CHAPTER 15: ACCOUNTING FOR
CORPORATIONS
Corporation
• The Philippine Corporation Code defines a
corporation as
o “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.”
o is a separate legal entity
distinguished from its owners
o formed through operation of law, not
mere agreement
o continues to exist notwithstanding
the withdrawal, death, insolvency or
incapacity of the owners
o only dissolved through operation of
law
o operations are subject to a higher
degree of government regulation
Organization of a corporation
• formed by at least 5 but not more than 15
natural persons of legal age and majority are
residents of the PH
• the entity’s articles of incorporation state the
entity's "authorized capital stock"
• authorize capital stock is the maximum
number of shares an entity may issue
• excess shares issued is illegal
• must amend articles to issue more
• to amend articles, there must be a majority
vote of the board plus a vote by shareholders
representing at least two-thirds of
outstanding share capital is needed
• amended articles shall become effective only
upon SEC’s approval
• at least 25% of the corporation’s authorized
capitalization must be subscribed and at
least 25% of the total subscription must be
paid upon subscription
• the paid-up capital cannot be less than five
thousand pesos
Shareholders’ equity
• is the residual interest in the assets of a
corporation after deducting all its liabilities
• equivalent of ‘owner’s equity”
• components:
o share capital
▪ preference share capital
(preferred stock)
▪ ordinary share capital
(common stock)
▪ subscribed share capital
(subscribed capital stock)
▪ subscription receivable (as a
deduction)
▪ share dividends distributable
(stock dividends payable)
▪ capital liquidated (as a
deduction)
▪ share premium (additional
paid-in capital)
o other components of equity
o treasury shares (treasury stock)
• the following transactions affect the
accounting for a corporation’s equity
o authorization, subscription, and
issuance of shares
o acquisition and reissuance of
treasury shares
o retirement of shares
o donated capital
o distributions to owners (dividends)
Accounting for share capital
• uses one of the following:
o memorandum method
▪ only a memorandum is made
for the authorized
capitalization
▪ subsequent issuances of
shares are credited to the
share capital account
o journal entry method
▪ the authorized capitalization
is recorded by crediting
‘authorized share capital’ and
debiting “unissued share
capital’
▪ difference between the two
accounts represent the issued
share capital
• the more commonly used method is the
memorandum method
• authorized share capital
o represents the maximum number of
shares fixed in the entity’s authorized
articles of incorporation that can be
 subscribed and issued to
shareholders
• unissued share capital
o represents the portion of the
authorized share capital not yet
issues and is still available for
subscription and issuance
• subscription
o a contract between the purchaser or
shares (investor) and the issuer
(corporation) in which the purchaser
promises to buy shares of the
company’s stocks at an agreed price
• subscription receivable
o represents the unpaid portion of the
subscription price
o more commonly presented as a
deduction from the related
subscribed share capital (contra
equity account)
• subscribed share capital
o represents the portion of the
authorized share capital that is
subscribed but not yet issued
• share capital
o represents the potion of the
authorized share capital that is
already issued
• share certificate
o is a document that evidences
ownership of a share
• share capital is credited (under
memorandum method) and unissued share
capital is credited (under journal entry
method) only upon the issuance of shares
• under the Corporation Code, shares and
shares certificates are issued to subscribers
only upon full payment of the subscription
price
• the Corporation Code prohibits the issuance
of shares in exchange for promissory notes
or future services
• the corporation must receive first the full
consideration before shares are issued
• share capital (unissued share capital) is
directed credited for cash subscriptions
• subscription receivable is more commonly
presented as contra equity account (a
deduction in equity) rather than as an asset
as applied under traditional US GAAP
• most companies use the memo method
Classes of Share capital
• classified into two
o ordinary share capital (ordinary share
capital)
o preference share capital (preferred
stock)
Ordinary shares
• represent the residual corporate interest that
beats the ultimate risk of loss and receives
the benefits of success
• ordinary shareholders are guaranteed neither
dividends nor assets upon dissolution, but
they generally control the management and
tend to profit the most if the entity is
successful
• the Corporation Code prohibits the issuance
of only preference shares without ordinary
shares
• ordinary shareholders enjoy the same rights
with no preference over other shareholders
• four basic rights of ordinary shareholders
o right to attend and vote in
shareholders’ meetings
o right to purchase additional shares
(preemptive right or stock right)
▪ protects shareholders for
involuntary dilution of their
ownership interests
o right to share in the corporate profits
(also known as right to dividends)
o right to share in the net assets of the
corporation upon liquidation
• a shareholder who holds more shares
normally will have more voting rights
• some corporations have more than one type
of ordinary shares (Class A and Class B)
• one class of ordinary shares will have more
voting rights than the other class, called
‘super voting’ shares
• issuing super voting shares if to five key
company insiders greater control of voting
rights to control corporate policies and
management decisions
Preference shares
• are shares that give the holders thereof
certain preferences over other shareholders
• such preferences may include priority claims
over dividends and/or net assets of the
corporation upon liquidation
 • in exchange for preferences, preference
shareholders sacrifice certain rights of
ordinary shareholders (voting rights)
• purpose of preference share is to broaden
investor appeal by increasing the
opportunity to generate equity financing
Share premium
• share premium (additional paid-in capital)
arises from various sources which include
the following
o excess of subscription price over par
value or stated value
o excess of reissuance price of cost of
treasury shares issued
o distribution of small stock dividends
• share capital and subscribed share capital are
credited at par value regardless of the
subscription price
• share premium is credited at the subscription
date even for subscriptions that are not yet
paid, provided that the total subscription
price will be collected
Par value and No-par value shares
• a par value share is one with a peso fixed
value in the articles of incorporation,
purpose is to fix the amount of issuance
price
o a par value share cannot be issued
below its par value
• a no-par value share is one without a peso
value fixed in the articles of incorporation
o a no-par value share has a stated
value (issued value) which is also
indicated in the articles but not in the
share certificate
• par value and no-par value shares are
distinguished by the presence or absence of
value per share on the share certificate
issued
• under the Corporation Code, no-par values
should not be issued less than five pesos
(P5) per share
• excess of subscription price over the stated
value is credited to share premium
• under the Corporation Code, ordinary shares
may be issued as either par or no-par value
shares
• but preference shares should only be issued
as par value shares
Legal capital
• is the portion of contributed capital that
cannot be distributed to the owners during
the lifetime of the corporation unless the
corporation is dissolved and all of its
liabilities are settled first
• based on the concept of trust fund doctrine
which states that the share capital of a
corporation is a trust fund held for the
protection of its creditors
• computed as follows:
o for par value shares, legal capital is
the aggregate par value of shares
issued and subscribed
o for no-par value shares, legal capital
is the total consideration received or
receivable from shares issued or
subscribed
▪ total consideration refers to
the subscription price
inclusive of any amount in
excess of stated value
• in case of no-par value shares, legal capital
includes the share premium of ordinary
shares
• preference shares can only be issued as par
value shares, thus the share premium of the
preference shares is not included (?)
Share issuance costs
• include regulatory fees, legal, accounting,
and other professional fees, commissions
and underwriter’s fees, printing costs of
certificates, and documentary stamp tax and
other transaction taxes
• are deducted from any resulting share
premium from the issuance
• if share premium is insufficient, the excess
is charge to retained earnings
Treasury shares
• are an entity’s own shares that were
previously issued but are subsequently
reacquired but not retired
• under the Corporation Code, an entity may
reacquire its previously issued shares only if
it has sufficient unrestricted earnings
Accounting for treasury shares
• treasury shares are accounted for using the
cost method
 • reacquisition and subsequent reissuance of
treasury shares are recorded at cost
• treasury shares are presented as a deduction
in the shareholders’ equity (contra equity
account)
• retained earnings represent cumulative
profits (net of losses, distribution to owners,
and other adjustments) that are retained in
the business and not yet distributed to the
shareholders
• total retained earnings may consist of
o unrestricted
▪ the portion of retained
earnings that is available for
future distribution to the
shareholders
o appropriated (restricted)
▪ the portion of retained
earnings that is not available
for distribution unless the
restriction is subsequently
reversed
• when treasury shares are reissued the related
appropriated retained earnings are reverted
back to unrestricted earnings
• when treasury shares are reissued at more
than the reacquisition cost, the excess of the
reissuance price over the cost is credited to
share premium – treasury shares, this forms
part of the total share premium
• when treasury shares are subsequently
reissued at below the reacquisition cost, the
excess of the cost over the reissuance price
is debited to the following in the order of
priority:
o any balance in share premium –
treasury shares arising from the same
class of share capital
o if the balance share premium –
treasury shares is insufficient or if it
has no outstanding balance, any
excess is debited to retained earnings
Retirement of shares
• shares are considered retired if they have
been reacquired and cancelled in accordance
with SEC regulations
• retired shares cannot be reissued anymore
• when shares are retired, total par value and
the related share premium of the retired
shares are removed from the books of
accounts
• any difference between the total amount
removed and the retirement cost is
accounted for as follows:
o if the par value and related share
premium of the retired shares exceed
the retirement cost, the difference is
credited to share premium –
retirement
o if the par value and related share
premium of the retired shares are less
than the retirement cost, the
difference is debited to the following
in the order of priority
▪ share premium – treasury
shares
▪ retained earnings
• when shares are reacquired and immediately
retired, there is no need to set up a treasury
share account
• the par value and related share premium of
the retired shares are immediately debited,
with a corresponding credit to cash
• in the accounting for treasury shares and
retirement of shares, retained earnings may
be decreased but never increased
Donated capital
• arises from gifts received by the corporation
from nonreciprocal transactions
• donated capital may arise from the following
o donations from shareholders
▪ credited to share premium
o donations from the government
▪ recognized as government
grants
o donations from other sources
▪ these are recognized as
income when
• the conditions
attached to the
donation are fulfilled
or are reasonably
expected to be
fulfilled
• the donation becomes
receivable
• the criteria for asset
recognition are met
• donations from shareholders may be in the
form of
o cash
▪ recognized at the amount of
cash received or receivable
o noncash assets
▪ recognized at the fair value of
the noncash assets
o entity’s own shares
▪ initially recorded through
memo entry
▪ donated capital is only
recognized when the donated
shares are reissued
▪ no asset is generated until
reissued
▪ if donated shares are not to be
resold, the entity should
effect a formal reduction of
its authorized capital by
retiring the shares received