Chapter 6-7: Liquidation

Types of Liquidation
1. Lump-sum liquidation or liquidation by totals
2. Liquidation by installment or piece-meal liquidation

Procedures in Lump-sum Liquidation

1. Sale of non-cash assets and distribution or allocation of gain or loss
2. Distribution of cash to creditors and partners

Cash can be distributed to partners before or after the elimination of the deficiency. If
cash is distributed after the elimination of the deficiency
1. Capital deficiency is eliminated by
a. Making additional cash investment, if the deficient partner is solvent.
b. Charging the deficiency as an additional loss to the remaining partners, if
the deficient partner is insolvent
2. Cash available for distribution is then paid to partners to apply first on loan then
on capital

The final distribution of cash to partners is made based on partner’s capital balances
and not on any ratio

If cash is distributed to partners before eliminating the deficiency

1. Cash available for distribution is paid to partners based on an accompanying
schedule to determine amounts to be paid to partners.
2. Deficient partners may
a. If solvent, make additional cash investment; to be paid to partners as
second cash distribution or the deficient partner may make direct cash
settlement to the other partners.
b. If insolvent, the deficiency shall be absorbed by the other partners as
additional loss according to their profit and loss ratio.

When personal assets exceed personal liabilities, the partner is solvent.

When personal assets are less than personal liabilities, the partner is insolvent.

Liquidation procedure in installment liquidation: The liquidation procedure shall be the

same as in lump-sum liquidation except:
1. Cash is distributed to partners even before fully realizing non-cash assets and
determining total gain or loss on realization.
 2. Restricted interest, in the Accompanying Schedule to Determine Amounts to be
Paid to Partners, shall consist of:
a. Remaining unsold assets
b. Cash withheld (for possible expenses)
c. Debit balances to capital

Chapter 8: Organization and Formation of a Corporation

A corporation is an artificial being created by operation of law, having the right of

succession and the powers, attributes, and properties expressly authorized by law or
incident to its existence. (Section 1, Corporation Code of the Philippines)

SHARE CAPITAL (Capital Stock)

- the amount fixed by the corporate charter to be subscribed and paid in or
secured to be paid in by the shareholders of the corporation either in money or in
property, labor or services upon the organization of the corporation

CLASSES OF SHARE CAPITAL

Preference Share Capital (Preferred Stock) - generally issued with a par value
and a dividend rate. The holders of preference shares have priority as to distribution of
dividends and as to distributions of assets in the event of corporate liquidation.

Ordinary Share (Common Stock) - represents residual ownership equity; carry

the greatest risk; equal or pro-rata division of profits; single class of share

CHARACTERISTICS OF A CORPORATION
1. Separate Legal Entity - an artificial being
2. Created by Operation of Law - the mere agreement of the parties cannot give
rise to a corporation.
3. Right of Succession - a corporation can continue its existence up to the period
of time stated in the articles of incorporation but not exceed to fifty years
regardless of changes in shareholders.
4. Power, Attributes, Properties Authorized by Law - a corporation can only
exercise powers provided by law and those powers which are incidental to its
existence.
5. Ownership Divided into Shares - the shareholders or stockholders of a
corporation are considered owners of the business.
 6. Board of Directors - the governing body or decision-making body of the
corporation which consist of people elected by the shareholders. The corporation
law provides that the number of board of directors are not less than five and not
more than fifteen.

COMPONENTS OF A CORPORATION
1. Incorporations - the persons who originally formed the corporation.
2. Corporators the persons who compose the corporation whether as shareholder
or member.
3. Stockholders or Shareholders - the corporators of a stock corporation.
4. Members - they are the corporators of a non-stock corporation.
5. Promoters - the person who undertakes to (a) form a company based on a given
project, (b) set it going, and (c ) take the necessary step to accomplish the
purpose for which the corporation is organized.
6. Subscribers - the person who agreed to take original, unissued shares but will
pay later.
7. Underwriters - they are those who undertake to dispose of the shares to the
general public.

ISSUANCE OF SHARE CAPITAL

Memorandum Entry Methods
At Par
Cash
Ordinary Share Capital
Number of Shares x Par Value/Stated Value = Amount to be recorded
Above Par
Cash
Ordinary Share Capital
Ordinary Share Premium / OSC in Excess of Stated Value
Number of Shares x Issuance Price = Amount in Cash
Number of shares x Par value/Stated Value = Amount in OSC
Number of Shares x (IP-PV) = Amount in OSP/OSCESV

Journal Entry Method

At Par
Cash
Unissued Ordinary Share Capital
Number of Shares x Par Value/Stated Value = Amount to be recorded
Above Par
Cash xxx
Unissued Ordinary Share Capital xxx
Ordinary Share Premium / OSC in Excess of Stated Value xxx
Number of Shares x Issuance Price = Amount in Cash
Number of shares x Par value/Stated Value = Amount in UOSC
Number of Shares x (IP-PV) = Amount in OSP/OSCESV

ISSUANCE FOR NON-CASH ASSETS OR PROPERTY

The land has a FAIR VALUE

Land xxxx
Ordinary Share Capital xxx
Ordinary Share Premium/ OSCESV xxx
Fair Value = Amount in Land
Number of Shares x Par Value/Stated Value = Amount in OSC
Fair Value - Amount in OSC = Amount in OSP
The land has no known market value. The fair value of Ordinary Share Capital on
the date of exchange is P15.
Land xxx
Ordinary Share Capital xxx
Ordinary Share Premium/ OSCESV xxx
Number of Shares x Fair Value of OSC = Amount in Land
Number of Shares x Par Value/Stated Value = Amount in OSC
Amount in Land - Amount in OSC = Amount in OSP

ISSUANCE IN EXCHANGE FOR SERVICES RENDERED

The services of the lawyer is valued at Pxx,xxx

Pre-Operating Expense xxx
Ordinary Share Capital xxx
Ordinary Share Premium/ OSCESV xxx
Value of Services = Amount in Pre-Operating Expense
Number of Shares x Par Value/Stated Value = Amount in OSC
Pre-Operating Expense - Amount in OSC = Amount in OSP
There is no known fair market value for the service. The fair market value of
Ordinary Share Capital issued is P15 per share.
Pre-Operating Expense
Ordinary Share Capital
Ordinary Share Premium/ OSCESV
 Number of Shares x Fair Market Value of OSC = Amount in Pre-Operating
Expense
Number of Shares x Par Value/Stated Value = Amount in OSC
Amount in Pre-Operating Expense - Amount in OSC = Amount in OSP

SALE OF SHARE CAPITAL ON A SUBSCRIPTION BASIS

To record the receipt of subscription

SP = PV
Share Capital Subscription Receivable
Share Capital Subscribed
Shares Subscribed x Par Value = Amount to be recorded
SP>PV
Share Capital Subscription Receivable
Share Capital Subscribed
Share Premium/SCESV
Number of Share Subscribed x Subscription Price = Receivable
Number of Share Subscribed x Par Value = Subscribed
Receivable - Subscribed = Premium

To record collection of subscriptions from subscribers.

Cash
Share Capital Subscription Receivable

To record issuance of stock certificate upon full payment of subscription

Share Capital Subscribed
Share Capital (or Unissued Share Capital)

SUBSCRIPTION DEFAULTS
Upon Default
Receivable from Highest Bidder
Share Capital Subscription Receivable

Cost incurred in connection with the delinquency sale

Receivable from Highest Bidder
Cash

Upon receipt of payment from highest bidder

Cash
Receivable from Highest Bidder
Upon Issuance of certificate of stock
Share Capital Subscribed
Share Capital (or Unissued Share Capital)

Reminders:
● The highest bidder is the one who is willing to pay the unpaid subscription and
the expenses incurred and is willing to take the lease number of shares. (pg.
301)
● If there is no bidder, the shares will be considered as treasury shares.
Treasury Share
Receivable from highest bidder

Share Capital Subscribed

Share Capital (or Unissued Share Capital)

- Cash dividends, scrip dividends, and property dividends do not affect the
corporation’s number of issued and outstanding. However, there is a decrease in
the total assets and total retained earnings.

- Share capital dividends do not affect asset and total SHE. rather it simply
represents transfer of capital from retained earnings to contributed capital.
Retained earnings decreased and total contributed capital increase. Total SHE
remains the same.Declaration and distribution of share capital dividends
increases the capital shares outstanding.

- The only share entitled to dividends are the outstanding shares

- The balance of the treasury shares account is reported as a deduction from

the sum of total contributed capital and retained earnings.

- The reacquisition of a company’s own shares reduces the number of

outstanding shares but does not affect the number of issued shares.
FORMULA:

Book Value per Share- the amount that would be paid on each share owned in case of
a corporate liquidation
a.) One class of share capital
BV/Sh = Total SHE / No.of Outstanding Shares
b.) More than one class of share capital
Non-cumulative
Total SHE - Equity identified with PSC = Equity identified with OSC
*Equity identified with PSC = Outs Sh x Liquidation Value
BV / Sh = Equity identified with PSC or OSC / Outstanding share

Cumulative
Total SHE - Equity identified with PSC = Equity identified with OSC
*Equity identified with PSC = Outs Sh x Liquidation Value
*Dividend in arrears = PSC x percentage x years in arrears
BV / Sh = Equity identified with PSC or OSC / Outstanding share

Earnings per Share- amount earned during a given period on each ordinary share
outstanding.
a.) One class of share capital
EPS = Profit / No.of Outstanding Shares

b.) More than one class of share capital

Cumulative
 Profit xxx
Less Dividends on PS
(Outstanding x par x div. rate) xxx
Profit attributable to OS xxx

EPS
Profit attributable to OSC / OS Outstanding Shares

Non-cumulative
EPS = Profit / OS Outstanding Shares

Dividends
Dividends = Outstanding share x percentage x par value

Dividends per Share

Dividends per share = Dividend per year / Outstanding Shares

*Treasury Shares- it is computed based on the cost of the share on the time of
purchase NOT by PV.

Total Contributed Capital

Share Capitals + APIC = Total Contributed Capital

Retained Earnings:
Accounts Effect on Retained Earnings

Cash Dividends Payable Less/Decrease

Scrip Dividends Payable Less/Decrease

Property Dividends Payable Less/Decrease

Share Capital Dividends Distributable Less/Decrease

Share Capital Retirement at less than Less/Decrease

Original Issuance Price

Conversion of preference share to Less/Decrease

ordinary share with an indicated loss