Introduction to Corporations

Dr. RONNIE G. SALAZAR, CPA

 Coverage
Stockholders Equity
Investment in Equity
Employee Benefits
Share Based Compensation
Investment in Associates
Related Parties
Corporation Code of the Phil. (Batas
Pambansa Blg. 68)
Law governing private corporations.
Corporation
Artificial being -
It is created under operation of law
separate and distinct with the
stockholders. Having no physical
appearance.
Doctrine of piercing the veil of corporate
entity or corporate fiction.

This is the doctrine to the effect that

the separate personality of a
corporation may be disregarded it
such entity is used to defeat public
convenience, justify a wrong, protect
fraud or defend crime.
Created by operation of law
It does not come into existence by mere agreement of
the parties. Persons desiring to form a private
corporation must comply with the requirements of the
law its creation.
Has the right of succession
As a rule, corporation continues to exist for the
period for which it has been formed regardless
of the changes in the ownership of its stocks or
in its membership. Its existence is not affected
by the death, insolvency, or incapacity of the
individual stockholders or members
It has the powers, attributes and properties expressly
authorized by law or incident to its existence
A corporation can exercise only the powers
expressly conferred upon it by law and its
articles of incorporation, those implied from
such powers expressly granted and those that
are incident to its existence.
Similarities between a corp. and
a partnership.
Both have a separate juridical personality.
Both are artificial persons
Both are composed of a group of persons
with the exception of a sole.
A partnership, with the exception of a gen.
professional partnership, is taxed as a corp.
Distinctions
Manner of Creations
A corporation is created by
operation of law, while a
partnership is created by
mere agreement of the
partners.
Number of Organizers
A corporation is formed by
a 5 or more persons but not
exceeding 15. A partnership
maybe formed by 2 or more
persons.
Distinctions
Right of succession
A corporation has the right
of succession, while a
partnership has no right.
Powers
A corporation can exercise
only the powers expressly
authorized by law or
incident to its existence. A
partnership may exercise
any power provided it is
authorized by the partners
and it is not contrary to law,
morals, good customs,
public order or public policy.
Distinctions
Management
A corporation acts through
its board or directors, while
a partnership acts through
all the general partners
each one of whom is
considered an agent of the
partnership unless
otherwise agreed.
Liability
The stockholders or
members are not liable for
the obligations of
corporation, while the
general partners in a
partnership are liable with
their separate assets for
partnership debts.
Distinctions
Commencement of existence.
Corporation – commence its
existence on the date of the
issuance of its certificate of
incorporation.
Partnership – upon
execution of the partnership
contract unless a different
date is set by the partners.
Transferability of interest
Corporation – a stockholder
can transfer his share to
another person without the
consent of the other
stockholders
Partnership –cannot transfer
his interest without the
consent of the other
partners.
Distinctions
Term of existence
Corporation – may exist for
a period not exceeding 50
years, renewable.
Partnership – indefinite
period
Dissolution
Corporation – cannot be
dissolved without the
consent of the State.
Partnership – may be
dissolved by the partners
 Classifications of corporations
AS to share of stock issued or not
Stock Corporation – Non-stock corporation
one that has capital – one no part of the
stock divided into income of which is
shares and is distributable as
authorized to dividends to its
distribute dividends or member, trustees or
allotments of the officers.
surplus profits on the
basis of shares held.
As to the state or country under
whose laws it was created
Domestic Corp. – Foreign Corp. – formed
incorporated under and organized under
Philippine laws. any laws other than
those of the Philippines
and whose laws allow
Filipino citizens and
corporation to do
business in its own
country.
As to number or person
composing them
Corporation aggregate Corporation sole – one
– one that is composed of only one
composed of more person like a bishop or
than one corporator rabbi
 As to whether its purpose is
public or private
Public corporation – Private corporation –
one that is organized one that is formed for
for the government of a private purpose or
a portion of the State, end, like Jollibee
like provinces, cities, Foods Corp.
municipalities and
barangays
According to whether for
charitable purpose or not
Ecclesiastical Eleemosynary
corporation – corporation –
organized for religious established for public
purposes charity

Civil corporation –
established for
business or profit
According to their legal right to
corporate existence

De jure corporation – De facto corporation –

existing in fact and in existing in fact but not
law. in law.
According to degree of public
participation with regard to their
share ownership:

Close corporation – Open corporation –

share ownership is the share is available
limited to selected for subscription or
persons or member purchase by any
of a family not person.
exceeding 20
persons.
According to their relation to
another corporation:
Parent or holding Subsidiary corporation
corporation – a – a corporation
corporation that is related
controlled by another
to another corporation
that it has the power to corporation known as
either directly or indirectly a parent corporation.
elect the majority of the
directors of a subsidiary
corporation.
 Components of a corporation
Incorporators – those stockholders or members mentioned
in the articles of incorporation as originally forming and
composing the corporation and who are signatories of such
document.
Corporators – those who compose the corporation whether
as stockholders or members.
Shareholders – are owners of stock in a corporation.
Members – they are corporators of a non-stock corporation.
Promoters – they are the one who undertake to form a
group of persons interested in organizing a corporation.
Board of directors – a governing body formed out of the
shareholders.
Subscribers – they are natural or artificial persons who
agreed to buy original and unissued stocks of the corporation.
How to form a corporation

Organization Stage

Incorporation Stage

Commencement Stage
Articles of Incorpo
-Name of corp.
-Specific purpose
-Location of busine
-Term of existence
-Incorporators R/N
-Authorized share
By-laws – refers to the rules and
and regulations adopted by the
corporation administering its
internal government.
Includes the following:
1. Time, place and manner of calling a meeting.
2. Manner of voting and use of proxies
3. Manner of electing BOD
4. Qualifications, duties and compensations of
directors or trustee, officers and
employees.
5. Procedure of amending Articles of Inc.
and By-Laws.
Corporate Name
1. Should not be identical with or similar to one already
registered.
2. Must have at its suffix “INC” or “Incorporated”
unless it includes the word “Corporation” as part of
its corporate name.
3. If subsidiary of foreign corporation, the word
(PHIL.) or (PHILIPPINES) in parenthesis should
be affixed to the corporate name.
4. The word(s) “Maharlika” or “Barangay” is strictly
prohibited.
 Shareholder’s Journal

Minutes of the Meetings Shareholder’s Ledger

Corporate Secretary

Subscriber’s Ledgers
 Components of stockholders
equity
Share Capital or Capital Stock xxx
Subscribed Capital Stock (xxx)
Share premium or Additional Paid-In Capital xxx
Treasury Shares (xxx)
Equity Reserved xxx
Accumulated Profits or Losses (R/E) xxx
Total Stockholders Equity XXX
 Shareholder’s Equity
Contributed Capital:
Share Capital Pxxx
Subscribed share capital Pxxx
Less: Subscription Receivable xxx xxx xxx
Reserves:
Share premium in Excess of Par Value xxx
Share premium from Treasury Shares xxx
Accumulated Profits & Losses – Appro. xxx
Revaluation Surplus xxx xxx
Accumulated Profits and Losses – Unrestricted xxx
Less: Treasury Share at Cost xxx
Total Shareholder’s Equity Pxxx
Stockholder’s Equity – Sub Sections
1. Contributed Capital – the first sub-
section of the shareholder’s equity consist
the following elements.
A. Share Capital – refers to the portion of
the paid-in capital representing the
amount of the total par or stated value of
the shares issued.
B . Subscribed Share Capital – refers to
the portion of the share capital that a
prospective investor agreed to subscribe
but nit yet paid-in-full and therefore, still
unissued.
C. Subscription Receivable – refers to the
unpaid portion of the share capital that a
prospective investor has agreed to
subscribe.
2. Reserve – second sub-section of the
shareholder’s equity.
A. Share Premium Reserve – also known as
“additional paid in capital” excess of the par
value or stated value.
B. Revaluation Reserve – also known as “
Revaluation Increment in Property” “ Asset
Revaluation Reserve”. This is the excess of
value of plant assets as a result or appraisal
over net book value.
C. Accumulated Profit (Losses) Reserve – it is
the portion of the Accumulated Profit and
Losses that is appropriated for plant
expansion, purchase of Treasury Shares, etc.
3. Accumulated Profit (Losses)
Unappropriated – known as Retained
Earnings, this account represents the
cumulative income and expense from the
start it operates up to the present.
Capital stock -
the amount specified in the articles of
incorporation paid in, or procured to be
paid in for carrying on of the business of
the corporation.
Capital Stock
Authorized capital stock – this is
the total of shares which a
corporation is allowed to issue if
the shares have par value.
Subscribed capital stock – this
is the part of capital stock
which is subscribed, whether
paid or unpaid.
Outstanding capital stock –
refers to the total shares of
stock issued to subscribers or
stockholders, whether or not
fully or partially paid.
Paid-up capital stock – the part
of the subscribed capital stock
paid to the corporation.
Unissued capital stock – part of
the capital stock which is not
issued or subscribed.
 Legal Capital -

It refers to that portion of the shareholder’s

investment in a corporation that is permanent in
nature and represents assets that will continue
to be available for the satisfaction of creditor’s
claim.
Legal capital
Par value shares No-par value shares
Aggregate par value of all Is the aggregate stated
shares issued and value of all shares issued
subscribed. and subscribed plus any
excess over the stated
value.
 Illustration
The shareholder’s equity section of Fan Company revealed the following
information on December 31, 2014:

Preference share (P100 par), P2,300,000; share premium in excess of

par-preference, P805,000; Ordinary share (P15 par), P5,250,000;share
premium in excess of par-ordinary, P2,750,000; subscribed ordinary
share, P50,000; Accumulated profits and losses , P1,900,000; and
subscription receivable-ordinary, P400,000. How much is the legal
capital?
Treasury Shares-
Those which have been issued and fully
paid for, but subsequently reacquired by
the issuing corporation by purchase,
redemption, donation or through other
lawful means.
Contributed capital -
the amount of equity contributed by the
corporation’s shareholders. It consists of
share capital plus share premium.
Illustration
The articles of incorporation of Paramount Corp.
provide an authorized capital stock of P1,000,000
divided into 10,000 shares each having a par value
of P100 per share. At the time of incorporation 25%
of the authorized capital stock was subscribed of
which 25% was paid. In its first year of operations,
the corporation obtained a loan of P300,000 which it
used to buy equipment of the same amount. During
the same period, the corporation posted a net profit
of P100,000.
Solutions
Authorized capital stock = P 1,000,000
Subscribed capital stock =
(P1,000,000 X 25%) 250,000
Outstanding capital stock = 250,000
Unissued capital stock
(P 1,000,000 – 250,000) = 750,000
Paid-up capital stock
(P 250,000 x 25% ) = 62,500
Legal capital 250,000
Classes of shares of stock
1. Ordinary shares 2. Preference shares
(Common stock) – the (Preferred stock) –
ordinary stock of a one entitles the holder
corporation which to certain preferences
entitles the holder to a over shareholders.
pro rata division of the A.Preferred stock as to
dividends, without any asset.
preference or B.Preferred stock as to
advantage over any dividends.
other stockholders.
Con- preferred stock
Preferred stock as to asset
– one entitles the holder
to preference in the
distribution of assets over
common upon liquidation
of corp.
Cumulative preferred
stock – entitle the holder
to payment not only of
current but also those in
arrears.
Non-cumulative preferred
stock – entitle the holder
to payment of current
dividends but not those in
arrears.
Con- preferred stock
Participating preferred Non-participating
stock – entitle the preferred stock –
holder to participate entitle the holders only
with the holders of to the stipulated
common share in the preferred dividend.
surplus profits after
the amount stipulated
has been paid to the
holders or preferred
shares.
Con – classes of capital stock
3. Par value stock – 4. No-par value stock
one the nominal value – one without any
of which appears on nominal or par value
the stock certificate. appearing on the stock
certificate.
Con – classes of capital stock
5. Redeemable shares 6. Founders shares –
– those which grant those that grant to the
the issuing corporation founders certain rights
the power to redeem and privileges not
or purchase them after enjoyed by the others
a certain period. shares.
Con – classes of capital stock
7. Treasury shares - 8. Watered stock –
those which have been those issued without
issued and fully paid for, consideration or with
but subsequently no adequate
reacquired by the issuing
consideration
corporation by purchase,
redemption, donation or
through other lawful
means.
Con – classes of capital stock
9. Voting shares – 10.Non-voting shares
entitled to vote in the – those without voting
meetings of the rights, except in
corporation. certain cases.
 Accounting for Share Capital
1. Memorandum method

1. Journal entry method

 Illustration
An entity was authorize to issue share capital
of P4,000,000 divided into 40,000 shares
with a par value of P100.
Transactions
An entity was authorized to
issue share capital of
P4,000,000 divided into
40,000 shares with a par
value of P100
Received subscription to
10,000 shares at par
Memorandum Method
MEMO-The entity was authorized to
issue share capital of P4,000,000
divided into 40,000 shares with a par
value of P100
Subscription Receivable 1,000,000
Subscribed Share Capital 1,000,000
Journal Entry Method
Unissued Share Capital 4,000,000
Authorized Share Capital
4,000,000
Subscription Receivable 1,000,000
Subscribed Share Capital 1,000,000

Collected 25% on the above Cash 250,000 Cash 250,000

subscription Subscription receivable Subscription receivable
250,000 250,000
Received full payment for
6,000 shares originally
subscribed Cash 450,000 Cash 450,000
Subscription price (6,000 x Subscription receivable Subscription receivable
100) 600,000 450,000 450,000
Less:Partial payment
(600,000x25%) 150,000
Balance 450,000
Issued the share certificates Subscribed share capital 600,000 Subscribed share capital 600,000
for 6,000 shares which are Share capital 600,000 Unissued share capital 600,000
fully paid.
Cash subscription for 5,000 Cash 500,000 Cash 500,000
shares Share capital Unissued Share capital
500,000 500,000
 Statement Presentations
Memorandum Method Journal Entry Method
Share Capital, P100 par, 40,000 Authorized Share Capital ,P100par
Shares authorized, 11,000 shares issued 1,100,000 40,000 shares 4,000,000
Subscribed share capital, 4,000 shares 400,000 Unissued Share Capital
Subscription receivable 29,000 shares
(300,000) (2,900,000)
Shareholder’s Equity 1,200,000 Issued Share Capital
1,100,000
Subscribed Share Capital
4,000 shares 400,000
Subscription receivable
(300,000)
Shareholder’s Equity 1,200,000
 Illustration
January 1, 2014 - Coca-Cola Corp. is authorized to issue 30,000 shares of
Ordinary Shares at a par value of P50 per share.

January 5, 2015 – Coca-Cola Corp. sold its 5,000 ordinary shares for cash.
Case 1 - Issued at par value
Case 2 – Issued at P60 per share

January 30, 2015 – Coca-Cola Corp. issued 2,000 ordinary share to Grace Poe on
subscription basis and collected 25% down-payment. The balance is payable on.
February 15, 2015.
 Issuance of two (2) shares of stocks
On January 1, 2014, Cola Cola Corp. is authorized to issue 10,000 shares of
10% Preference Shares at a Par Value of P100 per share and 30,000 shares
of Ordinary Shares at a par value of P50 per share.

1.Authorization as to number of shares with par value

2.25% Subscription to Share Capital
3.Payment of 25% Subscription
4.Full payment of 5,000 Preference Shares and 15,000 of Ordinary Shares
5.Issuance of Certificate of Shares of Stocks.
6.Cash subscription of 2,000 shares of Preference Shares @ P110 per share
and 5,000 Ordinary Shares @ P55 per share.
 Accounting for No-Par Value Shares
“No-Par Value” shares are shares without any nominal value printed in
the share certificate.

“ No-Par Value shares with stated value” are shares without any
nominal value printed in the share certificate but with stated value.

“ No-Par Value shares without stated value” are shares without

any nominal value printed in the share certificate and also no stated
value.

Note: Banks, trust companies, insurance companies and loans

associations and Preference Share as to Assets shall not permitted to
issue “No-Par Value Shares”.

Method: Memo Method

 Issuance of shares below par
Cola-Cola Corporation issued its 2,000 shares to Mr. Mar
Roxas with a par value of P50 in exchange for a land with
a fair market value of P90,000.
Entry:
Land 90,000
Discount on Ordinary Share Capital 10,000
Ordinary Share Capital 100,000

Reassessment and payment of Mar Roxas:

Entry:
Cash 10,000
Discount on Ordinary Share Capital 10,000
 Issuance of No-Par, with Stated Value
Coca-Cola Corp. was organized on January 1, 2014 and was
authorized to issue 30,000 shares of Ordinary Shares, no-par
shares with a stated value of P50 per share.

February 5, 2015, 5,000 shares were issued for cash at P57

per share.

April 15, 2015, 7,000 shares were subscribed to by Mr. Enrile

at P65 per share. A 50% down-payment was received.

June 1, 2015, he made full payment of the subscription and

was received by the corporation.
 Entry-
January 1, 2014 – Memo Entry - Coca-Cola Corp. was authorized to issue P 1,500,000 ordinary
share capital divided into 30,000 shares of Ordinary Shares, no-par shares with a stated value of
P50 per share.

February 5, 2014 – Entry

Cash 285,000
Ordinary Share –No-Par, with stated value of P50 250,000
Share Premium – No-Par , Ordinary Share 35,000

April 15, 2014 – Entry

Cash 227,500
Subscription Receivable 227,500
Subscribed Ordinary Share Capital, No-Par 350,000
Share Premium, No-Par – O/S 105,000
 Continuation -

June 1, 2015 – Entry (Collection of Full Payment)

Cash 227,500
Subscription Receivable 227,500

Issuance of Certificate – Entry

Subscribed Ordinary Share Capital, No-Par – O/S 350,000

Ordinary Share Capital,No-Par 350,000
 Issuance of True “No-Par Value”
“ Shares without par value (NO PAR) may not be issued for a
consideration less than the value of five pesos (P5.00) per share, the
entire consideration received by the consideration for its par value shares
shall be treated as capital and shall not available for distribution as
dividends”

Example: Coca-Cola Corporation issued 2,000 shares of No-Par, No Stated Value

shares. (Assume it is issued for P60 per share).

Entry:
Cash 120,000
Ordinary Share Capital 120,000
 Accounting for Issuance of Share Capital
1. Issued or Sold for Cash
2. Issued or Sold on Subscription Basis
3. Issued in Exchange for Non-Cash Assets.
4. Issued in Exchange for Services
Rendered or Liability Incurred
5. Issued in Exchange for Equity Security
of other Corporation
 Shares Issued for Non-Cash Assets
If issued for non-cash asset, the value of share capital issued is equal to
the values according to the following order of priority.
1.Fair market value of the property received
2.Fair market value of the share issued
3.Par value of the share capital

Example: Cola-Cola Corporation issued its 2,000 shares to Mr. Mar Roxas
with a par value of P50 in exchange for a land. Assuming that equity per
share has a fair market value of P55 and the land has the fair market
value of P250,000.
Case I – Fair Market Value of property received is given:
Entry: Land 250,000
Ordinary Share Capital 100,000
Share Premium – O/S 100,000
 Continuation -
Case II – Fair market value of the property received is not given

Entry: Land (2,000 x P55) 110,000

Ordinary Share Capital 100,000
Share Premium – O/S 10,000

Case III – Fair market value of property received and share

issued is not given

Entry: Land 100,000

Ordinary Share Capital 100,000
 Shares Capital Issued for Services Rendered

Valuation: Shares should be valued at Fair Market Value of

services rendered.

Example:
Cola-Cola Corporation issued its 2,000 shares @ P50 par to Atty.
Richard Portun for payment of legal services rendered which has the fair
market value of P120,000. The fair market value of the share is P65.
Entry:
Organization Expense 120,000
Ordinary Share Capital 100,000
Share Premium – O/S 20,000

Note: Ordinary share issued for an outstanding liability, the amount of

liability should be measured for recording.
 Share Capital Issued for Equity Securities
Valuation: Share Capital should be valued at Fair Market Value of the
Equity received.

Example:
Cola-Cola Corporation issued its 2,000 shares @ P50 par in
exchange for San Miguel, Inc. 2,100 shares. The fair market value of the
share is P 55 while that of San Miguel, Inc. is P60.

Entry:
Investment in Equity Securities – San Miguel, Inc. 126,000
Ordinary Share Capital 100,000
Share Premium – O/S 26,000
 Direct Costs for Share Capital Issuance
Share issuance costs - are direct expenses incurred in
selling share capital. It includes printing costs, legal fees,
documentary stamps, costs of promoting the issue,
registration and other regulatory fees.

Gen. Rule: Debited to share premium arising from the share

issuance

Deficit: This costs are treated a reduction in Share Capital

by order of priority;
1. Share Premium or Additional Paid-In Capital
previous issuance
2. Retained Earnings
 Illustration
Mt. Apo Corp. issued 1,000 ordinary shares with a par
value of P100 for P130 per share. Direct costs related to
the issuance of the share is P20,000.

Issuance:
Cash 130,000
Ordinary Share Capital 100,000
Share Premium 30,000
Direct Cost:
Share Premium or APIC 20,000
Cash 20,000
 Continuation
Using the same illustration, if direct cost is P40,000 and
the share premium or additional-paid in capital is P30,000

Entry:
Share Premium 30,000
Legal Expense 10,000
Cash 40,000
 Cost of public offering of shares
“cost that relate to stock market listing, or
otherwise are not incremental costs directly
attributable to the issuance of new shares,
shall be recorded as expense in the income
statement”

Includes;
a. road show presentation
b. public relations consultant’s fees
 Joint Costs
- These are costs that relate jointly to the concurrent listing and
issuance of new shares and listing of old existing shares
- Includes:
- Audit and other professional advice relating to prospectus
- Opinion of counsel
- Tax opinion
- Fairness opinion and valuation reports
- Prospectus design and printing
- Allocations:
prorata on the basis of outstanding newly issued and listed shares
and outstanding newly listed old existing shares
 Illustration
An entity undertakes an initial public offering or IPO for the listing
and issuance of 700,000 new shares and listing of 300,000 old
existing shares.
The entity incurred the following costs:
Documentary stamp tax 25,000
Fairness opinion and valuation report 125,000
Tax opinion 100,000
Newspaper publication 200,000
Listing fee 300,000
Other joint cost 275,000
 Computations
Cost of public offering
Listing fee 300,000

Share issuance costs

Documentary stamp tax 25,000
Newspaper publication 200,000
Total 225,000

Joint Costs
Fairness opinion and valuation report 125,000
Tax opinion 100,000
Other joint costs 275,000
Total 500,000

Allocations: Outstanding Fraction Allocated

Newly issued & listed shares 700,000 7/10 350,000
Newly listed old existing shares 300,000 3/10 150,000
1,000,000 500,000
 Entry
Cots of public offering:
Stock listing fee 300,000
Cash 300,000

Share issuance cost:

Issued at more than par Issued at par
Share premium 225,000 Share issuance cost 225,000
Cash 225,000 Cash 225,000

Joint Costs
Share premium 350,000
Stock listing fee 150,000
Cash 500,000
 Watered share
- Is share capital issued for inadequate or insufficient
considerations
- The consideration received is less than par value or stated
value, but the share capital is issued as fully paid.
- Asset and capital is overstated
Example:
Land with a fair value of at P800,000 is received for P10,000
shares of P100 par value. To create a water in the share capital,
the issuance of 10,000 shares is recorded as fully paid as
follows:
Land 1,000,000
Share capital 1,000,000
To correct:
Discount on share capital 200,000
Land 200,000
 Secret reserve
Arises when the asset is understated or liability is overstated with a
consequent understatement of capital. Arises from:
1. excessive provision for depreciation, depletion,
amortization and doubtful accounts.
2. excessive write-down of receivables, inventories and
investments
3. Capital expenditures are recorded as outright expense
4. Fictitious liabilities are recorded.
January 30, 2015 – Coca-Cola Corp. issued 2,000 ordinary share to Grace
Poe on subscription basis and collected 25% down-payment. The balance is
payable on. February 15, 2015

January 30, 2015 – Subscription

Cash 25,000
Subscription Receivable 75,000
Subscribed Share Capital – O/S 100,000

February 15, 2015 – Payment (Full Payment)

Cash 75,000
Subscription Receivable 75,000

Issuance of Share Certificate

Subscribed Share Capital – O/S 100,000
Ordinary Share Capital 100,000
 Continued – Defaulted Subscriptions (Delinquent Shares)

Feb. 15, 2015 – Let us assume that Grace Poe defaulted her subscription of 2,000
at a par after paying 25% down-payment. Her 2,000 share are considered
delinquent.

Subscription: Subscription Receivable 100,000

Subscribed Share Capital – O/S 100,000

25% Down Payment: Cash 25,000

Subscription Receivable 25,000

Delinquency: Receivable from the Highest Bidder 75,000

Subscription Receivable 75,000

Expenses for delinquency (Assume 5,000)

Receivable from the Highest Bidder 5,000
Cash 5,000
 Continuation: 2 or more bidders
Assume: After few days, three bids were received. Panfilo Lacson is
willing to pay the subscription balance of P75,000 plus expenses of
P5,000 in exchange 4,900 shares. Janet Napoles bids in exchange of
4,500 shares while Duterte bids for 4,700 shares.

Highest Bidder: Entry

Cash (75,000 + 5,000) 80,000
Receivable from Highest Bidder 80,000

Issuance of certificate: Entry

Subscribed Share Capital –O/S 100,000
Ordinary Share Capital 100,000
 Continuation – Reacquired by Company

Reacquisition by the Company:

Treasury Shares 80,000
Receivable from the Highest Bidder 80,000

Issuance of Certificate:
Subscribed Share Capital 100,000
Ordinary Share Capital 100,000
 Callable preference shares
- Is one which can be called in for redemption at a specified price at the option
of the corporation.

- No definite redemption date as this is dependent on the “call of the issuer”.

- “equity instruments”

- Called at more than the original issuance price of the preference shares, the
excess is debited to Retained Earnings

- The excess of the call price over the par value of the preference shares is
charged to the following:
a. Share premium from the original issuance of the preference share
b. Retained earnings
- Called in at less than original issuance price – credited to share premium
related to ordinary shares.
 Illustration
An entity issued 10,000 callable preference shares with par value of
P100 at P120 per share.

1.Subsequently, the preference shares are called in at P150 per share.

 Entry
Issuance of preference shares Cash 1,200,000
Preference shares 1,000,000
Share premium – PS 200,000

Callable at P150 Preference shares 1,000,000

Share premium – PS 200,000
Retained Earnings 300,000
Cash 1,500,000
 Redeemable preference shares
- Provides for mandatory redemption by the issuer for a fixed or
determinable amount at a future date.

- Gives the holder the right to require the issuer to redeem the
instrument for a fixed or determinable amount at a future date.

- Has the legal form of an equity instruments but meets the definition
of a financial liability

- Shall be classified as current or noncurrent liability depending on the

redemption date

- Dividend paid to holders of redeemable preference shall be

accounted for as interest expense
 Illustration
An entity issued 10,000 preference shares at the par value of P100 per
share.

The preference shares have a mandatory redemption by the issuer for

P1,200,000.

A dividend of P100,000 is paid to the redeemable preference

shareholders

Subsequently, preference shares are redeemed by the issuer for

P1,200,000.
 Entry

Issuance of preference shares Cash 1,000,000

Redeemable preference shares 1,000,000

Payment of dividends Interest Expense 100,000

Cash 100,000

Redemption Redeemable preference shares 1,000,000

Loss on redemption 200,000
Cash 1,200,000

Gain or Loss on redemption Redemption Price – Financial Liability

Recognized in profit or loss

 Illustration 2
On January 1, 2017, an entity issued preference shares for cash equal to
the par value of P6,000,000.

The preference shares are redeemable at the option of the preference

shareholders.

No dividends are to be paid on these shares but the preference

shareholders have the right to require the issuer to redeem the shares
on January 1, 2019 for P6,615,000.

The interest are implicit in this agreement is 5% which is compunded

annually.
 Entry
2017
Jan. 1 - Issuance Cash 6,000,000
Redeemable preference shares 6,000,000
Dec. 31 – Interest Interest Expense 300,000
Accrued interest payable 300,000
2018
Dec. 31 Interest Expense 315,000
Accrued interest payable 315,000

2019
Jan. 1 Redeemable preference shares 6,000,000
Accrued interest payable 615,000
Cash 6,615,000
 Convertible preference shares
Is one which gives the holder the right to exchange the holdings for
other securities of the issuing corporation.

May convert the preference share into ordinary shares because

operations are successful and earnings on the ordinary are unlimited.

May convert into bonds which is actually a change of equity from that of
an owner to that of creditor.
 Entry

Case I Case 2

Preference share capital 1,000,000 Preference share capital 1,000,000

Share premium – PS 200,000 Share premium – PS 200,000
Ordinary Share capital 900,000 Retained Earnings 300,000
Share premium – ordinary 300,000 Ordinary Share capital 1,500,000