Accounting for Corporations

Learning Outcomes:
1. Explain the basic characteristics of a corporation.
2. Elaborate the components of shareholders’ equity.
3. Account for the initial issuances of shares of stocks.
4. Account for treasury shares and donated capital.
Introduction
► The Revised Corporation Code of the Philippines (RCC) was
signed into law by Pres. Rodrigo Duterte on 20 February 2019,
and became effective on 23 February 2019, following its
publication in 2 newspapers of general circulation.

► Inits repealing clause, the Revised Corporation Code expressly

repealed the 1980 Corporation Code, which had no amendments
for almost 39 years.
Introduction

► 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 incidental to its existence.
Introduction
TYPES OF CORPORATIONS (AS TO PURPOSE)
1. Public corporations
Created to govern a portion of the State.
Its purpose is for the general good and welfare (Sec. 3, Act 1456).
2. Private corporations
Created for some private purpose, benefit, aim or end. It may either be stock nor non-stock, government-owned or controlled, or quasi-
public.
a. Publicly-listed corporations
Private corporations whose stocks are listed in the PSE (Philippine Stock Exchange).
Examples: (1) San Miguel Corporation (2) Philippine Long Distance Telephone Company (3) SM Prime Holdings, Inc. b. Quasi-
public corporations
Private corporations performing public functions.
(Example: CAGELCO, Maynilad)
c. Government-Owned and Controlled Corporations
Private corporations created by the Congress through a special charter and the majority of its shareholdings are owned by the
government.
 A GOCC has a personality of its own, separate and distinct from that of the government.
Examples: (1) Development Bank of the Philippines (2) Philippine Ports Authority (3) Philippine Amusement and
Gaming Corporation (4) Land Bank of the Philippines (5) Manila International Airport Authority

Introduction
TYPES OF CORPORATIONS (under the REVISED CORPORATION CODE)
1. Stock Corporation
✔ Those which have capital stock 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.
✔ It has capital stocks divided into shares and distributed to the holders.
✔ A stock corporation is also considered as a corporation for profit.
✔ Purpose of dividing shares: Determine the share in the profits.

2. Non-Stock Corporation
✔ All other corporations; they do not issue shares and do not distribute profits to its members. However, they still own
profits for expenditures and to improve their facilities.
✔ They cannot distribute the profits to its members. They must plough this back to the corporation for the benefit of the
members in terms of improvement of facilities.
Introduction
TYPES OF CORPORATIONS (AS TO NUMBER OF CORPORATORS)
1. Corporation Sole
► one member or corporator; for purely religious purposes

2. One Person Corporation

► one member or corporator also but not limited to purely religious purposes

3. Corporation Aggregate
► consisting of more than one corporator or member
Introduction
TYPES OF CORPORATIONS (AS TO WHETHER IT IS OPEN OR
CLOSE)
1. Open Corporation

►open to any person who may wish to become shareholders. Most of these are publicly listed.

2. Close Corporation
► limited to selected persons or members of a family.
Introduction
TYPES OF CORPORATIONS (AS TO LEGAL OR CORPORATE EXISTENCE)
1. De jure corporation
► corporation existing in fact or in law

2. De facto corporation
► existing in fact but not in law
Introduction
TYPES OF CORPORATIONS (WHETHER IT IS FOR A RELIGIOUS PURPOSE OR NOT)
1. Ecclesiastical Corporation
► for religious purposes 2.
Lay Corporation
► purpose other than religion

**Other types of religious/charitable corporations:

1. Corporation Sole
► incorporated by one person
►a corporation formed for the purpose of administering and managing, as trustee, the affairs, properties and temporalities of
any religious denomination, sect or church, by the chief archbishop, bishop, priest, rabbi or other presiding elder of such
religious denomination, sect or church.
2. Corporation Aggregate (Religious Society)
► A religious organization incorporated by more than one person
3. Eleemosynary Corporation
► One organized for a charitable purpose
Introduction
TYPES OF CORPORATIONS (AS TO FORMATION)
1. Domestic Corporation
► a corporation formed, organized or existing under the laws of the Philippines.

2. Foreign Corporation
► formed under any laws other than those of the Philippines
Introduction
TYPES OF CORPORATIONS (AS TO THEIR RELATION TO ANOTHER CORPORATION)
1. Parent Corporation
► corporation which holds ownership of various corporations, thereby having control over such corporations. It
has the capacity to elect or control other corporations.
** A holding company is a parent corporation which has no other business aside from the holding of the shares of its
subsidiaries, which it controls

2. Subsidiary Corporation
► owned and controlled by the holding or parent corporation. The holding corporation elects the Board of
Directors (BOD) for the subsidiary.
3. Affiliated Corporation
► those related to the parent corporation or subsidiary corporation
4. Sister Company
► fellow subsidiary with respect to another subsidiary; both owned by the parent corporation
Introduction
PARTIES INVOLVED IN THE ORGANIZATION OF A CORPORATION

(1) Incorporators
(2) Corporators
(3) Board of Directors/ Trustees
(4) Promoters
(5) Underwriters
(6) Founders
Introduction
PARTIES INVOLVED IN THE ORGANIZATION OF A CORPORATION

Incorporators
► Incorporators are the organizers of the corporation upon its inception.
► They are mentioned in the AOI as originally forming and composing the corporation, and
who are signatories thereof.
► Under the New Code, juridical persons can now be incorporators.
► Under the Old Code, only natural persons can be incorporators.
Introduction
PARTIES INVOLVED IN THE ORGANIZATION OF A CORPORATION

Corporators
► Corporators are those who fund the corporation.
► These refer to the stockholders, investors, and incorporators themselves.
► They are people who have interest over the corporation.
▪ Stockholders – in a stock corporation
▪ Members – in a non-stock corporation
Introduction
PARTIES INVOLVED IN THE ORGANIZATION OF A CORPORATION

Board of Directors/ Trustees

► are the group of people who manage the corporation.
Introduction
PARTIES INVOLVED IN THE ORGANIZATION OF A CORPORATION

Promoters
► The promoters promote the corporation itself.
► They convince the people to invest.
► They tell the people that they are organizing such corporation.
► However, they are not committed to buy the shares, and are purely salesmen.
Introduction
PARTIES INVOLVED IN THE ORGANIZATION OF A CORPORATION

Underwriters
► Underwriters are mostly banking companies.
► As distinguished from promoters who have no commitment since they simply promote,
underwriters have commitment such that they guarantee the sale of stocks and if these
were not sold, they will be the ones who will buy the shares. The underwriters therefore
assume liability.
Introduction
PARTIES INVOLVED IN THE ORGANIZATION OF A CORPORATION

Founders
► The founders are those who came about the idea – they are the think tanks of the
corporation.
► As a matter of fact, they are given privilege.
▪ They are entitled to an exclusive right to vote and be voted for, but limited for 5 years only from
date of inception of the Corporation.
Introduction
CONTENTS OF THE ARTICLES OF INCORPORATION
(1) Name of the Corporation (2) Purpose
a. (a) Primary Purpose – main business
Example: Operate and establish the best funeral parlor of all time and name it “Libing Things”
b. (b) Secondary purpose – may refer to incidental or related products or activities
(3) Nature of the business (4) Term
► perpetual term; you could exist for as long as you wish. If you want to stop, just dissolve it along the way

(6) Address (7) Names of the Stockholders (8) Names of the Incorporators
► Purpose: In order that the SEC will know where to send notices or serve you summons
► Note: Incorporators may now be juridical persons so long as they present appropriate authority. (Old
law: only natural persons)
(9) Capital Structure of the Corporation
Introduction
ADVANTAGES OF A CORPORATION

(1) More capitalization

(2) Limited liability – veil of corporate fiction applies
VEIL OF CORPORATE FICTION
A corporation has a separate and distinct personality from its shareholders, officers, and directors. Once said corporate fiction is created, the veil
hides the stockholders such that when a corporation incurs liability, the stockholders are shielded from liability. In so far as the law is concerned, we
are only dealing with the corporation.

(3) Right of succession – upon the death of a stockholder, the heir becomes the new
stockholder which provides stability for the business to continue
(4) Transferability of interest – does not require the consent of other stockholders
(5) Easier management – management is centralized in the Board of Directors
Introduction
DISADVANTAGES OF A CORPORATION
(1) Higher Income Tax Liability (May be taxed twice) ► Corporate Income Tax and
Income Tax to Stockholders

(2) Less Participation in the Management

► Participation of stockholders in a corporation is indirect.

(3) No delectus personae

► Investing with people you do not know; there is no personal touch; no delectus personae

(4) Dissolution – dissolution is granted by the State, unlike in a Partnership which can be dissolved
anytime.
► Dissolution of a Corporation requires consent of the State because it is imbued with public interest.
(5) Greater degree of government control and supervision (6) Difficulty in meeting
requirements
► high cost of formation and operations
Introduction
Sole Proprietorship Partnership Corporation

Created by mere
Commencement Starts upon selling Created by operation of law
agreement of the parties

New Law: One Person Corporation is

No. of
Sole proprietor At least 2 persons allowed
Incorporators
Old Law: At least 5 incorporators

Commencement From the date of issuance of the

No juridical
of Juridical Execution of the contract Certificate of Incorporation by the
personality
Personality SEC
Introduction
Sole Partnership Corporation
Proprietors
hip
 Stockholder
s are liable
only to the
extent of
their
investments
as
represented
by the
shares
subscribed
Liable up to by them
the extent of
Liability Important:
personal
properties Veil of
Corporate
Fiction
applies only
to a
Corporation
Management

Power to do
business is
vested in the
Managed by
Introduction
Transferability of Interest Does not
Transferrable need prior
Sole Proprietorship Partnership Corporation consent of
through asset Needs consent of all partners (based on delectus personae)
sale the
Right of stockholders
No right of succession There is right of succession
Succession
Absence of any
agreement, every partner
is an agent of the
partnership
Introduction
If you are a new corporation, how much should be
subscribed?

The Revised Corporation Code does not require a minimum subscribed

capital stock.
► Reason: To attract the formation of more business organizations.
► Exception: However, the 25% subscribed capital stock is compulsory when
there is an increase in the capital stock. Thus, it requires that at least 25% must
be subscribed, and 25% must be paid-up.
Introduction
What is the Minimum Capital Stock?

Stock corporations shall not be required to have a minimum capital stock,

except as otherwise specifically provided by special law.
Components of Stockholders’
Equity
The following transactions affect the accounting for a
corporation’s equity:

1. Authorization, subscription, and issuance of shares

2. Acquisition and reissuance of treasury shares
3. Retirement of shares
4. Donated capital
5. Distributions to owners (Dividends)
Accounting for share capital

1. Memorandum method - Only a memorandum is made for the

authorized capitalization. Subsequent issuances of shares are
credited to the share capital account.

2. Journal entry method - The authorized capitalization is recorded by

crediting “ authorized share capital ” and debiting “ unissued share
capital .” Subsequent issuances of shares are credited to “unissued
share capital.”
Classes of share capital

►Share capital is basically classified into two, namely:

1. Ordinary share capital (common stock); and
2. Preference share capital (preferred stock).
Four basic rights of ordinary shareholders

1. Right to attend and vote in shareholders’ meetings

2. Right to purchase additional shares (also known as preemptive right
or stock right )
3. Right to share in the corporate profits (also known as right to
dividends)
4. Right to share in the net assets of the corporation upon liquidation
Share premium
► Sharepremium (additional paid-in capital) arises from various sources which
include the following:
1. Excess of subscription price over par value or stated value.
2. Excess of reissuance price over cost of treasury shares issued.
3. Issuance or origination of other equity instruments, such as share options, detachable
share warrants, and equity components of compound financial instruments.
4. Distribution of “small” stock dividends.
5. Quasi-reorganization and recapitalization.

Legal capital
► 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. Legal capital is computed as
follows:
1. For par value shares, legal capital is the aggregate par value of shares issued and
subscribed.
2. 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.
Share issuance costs

► “The transaction costs of an equity transaction are

accounted for as a deduction from equity to the extent
they are incremental costs directly attributable to the
equity transaction that otherwise would have been
avoided.” (PAS 32.7)
Treasury shares
► Treasury shares (treasury stocks) 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 retained earnings.
► Treasury shares (treasury stocks) are presented as
deduction in the shareholders’ equity (i.e., contra-equity
account).
Accounting for treasury shares

►The cost method is used in accounting for

treasury share transactions. Under this method,
the reacquisition and subsequent reissuance of
treasury shares are recognized and
derecognized, respectively, at cost .
Retirement of shares
Donated capital
1. Donation from shareholders – recognized directly in equity
(i.e., credited to share premium/donated capital, except if the
donation is in the form of shares, in which case only memo is
prepared until such donated shares are sold).
2. Donation from the government – recognized as government
grant.
3. Donation from other sources – recognized in profit or loss
(i.e., income) when (a) the conditions attached to the donation
are fulfilled or reasonably expected to be fulfilled, (b) the
donation becomes receivable, and (c) the criteria for asset
recognition is met.
Donated capital (Continuation)
► Cash – recognized at the amount of cash received or receivable.
► Noncash assets – recognized at the fair value of the noncash assets.
► Entity’s own shares – initially recorded through memo entry. Donated
capital is recognized only when the donated shares are subsequently
reissued. This is because no asset is generated from the donated shares
until they are subsequently reissued. If the donated shares are not to be
resold, the entity should effect a formal reduction of its authorized capital
by retiring the shares received.
Illustration:

At the beginning of current year, Ashe Company was organized with

authorized capital of 100,000 shares of P200 par value.

Jan. 10 Issued 25,000 shares at P220 a share.

Mar. 25 Issued 1,000 shares for legal services when the fair value
was P240 a share.
Sept. 30 Issued 5,000 shares for a tract of land when the fair
value was P260 a share.

Requirement: Provide the journal entries for the above transactions.

Illustration:
The shareholders’ equity of Rhenz Co. appears as follows:
Ordinary share, 50,000 shares, P100 par P5,000,000
Share premium 200,000
Retained earnings 2,000,000

Subsequently, the following transactions, among others, occurred: a. Treasury

shares 5,000 were acquired at P160 per share.
b. Reissued 2,000 treasury shares at P180 per share.
c. Reissued 1,000 treasury shares at P150 per share.
d. Retired the remaining treasury shares.
e. Stockholder donated 5,000 shares when the market price is P150 per share. Subsequently,
the company sold 2,000 shares at P180 per share.