Corporation – an artificial being/ legal or juridical person created by operation of law.

Who may organize: Any person, partnership, association or corporation simply or jointly, maximum of 15 (sec 10).
Except: Those who are licensed and organized to practice profession unless o/w provided under special laws.

RA 11232 (Revised Corp Code)

Perpetual term Participation via remote communications, in absentia

One Person Corporation Emergency board
No min capital stock (sec 12) Electronic filing and monitoring system

Requirements to file to Securities and Exchange Commission (SEC) Certificate of Incorporation – commences
1. Articles of Incorporation (sec 14) – all corporation the juridical personality and legal existence
2. Bylaws – rules of action for its internal gov’t – formal organization of a corporation but not yet ready to do
business until organized.
Components of Corporation
a. Corporators – shareholders or members All incorporators are corporators but not all
b. Incorporators – pioneers mentioned in articles of incorporation corporators are incorporators.
c. Shareholders – owners of shares in a stock corp
d. Members – corporators of nonstock corp

Shareholder’s equity – residual interest of owners in the net assets (A-L)

Share capital – paid-in capital representing the total par/stated value of the shares issued; incl TS
Subscribed share capital – authorized share capital subscribed but not yet fully paid; unissued
Subscription receivable – unpaid subscription (full + partial payment – subs receivable)
Share premium or additional paid-in capital – excess over par/stated value
(sources: resale of TS at more than cost, donated capital, etc.)
RE – cumulative balance of periodic earnings, dividend distributions, prior period error, etc.
Revaluation surplus – excess of revalued amount over CA of revalued asset
TS @ cost of acquisition after issuance
- Corp – allowed to acquire TS to the extent of RE
- Gain on retirement – (dr) SP from TS;
- Loss on retirement – (cr) SP from orig issuance, SP from TS, RE
Donated shares – actually TS that can be reissued w/o any discount liability
- DS not retired do not affect shareholder’s equity; reissuance is credited to SP

Capital stock or Authorized share capital – amount fixed in AOI to be subscribed and paid in by the shareholders
Share – represents 4 rights: share in earnings, vote, share right, share in the net assets upon liquidation
Share certificate – evidences ownership of shares
GR: Share certificate is issued only when
Share warrants – evidences ownership over rights issue.
subscription is fully paid, so is share cap.

Per value share – specific value fixed in AOI

No-par share – always has issued value or stated value; min issue price is Php5 GR: Share shall not be issued at less than
par/stated value nor issued in exchange
Ordinary share capital – have no fixed or specific return on investment for promissory notes or future service.
Preference share capital – have limited or fixed return on investment
Legal capital – Trust fund doctrine – illegal to return to shareholders
GR: illegal to pay dividends if
during the lifetime of the corporation
the entity has a deficit

Issuance of share capital for noncash consideration Organization Cost – expensed outright except share issuance costs
a. FV of noncash consideration received a. Legal fees (eg. Drafting of AOI and by-laws, corp registration)
b. FV of shares issued b. Incorporation fees
c. Par value of shares issued c. Share issuance costs
 Cost of public offering of shares – Joint cost - allocated bet new and old
Share issuance cost - capitalized expensed outright shares
legal fees road show presentation cost relating to prospectus
CPA fees public relations consultant's fees opinion of counsels
underwriting fees tax opinion
commissions fairness opinion and valuation report
cost of printing cert
documentary stamps Watered share – understated consid Secret reserve – overstated consideration
filing fees A & C - overstated A & C – understated; L – overstated
cost of ads and promotion
newspaper publication fee Delinquent subscription
- does not pay on the fixed date or upon the “call” of BOD
- delinquent sh – public willing to pay offer price for the smallest no.
auction – highest bidder of shares

Callable PS Redeemable PS Convertible PS

at the option of corp at the option of the shareholder at the option of the shareholder
no definite redemption date fixed amount at a future date
current or non-current fin
equity instrument liability Allocatio
excess of call price over par value excess: MV n Par value SP
SP from orig issuance gain or loss on redemption 10T OS x 36 360 320 200 120
RE 20T CPS x 27 540 480 400 80
Total 900 800

excess of par value over call price Issue price of CPS

SP related to OS (Par value of OS issued)
Cash received 11,000 MV Allocation SP as a result of sh issuance and
subseq conversion
Bonds w/o -4,000 PS w/o warrants 50 350
Residual amt – Sh 7,000 Share warrants 10 70 Issue price of CPS
Par value -500 Total 60 420 (Conversion of PS)
SP 6,500 SP as a result of conversion

Usually asked in the problem

OS capital (incl SP) Outstanding share capital – shares

PS capital (incl SP) Cash & other in the hands of shareholders
Subs PS cap – CA assets
(Subs PS cap – NCA) shareholders Issued
Contributed capital have given in Share dividend (basis: share outs)
or paid-in capital exchange for (TS @ cost)
shares. Outstanding shares
TS @ cost not deducted
RE not included

Legal capital for par value sh for non-par value

PS capital (excl sh prem)
OS capital (excl sh prem)
Subscribed sh cap
Accounting
Totals for Share Capital
PS capital (incl sh prem)
OS capital (incl sh prem)
Subscribed sh cap
Totals
 Memo JE Authorized share capital
Memo entry Unissued share cap (Unissued share capital)
Authorized share cap Issued share capital
Cash or subscribed sh cap Cash or subscribed sh cap Subscribed share capital
Share cap Unissued share cap (Subscription receivable)
Share premium
GR: Share capital is only recognized (cr) when shares are RE
issued. Revaluation surplus
(Remaining TS @ cost)
(Discount on share cap)
Accounting for TS
Shareholder's equity
Par value method Cost method
Cash 10,500 Cash 10,500 alternative
Share capital 7,500 Share capital 7,500 (purchase of TS @ cost)
SP from issuance 3,000 SP from issuance 3,000 sale of TS
*retirement of TS affects the
elements but not the total equity
TS at par value 500,000 TS at cost 550,000
SP from issuance 200,000 Cash 550,000
Cash 550,000
SP from TS 150,000
(issuance - purch) x no. of sh

reissuance > cost = (cr) SP from TS Share premium from orig issuance
reissuance < cost = (dr) SP from TS; RE Share capital
retirement: share cap is reduced by par value (TS @ cost)
cost > par = (dr) SP from orig issuance; SP from TS; RE Amount to be debited to RE
cost < par = (cr) SP

Accounting of Recapitalization

Change from par to no-par par value > stated value = RE

 
Change from no-par to par
 
Reduction of par/stated value
 
Share split – do not affect elements of equity
Split up (two-for-one)
Split down or reverse share split
par value < stated value = SP
stated value > par value = RE
stated value < par value = SP
Share capital
SP - recap
 
no. of shares (+); par value (-)
no. of shares (-); par value (+)
 RE (cr) – o/w known Accumulated Profits (IFRS) Deficit (dr) – Accumulated Losses
NI or net loss Retirement of PS in excess of issuance Loss on sale of TS in excess of SP - TS Reclassifications

Dividend distribution Changes in accounting policy Loss on retirement of TS in excess of Prior period errors

Kinds of RE

1. Unappropriated – can be declared as dividends; silent assumption

2. Appropriated – restricted

Dividends – distribution of earnings or capital

1. Dividends out of earnings – from RE only 2. Dividends out of capital/liquidating

- Dividends to the extent of RE dividend
- When deficit – illegal to pay dividends - Capital returned to shareholders
- Share dividends – can be declared from premium on par value - Wasting asset doctrine
share - Dividends declared even
3 Dates: to the extent of
a. Declaration – authorization – liability recognized accumulated depletion
RE - Wasting asset entity
Dividends payable - Engages in exploitation of
natural resources
b. Record – closed for registration; no entry ^ Capital liquidated account
c. Payment – dividend liability paid - Deduction from shareholder’s
Dividends payable equity
Cash

4 Forms
a. Cash dividends
CA
b. Property dividends
(Impairment loss)
b.1. @ FV of asset to be distributed; change in FV adjusted at year end
and date of settlement Net CA or msmt of NCA
* FV of dividend payable @ settlement – CA of asset distributed = P/L
b.2. @ lower of CA and FV – cost to distribute FV @ settlement
* if CA > FV – cost to distribute at the EOP = impairment loss (CA – impairment loss)
6
Gain/loss on distribution of prop dividends
^ case where there’s a choice of either noncash or cash
– consider all associated probabilities
- Cash chosen – retain amount in div payable Shares issued
- Noncash chosen – FV and CA essential (TS)
- Outstanding shares
c. Scrip and bonds – EOP: Int exp Share dividend (outstanding shares x %)
Interest payable Total outstanding shares

d.Share dividends or bonus issue – never reduces assets; not a liab No. of shares issued
- Decrease RE but increases share capital @ par Divide by no. of shares outstanding
^ Small share dividend if SD < 20% = FV on the date of declaration dr to RE % of share dividend
- However, if MV < par/stated value = par/stated value dr to RE
- Used if selling price is not affected by the share dividend To be capitalized in RE
Divide by FV
^ Large share dividend if SD = or > 20% = par or stated value dr to RE Shares to be issued as share div

^ Cash in lieu of fractional shares possible if source of SD if RE; not SP Increase in share capital – 2021 to 2022
Increase in share premium – 2021 to 2022
- amount to be recognized = optional cash dividend
^ Fractional warrants outstanding, even unexercised is part of SP Share dividend
^ TS can be declared as SD
^ In closely held entities, SD recognized to the extent of par/stated value

Prior periods and other adjusting Q: increase in CL as a result of the share dividend
entries net of income tax rate declaration? 0; Share dividend payable is not a L
Appropriated RE – limits declaration of dividend
- Indicates that the portion can’t be used as basis in paying dividends

Legal appropriation Contractual appropriation Voluntary appropriation

- appropriated for an - insure eventual - for expansion purposes
amount equal to TS at cost payment of bonds or for covering possible
payable and redemption losses or contingencies
of PS

Do not necessarily require an appropriation of RE: Take note:

- cash restriction for the retirement of bonds payable
- preference dividends in arrears GR: Dividends, NI (already net of tax)
- Overstatement (+) understatement (-)

Reserves

Components of OCI

Unrealized G/L on equity investment designated @ FVOCI Cash flow hedge

Unrealized G/L on debt investment measured @ FVOCI G/L from translating foreign operation
Change in revaluation surplus Change in FV attrib to credit risk of liab irrevocably designation @ FVPL

Statement of changes in equity – shows mov’t in the components of shareholder’s equity

Quasi-reorganization or corporate readjustment – must be approved by SEC

– permissive but not mandatory procedure under which a financially troubled entity restates its accounts it’s A, L, and
C in conformity with FV for the purpose of eliminating a deficit.

a. Recapitalization b. Revaluation of PPE

- Against SP from recapitalization - Against revaluation surplus
- E.g. from cost, CA to FV, sound value, etc. - Losses subsequent can’t be
charged to rem revaluation
To reduce par value: surplus
SC RE dr when reducing PPE, inventory - RE subsequent restricted to
SP the extent of deficit wiped out
To eliminate deficit RE cr when deficit is charged against SP and can’t be declared as div
SP - Disclosed for at least 3 yrs
SP cr when reducing SC
RE
Revaluation surplus
Share premium per book = increase in value of PPE
Reduction of par value (par – 5 x shares outs)
Cash contribution from shareholders
(Elimination of deficit, includes reduction in inventories and PPE) Reasonably possible – disclosure
Adjusted share premium w/c may be done by
appropriation of RE
“reducing the 30 par value to 5” (reduction is 15) Probable – accrual to expense
“eliminating the deficit against SP” (reduction to the extent of SP bal)

Deficit
Reduction in inventory
Reduction in PPE
Write-off of goodwill
Total deficit
(Charged against SP)
Reduction of share capital
 SHARE-BASED COMPENSATION
– whereby entity’s employees receive equity shares in exchange for their services or the entity incurs liabilities to the
employees in amounts based on the price of its equity shares.
a. Equity settled
- Share options – add’l compensation granted upon 20x1 20x2
fulfillment of certain conditions at a specified
No. of employees
price.
- Share options outs – part of equity as SP (Who left in current year)
Measurement (Who left in prev year)
@ FV of share options at grant date – default (Expected to leave)
@ Intrinsic value over vesting period
Employees entitled to share options
- excess of FV of share over option price
Recognition Multiply by no. of share options
1. Vest immediately – employees are not required to Multiply by FV of share options at grant date
complete a specified period of service Total FV of share options
- Recognize as expense in full
Divide by vest period 1/3 2/3
- Following the grant date;
2. Do not vest until employees completed the condition Compensation exp to date
- Recognize as expense over vesting period (Cumulative compensation last year)
^ Vesting period = date of grant – date of exercise Compensation expense for the year
- Service period

To recognize compensation Total compensation Cash payment

Salaries
Compensation for Yr 1 Compensation for Yr 1
Share options outstanding
Compensation for Yr 2 Compensation for Yr 2
To recognize the exercise of share options Compensation for Yr 3 if SO not
Compensation for Yr 3
Cash (shares x option price) exercised but paid cash
Share options outstanding
TS @ cost or Share capital (depending on the problem) “any payment on the cancellation or settlement of share options is
Share premium accounted for as repurchase of equity interest, excess over FV of SO
is expensed”
Case of TS as compensation Case of OS
Take note:
Option price (exercised only) Option price or exercise price
net increase in equity as a result of the grant and exercise of
Share options outs FV of share options – tot compensation options = cash received @ option price or (share options x option
Total consideration Total consideration price)
(TS @ cost) (Par value of shares) Average % – need to get the average
Share premium Share premium Total compensation expense – no further calculation if available

Share options @ FV at grant date FV of SO and SO price – 2 different matters

Divide by vesting period Share of option price and vest period
Annual compensation expense or the increase in expense and
equity

20x1 20x2 20x3 20x4

Share options remaining
Employees entitled to share options
Multiply by decrease in intrinsic value
Multiply by no. of share options
Decrease in intrinsic value
OP-SP SP 20x4 –
Multiply by IV - a gain on reversal
OP-SP OP-SP SP 20x3
Total compensation
Divide by vest period 1/3 2/3 3/3 Treated as additional
Compensation exp to date compensation
(Cumulative compensation last year)
Compensation expense for the year
 b. Cash settled – liability incurred by entity ^ Modification from cash settled to equity settled
- Share appropriation rights – entitlement to Step 1: @ FV of equity instrument
receive cash = to the increase in the price of a Step 2: Liability for cash settled is canceled
given number of shares over a given period. Step 3: P/L = CA of accrued liab – FV of share options

Measurement
@ FV of liability at reporting date and
remeasured at every year-end ‘till settlement date.
FV of current year
(Predetermined)
FV of liability
Recognition
1. Vest immediately – recognized on grant date
2. Do not vest – over vesting period

^ Cash alternative: cash payment = MV of a certain no. of

shares subject to certain conditions
^ Share alternative: equity shares issued

If entity has the choice of settlement, instrument is not a

compound financial one. Thus, accounted initially either
as liability or equity.
M if If not, compound financial instrument.
Equity component = residual amount of FV of the
rnative Chooses cash
whole alternative
instrument and FV of liability component.
e on CA Total liability base on CA

Total equity

on Total compensation

(Total equity)

SP

IMPLIED INTEREST - CA

Total liability to date

Total liability last year

 MODIFICATION

From Intrinsic to FV Y1 Y2 M Y3 Y4 E From FV to Intrinsic

SAR not yet exercised SO not yet exercised @ FV

Multiply by IV IV FV FV Multiply by

Total compensation exp         Total compensation exp

Divide by vest period         Divide by vest period (e.g. 3 yrs)

Compensation to date         Compensation to date

(Cumulative compensation last year)         (Cumulative compensation last year)

Compensation for the year         Compensation for the year – not yet ex

Increase in compensation due to modification       Compensation for the year – ex

Total compensation for the year Total compensation for the year

Share option SAR exercised

FV of SO @ grant IV of current year