Partnership and Corporation Accounting Reviewer

Lesson 5: Liquidation
Liquidation of partnership is the winding up of its business activities characterized by sale of non-cash assets,
settlement of liabilities and distribution of the remaining cash to partners.
Realization is the conversion of non-cash assets into cash.
Capital Deficiency is the excess of a partner’s share in losses over the partner’s capital credit balance.
Partner’s Interest is the sum of his capital and loan accounts in the partnership.
Right of Offset is the legal right of a partner to apply part or all of his loan account balance against his capital
deficiency resulting from losses in the realization of partnership assets.
Order of Preference
1. Outside Creditor
2. Inside Creditor including employee’s salary
3. Capital Contributions
4. Share of the Profits
Method of Partnership Liquidation
1. Lump-sum Method – all non-cash assets are realized and the related gains or losses and all liabilities are
paid before a single final cash distribution is made to partners.
2. Installment Method – realization of non-cash assets is accomplished over an extended period of time.
Creditors may partially or fully pay. Anny excess may be distributed to the partners in accordance with a
program of safe payments or a cash priority program.
Lump-sum Liquidation
Case 1. Loss on Realization Fully Absorbed by Partners’ Capital Balances
Feliciano, Tria, and Marasigan
Statement of Liquidation
December 31, 2019

Cash NC Assets Liabilities Tria, Marasigan, Feliciano, Tria, Marasigan,

Loan Loan Capital Capital Capital
P/L 40% 40% 20%
Percentages
Balances
before 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Liquidation
Sale of Non-
Cash Asset
and 2,500,000 (3,400,000) (360,000) (360,000) (180,000)
Distribution
of losses
Balances 2,700,000 1,120,000 50,000 80,000 590,000 240,000 620,000
Payment of
(1,120,000) (1,120,000)
Liabilities
Balances 1,580,000 50,000 80,000 590,000 240,000 620,000
Payment to
(1,580,000) (50,000) (80,000) (590,000) (240,000) (620,000)
Partners
Partnership and Corporation Accounting Reviewer
Case 2. Loss on Realization Resulting to a Capital Deficiency with Right of Offset
Feliciano, Tria, and Marasigan
Statement of Liquidation
December 31, 2019

Cash NC Assets Liabilities Tria, Marasigan, Feliciano, Tria, Marasigan,

Loan Loan Capital Capital Capital
P/L 40% 40% 20%
Percentages
Balances
before 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Liquidation
Sale of Non-
Cash Asset
and 1,850,000 (3,400,000) (620,000) (620,000) (310,000)
Distribution
of losses
Balances 2,050,000 1,120,000 50,000 80,000 330,000 (20,000) 490,000
Payment of
(1,120,000) (1,120,000)
Liabilities
Balances 930,000 50,000 80,000 330,000 (20,000) 490,000
Right of
(20,000) 20,000
Offset
Balances 930,000 30,000 80,000 330,000 490,000
Payment to
(930,000) (30,000) (80,000) (330,000) (490,000)
Partners

Case 3. Loss on Realization Resulting to a Capital Deficiency to a Personally Solvent Partner

Feliciano, Tria, and Marasigan
Statement of Liquidation
December 31, 2019

Cash NC Assets Liabilities Tria, Marasigan, Feliciano, Tria, Marasigan,

Loan Loan Capital Capital Capital
P/L 40% 40% 20%
Percentages
Balances
before 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Liquidation
Sale of Non-
Cash Asset
and 1,700,000 (3,400,000) (680,000) (680,000) (340,000)
Distribution
of losses
Balances 1,900,000 1,120,000 50,000 80,000 270,000 (80,000) 460,000
Payment of
(1,120,000) (1,120,000)
Liabilities
Balances 780,000 50,000 80,000 270,000 (80,000) 460,000
Right of
(50,000) 50,000
Offset
Balances 780,000 80,000 270,000 (30,000) 490,000
Additional
30,000 30,000
Investment
Balances 810,000 80,000 270,000 490,000
Payment to
(810,000) (80,000) (270,000) (490,000)
Partners
Partnership and Corporation Accounting Reviewer
Case 4. Loss on Realization Resulting to a Capital Deficiency to a Personally Insolvent Partner
Feliciano, Tria, and Marasigan
Statement of Liquidation
December 31, 2019

Cash NC Assets Liabilities Tria, Marasigan, Feliciano, Tria, Marasigan,

Loan Loan Capital Capital Capital
P/L 40% 40% 20%
Percentages
Balances
before 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Liquidation
Sale of Non-
Cash Asset
and 1,700,000 (3,400,000) (680,000) (680,000) (340,000)
Distribution
of losses
Balances 1,900,000 1,120,000 50,000 80,000 270,000 (80,000) 460,000
Payment of
(1,120,000) (1,120,000)
Liabilities
Balances 780,000 50,000 80,000 270,000 (80,000) 460,000
Right of
(50,000) 50,000
Offset
Balances 780,000 80,000 270,000 (30,000) 460,000
Additional
Losses to (20,000) 30,000 (10,000)
Partner
Balances 780,000 80,000 250,000 450,000
Payment to
(780,000) (80,000) (250,000) (450,000)
Partners
Partnership and Corporation Accounting Reviewer
Case 5. Partnership Insolvent but Personally Insolvent
Feliciano, Tria, and Marasigan
Statement of Liquidation
December 31, 2019

Cash NC Assets Liabilities Tria, Marasigan, Feliciano, Tria, Marasigan,

Loan Loan Capital Capital Capital
P/L 40% 40% 20%
Percentages
Balances
before 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Liquidation
Sale of Non-
Cash Asset
and 900,000 (3,400,000) (1,000,000) (1,000,000) (500,000)
Distribution
of losses
Balances 1,100,000 1,120,000 50,000 80,000 (50,000) (400,000) 300,000
Payment of
(1,100,000) (1,100,000)
Liabilities
Balances 0 20,000 50,000 80,000 (50,000) (400,000) 300,000
Right of
(50,000) 50,000
Offset
Balances 0 20,000 80,000 (50,000) (350,000) 300,000
Additional
400,000 50,000 350,000
Investment
Balances 400,000 20,000 80,000 300,000
Payment of
(20,000) (20,000)
Liabilities
Balances 380,000 80,000 300,000
Payment to
(380,000) (80,000) (380,000)
Partners

Installment Liquidation
Safe Payments Assume that the partners are solvent and that any
partner who is deficient made appropriate payment to
the partnership on July 31.
Gamba, Mulles, and Mones
Statement of Financial Position Gamba, Mulles, and Mones
April 30, 2019 Schedule of Safe Payments
Assets Liabities and Equity May 31, 2019
Cash 315,000 Liabilities 435,000 Gamba Mulles Mones
Non-Cash Mones, Loan Capital Bal. 600,000 350,000 150,000
1,250,000 30,000
Assets Loan Bal. 30,000
Gamba, Capital 600,000 Total
Mulles, Capital 350,000 600,000 350,000 180,000
Interest
Mones, Capital 150,000
Restricted
Total Total Liab. & (380,000) (285,000) (285,000)
1,565,000 1,565,000 Interest
Assets Equity
Balances 220,000 65,000 (105,000)
Distribution
(60,000) (45,000) 105,000
Profit & Loss Ratio of 4:3:3. In May, part of the assets of loss
was sold at the book value for 310,000 and the Free
160,000 20,000 0
remaining assets were sold in June for 210,000. Interest
Partnership and Corporation Accounting Reviewer
Gamba, Mulles, and Mones
Schedule of Safe Payments
June 31, 2019
Gamba Mulles Mones
Capital Bal. 144,000 108,000 (42,000)
Restricted
(24,000) (18,000) 42,000
Interest
Free
120,000 90,000 0
Interest

Restricted Interest represents the portion of a partner’s interest which should remain available to absorb possible
future losses.
Free Interests are simply the amounts to be paid to the partners.
Gamba, Mulles, and Mones
Statement of Liquidation
May to June 31, 2019
Cash Non-cash Liabilities Mones, Loan Gamba, Mulles, Mones,
Assets Capital Capital Capital
Balances
before 315,000 1,250,000 435,000 30,000 600,000 350,000 150,000
Liquidation
Sale of NC
300,000 (300,000)
Assets
Balances 615,000 950,000 435,000 30,000 600,000 350,000 150,000
Payment of
(435,000) (435,000)
Liabilities
Balances 180,000 950,000 30,000 600,000 350,000 150,000
May-
Installment (180,000) (160,000) (20,000)
to Partners
Balances 0 950,000 30,000 440,000 330,000 150,000
Sale of NC
Assets &
210,000 (950,000) (296,000) (222,000) (222,000)
Distribution
of Losses
Balances 210,000 30,000 144,000 108,000 (72,000)
Right of
(30,000) 30,000
Offset
Balances 210,000 144,000 108,000 (42,000)
June-
Installment (210,000) (120,000) (90,000)
to Partners
Balances 24,000 18,000 (42,000)
Investment 42,000 42,000
Balances 42,000 24,000 18,000
July-
Installment (42,000) (24,000) (18,000)
to Partners
Partnership and Corporation Accounting Reviewer
Cash Priority Program
Gamba, Mulles, and Mones
Cash Priority Program
<date>
Cash Priority Payment to
Gamba Mulles Mones Gamba Mulles Mones
Capital Bal. 600,000 350,000 150,000
Loan Bal. 30,000
Partners’ Total
600,000 350,000 150,000
Interest
P/L Ratio 40% 30% 30%
Loss
1,500,000 1,166,667 60,000
Absorption Bal.
Priority I (333,333) 133,333*
1,166,667 1,166,667 60,000
Priority II (566,667) (566,667) 226,667.67** 170,000***
60,000 60,000 60,000 240,000 170,000

Lesson 6: Corporation
Corporation – is an artificial being created by authorized by law or incident to its existence. (Revised
operation of the law, having the right of succession Corporation Code of the Philippines, Sec. 2)
and the powers, attributes and properties expressly
Attributes of a Corporation 6. Management and control have been separated
from ownership.
1. Artificial being
7. Transferability of shares permits the uniting of
2. Created by operation of law
incompatible and conflicting elements in one
3. Right of Succession
venture.
4. Has the powers, attributes and properties
expressly authorized by law or incident to its Classes of Corporations
existence
1. Stock Corporation – Corporations which
Advantage of a Corporation have share capital divided into shares and
authorized to distribute to the holders of such
1. Has a legal capacity to act as legal entity.
shares, dividends or allotments of the surplus
2. Shareholders have limited liability.
profits on the basis of the shares held.
3. Has continuity of existence
2. Non-stock Corporation – Corporation where
4. Shares of Stock can be transferred without the
no part of its income is distributable to its
consent of other shareholders.
members, trustees or officers. Non-stock
5. Its management is centralized in the board of
Corporations may be formed or organized for
directors.
charitable, religious, educational, professional,
6. Shareholders are not general agents of the
cultural, recreational, fraternal, literary,
business.
scientific , social, civil service or similar
7. Greater ability to acquire funds.
purposes like trade, industry, agricultural and
Disadvantages like chambers or any combinations.

1. Complicated in formation and management. Components of a Corporations

2. Greater degree of government control and
1. Corporators – those who compose
supervision
corporations, whether stockholders or
3. Requires high cost of formation and operation
shareholders in a stock corporation or as
4. Subject to heavier taxation
member in a non-stock corporation.
5. Minority shareholders are subservient to the
2. Incorporators – those stockholders or
wishes of the majority.
members mentioned in the Articles of
Partnership and Corporation Accounting Reviewer
Incorporation(AOI) as originally forming and
composing the corporation and who are
signatories to said AOI.
3. Shareholders or stockholders are
corporators in a stock corporation.
Shareholders may be natural or juridical
persons.
4. Members – are corporators of a non-stock
corporation.
5. Subscribers – are the persons who have
agreed to take and pay for original, unissued
shares of a corporation formed or to be formed.
6. Promoter – is a person who, acting alone or
with others, takes initiative in founding and
organizing the corporation and receives
considerations therefor.
7. Underwriter – are usually investment
bankers who have:
a. Agreed to buy at stated terms an entire
or substantial part of an issue of
securities; or
b. Guaranteed the sale of an issue by
agreement to buy from the issuing
corporation any unsold portion at a
stated price; or
c. Agreed to use his best efforts to market
all or part of an issue; or
d. Offered for the sale shares he has
purchased from a controlling
stockholder.
8. Independent Directors – is a person who is
independent of management and free from
any business or other relationship which could
materially interfere with the exercise of
independent judgment in carrying out the
responsibilities as a director.
Classes of Shares
1. Par value shares – one in which a specific
amount is fixed in the AOI and appearing on
the certificate of stock. Par value is the
minimum issue price of the shares.
2. No-par value shares – One without any value
appearing on the face of the certificate of stock.
The issue price may vary from time to time as
it is usually fixed based on the book value of
the corporation’s shares.
3. Minimum stated value – minimum stated
value of no-par value share is five pesos(₱5.00)
4. Voting shares – those issued with the right to
vote.
5. Non-voting shares – issued without the right
to vote.
6. Ordinary shares – shares entitle the holder to
an equal pro-rata division of profits without
any preference.
7. Preference shares – shares entitle the holder
to certain advantages or benefits over the
holder of any ordinary shares.
8. Founders’ shares – may be given certain
rights and privileges not enjoyed by owner of
other stocks.
9. Redeemable shares – issued by the
corporation when expressly provided in the
AOI.
10. Treasury shares – stock that has been issued
by the corporation as fully paid and later
reacquired but not retired.
11. Promotion shares – issued to promoters as
compensation in promoting the incorporation
of a corporation, or the services rendered in
launching or promoting the welfare of the
corporation.
12. Convertible shares – stock which is
convertible or changeable from one class to
another class.
Lesson 7: Corporation – Share Capital
Shareholder’s Equity – the residual interest in the
assets of a corporation after deducting all of its
liabilities.
Components of Shareholder’s Equity
1. Share Capital – is a portion of the paid in
capital representing the total par or stated
value of the shares issued. Share capital can be:
a. Preference Share Capital
b. Ordinary Share Capital
2. Retained Earnings – represents the
cumulative balance of periodic earnings,
dividend distributions, prior period errors and
other capital adjustments.
Definitions of Terms
Subscribed Share Capital – is the portion of the
authorized share capital that has been subscribed but
not yet fully paid and therefore still unissued.
Shareholders’ equity account is credited for the total
Partnership and Corporation Accounting Reviewer
par value of the shares and debited for the total par
value of the fully collected subscriptions.
Legal Capital – is the portion of the paid in capital
arising from issuance of share capital which cannot be
distributed/returned to the shareholders during the
lifetime of corporation.
In case of par value shares, legal capital is the
aggregate par value of all issued and subscribed shares.
In case of no-par shares, legal capital is the total
consideration received by the corporation for the
issuance of its shares to the shareholders including the
excess of issue price over the stated value.
Share Premium – is the portion of the paid in capital
representing excess over the par or the stated value.
Treasury Shares/Stock – are the corporation’s own
shares that has been issued and then reacquired but
not cancelled.
Authorized Share Capital – represents the maximum
number of shares fixed in the article of incorporation
that can be subscribed and issued to shareholders of
the corporation.
Issued Share Capital – shares that been sold and fully
paid. It may include treasury shares.
Unissued Share Capital – represents the portion of
the authorize share capital not yet issued and is still
available for subscription and issuance.
Share – represents the interest or right of the
shareholder in a corporation.
Share Certificate – is the instrument or document
that evidences the ownership of a share. A share
certificate is issued only upon full payment of the
subscription.
Outstanding Share Capital – issued shares which are
in the hands of the shareholders. The number of
outstanding shares will equal the difference between
the issued shares and the treasury shares.
Two Basic Types of Shares
1. Ordinary Share – represents the basic
ownership class of the corporation.
❖ Ordinary shareholders have no fixed or
specific return on investment.
❖ Financial reward is dependent on the
operation of the entity.
❖ If the entity is profitable, their holdings
become more valuable.
❖ If the entity suffers losses, the value of
their holdings will be reduced as fewer
assets are available to satisfy their residual
claims.
2. Preference Share – is a class of share that
gives the holder thereof certain preferences
over other shareholders.
❖ The preferences usually pertain to the
claims on dividends and claims on the net
assets of the corporation in the event of
liquidation.
❖ In exchange for such preferences, the
preferences shareholders sacrifice certain
rights over ordinary shareholders.
❖ Preference shareholders have only a
limited or fixed return on investment.
Share Issuance for Cash
Issuing Share Capital at Par
Narsan Holdings is authorized to issue 1,000,000
ordinary shares divided into 10,000 shares, with a par
value of 100/share. The diversified corporation
issued on cash basis 2,000 shares at a par. The share
issuance entry will be:
Cash 200,000
Ordinary Shares 200,000
Issuing Share Capital above Par
Suppose the 2,000 shares were sold at 150/share, the
entry follows:
Cash 300,000
Ordinary Shares 200,000
Share Premium 100,000
Partnership and Corporation Accounting Reviewer
Subscription of Shares JE Method:
1. On January 1, 2020, XYZ Corp. was authorized to Cash 360,000
issue share capital of P2,000,000 divided into
Subscription receivable 360,000
20,000 shares with par value of P100.
Subscribed Share Capital 600,000
Memorandum Method:
Unissued Share Capital 600,000
The entity was authorized to issue share capital of
2,000,000 divided into 20,000 shares with par value of
100.
Share-based Payment to Employee
JE Method:
Share Option – is a right, not an obligation, to
Unissued Share Capital 2,000,000 subscribe to an entity’s shares at a specified price at
specified time in future.
Authorized Share Capital 2,000,000
Vest – to become an entitlement.
2. The entity received subscription to 10,000 shares
at 100 par value. Grant Date – is the date which the entity and another
party agree to a share-based payment arrangement.
Memorandum Method:
Vesting Period – the period during which all the
Subscription receivable 1,000,000
specified vesting conditions of a share-based payment
Subscribed Share Capital 1,000,000 arrangement are to be satisfied.
JE Method: Vesting Conditions – the conditions that determine
whether the entity receives the service that entitle the
Subscription receivable 1,000,000
counterparty to receive cash or equity instrument of
Subscribed Share Capital 1,000,000 the entity, under a share-based payment arrangement.

3. On February 1, 2020, the entity collected 40% on Service Condition – require the counterparty to
the subscription. complete a specified period of service.

Memorandum Method: Performance Conditions – require the counterparty

Cash
Subscription receivable
JE Method:
Cash
Subscription receivable
4. On March 1, 2020, XYZ Corp. received full payment
on the 6,000 shares subscribed and issued the
share certificates.
Memorandum Method:
Cash
Subscription receivable
Subscribed Share Capital
Share Capital
to complete a specified period of service and specified
400,000 performance target to be met.
400,000 Market Performance Conditions – is a target that is
based on the market price of the entity’s equity
instrument, for example, achieving a certain share
400,000 price target.
400,000 Non-market Performance Conditions – is a target
that is not based on the market price of the entity’s
equity instrument, for example, profit targets and
sales targets.
Illustration. Andam Farms, Inc. granted 100 share
option to each of its 1,000 employees on Jan. 1, 2018.
360,000 The grant is conditional upon the employee’s
remaining in the entity for the next 3 years. The FV of
360,000 each share option at the grant date is 30. The
600,000 employee is expected to remain with the entity for the
next 3 years.
600,000
Partnership and Corporation Accounting Reviewer
Dec. 2018:
Employee Benefits Expense 810,000*

Total Expense = 100 × (1,000 × 100%) × 30 Share Options 810,000

Total Expense = 3,000,000 *(100 options × 810 employee × 30 × 1/3 years)

The total expense will be recognized in profit or loss Dec. 2019:

over three years’ vesting period as follows: Employee Benefits Expense 750,000*
Dec. 2018: Share Options 750,000
Employee Benefits Expense 1,000,000 *(100options × 780employee × 30 × 2/3years) –
Share Options 1,000,000 810,000

Dec. 2019: Dec. 2020:

Employee Benefits Expense 1,000,000 Employee Benefits Expense 1,000,000*

Share Options 1,000,000 Share Options 1,000,000

Dec. 2020: *(100 options × 795 employee × 30 × 3/3 years) –

810,000 – 750,000
Employee Benefits Expense 1,000,000
Share Options 1,000,000
Treasury Stocks
The Share options can be exercised starting Jan. 2021
and expire at the end of the year. The 100 par value Purchase of Treasury Stock
shares can acquire at 120. All option were exercised Illustration. Plantation EcoResort is a world class
on Dec. 31, 2021. destination in Indang, Cavite. The operation has been
Cash (100×1,000×120) 12,000,000 successful. To consolidate control over the enterprise
and thus avoid a corporate takeover by outsider, the
Share Options 3,000,000 board of directors decided to minimizes outstanding
shares by purchasing 1,500 shares with a par value of
Ordinary Share 10,000,000
1,000 for 2,000.
Share Premium 5,000,000
The entry will be:
Treasury Stock 3,000,000
Illustration. Assume that during 2018, 100
Cash 3,000,000
employees actually left the entity. At Dec. 31, 2018, the
entity estimates that another 90 employees will leave Reissuance of Treasury Stock
the entity during the next 2 years to Dec. 31, 2020.
During 2019, 80 employees actually left the entity. At At Cost. Assume that the treasury stock subsequently
Dec. 31, 2019, the entity estimates that another 40 reissued at cost.
employees would leave during the year Dec. 31, 2021. Cash 3,000,000
During 2020, 25 employees actually left the entity.
Treasury Stock 3,000,000
The total expense will be recognized in profit or loss
over three years’ vesting period as follows:
Partnership and Corporation Accounting Reviewer
Above Cost. Assume all the treasury shares were Illustration. A corporation issued 10,000 callable 50
reissued at 2,500 per share. par preference share for 60 per share. The entries will
be:
Cash 3,750,000
Cash(10,000×60) 600,000
Treasury Stock 3,000,000
Preference Shares(10,000×50) 500,000
Share Premium- Treasury 750,000
Share Premium 100,000
Later, the shares were called in at 75 per share. The
Below Cost. Assume that 1,500 treasury shares were
entries will be:
reissued at 1,500 per share.
Preference Shares 500,000
Cash 2,250,000
Share Premium 100,000
Retained Earnings 750,000
Retained Earnings 150,000
Treasury Stock 3,000,000
Cash(10,000×75) 750,000

Retirement of Treasury Stocks

The retirement may result in a gain or loss. “Gain” is
With Gain on Retirement. Assume that Plantation
credited to share premium related to ordinary shares.
EcoResort purchased the treasury shares for 750 per
“Loss” is debited against share premium related to
share. Observe that there is a “gain” on retirement if
issuance of preference share then to retained earnings.
the cost of treasury shares is less than the par value.
Ordinary Share (1,500×1,000) 1,500,000
Convertible Preference Shares
Treasury Stock(1,500×750) 1,125,000
Illustration.
Share Premium 375,000
Preference Share, 200 par, 10,000 2,000,000
Ordinary Share, 60 par, 100,000 6,000,000
With Loss on Retirement. Assume that a total of
10,000 shares have been issued at 1,500 per share OS outstanding 100,000 shares
prior to the purchase of treasury shares. The entity
Share Premium-Preference 400,000
purchased 1,500 treasury shares for 2,000 per share;
these were not reissued and were ultimately retired. Share Premium-Ordinary 2,000,000
Ordinary Share (1,500×1,000) 1,500,000 Retained Earnings 4,000,000
Share Premium 750,000
Retained Earnings 750,000 If the preference share is all converted into ordinary
shares in a 1:3 ratio, the entries will be:
Treasury Stock(1,500×2,000) 3,000,000
Preference Share 2,000,000
Share Premium-Preference 400,000
Callable Preference Shares
Ordinary Share(30,000×60) 1,800,000
Callable Preference Shares give the issuing
corporation the right to purchase(retire) the shares Share Premium-Ordinary 600,000
from its holder at a specified price.
Call price is the amount paid to call and retire a
preference share.
Partnership and Corporation Accounting Reviewer
Recapitalization
Recapitalization is manifested when there is a
change of structure of the corporation. The typical
recapitalization are as follows:
Change from Par to No-Par
Ordinary Share, 50 par, 50,000 2,500,000
Share Premium 250,000
Retained Earnings 1,250,000
If all the par value shares are cancelled and replaced
with the same number of 25 stated value shares, the
recapitalization entries will be:
Lesson 8: Corporation – Retained Earnings
Retained Earnings represent the component of
shareholder’s equity arising from the retention of
assets generated from the profit-directed activities of
the corporation.
The retained earnings account is credited with the
corporation’s profit or debited with the loss.
Dividends is the distributions of cash, property or
stocks from unrestricted retained earnings on the
basis of all issued and fully paid shares , and all
subscribed par value shares except treasury shares.
Dividends declaration reduced retained earnings.

Ordinary Share(50 par) 2,500,000 Prior Period errors are errors discovered in the
current period that are of such significance that the
Share Premium- Ordinary 250,000 financial statements of one or more prior periods can
Ordinary Share, 25 stated 1,250,000 no longer be considered to have been reliable at the
date of issue.
Share Premium-Recapitalization 1,500,000
Note: Credits entries increases the retained earnings
balanced and debits decrease it.
Change from No-Par to Par Deficit is a debit balance in the retained earnings
accounts resulting from accumulated losses.
Ordinary Share, 50 stated, 50,000 2,500,000
The declaration and payment of retained earnings
Retained Earnings 1,250,000
involve 3 important date and they are:
If all the no-par value shares are cancelled and
1. Date of Declaration – on the date of
replaced with the same number of 75 par value shares,
declaration, the board of directors will adopt a
the recapitalization entries will be:
resolution declaring that a dividend is to be
Ordinary Share(50 stated) 2,500,000 paid.
2. Date of Record – a list of shareholders
Retained Earnings 1,250,000 entitled to the declared dividends is prepared
Ordinary Share, 75 par 3,750,000 at the date of record.
3. Date of Payment – the corporation settles its
liability on this date.
Reduction of Par Value(same with stated value)
Ordinary Share, 100 par, 25,000 2,500,000
Share Premium 250,000
Retained Earnings 1,000,000
If the par value is reduced to 80, the recapitalization
entries will be:
Ordinary Shares (20×25,000) 500,000
Share Premium-Recapitalization 500,000