Accounting For Corporation

ACCOUNTING FOR CORPORATION

• shareholders’ equity
• owner’s equity section of a corporation’s statement of financial position
• 2 major components:
• Share Capital (contributed or paid-in capital)
• Retained Earnings (accumulated profits/losses)

• 3 major line items:

• Share Capital (legal capital / aggregate par value of issued and outstanding shares
)
• Reserves (Share Premium, Appropriation, Revaluation Surplus, OCI adjustments)
• Retained Earnings (accumulated profits/losses)
 Shareholders' Equity
Share Capital
8% Preference Shares - P50 par, 1,000 shares
authorized, issued and outstanding ₱ 50,000
Share Premium - Preference 12,000 ₱ 62,000
Ordinary Shares - P5 par, 30,000 shares authorized
20,000 shares issued, and 18,000 shares outstanding ₱ 100,000
Share Premium - Ordinary 40,000 140,000
Total Share Capital ₱ 202,000
Retained Earnings 75,000
TOTAL ₱ 277,000
Less: Treasury Shares 2,000 shares, @ cost 12,000
Total Shareholders' Equity ₱ 265,000
 Shareholders' Equity
Share Capital (6) 2,750,000
Reserves (7) 1,450,000
Retained Earnings 2,450,000
Total Shareholders' Equity 6,650,000

Note 6 Share Capital Note 7 Reserves

Ordinary Share Capital - P20 par 2,000,000 Share Premium - PS 250,000
100,000 shares issued & outstanding Share Premium - OS 700,000
Preference Share Capital P100 par 750,000 Retained Earnings appropriated for 200,000
7,500 shares issued & outstanding contingencies
Total Share Capital 2,750,000 Cumulative Translation Adjustment - CR 300,000
Total Reserves 1,450,000
Share Capital
• contributed or paid-in capital
• Reflects the amount of resources received by a corporation as a result
of investment by shareholders, donations or other share capital
transactions
• Shares to be subscribed and paid in or secured to be paid in by the
shareholders, either in money, property or services, at the time of
organization of the corporation or afterwards, and upon which it is to
conduct operations.
• Divisions of Share Capital
• Legal Capital
• Share Premium
Legal Capital
• Portion of the contributed capital or the minimum amount of paid-in
capital which must remain in the corporation for the protection of
corporate creditors.
• Par Value shares
• Aggregate par value of all issued and subscribed shares
• No-Par Shares
• Total consideration received for the issuance of shares including
the excess of issue price over stated value
Share Premium
• additional paid in capital
• the portion of the paid-in capital representing amounts paid by
shareholders in excess of par.
• may also result from transactions involving
• treasury stocks,
• retirement of shares,
• donated capital,
• share dividends
• any other “gain” on the corporation’s own stock transactions
 Two Basic Types of Shares
• Ordinary Share
• represents the basic ownership class of the corporation.
• When only one class of share is issued, it must be ordinary share.
• the entity’s residual equity
• Preference Share
• This share gives its owners certain advantages over ordinary
shareholders.
• Preferred as to
• DIVIDENDS – to receive dividends when declared before the
ordinary shareholders
• ASSETS - priority claims on assets in the event of corporate
liquidation.
Terms related to share capital
Authorized SHARE CAPITAL
• the maximum number of shares multiplied by the par value
• The number of authorized shares indicates the maximum number
of shares the corporation can issue as specified in the article of
incorporation.

• NOTE: increase or decrease in authorized share capital requires prior

approval of the SEC and formal amendment of the articles of
incorporation.
ISSUED SHARE CAPITAL
• Shares which have been sold and paid for in full
• Treasury shares included
• Share Capital account (ordinary shares or preference shares)
• CREDITED for the total par value of fully collected subscriptions or
in the case of no-par value shares, for the total consideration
received in relation to the issue
• DEBITED only when the issued shares are retired, redeemed or
cancelled by the corporation
SUBSCRIBED SHARE CAPITAL
• Portion of the authorized share capital that has been subscribed but
not yet fully paid

• ACCOUNT: Subscribed Ordinary Shares

• Represents the par value of the subscribed shares
• Credited for the total par value of the shares subscribed
• Debited for the total par value of the fully collected subscriptions
• OUTSTANDING SHARE CAPITAL
• Issued shares which are in the hands of the shareholders
• Difference between the issued shares and the treasury shares

• TREASURY SHARES
• Issued shares acquired by the corporation but not retired and are
awaiting to be reissued at a later date
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Issuance of Share Capital
• When shares with par value are
sold, the proceeds shall be
credited to the extent of par value, CASH ( 10,000 * P150 ) 1,500,000
Ordinary Shares ( 10,000 * P100 ) 1,000,000
with any excess being reflected as Share Premium 500,000
share premium. To record issuance of shares for cash
• 10,000 ordinary shares of P100 par
value are sold at P150 per share.
CASH ( 20,000 * P80 ) 1,600,000
• When shares without par value Ordinary Shares ( 20,000 * P50 ) 1,000,000
are sold, the proceeds shall be Share Premium 600,000
credited to the extent of the To record issuance of shares for cash
stated value and any excess is
credited to share premium. NOTE: Section 65 of the Corporation Code
• 20,000 ordinary shares of P50 prohibits the original issue of share capital for a
stated value are issued at P80 per consideration less than the par or stated value.
share
Considerations for the issuance of shares
1. Actual cash paid to the corporation
2. Tangible or intangible properties received by the corporation
3. Labor already performed for or services actually rendered to the
corporation
4. Previously incurred indebtedness by the corporation
Share issue costs
• Costs associated with preparing, printing and filing the relevant
documentation and marketing the share issue
• Might include registration and other regulatory fees, amounts paid to
legal, accounting and other professional advisers, printing costs and
stamp duties
Accounting for Share issue costs
• PAS 32, par 37, provides that transaction costs that are directly
attributable to the issuance of new shares shall be deducted from
equity, net of related income tax benefit.
• Share issuance cost shall be debited to the share premium arising
from the share issuance.
• If the share premium is not sufficient to absorb such costs, the excess
shall be debited to “share issuance costs” account to be reported as
“contra equity” or as a deduction from other share premium first and
retained earnings second.
Subscription of shares
• Subscription Contract
• Legally binding contract which provides for the number of shares
subscribed, the subscription price, the terms of payment and other
conditions of the transaction.

• A subscriber becomes a shareholder upon subscription but the stock

certificates evidencing ownership over shares of stocks are not issued
until the full collection of the subscription.
ILLUSTRATION:
Warranty Auto Shop
• Assume that 5,000 shares of P10 par value ordinary shares of the
corporation was sold on subscription at P12 per share to Ashley
Langga.

Subscription Receivables 60,000

Subscribed Ordinary Shares 50,000
Share Premium 10,000
ILLUSTRATION:
Warranty Auto Shop
• Subscription instalments of P24,000 and P36,000.
Cash 24,000
Subscription Receivables 24,000

Cash 36,000
Subscription Receivables 36,000

Subscribed Ordinary Shares 50,000

Ordinary Shares 50,000
Subscription receivable
• Shareholders’ equity account

• Presentation in the statement of financial position

• a deduction from the related subscribed ordinary shares
• As current asset, when collectible within one year

• Debited for the total proceeds of the subscription

• Credited for the collections on the subscriptions
Delinquent shares
• When a subscriber fails to settle the subscriptions in full on the date
specified in the subscription contract
• Remedy is to dispose the shares in a public auction for the account of
the delinquent subscriber.
• Highest Bidder – person who is willing to pay the “offer price” which
includes the full amount of the subscription balance plus accrued
interest, cost of advertisement and expenses on auction sale in
exchange for the smallest number of shares
ILLUSTRATION:
Warranty Auto Shop
• Assume that the subscriber failed to settle part of his subscriptions in
the amount of P48,000

Subscription Receivables 60,000

Subscribed Ordinary Shares 50,000
Share Premium 10,000

Cash 12,000
Subscription Receivables 12,000
ILLUSTRATION:
Warranty Auto Shop
• A public auction was held. The offer price is P56,000 including P3,000
accrued interest and P5,000 expenses for sale.

Receivable from Highest Bidder 3,000

Interest Revenue 3,000

Receivable from Highest Bidder 5,000

Cash 5,000
 ILLUSTRATION: Warranty Auto Shop
• Three Bidders
Loqueloque 4,300 shares
Luz Un 4,500 shares
Villanueva 4,700 shares

Cash 56,000
Receivable from Highest Bidder 8,000
Subscriptions Receivable 48,000

Subscribed Ordinary Shares 50,000

Ordinary Shares 50,000
ILLUSTRATION:
Warranty Auto Shop
• If there is no bidder, the corporation may bid for the delinquent shares
and the total amount due shall be credited as paid in full in the books of
the corporation.
• The shares shall be considered as treasury shares.

Treasury Shares 56,000

Receivable from Highest Bidder 8,000
Subscriptions Receivable 48,000
 Shares for non-cash assets
1. Fair Value of the non-cash asset received
2. Fair Value of the shares issued
3. Par Value of the shares issued
• A tract of land with fair value of P10,000,000 was received in exchange
for 9,000 shares of P1,000 par ordinary shares. The fair value of shares
at the time of exchange was P1,150.
Land 10,000,000
Ordinary Shares 9,000,000
Share Premium 1,000,000
Shares for services
• A corporation may issue shares in exchange for legal, accounting or
other services.
• These cost, which are incurred before the corporation begins
operations, include incorporation fees, legal fees for the preparation
of the Articles of Incorporation, and other expenditures necessary for
the formation of the corporation.
Shares for services
• When shares are issued for services in connection with the
incorporation, the account Organization Expense may be debited at
an amount equal to the fair value of such services.
• Shares shall not be issued for future services.
• IAS 38 (Intangible Assets), start-up costs which consists of
establishment costs such as legal and secretarial costs incurred in
establishing a legal entity are recognized as expense when incurred.
• Organization cost should be expensed immediately
Illustration
• DEE Inc. engaged the services of a promoter during its formation and
organization. The corporation issued 800 shares of P100 par value
ordinary shares for the services. The fair market value of such
services is P100,000.
Organization Expense 100,000
Ordinary Shares 80,000
Share Premium 20,000
TWO METHODS
Accounting for share capital
• Journal Entry Method
• Memorandum Method

• Difference lies in the entries pertaining to authorization and issuance

of share capital
ILLUSTRATION
• A company was authorized to issue P400,000 ordinary
shares divided into 4,000 shares with a par value of P100
per share.
• Journal Entry Method
Unissued Ordinary Shares 400,000
Authorized Ordinary Shares 400,000

• Memorandum Method
MEMO: The corporation was authorized to issue
P400,000 ordinary shares divided into
4,000 shares with P100 par.
ILLUSTRATION
• On Aug 23, 2018, the corporation received
subscriptions for 1,000 shares at par from various
individuals.
• Journal Entry Method
Subscriptions Receivable 100,000
Subscribed Ordinary Shares 100,000

• Memorandum Method
Subscriptions Receivable 100,000
Subscribed Ordinary Shares 100,000
ILLUSTRATION
• As at Sept 30, 600 of the subscribed shares have been
fully paid.
• Journal Entry Method
Cash 60,000
Subscriptions Receivable 60,000

• Memorandum Method
Cash 60,000
Subscriptions Receivable 60,000
ILLUSTRATION
• As at Sept 30, the stock certificate pertaining to 600 of
the subscribed shares have been issued.
• Journal Entry Method
Subscribed Ordinary Shares 60,000
Unissued Ordinary Shares 60,000

• Memorandum Method
Subscribed Ordinary Shares 60,000
Ordinary Shares 60,000
ILLUSTRATION
• As at Oct 1, the corporation issued 500 shares @ par
for cash.
• Journal Entry Method
Cash 50,000
Unissued Ordinary Shares 50,000

• Memorandum Method
Cash 50,000
Ordinary Shares 50,000
Treasury shares
• shares which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation either by purchase, redemption,
donation or through other lawful means.
• Sec 41 of Corporation Code provides that a stock corporation has the
power to purchase its own shares for a legitimate purpose provided it
has unrestricted retained earnings
• To support employee stock compensation plans,
• to improve the stock market price by decreasing the supply of
shares;
• to avoid takeover by an outside party
Treasury shares
• PAS 32 par 33, Financial Instruments Presentation, states that,
• if an entity reacquires its own equity instruments, these
Instruments (treasury shares) shall be deducted from equity.
• No gain or loss shall be recognized in profit or loss on the
purchase, sale, issue or cancellation of an entity's own equity
instruments.
Treasury shares
• Treasury stock is not an asset because the corporation may not
own shares of itself.
• two methods of accounting for treasury stock transactions
(1) par or stated value method
(2) cost method
Treasury shares
• An entity acquired 2,000 shares with par of P100 at P150 per share
(1) par or stated value method
Treasury Shares @ par 200,000
Share Premium / Ret. Earnings 100,000
Cash 300,000

(2) cost method

Treasury Shares 300,000
Cash 300,000
Reissuance of treasury shares
• @ COST

• More than Cost

• share premium – treasury shares

• Below Cost
1. Share Premium – treasury shares of the same class
2. Retained Earnings
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Treasury Shares: Cost Method
2020
• ILLUSTRATION Mar 28 Treasury Shares 150,000
CASH ( 10,000 * P15 ) 150,000
• On March 28, 2020, the To record acquisition of own 10,000 shares @ cost
corporation purchased 10,000 Apr 10 CASH ( 1,000 * P14 ) 14,000
shares as treasury stock at P15 Retained Earnings 1,000
per share. Treasury Shares ( 1,000 * P15 ) 15,000
To record sale 1,000 TS @ P14
• On April 10, it sold 1,000 of the May 5 CASH ( 2,000 * P16 ) 32,000
treasury shares at P14 per share. Treasury Shares ( 2,000 * P15 ) 30,000
• On May 5, it sold 2,000 shares at Share Premium - TS 2,000
To record sale 2,000 TS @ P16
P16 per share. Jun 24 CASH ( 3,000 * P15 ) 45,000
• On June 24, it sold 3,000 shares Treasury Shares 45,000
To record sale 3,000 TS @ cost
at P15 per share.
Apr 10 CASH ( 4,000 * P14 ) 56,000
• On July 10, it sold 4,000 shares Share Premium - TS 2,000
at P14 per share. Retained Earnings 2,000
Treasury Shares ( 4,000 * P15 ) 60,000
 Retirement of treasury shares
• The ordinary shares account is reduced by its par value.
• The number of shares issued is reduce by the treasury shares retired.
• The treasury shares account is credited at cost.

• GAIN on retirement
• share premium – treasury shares

• LOSS on retirement
• Share premium to the extent of the credit when the share is issued
• Share Premium – treasury shares of the same class
• Retained Earnings
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Retirement of Treasury Shares
• ILLUSTRATION I
I Ordinary Shares ( 1,000 * P100 ) 100,000
• If 1,000 ordinary shares with par Treasury Shares 80,000
of P100 are held as treasury at a Share Premium - TS 20,000
cost of P80,000 and To record retirement of 1,000 treasury shares
subsequently retired.
• ILLUSTRATION II II Ordinary Shares ( 5,000 * P100 ) 500,000
Ordinary Share Capital, 50,000 shares, P100 par 5,000,000 Share Premium - original 50,000
Share Premium - original issuance 500,000 Share Premium - TS 100,000
Share Premium - Treasury shares 100,000 Retained Earnings 100,000
Retained Earnings 1,000,000 Treasury Shares 750,000
To record retirement of 5,000 treasury shares
Treasury Sahres, 5,000 shares @ cost 750,000
P500,000 * ( 5,000 TS / 50,000 OS )
• If 5,000 treasury shares were
retired.
Donated capital
• contributions, including shares of an entity, received from
shareholders should be recorded at the fair market value of the
items received, with the credit going to share premium.
• If significant, such contributions may be designated as donated
capital.
• Jocker Inc received a new service van form its major shareholder
as gift. The donated asset has a cash price of P350,000.
Service Vehicle 350,000
Donated Capital 350,000
Donation
• Jocker Inc received 500 of P100 par value ordinary shares from its
major shareholder as a gift.
MEMO: Received 500 ordinary shares as donation

• The number of share received as donation will reduce the

outstanding shares. (Treasury Shares)

• The 500 shares were issued at P80 per share

Cash 40,000
Donated Capital 40,000
Callable preference shares
• Gives the issuing corporation the right to purchase (retire) the shares
from its holder at a specified price.
• The amount paid to call and retire a preference share is its call price.
• A corporation issued 10,000 callable P50 par value preference shares
for P60 per share.
Cash (10,000 shs. x P60) 600,000
Preference Shares 500,000
Share Premium-Preference 100,000
Callable preference shares
• The 10,000 shares were called in at P75 per share
Preference Shares 500,000
Share Premium-Preference 100,000
Retained Earnings 150,000
Cash (10,000 shs.x P75) 750,000

• The retirement may result in a gain or loss.

• "Gain" is credited to share premium related to ordinary shares. "
• Loss" is debited against share premium related to issuance of
preference shares and then to retained earnings.
Redeemable preference shares
• PAS 32, Financial Instruments, par 18, defines a redeemable preference
share as:
a. A preference share that provides for mandatory redemption by the
issuer for a fixed or determinable amount at a future date,
b. A preference share that gives the holder the right to require the issuer
to redeem the instrument for a fixed or determinable amount at a
future date
Redeemable preference shares
• A redeemable preference share is one which has a mandatory
redemption date or one which must be redeemed at the option of the
holder.
• Has a legal form of an equity instrument but meets the definition of
liability
• Dividends paid to holders of redeemable preference shares shall be
treated as interest expense as a component of finance cost.
• PAS 32, par 36, provides that gain on loss associated with redemption
or refinancing of a financial liability shall be recognized in profit or
loss.
Redeemable preference shares
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.

Cash (10,000 * P100) 1,000,000

Redeemable Preference Shares 1,000,000
Redeemable preference shares
ILLUSTRATION
• If a dividend of P100,000 is paid to the redeemable preference
shareholders
Interest Expense 100,000
Cash 100,000

• If the preference shares are redeemed by the issuer for P1,200,000.

Redeemable Preference Shares 1,000,000
Loss on redemption 200,000
Cash 1,200,000
 Convertible preference shares
• One which gives the right to exchange the holdings for other securities of the issuing
corporation
Preference Shares, P200 par value, 10,000 shares P2,000,000
Ordinary Shares, P60 par value, 200,000 shares 6,000,000
Share Premium-Preference 400,000
Share Premium-Ordinary 2,000,000
Retained Earnings 4,000,000

• If the preference shares are all converted into ordinary shares in a 1:3 ratio,
Preference Shares 2,000,000
Share Premium-Preference 400,000
Ordinary Shares (30,000 shs. x P60) 1,800,000
Share Premium – Ordinary 600,000
 Recapitalization
PAR to NO-PAR
Ordinary Shares, P50 par value, 50,000 shares P2,500,000
Share Premium 250,000
Retained Earnings 1,250,000
• If all the par value shares are cancelled and replaced with the same
number of P25 stated value shares, the recapitalization entries will be:
Ordinary Shares 2,500,000
Share Premium-ordinary 250,000
Ordinary Shares (50,000*P25) 1,250,000
Share Premium – Recapitalization 1,500,000
Recapitalization
NO-PAR to PAR
Ordinary Shares, no-par, P50 stated value 50,000 shares P 2,500,000
Retained Earnings 1,250,000

• If all the no-par value shares are cancelled and replaced with the same
number of P75 par value shares, the recapitalization entries will be:
Ordinary Shares, no-par 2,500,000
Retained Earnings 1,250,000
Ordinary Shares (50,000*P75) 3,750,000
Recapitalization
reduction of PAR value
Ordinary Shares, P100 par value, 25,000 shares P2,500,000
Share Premium 250,000
Retained Earnings 1,250,000

• If the par value is reduced to P80, the recapitalization entries will be:

Ordinary Shares (25,000*P20) 500,000

Share Premium – Recapitalization 500,000
Recapitalization
reduction of stated value
Ordinary Shares, P100 stated value
25,000 shares P 2,500,000
Retained Earnings 1,000,000

• If the stated value is reduced to P80, the recapitalization entries will

be:

Ordinary Shares (25,000*P20) 500,000

Share Premium – Recapitalization 500,000
END…