the sales
proceeds of treasury stock over cost, donated capital and
other premiums in relation to the retirement of stocks.
B. Revaluation reserve. Also called “Surplus,” or “Asset
Revaluation Reserve.” This increase of the recorded amount
in the value of plant assets is the result of their
appraisal in relation to their current replacement cost.
C. Retained earnings reserve. It is the restricted portion of
retained earnings which is commonly called “appropriated
retained earnings.” Except when reverted back to
unrestricted retained earnings, the appropriated retained
earnings are not to be declared as dividends. Examples are
retained earnings appropriated for plant expansion,
contingencies, treasury stock, bond or Preference Share
redemption.
D. Net changes reserve. This item includes those items treated
as either additions or deductions from the stockholders’
equity.
Examples of this reserve are:
1. Foreign currency translation reserve. It refers to the
net changes in translating foreign currency denominated
financial statements from one foreign currency to
another.
2. Equity adjunct or contra reserve. It includes the
temporary increases or decreases in the value of
noncurrent securities as a result of market fluctuation.
An example of this reserve is the “unrealized gains or
losses on fair value through other comprehensive income
investments.”
The creation of reserves is sometimes required by statute or

other law in order to give the enterprise and its creditors an
added measure of protection from the effects of losses.
4. Retained Earnings or Accumulated Profits. This account is used

to record the accumulated corporate periodic earnings since
the inception of the enterprise. It is decreased by any
earnings distributed to stockholders in the form of dividends
and adjusted by any prior year’s income adjustments or
fundamental errors and changes in accounting policies.
Unless stated otherwise, retained earnings as presented in the
equity section of the statement of financial position refer to
the “free,” “unrestricted” or “unappropriated” retained
earnings. This kind of retained earnings is basically
available for distribution as dividends to the stockholders.
5. Contributed Capital (also known as Paid-In capital). This
represents the amount invested or contributed by owners. This
is composed of share capital and share premium.
ILLUSTRATION: Shareholders’ Equity Composition
The accounts below appear in the December 31 trial balance of

Prescett Company:
Authorized ordinary share ₱ 3,500,000

Unissued ordinary share 1,000,000
Subscribed ordinary share 500,000
Subscription receivable 600,000
Premium on ordinary share 200,000
Retained earnings - unappropriated 500,000
Retained earnings - appropriated 220,000
Revaluation surplus 400,000
Treasury shares, at cost 220,000
Required: Compute the amount of total shareholders’ equity that
Prescett should report in its December 31 statement of financial
position.
SOLUTION:
Authorized ordinary share ₱ 3,500,000

Unissued ordinary share (1,000,000)
Issued ordinary share 2,500,000
Subscriptions receivable (600,000) (100,000)
Premium on ordinary share 200,000
Total contributed capital 2,600,000
Retained earnings unappropriated 500,000
Retained earnings appropriated 220,000
Revaluation surplus 400,000
Total 3,720,000
Treasury shares at cost (220,000)
Total shareholders’ equity ₱ 3,500,000
LEGAL CAPITAL
Legal capital is the portion of paid in capital which cannot be

returned to stockholders in any form (cash, property or stock
dividends) during the lifetime of the corporation.
The legal capital of a capital stock with par value is the aggregate
amount at par value of the shares issued and subscribed. “The
premium or excess over par is not to be considered as part of the
legal capital.” Although the additional paid-in capital is not
considered part of the legal capital, “sound accounting principles
dictate that dividends may be declared only out of actual earnings
or profits of the corporation.”
The legal capital of a capital stock without par value is the entire
consideration received. Accordingly, both the stated value and the
additional paid in capital in excess of stated value shall not be
distributed as dividends to the stockholders during the lifetime of
the corporation.
Formula for the Computation of Legal Capital:
1. With par value Share capital XX

Total Legal Capital XX
2. No par value Share capital XX
Paid in capital in excess of XX
stated value
Total Legal Capital XX
ILLUSTRATION: Legal Capital
The stockholders/ equity section of Alyssa Anne Company revealed the

following information on December 31, of the current year:
Preference share, ₱100 par 1,150,000

Premium on share capital – Preference share 402,500
Ordinary share, ₱15 par 2,625,000
Premium on share capital – Ordinary share 1,375,000
Retained earnings 950,000
Note payable 2,000,000
Subscriptions receivable – Ordinary share 200,000
Required:
1. How much is the legal capital?

2. Assume instead the ordinary shares have no par value but with
stated value, how much is the legal capital?
SOLUTION:
Requirement 1 – With par value
Preference share, ₱100 par 1,150,000

Ordinary share, ₱15 par 2,625,000
Total Legal Capital 4,025,000
Requirement 2 – No par value
Preference share, ₱100 stated value 1,150,000

Ordinary share, ₱15 stated value 2,625,000
Premium on share capital-OS 1,375,000
Total Legal Capital 5,400,000
Note: Under the corporation code, preference shares should always be
issued with par value.
ORGANIZATION COST AND EXPENSES RELATED TO SHARE CAPITAL
Organization cost represents costs incurred in forming or organizing
a corporation. These costs include:
1. Legal fees in connection with the incorporation – includes
drafting of articles of incorporation and by-laws and
corporation registration.
2. Incorporation fees
3. Share issuance cost – direct costs to sell share capital which
normally include the following:
a. Legal fees
b. CPA fees
c. Underwriting fees and commissions
d. Cost of printing certificates
e. Documentary stamps
f. Filing fees with SEC
g. Cost of advertising and promoting the issue
Accounting for organization costs
Organization costs, except for share issuance costs, shall be

recognized as expense in the first year of operations.
Accounting for share issuance costs
According to PAS 32 paragraph 35, “transaction costs of an equity

transaction shall be accounted for as a deduction from equity, net
of any related income tax benefit.” Therefore, stock issuance cost
shall be debited in the following order:
1. Share premium from issuance

2. Share premium from previous issuance
3. Retained earnings
Accounting for Indirect Costs
Management salaries and other indirect costs related to the sale of

share capital should be expensed outright. Recurring cost of
maintaining shareholders records and handling ownership transfers
such as registrar agent fees shall be charged as expense in the
period incurred.
ISSUANCE OF SHARE CAPITAL: Cash Consideration
Cash xxx
Discount on share capital (if any) xxx
Share capital (at par or stated value) xxx
Premium on share capital (if any) xxx
Watered share
Watered share is a share issued at a discount or issued for

inadequate or insufficient consideration or consideration received
less than par value or stated value, but share capital is issued as
fully paid. It is done by overstating asset and capital.
The related discount on share capital shall be presented as

deduction to total shareholders’ equity.
Secret reserve
Secret is the reserve of watered share. It arises when asset is

understated or liability is overstated with a consequent
understatement of capital. Secret reserve usually arises from the
following:
 Excessive provision of for depreciation, depletion,

amortization and doubtful accounts.
 Excessive write-down of receivables, inventories and
securities.
 Capital expenditures are recorded as outright expense.
 Fictitious liabilities are recorded.
ILLUSTRATION: Issuance of Share Capital
Assume the following issuances of a ₱100 par value share of stock:
1. Issuance of 3,000 shares at par for cash.

2. Issuance of 5,000 shares at ₱110 per share for cash. Stock
issue costs that were paid by the corporation amounted to
₱60,000.
3. Issuance of 4,000 shares at ₱90 per share for cash.
Required: Prepare the necessary journal entries.
SOLUTION:
1. Cash (3,000 x ₱100) 300,000

Share capital 300,000
To record share issuance at a premium
2. Cash (5,000 x ₱110) 550,000

Share capital (5,000 x ₱100) 500,000
Share premium 50,000
To record share issuance at a premium
Cash 60,000
To record payment of share issue cost
3. Cash (4,000 x ₱90) 360,000

Discount on share capital 40,000
Share capital (4,000 x ₱100) 400,000
To record share issuance at a discount
ISSUANCE OF SHARE CAPITAL: Noncash Consideration
Based on the provision of the Corporation Code and in conformity

with the PFRS 2, the following rules shall be observed when share
capital is issued for noncash consideration.
Consideration Valuation
received
Non-cash asset Share capital shall be recorded at an amount
or service equal to the following (in the order of
priority):
1. Fair value of noncash consideration
Received.
2. Fair value of share capital Issued.
3. Par value of share capital Issued.
Liability Items classified as debt for equity swap under
extinguished IFRI 19 (in order of priority):
1. Fair value of share capital issued.
2. Fair value of liability extinguished.
3. Carrying amount of liability extinguished.
Items not covered by “debt for equity swap”:

Carrying amount of the liability extinguished
Any difference between the carrying amount of
the financial liability (or part) extinguished
and the measurement of the equity instruments
issued shall be recognized in profit or loss.
Formulas related to issuance of shares to extinguish liability
Fair value of equity instruments issued (or if not XX

reliably determinable, use the fair value of liability)
Less: Carrying amount of liability XX
Loss (or Gain) on extinguishment of liability XX
Fair value of equity instruments issued (or if not XX

reliably determinable, use the fair value of liability)
Less: Total par or stated value of equity issued XX
Share premium (or Discount) XX
ILLUSTRATION: Issuance of Share Capital for Noncash Consideration
Assume the following issuances of a ₱100 par value share of stock:
1. Issued 2,500 shares of stock for machinery: The machinery has a

fair value of ₱280,000 while the stock is selling at ₱105 per
share.
2. Issued 1,000 shares of stock for patent (an intangible asset):
The stock is selling at ₱105 per share.
3. Issued 500 shares of stock in full payment of organization
services rendered from the legal counsel: The fair value of
such services is ₱60,000.
Required: Prepare the necessary journal entries.
SOLUTION:
1. Machinery 280,000
Share capital (2,500 x ₱100) 250,000
To record share issuance for machinery
2. Patent (1,000 x ₱105) 105,000

Share capital (1,000 x ₱100) 100,000
Share premium 5,000
To record share issuance for patent
3. Organization expense 60,000

Share capital (500 x ₱100) 50,000
To record share issuance for organization
services
ILLUSTRATION: Issuance of Share Capital for Existing Liability
The company issued 2,000, ₱100 par ordinary shares for an

outstanding bank loan of ₱250,000. On this date, shares are quoted
at ₱140 per share.
Required: Prepare the necessary journal entry to record the

transaction.
SOLUTION:
Loans payable – bank 250,000

Loans on extinguishment of liability* 30,000
Share capital (2,000 x ₱100) 200,000
Share premium** 80,000
To record issuance of shares for liability
*Computation of loss on extinguishment of liability

Fair value of equity instruments issued (2,000 x ₱140) ₱280,000
Less: Carrying amount of liability 250,000
Loss on extinguishment of liability ₱ 30,000
**Computation of increase in share premium

Fair value of equity instruments issued (2,000 x ₱140) ₱280,000
Less: Total par value of equity issued (2,000 x ₱100) 200,000
Share premium ₱ 80,000
ISSUANCE OF SHARE CAPITAL: Two or more classes of shares
A. Issued separately. When two or more classes of shares are

issued separately, the issuances shall be accounted separately.
ILLUSTRATION: Issuance Two or More Classes of Shares
The company issued the following shares of stock:
1. Issued 5,000, ₱200 par value preference share, for ₱220 per
share for cash
2. Issued 1,000, ₱100 par value ordinary share, for ₱120 per share
for cash

transaction.
SOLUTION:
1. Cash (5,000 x ₱220) 1,100,000

Preference shares (5,000 x ₱200) 1,000,000
Share premium-pref. share 100,000
To record issuance of preference shares
2. Cash (1,000 x ₱120) 120,000

Ordinary shares (1,000 x ₱100) 100,000
Share premium – ordinary shares 20,000
To record issuance of ordinary shares
B. Issued simultaneously at a basket or lump-sum price. When two
or more classes of shares are issued a basket or lump-sum
price, accounting for the issuance will be dependent on the
availability of fair values and will be accounted as follows:
1. If the shares have fair value, use the relative fair value
or proportional method
Under the relative fair value or proportional method, the
lump sum price shall be allocated as follows:
Total Fraction Allocated

FV Cost
Preference shares (No. of
Pref. shares x Fair value) AA AA/CC DD
Ordinary shares (No. of
Ordinary shares x Fair value) BB BB/CC EE
Total
CC FF (Total
Proceeds)
DD=AA divide by CC X FF EE=BB divide by CC X FF
2. If only one of them has an available fair value, use the

incremental method.
Under the incremental method, the lump-sum price shall be

allocated as follows:
Total proceeds XX
Less: Total fair value (Securities with available
fair value) XX
Amount allocated to the other securities
XX
Pro-forma journal entry:
Cash xxx
Preference shares xxx
Share premium excess over par – PS xxx
Ordinary shares xxx
Share premium - OS xxx
ILLUSTRATION: Issuance Two or More Classes of Shares (Relative Fair

value or Proportional Method)
The company issued for ₱1,000,000 cash, 1,000 shares of ₱200 par
value Preference share and 2,000 shares ₱100 ordinary share. The
preference and ordinary shares have fair values of ₱240 and ₱180 per
share, respectively on the date of sale.

transaction.
SOLUTION:
Allocation of the lump-sum price:

Total FV Fraction Allocated
cost
Preference shares (1,000 x ₱240) 240,000 24/60 400,000
Ordinary shares (2,000 x ₱180) 360,000 36/60 600,000
Total 600,000 1,000,000
The transaction will then be recorded as follows:
Cash 1,000,000
Preference shares (1,000 x ₱200) 200,000
Share premium – PS (400,000-200,000) 200,000
Share premium – OS (600,000-200,000) 400,000
ILLUSTRATION: Issuance Two or More Classes of Shares (Incremental
Method)
The company issued for ₱1,000,000 cash, 1,000 shares of ₱200 par
value Preference share and 2,000 shares of ₱100 ordinary share. The
preference share has a fair value of ₱240 on the date of sale. No
fair value available for the ordinary share.

transaction.
SOLUTION:
Allocation of the lump-sum price:
Total proceeds 1,000,000

Less: Total fair value of pref. shares (1,000x₱240) 240,000
Amount allocated to the other securities 760,000
The transaction will then be recorded as follows:
Cash 1,000,000
Preference shares (1,000 x ₱200) 200,000
Share premium-PS (240,000-200,000) 40,000
Share premium-OS (760,000-200,000) 560,000
To record issuance of preference and
ordinary shares
Important note:
When the shares issued have no fair values, use the proportional
method and allocate the lump-sum price based on the par value of
shares issued.
SUBSCRIPTIONS
A subscription is a written contract by which one engages to take
and pay for the capital stock of a corporation in some future date.
However, a corporation cannot issue its capital stock if not fully
paid. Hence, it should record its subscriptions receivable and the
total subscribed capital stock in the books of accounts. The reason
for this is that once a subscription contract is perfected, the
subscriber becomes bound to buy the corporate stocks.
According to the law, the approval of incorporation requires that at
least 25% of the authorized capital stock should have been
subscribed and 25% of which should have been paid.
ILLLUSTRATION: Subscription of Share Capital

Anna Loren Corporation was authorized to issue share capital of
₱1,000,000, divided into ₱100 par value per share on January 1.
The incorporators of Anna Loren Corporation subscribed to the 25% of
the total authorized share capital and paid the 25% of the
subscribed capital.
Required: Prepare the necessary journal entry to record the above
transactions.
SOLUTION:
To record subscriptions of share capital:

Subscription receivable ₱ 250,000
Subscribed share capital ₱ 250,000
To record cash collection:
Cash ₱ 62,500
Subscription receivable ₱ 62,500
Important notes:
1. The subscribed share capital and the cash received are

computed as follows:
Total authorized share capital ₱ 1,000,000

Multiply by: Required percent of subscription 25%
Subscribed share capital
250,000
Multiply by: Required percent of cash payment 25%
Cash received
₱ 62,500
Number of shares subscribed (₱250,000/₱100)
2,500
2. The journal entries presented in the previous page is single
entries. Alternatively, the entries can be presented in a
compound entry as follows:
Cash ₱ 62,500
Subscription receivable
187,500
₱ 250,000
DELINQUENT SUBSCRIPTION
If a stock subscriber does not pay in full his unpaid stock
subscription on the date fixed by the board of directors, he may be
declared a delinquent subscriber.
Forfeited downpayment
The downpayment of the subscriber may be forfeited. If the
downpayment is forfeited, the corporation will have to make this
journal entry:
Subscribed share capital xxx

Premium on share capital xxx
Subscription receivable xxx
Share premium – forfeited downpayment Xxx
Note that the Share Premium forfeited downpayment is equal to the

amount paid by the delinquent subscriber.
Auctioned subscription
When the downpayment is not forfeited, the delinquent subscription
will then be sold at public auction to the person who will pay the
“offer price” of the delinquent stock and is willing to receive the
smallest number of shares. Such person is commonly called as the
“highest bidder.”
The offer price usually includes the following items:
a. Unpaid balance due on subscription

b. Cost of money, such as accrued interest on the subscription
due
c. Related expenses in public auction, such as advertising and
other cost in selling
Pro-forma journal entries
To record expenses incurred related to the auction

Advances from sales of delinquent share xxx
Cash xxx
Note: The “advances on stock delinquency sale” account shall be
treated as part of the current asset if the statement of financial
position is prepared before the payment of the highest bidder.
When sold to the highest bidder
To record collection from highest bidder

Cash xxx
Advances from sales of delinquency share xxx
Interest income xxx
To record issuance of share certificates

Share capital xxx
ILLUSTRATION: Delinquent Subscription (Forfeited Subscription)
The following transactions pertain to one of the subscribers of

Edward Co.
1. Folayang subscribed for 10,000, ₱100 par ordinary shares of

Edward Co. at ₱110 per share.
2. Folayang paid 40% of the subscriptions price.
3. Subsequently, Folayang was declared delinquent subscriber. In
accordance with the subscriptions contract, Folayang’s
downpayment was forfeited.
Required: Prepare the necessary journal entry to record these

transactions.
SOLUTION:
1. Subscriptions receivable (10,000 x ₱110) 1,100,000

Subscribed ordinary shares (10,000 x ₱100) 1,000,000
Share premium-ordinary share 100,000
To record subscriptions of 10,000 shares at ₱110
2. Cash (₱1,100,000 x 40%) 440,000

Subscriptions receivable 440,000
To record receipt of cash for subscriptions
3. Subscribed ordinary shares (10,000 x ₱100) 1,000,000

Share premium-ordinary share 100,000
Subscriptions receivable (₱1,100,000 x 60%) 660,000
Share premium forfeited down-payment 440,000
ILLUSTRATION: Delinquent Subscription (With Highest Bidder)
Mikee Cloudette Corporation declared Rex stock subscriptions

delinquent. The records of subscribed capital stock pertinent to Rex
shows 5,000 shares at ₱100 par of which the remaining unpaid
subscription balance is ₱280,000. The delinquent stocks are
subsequently offered for public auction incurring a cost of ₱20,000.
The offer price is ₱300,000.
There are three bidders during the auction who are willing to pay
the offer price corresponding to shares of stocks, as follows:
Bidders # of shares willing to be received

Zeus 3,000 shares
Andriz 3,500 shares
Rhad Vic 4,000 shares
Required: Provide the following:
1. Highest bidder
2. Number of shares Rex should receive
3. Necessary journal entries to record the transaction
SOLUTION:
Requirement No. 1
Based on the given data, Zeus qualifies as the highest bidder.
Requirement No. 2
Since there is a higher bidder, the entire 5,000 shares will be

issued to Rex and Zeus, as follows:
Total number of shares subscribed 5,000 shares

Less: Number of shares to Zeus 3,000 shares
Remaining shares to Rex 2,000 shares
The distribution of the number of shares is based on the following
provision of the law:
“The stock so purchased shall be transferred to such purchaser

(highest bidder) in the books of the corporation and a certificate
for such stock shall be issued in his favor. The remaining shares,
if any, shall be credited in favor of the delinquent stockholder who
shall likewise be entitled to the issuance of a certificate of stock
covering such shares.” -Corporation Code of the Philippines, Sec.
68, par. 3.
Requirement No. 3
1. To record the expenses incurred related to the auction

Receivable from highest bidder ₱ 20,000
Cash ₱ 20,000
2. To record the collection from highest bidder

Cash 300,000
Receivable from highest bidder 20,000
3. To record the issuance of share capital

Subscribed share capital 500,000
Delinquent Subscription without a Highest Bidder
When there are no bidders for the auction sale of the delinquent
shares, the corporation may purchase for itself its delinquent
shares resulting to a treasury share transaction.
Accordingly, the delinquent subscriber is released from liability of
his unpaid subscription, but he shall not be entitled for any number
of shares in his subscription as provided by the law, to wit:
“Should there be no bidder at the public auction…, the corporation

may bid for the same, and the total amount due shall be credited as
paid-in full in the books of the corporation. Title to all the
shares of stock covered by the subscription shall be vested in the
corporation as treasury stock…” -Ibid, par. 4.
When no highest bidder and the corporation acquires the shares
To record the acquisition of entity’s own shares

Treasury shares xxx
Receivable from highest bidder xxx
Note: Reissuance of shares will be accounted for as treasury
shares.
When no highest bidder and the corporation is prohibited to acquire

the shares
To record the acquisition of shares

Share premium – original subscription xxx
Receivable from highest bidder xxx
Share premium – delinquent subscription xxx
ILLUSTRATION: Delinquent Subscription (Without Bidders)
Using the same data in the previous illustration, except that there
are no bidders, and the corporation purchased its own delinquent
shares, provide the necessary journal entries to be made.
SOLUTION:
1. To record the expenses incurred related to the auction

Cash 20,000
2. To record the acquisition of entity’s own shares

Treasury shares 300,000
3. To record the issuance of share capital

Subscribed share capital 500,000
Summary of recipient of shares related to delinquent subscription
Condition Recipient of shares
1. Forfeited down payment No issuance will be made
2. With highest bidder a. To the highest bidder –
number of shares he/she is
willing to received when the
bid was made
b. To the Delinquent subscriber
– any remaining shares
3. With no highest bidder and the All shares will be acquired by
corporation acquires the shares the corporation.
4. With no highest bidder and the No issuance will be made
corporation is prohibited to
acquire shares
TREASURY SHARES
Treasury shares are company’s own stock previously issued,

reacquired but not cancelled.
Accounting for treasury shares
Treasury shares may be accounted as follows:
1. Cost method – Under this method, treasury shares are debited

or recognized at its acquisition cost. Also, any subsequent
reissuance and/or retirement of the treasury shares is
credited at the cost.
Cost shall mean the carrying amount of the consideration given

to reacquire the shares.
2. Par Value Method – Under this method, the amount debited to

treasury shares is equal to the total par value of the
treasury shares. In addition, share premium from the original
issuance is also debited. Any subsequent reissuance and
retirement of the treasury shares is also credited at par.
NOTE: In the Philippines, the standards require treasury shares to

be accounted exclusively under the cost method.
COST METHOD
A. Acquisition

Treasury shares (at cost) xxx
Cash xxx
B. Reissuance
To record reissuance of treasury shares at cost

Cash xxx
To record reissuance of treasury shares at above cost
Cash xxx
Share premium – treasury shares xxx
Note: Any difference between the consideration received and the cost
of treasury shares shall be credited to share premium – treasury
shares
To record reissuance of treasury shares at below cost

Cash xxx
Retained earnings xxx
Note: Any difference between the consideration received and the cost
of treasury shares shall be debited to the following:
a. Share premium – treasury shares

b. Any excess to retained earnings
Summary of balancing figures:
For debit: For credit:

a. Share Premium – TS; then to a. Share premium - TS
b. Retained earnings
C. Retirement
To record retirement at a perceived gain

Share capital xxx
Share premium – original issuance xxx
Share premium - treasury shares xxx
To record retirement at a perceived loss

Share capital xxx
Important notes:
 Regardless whether there is perceived gain or loss, share premium

arising from original issuance is derecognized.
 There is a perceived gain when the original issue price is
greater than the reacquisition price or cost of treasury share.
 There is a perceived loss when the original issue price is lesser
than the reacquisition price or cost of treasury share.
PAR VALUE METHOD
A. Acquisition

Treasury shares (at par value) xxx
Retained earnings (if any) xxx
Cash xxx
Note: Upon acquisition, the treasury share is treated as if it is
being retired (i.e., par value was debited with the corresponding
debit to share premium from original issuance and the balancing
figure for debit amount is retained earnings account and share
premium treasury shares for credit).
B. Reissuance
To record reissuance of treasury shares at par

Cash xxx
Treasury shares (at par) xxx
To record reissuance of treasury shares at above par

Cash xxx
To record reissuance of treasury shares at below par

Cash xxx
C. Reissuance
To record retirement of treasury shares

Share capital xxx
DONATED CAPITAL
Transactions credited to Donated Capital account are donations

received from shareholders. Donations received from parties other
than shareholders are credited to appropriate income account.
Asset Entity’s own

shares
Upon receipt Asset (at fair value) XX Memo
of donation Donated capital XX
Upon sale Cash XX Cash XX
Loss (if any) XX Donated capital XX
Asset XX
Gain (if any) XX
Note: Receipts of entity’s own share, though recorded only through a
memo, will decrease the number of outstanding shares.
ILLUSTRATION: Accounting for Treasury Shares using Cost Method and

Donated Capital
The shareholders’ equity of Rhenz Co. appears as follows:
Ordinary share, 50,000 shares, ₱100 par ₱ 5,000,000

Share Premium 200,000
Retained earnings 2,000,000
Subsequently, the following transactions, among others occurred:
a. Treasury shares 5,000 were acquired at ₱160 per share

b. Reissued 2,000 treasury shares at ₱180 per share
c. Reissued 1,000 treasury shares at ₱150 per share
d. Retired the remaining treasury shares
e. Stockholder donated 5,000 shares when the market price is ₱150
per share. Subsequently, the company sold 2,000 shares at ₱180
per share.

transactions.
SOLUTION:
a. Treasury shares (5,000 x ₱160) 800,000

Cash 800,000
b. Cash (2,000 x ₱180) 360,000
Treasury shares (2,000 x ₱160) 320,000
Share premium-Treasury shares 40,000
c. Cash (1,000 x ₱150) 150,000
d. Ordinary shares (2,000 x ₱100) 200,00
Share premium (200,000/50,000) x 2,000 8,000
Share premium-Treasury shares (40,000-10,000) 30,000
e. Memo entry: Received 5,000 shares from a
stockholder as a donation.
Cash (2,000 x ₱180) 360,000
Donated capital 360,000
ILLUSTRATION: Accounting for Treasury Shares – Par Value Method
The shareholders’ equity of Krizella Arah Co appears as follows:
Ordinary share, 50,000 shares, ₱100 par ₱ 5,000,000

Share Premium 200,000
Retained earnings 2,000,000
Subsequently, the following transactions, among others occurred:
1. Treasury shares 5,000 were acquired at ₱160 per share.

2. Reissued 2,000 treasury shares at ₱180 per share.

transactions.
SOLUTION:
1. Treasury shares (5,000 x ₱100) 500,000

Share premium (200,000/50,000) x 5,000 20,000
Retained earnings (balancing figure) 280,000
Cash 800,000
2. Cash (2,000 x ₱180) 360,000

RETIREMENT OF SHARE CAPITAL
If shares of stocks are reacquired and immediately retired, the

following accounting procedures should be observed:
Step 1 Derecognize the share capital and its related share premium
when it was original issued by debits to the capital stock account
and the related share premium from original issuance and credit
cash.
The share premium from original issuance may be computed as follows:

Total issue price when it was originally issued xxx
Less: Par value xxx
Share premium per share xxx
Multiplied by: Number of shares retired xxx
Share premium xxx
OR
Total share premium in excess of par or stated value of xxx

shares retired before retirement
Divided by: Total shares issued xxx
Balance xxx
Multiplied by: Number of shares retired xxx
Share premium xxx
Step 2 If retirement resulted to “gain” (i.e., total purchase price
is lesser than the combine total par value of the share retired and
the Share premium from original issuance), the difference should be
credited to Share Premium retirement.
Step 3 If retirement resulted to “loss” (i.e., total purchase price
is greater than the combine total par value of the share retired and
the Share premium from original issuance), the difference should be
debited to retained earnings account.
A. At a gain
Share capital xxx

Share premium – original issuance
xxx
Cash
xxx
Share premium - retirement
xxx
B. At a loss
Share capital xxx

Share premium – original issuance
xxx
Retained earnings
xxx
Cash
xxx
ILLUSTRATION: Retirement of Share Capital
The Shareholders’ equity section of Laurileen Co. on December 31 is

as follows:
Preference shares ₱100 par, 40,000 shares issued and ₱ 4,000,000

outstanding
Share premium on preference shares 400,000
Ordinary share ₱50 par, 100,000 shares issued and 5,000,000
outstanding
Share premium on ordinary shares 1,000,000
Accumulated profits 20,000,000
Required: Provide the journal entry to be made on the corporation
books assuming 4,000 shares of preferred are redeemed at:
a. ₱130 b. ₱90
SOLUTION:
a. Preference shares (4,000 x ₱100) 400,000

Share premium on Preference shares 40,000
[(400,000/40,000)x 4,000]
Accumulated profits (balancing figures) 80,000
Cash (130 x 4,00) 520,000
b. Preference shares (4,000 x ₱100) 400,000
Share premium on Preference shares 40,000
[(400,000/40,000)x 4,000]
Cash (90 x 4,000) 360,000
Share premium retirement of shares (balancing figure) 80,000
PREFERENCE SHARE
Item Description Treatment

1. Convertible Entitles the holder thereof Equity
preference to exchange the same to
ordinary share, at the
option of the shareholder
2. Callable preference Is one that gives the Equity
issuing corporation the
right, but not the
obligation, to reacquire and
retire the share at a fixed
or determinable call price
3. Mandatorily or Is one that must be retired Financial
compulsorily or reacquired by the issuing liability
redeemable preference corporation at a fixed or
(or redeemable at the determinable date
option of the holder)
Accounting for preference shares as part of financial liability is
discussed in Chapter 27: Financial Liabilities and Debt
Restructuring.
CONVERSION OF CONVERTIBLE PREFERENCE SHARE
A. At a gain
Share premium – PS (original issuance) xxx
Ordinary shares xxx
Share premium – ordinary shares xxx
B. At a loss
Ordinary shares xxx
Share premium – ordinary shares xxx
Note: Just like in any retirement, there is always debit to Share
Premium original issuance of the shares retired or converted.
ILLUSTRATION: Conversion of Convertible Preference Share
The Shareholders’ equity section of Alberto Co. on December 31 is as

follows:
Preference share ₱100 par, 40,000 shares issued and 4,000,000

outstanding
Share premium on preference shares 400,000
outstanding
Share premium on ordinary shares 1,000,000
books assuming 4,000 shares of preference are converted under each
assumption listed:
1. Preference share are convertible into ordinary on a share-for-

share basis.
2. Each preference share is convertible into 4 shares of ordinary.
SOLUTION:
1. Preference shares (4,000 x ₱100) 400,000

Share premium on Preference Shares 40,000
[(400,000/40,000)x 4,000]
Ordinary shares (4,000 x 1/1 x ₱50) 200,000
Share premium-ordinary shares 240,000
2. Preference shares (4,000 x ₱100) 400,000
Share premium on Preference Shares 40,000
[(400,000/40,000)x 4,000]
Accumulated profits 360,000
Ordinary shares (4,000 x 4/1 x ₱50) 800,000
RECAPITALIZATION
Recapitalization occurs when there is a change in the capital

structure of the company. The old shares are cancelled, and new
shares are issued. Examples include
a. Change from par to no-par

b. Change from no-par to par
c. Reduction of par value or stated value
d. Split up or split down
A. Change from par to no-par

Ordinary share capital XX
Share Premium XX
Retained Earnings (balancing figure) XX
Share premium-recapitalization (balancing figure) XX
B. Change from no-par to par
Share Premium XX
Retained Earnings (balancing figure) XX
Share premium-recapitalization (balancing figure) XX
C. Reduction of par value or stated value
Share premium-recapitalization XX
D. Split up
Split up is a transaction whereby the original shares are called
in for cancellation and replaced by a larger number accompanied
by a reduction in the par value or stated value.
Memo entry: Issued number of shares as a result of a XX for XX

share split (e.g., 4 for 1 share split), reducing the par value
to ₱xx.
The new number of shares after split would be:
Multiply by
Before (e.g., 4/1) After
Share capital issued
XX 4/1 XX
XX 4/1 XX
Total
XX 4/1 XX
Less: Treasury shares
XX 4/1 XX
Donated shares
XX 4/1 XX
Outstanding shares
XX 4/1 XX
The new par value of shares after split would be:
Before Multiply by After

Par value per share
XX 1/4 XX
E. Split down
It is a transaction whereby the original shares are cancelled
and replaced by a smaller number accompanied by an increase in
the par value or stated value.
Memo entry: Issued number of shares as a result of a XX for XX

(e.g., 1/4) share split, increasing the par value to ₱xx.
The new number of shares after split would be:
Multiply by
Before (e.g., 1/4) After
Share capital issued
XX 1/4 XX
XX 1/4 XX
Total
XX 1/4 XX
Less: Treasury shares
XX 1/4 XX
Donated shares
XX 1/4 XX
Outstanding shares
XX 1/4 XX

Par value per share
XX 4/1 XX
Summary of effect of share splits
Split up Split down

No. of shares Increase Decrease
Par value per share Decrease Increase
Total Shareholders’ Equity Same Same
ILLUSTRATION: Recapitalization of share capital
The shareholders’ equity section of Steven Co. on December 31 is as

follows:

outstanding
Share Premium on Ordinary shares 1,000,000
Accumulated Profits 20,000,000
books under the following independent scenarios:
1. All the 100,000 ordinary shares are called in for cancellation.

Instead, the company issued 100,000 no-par ordinary shares with
the following stated value:
a. ₱50 b. ₱150
2. A recapitalization is effected whereby the par value of the
ordinary shares is reduced to ₱40 per share.
3. The company effected a 5 for 1 stock split on the ordinary
shares.
SOLUTION:
1a. Ordinary shares (100,000 x ₱50) 5,000,000

Share premium on Ordinary shares 1,000,000
Ordinary shares (100,000 x ₱50) 5,000,000
Share premium-recapitalization 1,000,000
1b. Ordinary shares (100,000 x ₱50) 5,000,000
Ordinary shares (100,000 x ₱150) 15,000,000
2. Ordinary shares (₱50-₱40) x 100,000 1,000,000
Share premium-recapitalization 1,000,000
3. Share split
Before Multiply After
by
Ordinary share capital issued 100,000 5/1 500,000
Subscribed share capital - 5/1 -
Total 100,000 5/1 500,000
Less: treasury shares - 5/1 -
Outstanding shares 100,000 5/1 500,000

Par value per share
₱50 1/5 ₱10
Memo entry: Issued 500,000 ordinary shares as a result of a 5 for 1
share split, reducing the par value to ₱10.
SHARE WARRANTS
These are certificates that entitle the holder thereof to acquire

shares at a certain price within a specified period. Share warrants
may be issued for the following reasons:
1. As additional compensation (for example share options)

2. To make the securities (like warrants or bonds payable) more
attractive
3. As a right of preemption to existing shareholders of the
corporation
Non-detachable warrants
Stock warrants that cannot be traded separately from the security

with which they were originally issued.
Detachable warrants
Stock warrants that can be traded separately from the security with
which they were originally issued.
Rights issue/stock right/right of pre-emption
It is granted to existing shareholders to enable them to acquire new

shares at a specified price during a specified period.
1. To record issuance of warrants

Upon issuance of stock warrants, no formal accounting entry is
needed. A memorandum entry will suffice.
2. To record exercise of warrants
Cash xxx
Share capital
xxx
Share premium (if any)
xxx
3. To record expiration of warrants
Similar with issuance of warrants, only memorandum entry will be
made by the entity.
Detachable Share warrants
A. Share warrants issued with preference share

1. Fair value of share ex-warrant and fair value of warrant are
known. Use the relative fair value method.
Total Fair Fraction Allocated

value cost
Preference shares (No. of
Pref. shares x fair value) AA AA/CC DD
Warrants (No. of Warrants x
fair value) BB BB/CC EE
Total
CC FF (Total
proceeds)
2. Only one class of security has available fair value
Total proceeds xxx

Less: market value of securities known
xxx
Securities with unknown Market value
xxx
3. The fair values of the preference shares and warrants are
unknown
Market value of ordinary shares xxx

Less: Option price/exercise price
xxx
Intrinsic value of warrant
xxx
Multiply: # of ordinary shares
claimable under warrants xxx
Market value of share warrants
xxx
Total proceeds XX
Less: Value of Share warrants XX
Value assigned to preference share XX
Pro-forma journal entry
Cash xxx
Share premium (if any) xxx
Ordinary share warrants outstanding xxx
Note: Ordinary share warrants outstanding shall be reported as part
of share premium. If the warrants are not exercised, the ordinary
share warrants outstanding account is simply transferred to share
premium.
B. Share warrants issued with bonds payable
Issued price including warrants xxx

Less: Issue price of bond ex-warrants
xxx
Allocated to warrants
xxx
Note: Please refer to Chapter 27 for the discussion of share
warrants issued with bonds payable.
ILLUSTRATION: Share Warrants
The Myra Co. issued 4,000 shares of ₱50 par preference shares with
detachable warrants. The package sells for ₱150. The warrants enable
the holder to purchase 2,000 ordinary shares of ₱20 par at ₱45 per
share.
CASE NO. 1: If immediately after the issuance of the share, the

warrants are selling at ₱10 per share and the market value of the
preference without the warrants is ₱90.
Subsequently, 70% of the warrants are exercised.
CASE NO. 2: Assume instead that only the market value of the
preference without the warrants amounting to ₱90 is available.
CASE NO. 3: Assume instead that the warrants and the preference have
no known market values, but the ordinary share is trading at ₱50 per
share.

transactions.
SOLUTION:
CASE NO. 1
Total fair Fraction Allocated

value cost
Preference shares (4,000 x ₱90) 360,000 36/40 540,000
Warrants (4,000 x ₱10) 40,000 4/40 60,000
Total 400,000 600,000*
*(150 x 4,000)
Cash 600,000
Preference Share capital (4,000 x ₱50) 200,000
Share Premium (540,000-200,000) 340,000
Ordinary share warrants outstanding 60,000
When the warrants are exercised:
Cash (2,000 x 70% x ₱45) 63,000

Ordinary share warrants outstanding (60,000 x 70%) 42,000
Ordinary Share capital (2,000 x 70% x ₱20) 28,000
Share Premium-ordinary share 77,000
CASE NO. 2
Total proceeds 600,000

Less: Total fair value of the preference shares 360,00
(4,000 x ₱90) 0
Value of the warrants 240,000
Cash 600,000
Preference share capital (4,000 x ₱50) 200,000
Share premium (360,000-200,000) 160,000
CASE NO. 3
Market value of ordinary shares ₱ 50

Less: Option price/exercise price 45
Intrinsic value of warrant 5
Multiply: # of ordinary shares claimable under warrants 2,000
Market value of share warrants ₱ 10,000
Total proceeds 600,000
Less: value of Share warrants 10,000
Value assigned to Preference Share 590,000
Cash 600,000
Preference share capital (4,000 x ₱50) 200,000
Share premium (590,000-200,000) 390,000
RETAINED EARNINGS
Retained earnings represent the cumulative amount of profits

and/losses, dividends and other capital adjustment. Retained
earnings may be appropriated or unappropriated.
Appropriated retained earnings represent that portion which has been

restricted and therefore is not available for any dividend, whereas
unappropriated retained earnings represent that portion which is
free and can be declared as dividends to stockholders.
Furthermore, when the retained earnings have a debit balance, it is
appropriately termed as “Deficit” or “Accumulated Losses.”
DIVIDENDS
Dividends are resources distributed to entity’s shareholders.

Dividends may be in form of cash, non-cash assets, short-term and
long-term liabilities or shares of stocks.
Dividends may be declared as either
a. Dividends out of earnings; or

b. Dividends out of capital
DIVIDENDS OUT OF EARNINGS
Trust Fund Doctrine
The “trust fund doctrine” is a legal principle that prohibits a

private corporation to distribute its legal capital to the
stockholders for the protection of corporate creditors.
“This doctrine holds that the assets of the corporation as

represented by its capital stock are “trust fund” to be maintained
unimpaired and to be used to pay creditors…”
The corporation, however, is allowed to declare dividends to the

stockholders out of its unrestricted retained earnings.
Shares entitled to dividends
Only shares issued and outstanding are entitled to dividends. Issued

and outstanding shares may be determined as follows:
No. of Shares Amount

Number of share capital Issued xxx ₱ xxx
Add: Subscribed Share capital xxx xxx
Total xxx xxx
Less: Treasury shares (*at par) xxx xxx
Total outstanding shares xxx ₱ xxx**
*For the purpose of calculating the amount of issued and outstanding
shares, the treasury shares shall be deducted at par instead of its
cost.
**Alternatively, this item may be computed by multiplying the number

of outstanding shares by the par value per share.
Dividends on unpaid subscription
Cash dividends for those who have subscribed but have not yet fully
paid their accounts shall be paid in full provided they are not yet
declared delinquent by the board of directors also stock dividends
shall be issued to them in full.
But any “cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully paid”
(Sec. 43 of the Corporation Code of the Philippines)
Significant dates relating to dividends
1. Date of declaration. This is the date when the board of directors

announces the distribution of dividends. On this date, the
retained earnings account is to be charged and a liability
account is to be set up for cash and property dividend. The
appropriate journal entry is:

Dividends payable
xxx
2. Date of record. This is the cut-off date that determines who
among the stockholders are entitled to dividend per listing as of
the record date. No journal entry is required on this date.
3. Date of payment. This is the date on which the dividend liability

is to be paid
Dividends payable xxx

Cash/Non-cash asset/Share capital
xxx
FORM OF DIVIDENDS
A. Cash Dividends
The payment of cash to shareholders in proportion to number of

shares owned. Cash dividend may be:
a. Certain amount of pesos per share

b. Certain percent of the par or stated value
Date of declaration
Date of record
No entry
Date of payment
Cash xxx
ILLUSTRATION: Cash dividends
On December 1 of the current year, Brayden Corp. declared ₱2 per
share dividends on the outstanding ordinary shares to the
shareholders of record on December 15 payable on December 31.
Brayden has 10,000 issued ordinary shares with par value of ₱100.
These shares were issued on January 1 of the current year. On
February 1 of the current year, the company acquired 1,000 ordinary
shares at cost of ₱110 per share which were held in treasury.
Required: Provide the journal entries at the date of
a. Declaration b. Record c. Payment

SOLUTION:
Computation of outstanding shares:

Ordinary shares issued 10,000
Less: Treasury shares 1,000
Outstanding shares 9,000
a. Retained earnings (9,000 x ₱2) 18,000

Dividends payable 18,000
b. No formal accounting entry
c. Dividends payable 18,000
Cash 18,000
B. Property Dividends:
A dividend paid in the form of some asset other than cash
Examples of Property Dividends

1. Noncurrent assets covered by PFRS No. 5 (for example property,
plant and equipment, Intangibles and Investment in Associate)
2. Assets other than those covered by PFRS No. 5 (for example
current assets just like inventory, noncurrent assets covered
by PAS 39 or PFRS No. 9)
Accounting for property dividends (guidelines from IFRIC 17)
Step 1 At the date of declaration, measure the dividends payable at

fair value of the assets to be distributed.
Step 2 At the end of each reporting and at the date of settlement,

review and adjust the carrying amount of the dividends payable to
equity as adjustments to the amount of the distribution.
Step 3 At the date of settlement, get the difference between the

carrying amount of dividends payable and carrying amount of the
noncash assets to be distributed using the following formula:
Carrying amount of dividends payable (which is equal to the XX

fair value of the noncash asset at the date of settlement)
Less: carrying amount of noncash asset to be distributed XX
Gain (or Loss) on distribution of property dividends – P&L XX
Additional guidelines:
Noncurrent assets covered Assets other than those
by PFRS No. 5 covered by PFRS No. 5
Date of Reclassify the noncash No need to reclassify
declaration asset to be distributed as the property dividends
“Noncurrent Asset held for to other criteria
distribution” and measure (e.g., inventory shall
the noncurrent assets at remain as inventory in
the lower of the carrying accordance with PAS No.
amount and fair value less 2)
cost to distribute. (An
entity shall not depreciate
(or amortize) a noncurrent
asset while it is
classified as held for sale
or while it is part of a
disposal group classified
as held for sale.)
Dates of Measure the noncurrent Measure the property
reporting asset held for distribution dividends in accordance
and at the lower of the with applicable PFRS
settlement original carrying amount (e.g., for inventory at
and fair value less cost to the lower of cost or
distribute on the date of net realizable value.)
reporting or settlement.
Gain may be recognized but
not in excess of the amount
of cumulative loss that was
previously recognized.
Date of Carrying amount of the Carrying amount of the
settlement noncash asset for purposes noncash asset for
of computing the gain or purposes of computing
loss on distribution shall the gain or loss on
be the carrying amount as distribution shall be
adjusted in accordance with the carrying amount as
PFRS No. 5 on the date of adjusted on the date of
reporting. reporting in accordance
with applicable PFRS.
1. Date of declaration
Retained earnings (at fair value) xxx
2. Date of record
No entry
3. Reporting date (assuming fair value increases)
4. Date of payment
Loss on derecognition (if any) xxx
Cash xxx
Gain on derecognition (if any) xxx
ILLUSTRATION: Property Dividends (Current Assets)
On November 1, 2021, Elizabeth Company declared inventory as

property dividend payable on February 15, 2022. The carrying amount
of the inventory is ₱700,000. Data relating to the fair values of
the inventory are as follows:
Date Fair values

November 1, 2021 600,000
December 31, 2021 800,000
February 15, 2022 780,000
Assume the fair values are not materially different with the net
realizable values.
Required: Provide the journal entries to record these transactions.
SOLUTION:
Nov. 1, 2021 Retained earnings 600,000

Dec. 31, 2021 Retained earnings 200,000

Fair value ₱ 800,000

Less: Previous Fair value 600,000
Increase in dividends payable ₱ 200,000
Feb. 15, 2022 Dividends payable 20,000


Decrease in dividends payable ₱(20,000)

Inventory 700,000
Gain on distribution-prop dividends 80,000
Carrying amount of dividend payable =

Less: Carrying amount of noncash 700,000
assets
Gain on distribution of prop. ₱ 80,000
Dividends
ILLUSTRATION: Property Dividends (Property, Plant and Equipment)
On November 1, 2021, Aaron Company declared equipment as property

dividend payable on February 15, 2022. The carrying amount of the
equipment ₱700,000. Data relating to the fair values of the
equipment are as follows:
Date Fair values (assume that the cost

to distribute are immaterial
November 1, 2021 600,000
December 31, 2021 800,000
February 15, 2022 780,000
Required: Provide the journal entries to record these transactions.
SOLUTION:
Nov. 1, 2021 Retained earnings 600,000

Equipment-noncurrent asset for 600,000
distribution*
Impairment loss 100,000
(₱700,000-₱600,000)
Equipment 700,000
Dec. 31, 2021 Retained earnings 200,000


Increase in dividends payable ₱ 200,000
Equipment-noncurrent asset for

distribution** 100,000
Gain on recovery of impairment loss 100,000
Feb. 15, 2022 Dividends payable 20,000


Decrease in dividends payable ₱(20,000)
Equipment-noncurrent asset for 700,000
distribution
Gain on distribution-prop dividends 80,000
Carrying amount of dividend payable =

Less: Carrying amount of noncash 700,000
assets
Gain on distribution of prop. ₱ 80,000
Dividends
*(Lower of ₱700,000 and ₱600,000)
**(₱800,000 minus ₱600,000) but the gain shall not exceed the amount
of impairment loss of ₱100,000.
Computation of the impairment loss is as follows:
Original carrying amount ₱700,000

Less: Lower between these two amounts
FVLCTD 600,000
Original carrying amount 700,000 600,000
Impairment loss ₱100,000
Computation of the gain on reversal of the impairment loss is as
follows:
Lower between subsequent FVLCTD and original carrying amount

Original carrying amount ₱700,000
FVLCTD 800,000 ₱700,000
Carrying amount at initial recognition 800,000
Gain on reversal 100,000
Note: FVLCTD – Fair Value less Cost to Distribute.
C. Noncash or cash alternative

If an entity gives its owners a choice of receiving either a non-
cash asset or a cash alternative, the entity shall estimate the
dividend payable by considering both the fair value of each
alternative and the associated probability of owners selecting
each alternative. (IFRIC 17 par. 12)
ILLUSTRATION: Non-cash or Cash Alternative
On January 1, 2021, Drenz Company had five outstanding ordinary

shares. On December 31, 2021, Drenz declared dividends on the
ordinary shares. The corporation decided to give the ordinary
shareholders a choice between receiving a cash dividend of ₱10,000
per share or a property dividend in the form of a noncash asset.
Each noncash asset has a fair value of ₱12,000 and a carrying amount
of ₱9,000. The corporation estimated that 60% of the ordinary
shareholders will take the option of the cash dividend and 40% will
elect for the noncash asset. Journalize the transaction on December
31, 2021.
Required: Provide the journal entry on December 31, 2021.
SOLUTION:

Supporting computation:
Cash alternative (5 x 60% x ₱10,000) ₱ 30,000
Noncash alternative (5 x 40% x ₱12,000) 24,000
Total dividends ₱ 54,000
Date of payment:
If the shareholders opted to receive cash, the journal entry is:
a. Dividends payable 54,000

Cash (5 x 10,000) 50,000
Retained earnings (balancing figure) 4,000
If the shareholders opted to receive noncash and each noncash asset
has a fair value of ₱15,000, the journal entries are:
b. Retained earnings (₱15K x 5)- ₱54K) 21,000

Gain on distribution of dividends (balancing figure) 30,000
Noncash Asset (5 x 9,000) 45,000

D. Liability dividends
These items represent deferred cash dividends. This form of
dividends may either be scrip (for short-term) or bond (for long-
term).
Date of declaration
Retained earnings
xxx
Scrip dividends payable
xxx
Date of record
No entry
Date of redemption
Scrip dividends payable
xxx
Interest expense (if any)
xxx
Cash
xxx
E. Share dividends
It is a dividend paid in the form of entity’s own share. Shares
of other entities declared as dividends qualify as property
dividends and not as share dividends.
Share dividends may be classified as either small share dividend

or large share dividend.
Accounting for share dividend
Small dividend Large dividend

a. Percentage declared Less than 20% of 20% or more of
outstanding shares outstanding shares
b. Amount to be Fair value or par Par value of
charged to Retained value of shares, shares
earnings whichever is higher
c. Amount credited to Excess of fair value None
share premium over par value
Small dividend
Retained earnings (at fair value) xxx
Share dividends payable (at par) xxx
Share premium xxx
2. Date of record
No entry
3. Date of redemption
Share dividends payable xxx
Share capital xxx
Large dividend
2. Date of record
No entry
3. Date of redemption
Share capital xxx
FRACTIONAL SHARE DIVIDENDS
Issuance of share dividends might give rise to fractional share

dividends for it might not be possible to issue full shares to all
shareholders.
Let’s say, for example, a shareholder owning 82 shares and the

company declared 20% dividends. This shareholder is entitled to
receive 16 shares plus a fractional share of 2/5 share. A
shareholder receiving the 2/5 share might be issued warrants or
rights and be given time to accumulate enough warrants for the
acquisition of full new shares.
Accounting for such Fractional Share Warrants or rights follow:
1. Date of declaration of share dividends

Share premium xxx
2. Issuance of full share dividends and the fractional share
warrants or rights
Share capital (at par) xxx
Fractional warrants outstanding (part of Share xxx
premium)
3. Issuance of full shares as a result of the exercise of the
fractional share warrants
Fractional warrants outstanding xxx
Share capital (at par) xxx
Share premium xxx
ILLUSTRATION: Fractional Share Rights or Warrants
The shareholders’ equity section of Apple Pen Co. on December 31,

2021 is as follows:

outstanding
Share Premium on Ordinary shares 500,000
On December 30,2021, the company declared 20% share dividends to the
shareholders of record January 3, 2022 payable on January 31, 2022.
Assume that of the share dividends declared, 18,000 shares relate to
full shares issued while 2,000 relate to the fractional shares
issued. Also, assume that 1,500 of the fractional shares were
exercised at par while the rest were not exercised.
Required: Prepare all the necessary journal entries.
SOLUTION:
1. Date of declaration of share dividends

Retained earnings (100,000 X 20% X ₱10) 200,000
Share dividends payable 200,000
2. Issuance of full share dividends and the fractional share
warrants or rights
Share dividends payable 200,000
Share capital (18,000 X ₱10) 180,000
Fractional warrants outstanding 20,000
3. Issuance of full shares as a result of the exercise of the
fractional share warrants
Fractional warrants outstanding 20,000
Share capital (1,500 x ₱10) 15,000
Share premium-unexercised warrants 5,000
Although in the stock market it might not be possible to have less
than multiples of 10 because the unit of trading is usually in fixed
minimum amounts called board lots. The unit of trading usually
ranges from 10 to 1,000,000 shares.
The purpose of a board lot is to avoid “odd lots” and to facilitate

easier trading. It’s more difficult for a broker to find a buyer
for, say, 17 shares, than if everybody agrees to trade in 100 share
lots. (Investopedia.com)
TREASURY SHARE AS SHARE DIVIDEND
Under the corporation code, when the treasury shares are declared as
dividends, the cost of the shares should be charged to retained
earnings.
Share dividends payable – treasury shares xxx
2. Date of payment
Share dividends payable – treasury shares xxx
Treasury shares xxx
ILLUSTRATION: Treasury Stock as Share Dividend
The shareholders’ equity section of Kristina Erika Co. on December

31 is as follows:
Ordinary share ₱50 par, 105,000 shares issued 5,250,000

Treasury shares (5,000 shares) 300,000
Required: Provide the journal entries to be made under the following
independent assumptions:
1. The company declared 10% share dividends on the ordinary share

when the market value per share is ₱130.
2. The company declared 20% share dividends on the ordinary share
when the market value per share is ₱130.
3. The company declared and paid ₱2 per share liquidating dividends.
4. Assume instead that the 5,000 treasury shares were declared as
share dividends.
SOLUTION:
1. Accumulated Profits 1,300,000

[(105,000–5,000)x 10% x ₱130]
Share dividends payable [(105,000-5,000)x10%x₱50] 500,000
Share premium on Ordinary shares 800,000
2. Accumulated Profits 1,000,000
[(105,000–5,000)x 20% x ₱50]
Share dividends payable [(105,000-5,000)x10%x ₱50] 1,000,000
3. Capital Liquidated (₱2 x 100,000 shares) 200,000
Cash 200,000
4. Accumulated Profits 300,000
Share dividends payable – Treasury shares 300,000
DIVIDENDS OUT OF CAPITAL
Dividends out of capital are popularly known as liquidating

dividends. This type of dividends is treated as a return of
shareholders’ capital and normally declared during the liquidation
of the entity.
Capital liquidated or share premium xxx

Cash xxx
Note: Capital liquidated is to be deducted from the shareholders’
equity.
APPROPRIATION OF RETAINED EARNINGS
This refers to the restriction of retained earnings for certain

purpose. Appropriated Retained earnings are amount of retained
earnings restricted (i.e., made unavailable for dividend payments)
at the discretion of the board of directors or as mandated for by
law or contract. Thus, appropriation may be:
1. Legal appropriation – appropriation of retained earnings as

mandated for by law because the legal capital cannot be returned
to the shareholders until the corporation is dissolved and
liquidated. An example is appropriation for an amount equal to
the cost of the treasury stocks.
2. Contractual appropriation – appropriation of retained earnings as
required by the contract so as to ensure their payment. Such
issuances may impose restriction on the payment of dividends.
Examples include:
a. Appropriation for sinking fund or bond redemption
b. Appropriation for redemption of preference shares
3. Voluntary appropriation – appropriation made by management.
Examples include:
a. Appropriation for plant expansion,
b. Appropriation for increase in working capital, and
c. Appropriation for contingencies.
STATEMENT OF RETAINED EARNINGS
A statement of retained earnings may be prepared by a reporting

entity. Such statement includes the following (DACIP):
1. Dividends declared or paid to stockholders

2. Appropriation of retained earnings
3. Effect of Change in accounting policy
4. Net Income or loss for the period
5. Prior period errors

NOTES For Intermediate Accounting

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CORPORATION

-is an artificial being created by operation of law, having the

If a corporation does not formally organize and commence the

- At the time of incorporation, at least 25% of the authorized

Shareholders’ equity is the residual interest of owners in the net

Components of shareholders’ equity:

Terms used by the Corporation IAS and IFRS terms

Share capital refers to the paid-in capital representing the amount

a. Ordinary share capital. An ordinary share is an equity

TWO METHODS OF ACCOUNTING FOR SHARE CAPITAL

a. Memorandum Method – Under the memorandum method, memorandum

The summarized differences in the journal entries follow:

Memorandum Method Journal Entry Method

2. Subscriptions receivable. This refers to the unpaid portion of

3. Reserves. The caption “Reserves” generally includes

The creation of reserves is sometimes required by statute or

4. Retained Earnings or Accumulated Profits. This account is used

ILLUSTRATION: Shareholders’ Equity Composition

The accounts below appear in the December 31 trial balance of

Authorized ordinary share ₱ 3,500,000

Authorized ordinary share ₱ 3,500,000

Legal capital is the portion of paid in capital which cannot be

Formula for the Computation of Legal Capital:

1. With par value Share capital XX

The stockholders/ equity section of Alyssa Anne Company revealed the

Preference share, ₱100 par 1,150,000

1. How much is the legal capital?

Requirement 1 – With par value

Preference share, ₱100 par 1,150,000

Preference share, ₱100 stated value 1,150,000

Accounting for organization costs

Organization costs, except for share issuance costs, shall be

Accounting for share issuance costs

According to PAS 32 paragraph 35, “transaction costs of an equity

1. Share premium from issuance

Accounting for Indirect Costs

Management salaries and other indirect costs related to the sale of

ISSUANCE OF SHARE CAPITAL: Cash Consideration

Watered share is a share issued at a discount or issued for

The related discount on share capital shall be presented as

Secret is the reserve of watered share. It arises when asset is

 Excessive provision of for depreciation, depletion,

ILLUSTRATION: Issuance of Share Capital

Assume the following issuances of a ₱100 par value share of stock:

1. Issuance of 3,000 shares at par for cash.

Required: Prepare the necessary journal entries.

1. Cash (3,000 x ₱100) 300,000

2. Cash (5,000 x ₱110) 550,000

3. Cash (4,000 x ₱90) 360,000

ISSUANCE OF SHARE CAPITAL: Noncash Consideration

Based on the provision of the Corporation Code and in conformity

Items not covered by “debt for equity swap”:

Fair value of equity instruments issued (or if not XX

Fair value of equity instruments issued (or if not XX

ILLUSTRATION: Issuance of Share Capital for Noncash Consideration

Assume the following issuances of a ₱100 par value share of stock:

1. Issued 2,500 shares of stock for machinery: The machinery has a

Required: Prepare the necessary journal entries.

2. Patent (1,000 x ₱105) 105,000

3. Organization expense 60,000

ILLUSTRATION: Issuance of Share Capital for Existing Liability

The company issued 2,000, ₱100 par ordinary shares for an