CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS W/ CORPORATION

HANDOUT #01: CORPORATION

Topic 01: Basic Concept of Corporation

1) What is a corporation?

Answer:
a. An artificial being created by operation of law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its existence.

b. A corporation is a separate legal entity distinguished from its owners. It is formed through an operation
of law and not be mere agreement between the owners.

Under the doctrine of separate juridical personality – corporation has juridical personality separate and
distinct from the stockholders composing the company.

Piercing the veil of corporate entity doctrine – when the corporate fiction is used as a shield to perpetuate
fraud, to defect public convenience, justify wrong or defend crime, this fiction shall be disregarded and the
individuals composing it will be treated identically.

2) How is a corporation formed?

Answer:
a. A corporation is formed by any person, partnership, association or corporation, singly or jointly with
others but not more than 15 in number. Provided that natural persons must be of legal age. (RA No.
11232 – Revised Corporation Code of the Philippines)

b. The entity’s articles of of incorporation must be authorized by the Securities and Exchange Commission
(SEC).

c. Authorization of capital stock through submission of articles of incorporation.

3) What is the Articles of Incorporation?

Answer: This is a document containing basic information about the company such as:

a) The name of the corporation

b) The purpose or purposes for which the corporation is formed
c) The place where the principal office
d) The term for which the corporation is to exist
e) The names and residences of the incorporators
f) The names and addresses of the incorporating directors
g) The amount of share capital, its par value, and the number of shares authorized
h) The amount of share capital and the number of shares actually subscribed

4) What is By-Laws?

Answer: Are rules of actions adopted by the corporation for its internal government and for the government of
its officers, shareholders or members. It contains the following:

a) Time, place, manner of calling and rules for meetings

b) The number, qualifications, duties, powers and length of office of directors
c) The appointment, duties, powers, compensation and length of officers
d) The manner of issuing share certificates
e) The method of amending by-laws
f) Any other rules
5) What are the differences between sole proprietorship, partnership and corporation, their advantages and disadvantages?

Answer:

Sole Proprietor Partnership Corporation

Shareholders (for profit and stock company)
1. Owner Proprietor/Manager Partners Members (for non profit and non stock
company)

2. Number of owners One Two or more One or more

Not by operation of law Not by operation of law By operation of law

3. Manner of establishment
(No registration to SEC) (No registration to SEC) (Registration to SEC is required)

Extend beyond the personal asset of the Extend beyond the personal asset of the Do not extend beyond the personal asset of
4. Liability to creditors
proprietor partners the shareholders

Not transferable
5. Ownership Transferable Transferable
(Consent of partners is required)

Exempted from tax Taxable

6. Taxation (The proprietor will shoulder the tax, not the Taxable (with exception) (Both the business and the owners will be
business) taxed)

7. Distribution of profit to owners By withdrawal By withdrawal By dividends

Perpetual
8. Life Limited Limited
(forever)

9. Availability of capital Limited capital (resource) Large capital (resources) Larger capital (resources)

Corporation will not be dissolved if any of

Sole proprietor will be dissolved if the Partnership will be dissolved if one partner
10. Dissolution the shareholder dies
proprietor dies dies
(right of succession)
6) What are the different types of corporation?

Answer: This is a document containing basic information about the company such as:

Type 1 Type 2
1. As to number of Corporation aggregate – owned by more One person corporation – owned by
owner than one shareholder one person

2. As to religious Ecclesiastical Corporation – incorporated Lay Corporation – incorporated other

purpose for religious purposes than religious purposes

3. As to charitable or Eleemosynary Corporation – incorporated Civil Corporation – incorporated for

not for charitable purposes business or profit

4. As to country of Domestic Corporation – incorporated Foreign Corporation – incorporated

creation under Philippine law under foreign law

5. As to legal right to De jure – exist in fact and in law De facto – exist in fact but not in law
corporate
existence

6. As to extent of Close Corporation – the ownership is not Open Corporation – the ownership
membership open to the public and cannot be (shares) is for sale in the public (traded in
purchased by anyone the stock exchange) in which anyone with
the capacity can buy the ownership

7. As to relation to Parent Company – owner of subsidiary Subsidiary Company – owned by parent

other corporation company (50% or more) company

8. As to existence of Stock Corporation – capital is divided into Non-stock Corporation – no authorized

stocks shares of stock capital stock

7) What are the rights of a shareholder (owners)?

Answer: The following are the rights of a shareholder:

a) Right to attend and vote in shareholders’ meetings

b) Right to purchase additional shares (also known as pre-emptive right)
c) Right to share in the corporate profits (also known as right to dividends)
d) Right to share in the net assets upon liquidation (closing of business).

8) What are the two types of shareholder?

Answer: The type of shareholder will depend on the “class” of shares they are holding, namely:

a) Ordinary share
- Represent the residual corporate interest that bears the ultimate risk of loss and receives the benefit
of success.

b) Preference share
- Shares that give the holders thereof certain preference over other shareholders.

 Ordinary share Preference share
1. As to share in the Residual profit Fixed profit
profit of the
corporation

2. As to liquidation Least priority during liquidation – after
paying all the debt and returning the
investment and income of preference
shareholder, whatever is the remaining will
belong to ordinary shareholders.
3. As to requirement Required to be issued (at least one)
Priority during liquidation – their
investments and income will be returned
first when the company is about to shut
down.
Not required to be issued

4. As to voting rights Has the right to vote Has no right to vote

5. As to par value Par value is not required Par value is required

6. Other features No other features Other features include:

a. Convertible into ordinary
b. Redeemable

9) What is a par value?

Answer: The peso value indicated in articles of incorporation and also shown in the face of share certificate.
The purpose of which is to fix the amount of selling price of the shares. A par value share cannot be issued
below its par value.

Under the trust fund doctrine, it is illegal to return such par value of shares to shareholders during the lifetime of
the corporation for the protection of creditors.

Par value is a.k.a. legal nominal value (legal capital).

10) What are the different books and records of a corporation?

Answer:

a) Minutes book – contains the minutes of the meetings of the directors and shareholders

b) Stock and transfer book – is a record of the names of shareholders.

c) Books of accounts – represent the records of all business transactions (e.g., journal and ledger)

d) Subscription book - is a book of printed blank subscription

e) Shareholders’ ledger – is a records of the number of shares issued to each shareholders

f) Subscribers’ ledger – is a record of subscription receivable for each subscriber

g) Share certificate book – is a book of printed blank share certificates

CFAS by: Bernadette L. Baul, CPA Page 4 of 23

 Topic 02: Contributed Capital
Expected question(s):
1. What is the balance of share capital at year end?
2. What is the balance of share premium at year end?
3. What is the balance of retained earnings at year end?
4. What is the number of shares outstanding?

1) What is the balance of share capital at year end?

2) What is the balance of share premium at year end?
3) What is the balance of retained earnings at year end?

Answer: The usual question in this topic-02 is the ending balance of equity accounts. To answer these
question, one must know how to journalize share transactions and subsequently post in a ledger (T-account or
column) and compute the ending balance.

Since posting and footing is very easy, this topic will focus on journalizing share transaction. The following
transaction affects the equity accounts of the company:
a) Authorization
b) Subscription
c) Issuance of shares
d) Reacquisition of shares
e) Reissuance of shares
f) Retirement of shares
g) Donation from shareholders
h) Conversion of preference shares
i) Share split
j) Conversion of convertible bonds (discussed in Compound Instrument)
k) Exercise of share warrants attached on a bonds (discussed in Compound Instrument)
l) Exercise of share options (discussed in Share Based Payments)

(a) Authorization.

There are two methods in accounting for Authorization transaction:

(1) Memo Entry Method – The most common method in accounting for authorization. In this method, one
principal account will be used namely: “Share Capital” and no contra account is made. No entry is
made on Authorization transaction.

Journal Entry, Authorization: Journal Entry, Issuance:

None Dr. Cash 100
Cr. Share capital 100

(2) Journal Entry Method – In this method, one principal account and one contra-account is made. The
principal account “Authorized Share Capital” will remain the same all throughout, while the contra-
account “Unissued Share Capital” will decrease each time there is an issuance of share.

Journal Entry, Authorization:

Dr. Unissued Share Capital (authorized number of shares x par value per share) 1,000
Cr. Authorized Share Capital (authorized number of shares x par value per share) 1,000

Journal Entry, Issuance:

Dr. Cash 100

Cr. Unissued Share Capital (number of shares issued x par value per share) 100

Memo Entry Method Journal Entry Method

Principal Account : Share Capital 100 Principal Account : Authorized Share Cap 1,000
Contra Account : -- 0 Contra Account : Unissued Share Cap (900)
Carrying Amount 100 Carrying Amount 100

CFAS by: Bernadette L. Baul, CPA Page 5 of 23

(b) Subscription.

It is not possible to issue shares if the full consideration is not yet received. Since there is a limited number of
shares that the company can sell (authorized shares), a potential investor who do not yet have the means to pay
the full consideration can “reserve” the shares.

Journal Entry, Subscription:

Dr. Subscription Receivable (selling price – downpayment) X

Dr. Cash (downpayment) X
Cr. Subscribed Share Capital (par value) X
Cr. Share premium – Excess of par (selling price – par value of shares subscribed) X

Journal Entry, Subsequent Collection:

Dr. Cash (selling price – down payment) X

Cr. Subscription receivable (selling price – down payment) X

Journal Entry, Subsequent Collection:

Dr. Subscribed Share Capital X
Cr. Share Capital X

Journal Entry, Cancellation:

Dr. Subscribed Share Capital (selling price – par value) X

Dr. Share Premium – Excess (par value) X
Cr. Subscription Receivable (selling price – down payment) X
Cr. Cash / Accounts payable (if refundable) X
Cr. Share Premium – Forfeited Subscription (if not refundable) X

“Subscription Receivable” account is:

a) Contra-Equity Account – if collectible beyond 12 months (also if silent)
b) Current Asset Account – if collectible within 12 months

(c) Issuance.

C.1 Assigning Value to the Consideration Received – If the investor can pay in full immediately there is no
need to subscribed for the shares first, it can be issued already. Shares can be sold in exchange for the
following:

a) Cash
b) Non-cash
c) Services
d) Extinguishment of debt (Discussed in Debt Restructuring)

Step 1: Determine the value of the consideration received.

Consideration received Value assigned

a) Cash Face amount

1ST Priority – Fair value of the non cash asset received.

b) Non-cash 2ND Priority – Fair value of shares issued.
3RD Priority – Par value of shares issued.

1ST Priority – Fair value of the service received.

c) Service 2ND Priority – Fair value of shares issued.
3RD Priority – Par value of shares issued.

Step 2: Compute for the amount of Share Premium – Excess of Par.

Value of the consideration received X

Less: Par value of shares issued X
Share Premium – Excess of Par X

CFAS by: Bernadette L. Baul, CPA Page 6 of 23

 Journal Entry, Issuance:

Dr. Cash / Non-cash / Service Expense (value assigned) X

Cr. Share Capital X
Cr. Share Premium – Excess of Par X

C.2 Share Issuance Cost – Cost incurred in connection with selling or issuing of shares (e.g., commission to
brokers, finders fee, cost of printing share certificates, registrations, filing fees with SEC, legal fees, CPA fees,
underwriting fees, documentary stamp tax, etc.)
Share Issuance Cost

Indirectly Related Direct Related

Deducted to:
Treated as Expense Share Premium – Excess of Par

If no SP – Excess
Deduct to:
Retained Earnings

Journal Entry, Indirect: Journal Entry, Direct:

Dr. Expense X Dr. SP – Excess of Par X

Cr. Cash X Cr. Cash X
or
Dr. Retained Earnings X
Cr. Cash X

C.3 Lump-sum Issuance – Issuance of multiple class of shares (i.e., ordinary and preference) or two different
kinds of investment (i.e., shares and bonds) in exchange for a single consideration.

Ordinary + Preference
Shares
Investor The Company

Cash

Allocate to different class

using:
1. Relative FV method
2. Residual Value method

Fair value of all class of shares/debt Not all fair value of instrument issued is
issued is available: available:
Use Relative FV Method Use Residual Value Method

CFAS by: Bernadette L. Baul, CPA Page 7 of 23

1. Relative FV Method

Step 1: Compute the total fair value of all instrument issued.

Number of ordinary shares issue x Fair value per share = Total fair value of O.S.
Number of preference shares issue x Fair value per share = Total fair value of P.S.
Total fair value of all instrument = Total fair value of all shares

Step 2: Allocate the consideration received (usually cash).

Total fair value of O.S.

Total issue price (cash proceeds) x = Amount allocated to O.S.
Total fair value of all shares

Total fair value of P.S.

Total issue price (cash proceeds) x = Amount allocated to P.S.
Total fair value of all shares

2. Residual Value Method

Total issue price (cash proceeds) X

Less: Fair value of shares with available fair value (amount allocated to it also) X
Amount allocated to shares with no available fair value (the residual) X

(d) Reacquisition.

Reacquiring your own shares that was previously issued. Shares reacquired is referred as treasury shares (TS).
Treasury shares is a contra-equity account (normal balance is debit).

The measurement of the treasury shares is cost, the value of consideration given up to acquire the treasury
shares. The cost is:

a) Cash – face amount

b) Non cash – carrying amount of the non cash.

Journal Entry, Reacquisition:

Dr. Treasury Shares (cash = face, non-cash = CA) X

Cr. Cash / Non-cash (at CA) X

(e) Reissuance.

Selling the same share for the second time is called reissuance. Always be careful in defining the transaction
whether issuance (selling shares for the first time, selling unissued shares) or reissuance (selling shares from
treasury shares). There are two (2) issue here:

a) Value of treasury shares sold – The value of the treasury shares is measured at cost. The problem
arises when there is a multiple reacquisition of shares with different cost. Follow the following level of
priority when assigning value to the treasury shares:

1. Specific identification – the problem will state from what reacquisition the treasury shares will be
sold.

2. First in, first out – if the problem is silent as to method in assigning value, FIFO should be used. The
treasury shares sold will be coming from the earliest acquisition.

3. Weighted average – the value of all treasury shares is equal. The equal value of each shares can be
computed by:
Treasury shares available for sale in Peso
= Value of EACH treasury shares
Treasury shares available for sale in Units

CFAS by: Bernadette L. Baul, CPA Page 8 of 23

 b) Gain or loss from sale of treasury shares – There will a gain if the treasury shares is sold above its
value (refer to first issue for the value). While a loss if sold below its value (it can be sold below par
value). After debiting the consideration received and crediting the value of treasury shares, it is down to
the gain or loss:

Selling price (consideration received) of treasury shares sold X

Less: Value of treasury shares sold X
Gain (loss) from issuance X

If GAIN, If LOSS,
Credited to: Debited to:
Share Premium – Treasury Shares First – Share Premium – Treasury Shares, if any
Second – Retained Earnings

If GAIN, If LOSS,

Dr. Cash (at selling price) X Dr. Cash (at selling price) X
Cr. Treasury Shares X Dr. SP – Treasury Shares X
Cr. SP – Treasury Shares X Dr. Retained Earnings X
Cr. Treasury Shares X

(f) Retirement.

The corporation code requires the restriction (appropriation) of retained earnings equal to the amount of treasury
shares. Companies can retire their treasury shares so they can declare dividends without restriction.

One disadvantage of retirement though is that the company will incur new share issuance cost when issuing
unissued shares instead of issuing treasury shares. To journalize, we follow four (4) steps:

Step 1: Derecognize the Share Capital.

Number of shares retired X

Times: Par value of each shares X
Share Capital to derecognize (debited) X

Step 2: Derecognize the Share Premium – Excess of Par (SP from original issuance).

Total Share Premium Excess of Par X

Divide: Total Shares Issued X
Share Premium Excess Per Share X
Times: Number of shares retired X
Share Premium – Excess of Par to derecognized (debited) X

Step 3: Derecognize the Treasury Shares.

Number of treasury shares reacquired then retired X

Times: Cost per treasury shares X
Treasury shares to derecognize (credited) X

Step 4: Recognized the gain or loss from retirement.

Par value of shares retired X

Add: Share premium – excess of shares retired X
Original selling price (consideration received from first sale) X
Less: Cost of treasury shares (cost to reacquire and retire) X
Gain or loss from retirement X

CFAS by: Bernadette L. Baul, CPA Page 9 of 23

 Gain or loss from retirement

If GAIN, If LOSS,

Credited to: Debited to:

Share Premium – Retirement First – Share Premium – Treasury Shares, if any
Second – Retained Earnings

Dr. Share Capital X Dr. Share Capital X

Dr. Share Premium – Excess X Dr. Share Premium – Excess X
Cr. Treasury Shares X Dr. Share Premium – Treasury X
Cr. Share Premium – Retirement X Dr. Retained Earnings X
Cr. Treasury Shares X

(g) Donation.

The company received either: (1) cash; (2) non-cash; (3) service or (4) company’s own shares for free. The The
journal entry from receiving the following donation would include a credit to:

a) Other income – if donation is coming from a non shareholder.

b) Share Premium – Donated Capital (DC) – if donation is coming from a shareholder.

(1) Cash

Dr. Cash (face amount) X

Cr. Share Premium – DC X

(2) Non cash

Dr. Non cash asset (at FV) X

Cr. Share Premium – DC X

(3) Service

Dr. Service Expense (at FV) X

Cr. Share Premium – DC X

(4) Own Share

Upon receiving the donation:

No journal entry (memo only)

Upon reissuing the donated shares:

Dr. Cash (selling price) X
Cr. Share Premium – DC X

(h) Conversion of preference shares.

Ordinary shares Preference shares

(a) Residual income (a) Fixed income
(b) Least priority during liquidation (b) Priority during liquidation
(c) Can be issued with no par value (c) Par value is required
(d) With voting rights (d) Without voting rights
(e) No other features (e) Other features includes:
1. Can be convertible into ordinary shares
2. Can be redeemable preference shares
3. Share warrants can be attached

If the preference share is converted into ordinary shares, the preference returned will be retired, thus the step-
by-step procedure for retirement will apply. Then the ordinary shares will be issued, the issuance rule will apply.

CFAS by: Bernadette L. Baul, CPA Page 10 of 23

 Step 1: Derecognize the Preference Share (PS) – Share Capital.

Number of PS retired X
Times: Par value of each shares X
PS Share Capital to derecognize (debited) X

Step 2: Derecognize the Share Premium – Preference Shares (SP from original issuance).

Total Share Premium – Preference share X

Divide: Total PS Issued X
Share Premium – Preference share Per PS X
Times: Number of PS retired X
Share Premium – Preference share to derecognized (debited) X

Step 3: Recognized issuance of ordinary shares.

Number of preference shares converted X

Times: Exchange rate of PS to OS (e.g., one is to one, two is to one, etc.) X

Number of ordinary shares issued X

Times: Par value of each ordinary shares X
Total par value of ordinary shares issued X

Step 4: Recognized the gain or loss from conversion.

Par value of PS converted (Step 1) X

Add: Share premium – Preference shares of PS converted (Step 2) X
Original selling price of PS converted X
Less: Par value of ordinary shares issued (Step 3) X
Gain or loss from conversion X

If GAIN, If LOSS,

Credited to: Debited to:

Share Premium – Ordinary Retained Earnings

Dr. PS – Share Capital X Dr. PS – Share Capital X

Dr. SP – Preference Share X Dr. SP – Preference Share X
Cr. OS – Share Capital X Dr. Retained Earnings X
Cr. SP – Ordinary Share X Cr. OS – Share Capital X

(i) Share Split.

Equity account will remain the same after share split, thus, no journal entry is made for share split transaction. In
the memorandum, the number of shares (unissued, outstanding, treasury) increases, while the par value of
unissued and outstanding shares decreases and the cost per treasury shares also decreases.

4) What is the number of shares outstanding?

Answer: There are four classification of shares according to status:

a) Unissued – never been sold but can be sold.
b) Issued – shares that were sold –in the hands out the company (reacquired) and in the hands of investors.
c) Outstanding – shares that were sold –in the hands of investors (shareholders).
d) Treasury – shares that were sold –in the hands of the company (reacquired).

Number of shares issued (in the hands of the company and shareholders) X
Less: Number of shares reacquired (in the hands of the company) X
Number of shares outstanding (in the hands of the shareholders) X

CFAS by: Bernadette L. Baul, CPA Page 11 of 23

 Topic 03: Retained Earnings
Expected question(s):
1. What is the amount of cash dividend to be deducted from retained earnings?
2. What is the amount of cash dividends allocated to ordinary shareholders and preference shareholders?
3. What is the amount of equity accounts (share capital, share premium & retained earning) after share dividends?
4. What is the correct journal entry for property dividends?
5. What is the amount of appropriated retained earnings?
6. What is the ending equity accounts after quasi-reorganization?

1) What is the amount of cash dividend to be deducted from retained earnings?

Answer: Shares that are outstanding and subscribed are entitled to received dividends.

Step 1: Compute the total shares entitled to received dividends.

Number of shares issued X

Less: Number of treasury shares X

Number of shares outstanding X

Add: Number of shares subscribed X
Total shares entitled to received dividends X

Step 2: Compute the total dividends payable and amount deducted to retained earnings.

Total shares entitled to received dividends X

Times: Cash dividend per shares (e.g., P100 per share) X
Dividend payable (amounted deducted to retained earnings) X

Date of Declaration Date of Record Date of Settlement

Dr. Retained Earnings X Dr. Dividend Payable X

Cr. Dividend Payable X Cr. Cash X

No Entry

2) What amount of cash dividends is allocated to ordinary shareholders and to preference shareholders?

Answer: The allocation will depend on the classification of the preference shares (PS) as to:

a) Non cumulative, non participating

b) Cumulative, non participating Par value of preference share X
c) Non cumulative, fully participating Times: Dividend rate x%
d) Cumulative, fully participating Basic dividend X

a) Non cumulative, non participating.

Total dividends declared X

Less: One basic dividend of PS X
Residual dividend for OS X

b) Cumulative, non participating.

Total dividends declared X

Less: (One basic dividend x years in-arrears) for PS X
Residual dividend for OS X

Years in-arrears – number of years from the last time the company did not declare any dividends up to the year
the company declared a dividends (include the current year).

CFAS by: Bernadette L. Baul, CPA Page 12 of 23

 c) Non cumulative, fully participating

Particulars Ordinary Preference Total

Step 1 – Indicate the dividend declared X
Step 2 – Give one basic dividend for PS X (X)
Step 3 – Give one basic dividend for OS (OS par x DR) X (X)
Step 4 – Compute the remaining dividend X
Step 5 – Give the share of PS from the remaining X
Step 6 – Give the share of OS from the remaining X
Done X X

Total par of OS
Remaining dividend (Step 4) x = Share of PS from the remaining
Total par of PS + OS

Total par of PS
Remaining dividend (Step 4) x = Share of PS from the remaining
Total par of PS + OS
Dividend rate (DR) – borrow the dividend rate of the lowest participating preference share.

(a) Non cumulative, non participating.

Particulars Ordinary Preference Total

Step 1 – Indicate the dividend declared X
Step 2 – Give (one basic dividend x yrs. in-arrears) for PS X (X)
Step 3 – Give one basic dividend for OS (OS par x DR) X (X)
Step 4 – Compute the remaining dividend X
Step 5 – Give the share of PS from the remaining X
Step 6 – Give the share of OS from the remaining X
Done X X

3) What amount of equity accounts (share capital, share premium & retained earnings) after share dividends?

Answer: The correct entry for the share dividend should be carefully understand because three (3) equity
accounts might be affected by this transaction. First question to ask yourself is, “How much should be
deducted from retained earnings?”
Share Dividend

Coming from: Coming from:

Unissued shares Treasury shares

Deduct from retained earnings:

Cost of the treasury shares declared

Large share dividend Small share dividend Dr. Retained Earnings (cost of TS) X
≥ 20% < 20% Cr. Treasury Shares (cost of TS) X

Deduct from retained earnings:

Note!
Fair value of shares declared
The fair value
Dr. Retained Earnings (FV of shares) X of shares
Cr. Share Capital (Par of shares) X should not be
Cr. SP – Excess (FV – Par) X lower than its
par.
Deduct from retained earnings:
Par value of shares declared If lower than
par, use the
Dr. Retained Earnings (Par of shares) X par value
Cr. Share Capital (Par of shares) X instead of FV.

CFAS by: Bernadette L. Baul, CPA Page 13 of 23

4) What is the correct journal entry for property dividends?

Initially measure dividends payable at fair value at the Subsequently, update dividends payable at fair value at Before settlement, the Property Dividends Payable
date of declaration and deduct to the retained earnings year end. Any changes in the measurement of dividends should be updated to its current fair value. Any
the fair value of the property. payable will be added or deducted to retained earnings. changes in the measurement will be +/- to R.E.
Increase in FV: Decrease in FV Increase in FV: Decrease in FV
Dr. Retained Earnings (FV) X Dr. Retained Earnings X Dr. Dividends Payable X Dr. Retained Earnings X Dr. Dividends Payable X
Cr. Property Dividends Payable (FV) X Cr. Dividends Payable X Cr. Retained Earnings X Cr. Dividends Payable X Cr. Retained Earnings X

Property Dividends Payable Property Dividends Payable Property Dividends Payable

X (Beg.) FV @ declaration X (Beg.) FV @ declaration X (Beg.) FV @ Beg. of year

Decrease in FV X X Increase in FV Decrease in FV X X Increase in FV

X (End) FV @ year-end X (End) FV @ settlement

Accounting for the Liability

Date of Declaration Year End Date of Settlement

At date of declaration, the non cash asset should be At year, update the NCA held for sale to its new At settlement, do not update the value of NCA Held for
reclassified to non-current asset (NCA) held for LOWER of CA at before reclassification VS. new fair Sale.
disposal (under PFRS 5). value at year end. Increase is asset = reversal of (1) Derecognize the dividends payable
impairment; Decrease in asset = additional impairment. (2) Derecognize the NCA Held for Sale
Carrying amount before reclassification X
(3) Recognize gain or loss on extinguishment of debt
VS. Fair value less cost of disposal X Increase in LOWER OF: Decrease in LOWER OF:
Initial measure (select LOWER) X Dr. NCA Held for Sale X Dr. Impairment loss X
Dividends payable (after update) X
Cr. Gain on Reversal X Cr. NCA Held for Sale X
Dr. NCA Held for Disposal X Less: NCA Held for sale (lower of @ last year end) X
Dr. Impairment loss (if any) X Gain or loss on extinguishment X
Cr. PPE X
NCA Held for Disposal NCA Held for Disposal Dr. Dividends payable X
X (Beg.) lower @ declaration (Beg.) lower @ declar’n X Dr. Loss (if any) X
Cr. NCA Held for Sale X
Reversal of impairment X X Additional impairment Cr. Gain (if any) X
(End) lower @ year end X

5) What is the balance of appropriated and un-appropriated retained earnings?

Answer: The following reasons for appropriation of retained earnings is mentioned below:

Legal requirement Contractual requirement Voluntary appropriation

1. Appropriated retained
earnings for treasury shares
(cost of TS at year end)
1. Appropriated retained
1. Appropriated retained
earnings for contingency
earnings for retirement of
2. Appropriated retained
debt
earnings for plant expansion

Entry for appropriation. Entry for reversal of appropriation (once the

purpose for appropriation is already met/done).

Dr. Un-appropriated retained earnings X Dr. Appropriation for treasury shares X

Cr. Appropriation for treasury shares X Cr. Un-appropriated retained earnings X

Note! – the following does not require appropriation of retained earnings:

a) Dividends in-arrears
b) Restriction of cash

6) What is the balances of equity accounts after quasi-reorganization?

Answer: The following steps should be done in effecting the quasi-reorganization:

1. Revalue the assets and liabilities (direct effect to RE)

2. Record the assessment from shareholders (additional share premium)
3. Record the recapitalization (transfer from share capital to share premium)
4. Eliminate the deficit (transfer from share premium to retained earnings)

Particulars Share Share RE /

Capital Premium Deficit
Balances before quasi-reorganization X X (X)
Step 1 – Revalue asset asset and liabilities
To RE Add: Increase in Asset X
To RE Less: Decrease in Asset (X)
To RE Less: Increase in Liabilities (X)
To RE Add: Decrease in Liabilities X
Step 2 – Record assessment as addition to share premium X
Step 3 – Record recapitalization as transfer from SC to SP (X) X
Step 4 – Eliminate all deficit by transferring SP to RE (X) X
Balances after quasi-reorganization X X nil

Transactions affecting retained earnings.

Retained Earnings
X Beginning Balance
(a) Closing of loss for the year X X a) Closing of profit for the year
(b) Correction of prior period error X X b) Correction of error prior period error
(c) Change in accounting policy X X c) Change in accounting policy
(d) Realization of OCI loss X X d) Realization of OCI gain
(e) Appropriation of RE X X e) Reversal of appropriation
(f) Dividends paid X X f) Ending Balance
(g) Loss from share transaction X X g) Quasi reorganization
X Ending Balance

 Topic 03: Composition of Shareholders’ Equity
Expected question(s):
1. What is the total amount of legal capital?
2. What is the total amount of contributed capital?
3. What is the total amount of reserve?
4. What is the total amount of shareholders’ equity?

1) What is the total amount of legal capital?

Answer: To easily answer this question, we will group the equity accounts into five (5) groups namely:

Group 1: Legal Capital

a) Share capital – ordinary X
b) Share capital – preference X
c) Subscribed share capital – ordinary X
d) Subscribed share capital – preference X
e) Share dividend payable X
f) Share premium – ordinary shares (only if O.S. is no par) X
Total legal capital X

Group 2: Share Premium

a) Share premium – excess (ordinary / preference) X
b) Share premium – forfeited subscription X
c) Share premium – treasury X
d) Share premium – retirement X
e) Share premium – donated capital (assessment) X
f) Share premium – conversion option X
g) Share premium – share warrants X
h) Share premium – share options X
Total share premium X

Group 3: Retained Earnings

a) Un-appropriated retained earnings X
b) Appropriated retained earnings for treasury shares X
c) Appropriated retained earnings for retirement of bonds X
d) Appropriated retained earnings for contingencies X
e) Appropriated retained earnings for plant expansion X
Total retained earnings X

Group 4: Other Comprehensive Income

a) Unrealized gain or loss from a derivative instrument designated as cashflow hedge X
b) Unrealized gain or loss from translation of foreign currency F/S X
c) Unrealized gain or loss from change in fair value of debt instrument measured at FVOCI X
d) Unrealized gain or loss form change in fair value of equity instrument measured at FVOCI X
e) Revaluation surplus X
f) Remeasurement of employee benefits X
g) Unrealized gain or loss from change in fair value of financial liability due to credit risk X
Total Other Comprehensive Income X

Group 5: Contra-Equity
a) Treasury shares X
b) Subscription receivable (beyond 12 mos. or silent) X
c) Discount on share capital X
d) Capital liquidated X
Total contra equity accounts X

CFAS by: Bernadette L. Baul, CPA Page 16 of 23

2) What is the total amount of contributed capital?

Answer:

Legal capital (group 1) X

Add: Total share premium (group 2) X
Less: Subscription receivable (if beyond 12 mos. or silent) X
Contributed capital X

3) What is the total amount of reserve?

Answer:

Total share premium (group 2) X

Add: Total other comprehensive income (group 4) X
Add: Appropriated retained earnings X
Total reserves X

4) What is the total shareholders’ equity?

Answer:

Total legal capital (group 1) X

Add: Total share premium (group 2) X
Add: Total retained earnings (group 3) X
Add: Total other comprehensive income (group 4) X
Less: Total contra – equity X
Total shareholders’ equity X

PRACTICE SET

1) Captain America had the following issuance of P100 par value shares of stock:

• Issued 2,500 shares of stock for machinery. The machinery has a fair value of P280,000 while the stock is
selling at P105 per share.

• Issued 1,000 shares of stock for patent. The stock is selling at P105 per share.

• Issued 500 shares of stock in full payment of organization services rendered from the legal counsel. The fair
value of such services is P60,000.

What is the balance of total share premium after recording the above transactions?
A. 45,000
B. 30,000
C. 10,000
D. 5,000
2) On January 1, 2021, Damage Control Company issued 1,000 shares with par value of P400 for P480 per share.
Issuance costs incurred that are directly attributable to the equity transaction amounted to P20 per share.

How much is the net credit to share premium?

A. 80,000
B. 60,000
C. 20,000
D. 0
3) An entity issues 1,000 shares with par value of P400 for P320, the entry to recorded the transaction includes a
A. Credit to share capital for P320,000
B. Debit to share capital for P80,000
C. Credit to discount on share capital for P80,000
D. Debit to discount on share capital for P80,000

CFAS by: Bernadette L. Baul, CPA Page 17 of 23

4) During the current year, Roselle Company issued 10,000 ordinary shares with P200 par value and 20,000
convertible preference shares with P200 par value for a total consideration of P8,000,000. On the date of issuance,
the ordinary shares is selling at P360 and the preference shares is selling at P270.

What amount of the proceeds should be allocated to the convertible preference shares?
A. 6,000,000
B. 5,400,000
C. 4,800,000
D. 4,400,000

5) The company issued for P1,000,000 cash, 1,000 shares of P200 par value Preference share and 2,000 shares of
P100 par ordinary share. The preference has a fair value of P240 on the date of sale. No fair value available for the
ordinary share.

Upon issuance of the sale, the journal entry will include a credit to share premium – ordinary share:
A. 160,000
B. 200,000
C. 400,000
D. 560,000
6) The following are shown on the statement of financial position of Fox Company:
Share capital, P100 par, 1,000 shares 100,000
Share premium 2,000
Paid-in capital from treasury shares 3,000
Accumulated profits 75,000
Treasury shares, 200 shares at cost 25,000
All of treasury shares were sold at P20,000. How would the resale of the treasury shares be recorded?
A. Cash 20,000
Treasury shares 20,000

B. Cash 20,000
Share premium 2,000
Paid in capital from treasury 3,000
Treasury shares 25,000

C. Cash 20,000
Accumulated profits 5,000
Treasury shares 25,000

D. Cash 20,000
Paid in capital from treasury 3,000
Accumulated profits 2,000
Treasury shares 25,000
Numbers 7 and 8
On January 1, 2021, the statement of financial position of Cardiac Company shows the following information:

Share capital (authorized 10,000 shares with par value of P400) P 3,200,000
Share premium in excess of par 640,000
Share premium – treasury shares 20,000
Retained earnings 2,140,000
Total shareholders’ equity 6,000,000
7) If on July 1, 2021, Cardiac reacquires 1,000 shares at P320. On September 1, 2021, Cardiac retires the 1,000
treasury shares. The entry on September 1, 2021 includes a
A. CR to share premium – retirement for P80,000
B. CR to share premium – retirement for P160,000
C. DR to share premium – original issuance for P80,000
D. B and C
8) If on July 1, 2021, Cardiac reacquires 1,000 shares at P560 and immediately retires them. The entry includes
A. DR to retained earnings for P60,000
B. C and D
C. CR to share premium – original issuance for P80,000
D. CR to share premium – retirement for P560,000

CFAS by: Bernadette L. Baul, CPA Page 18 of 23

Numbers 9 and 10
The stockholders’ equity for Power Company on December 31 was:

Preference share, P20 par, 60,000 shares issued and outstanding 1,200,000
Share premium in excess of par – preference share 300,000
Ordinary share, P10 par, 300,000 shares issued and outstanding 3,000,000
Share premium in excess of par – ordinary share 600,000
Accumulated profit 2,500,000

Each share of preference is convertible into 1 ordinary share. In June, Power converted 4,000 of preference shares into
ordinary shares.

9) The entry to take up the conversion includes a credit to:

A. Preference share for P80,000
B. Ordinary share for P80,000
C. Share premium for P60,000
D. Accumulated profit for P60,000
10) Assuming that each share of preference is convertible into 4 ordinary shares and Power converted 4,000
preference shares into ordinary, the entry to take up conversion includes a debit to
A. Preference share for P160,000
B. Ordinary share for P160,000
C. Accumulated profit for P60,000
D. Accumulated profit for P80,000

Numbers 11 and 12
Cerebro Co. received 1,000 shares with par value of P400 and fair value of P480 per share from a shareholder as
donation

11) The entry to record the receipt of the share include

A. Debit to treasury shares P480,000
B. Debit to treasury shares P400,000
C. Credit to share premium – treasury P480,000
D. No entry
12) Subsequently, Cerebro reissues the 1,000 donated shares at P520 pre share. The entry to record the reissuance
includes
A. Credit to share premium for P520,000
B. Credit to income for P520,000
C. Credit to retained earnings for P520,000
D. No entry

13) Es Tri Company provided the following information from a comparative statement of financial position:

December 31, 2024 December 31, 2023

Share capital, P5 par 7,500,000 4,500,000
Share premium 52,000,000 40,000,000
Retained earnings 19,500,000 15,500,000
Treasury shares, at cost, 600,000 shares on December 31, 2024
and 400,000 shares on December 31, 2023. 7,000,000 5,000,000
What is the number of outstanding shares on December 31, 2024?
A. 1,500,000 B. 1,000,000 C. 900,000 D. 600,000

14) Dunn Company issued 2,500 ordinary shares. The shares have a P2 par value and sold them for P12 per share.
During the current year, Dunn reacquired 1,000 of these shares for P24 per share to be held as treasury, effected a
2-for-1 split, and reissued 500 of treasury shares for P28 per share. Dunn is using the cost method.

What is included in the entry to reissue the treasury shares?

A. A credit to share premium – treasury of P2,000
B. A credit to share premium – treasury of P8,000
C. A debit to treasury shares of P24,000
D. A credit to share capital of P6,000

CFAS by: Bernadette L. Baul, CPA Page 19 of 23

 TOPIC: RETAINED EARNINGS

15) On April 1, 2021, the board of directors of Cyclops Company declared P200 dividends per share to shareholders of
record as of April 15, 2021 for distribution on May 1, 2021.

The shareholders’ equity of Cyclops as of April 1, 2021 is as follows

Share capital, authorized capital 12,000 shares, P400 par 3,200,000

Subscribed share capital 880,000
Share premium capital 400,000
Retained earnings 1,816,000
Treasury shares (at cost of P480 per share) 576,000
Other components of equity 280,000
Total shareholders’ equity 6,000,000
How much is the cash dividends payable?
A. 1,800,000
B. 1,360,000
C. 2,200,000
D. 1,760,000

Numbers 16, 17, 18, 19 and 20

Captain Marvel Company declared P7,200,000 cash dividends to its preference and ordinary shareholders out of its
profit in 2023. No dividends have been, declared since 2021. The shareholders’ equity immediately before dividend
declaration are:

10% Preference share capital, P800 par P 8,000,000

Ordinary share capital, P400 par 32,000,000
Retained earnings 20,000,000
Total shareholders’ equity 60,000,000
16) How much is the dividend to ordinary shareholders if the preference shares are noncumulative?
A. 7,200,000
B. 5,080,000
C. 6,400,000
D. 6,000,000
17) How much is the dividend to ordinary shareholders if the preference shares are cumulative?
A. 2,400,000
B. 4,800,000
C. 5,600,000
D. 6,400,000
18) How much is the dividend to ordinary shareholders if the preference shares are noncumulative and fully
participating?
A. 7,560,000
B. 6,400,000
C. 5,120,000
D. 5,760,000
19) How much is the dividend to ordinary shareholders if the preference shares are cumulative and fully participating?
A. 4,480,000
B. 5,125,000
C. 5,760,000
D. 6,400,000
20) The dividend to ordinary shareholders if the preference shares are cumulative and participating up to 16% is
A. 5,120,000
B. 4,480,000
C. 5,480,000
D. 4,320,000

CFAS by: Bernadette L. Baul, CPA Page 20 of 23

21) Aha Company declared and distributed 10% share dividend with fair value of P1,500,000 and par value of
P1,000,000, and 25% share dividend with fair value of P4,000,000 and par value of P3,500,000.

What aggregate amount should be debited to retained earnings for the share dividends?
A. 4,500,000
B. 3,500,000
C. 5,000,000
D. 5,500,000
Numbers 22 and 23
Over Company showed the following balances:
Share capital authorized P100 par, 50,000 shares 5,000,000
Share capital unissued, 20,000 shares 2,000,000
Subscribed share capital, 10,000 shares 1,000,000
Treasury shares (5,000 at cost) 600,000
Share premium 500,000
Retained earnings 1,500,000
Market value of shares:
On declaration 140
On issuance date 150
22) What amount is deducted/debited to retained earnings account assuming the Board of Directors declared a share
dividend from unissued share capital of one share for each ten shares outstanding?
A. 350,000
B. 525,000
C. 560,000
D. 490,000
23) What amount is deducted/debited to retained earnings account assuming the Board of Directors declared a share
dividend from treasury shares for each ten shares outstanding?
A. 420,000
B. 480,000
C. 300,000
D. 360,000
Numbers 24, 25, 26 and 27
On October 31, Persecution Inc. declared a building as property dividend distributable to shareholders on January 31
of the following year. The building had a carrying amount of P1,500,000 on October 31. The building had a fair value of
P1,400,000 on the same date. On December 31 the value of the building deteriorated and latest estimates placed the
fair value of the building at P1,200,000.

The building was transferred to shareholders on January 31 when the prevailing fair value of the building was at
P1,300,000.

24) The entry to record the declaration of the property dividends would include a debit to retained earnings of
A. 1,500,000
B. 1,400,000
C. 1,200,000
D. 0
25) The property dividends payable should be reported in the statement of financial position as of December 31 is
A. 1,500,000
B. 1,400,000
C. 1,200,000
D. 0
26) How much loss should be recognized in the income statement on the reclassification of the building to asset held
for disposal on the declaration date?
A. 300,000
B. 200,000
C. 100,000
D. 0
27) What is the gain or loss to be recognized in the profit or losses as a result of the distribution of the property
dividends on January 31?
A. 300,000
B. 200,000
C. 100,000
D. 0

CFAS by: Bernadette L. Baul, CPA Page 21 of 23

28) The following information pertains to Ox Company:

• Dividends on its 50,000 shares of 10%, P100 par value cumulative preference share capital have not been
declared or paid for 3 years.
• Treasury ordinary shares were acquired at a cost of P1,000,000 during the year. The treasury shares had not
been reissued as of year end.
• At the year, Ox appropriated P3,000,000 of retained earnings for the construction of a new plant.
• Also, P2,000,000 of cash was restricted for the retirement of bonds payable due in the next year.

What amount of retained earnings should be appropriated as a result of these items?

A. 4,000,000
B. 5,500,000
C. 6,000,000
D. 7,500,000

29) Adverse financial and operating circumstances warrant that Salt Bae Company should undergo a quasi-
reorganization on December 31, 2022. The following information may be relevant in accounting for the quasi-
reorganization:
• Inventory with a fair value of P2,000,000 is currently recorded in the account at a cost of P2,500,000.
• Plant asset with a fair value of P7,000,000 are currently recorded at P8,500,000, net of accumulated
depreciation.
• Individual shareholders contribute P4,000,000 to create additional capital to facilitate the reorganization. No
new shares are issued.
• The par value of the share is reduced from P25 to P5.
• Immediately before these events, the shareholders’ equity appear as follows:
Share capital, P25 par, 100,000 shares outstanding 2,500,000
Share premium 1,750,000
Retained earnings (deficit) (3,000,000)
Total 1,250,000
After the quasi-reorganization, what amount should be reported as share premium?
A. 2,750,000
B. 3,250,000
C. 3,750,000
D. 1,750,000

TOPIC: SHAREHOLDERS’ EQUITY COMPOSITION

Numbers 30 and 31
Shokt Company’s adjusted balance at December 31, 2021, includes the following account balances:

8% preference stock (preference shares), P100 par 900,000

Common stock (ordinary shares), P3 par 500,000
Subscribed common stock (subscribed ordinary shares) 400,000
Subscription receivable (on ordinary shares) 150,000
Additional paid-in capital (share premium) – common stocks 300,000
Additional paid-in capital (share premium) – preferred stock 250,000
Retained earnings: appropriated for uninsured earthquake losses 100,000
Retained earnings: unappropriated 200,000
Treasury stock at cost 70,000
Net unrealized loss on investment measured at fair value through other comprehensive income 40,000
Net unrealized gain on foreign currency translation adjustment 25,000
Revaluation surplus 280,000
30) The amount that Shokt Company should report as total stockholders’ equity in its December 31, 2021 balance
sheet is
A. 2,695,000
B. 2,775,000
C. 2,995,000
D. 2,970,000

31) What is Shokt Company’s contributed capital?

A. 2,200,000
B. 2,130,000
C. 2,350,000
D. 2,280,000

CFAS by: Bernadette L. Baul, CPA Page 22 of 23

32) The following were lifted from the equity section of an entity’s statement of financial position showed the following
information:

Ordinary shares, P200 par value 3,200,000

6% Preference shares, P400 par value 800,000
Share premium – ordinary shares 1,200,000
Share premium – preference shares 200,000
Subscribed ordinary shares 400,000
Subscription receivable 200,000
Retained earnings 1,600,000
How much is the legal capital of the entity?
A. 5,600,000
B. 5,200,000
C. 4,400,000
D. 4,200,000

CFAS by: Bernadette L. Baul, CPA Page 23 of 23