,rT

P ar t n e r sh i1t Li q ui d at io n
il1

c. The perfect score is 2 points. you i

will be deducted 1 point

each mistake, including not cool solutions. However,
minimum score that you can have is 0.
ill Chapter 14
Partnersh ip Liq uidation
Ll

I
,

PRIZE: The winning sub-group in all the battles will be hailed as

the "The Knights in shining T-account.,, The losers will be mockecl
i Learning O0jectives i

as the "The Knights in Yellow Worksheet armor,, (not shining).

Battle #2: (Petfect score * 3 points)
* Assume the new parkrer is admitted to the partnership
through direct investment to the business.
a. Provide the joumal entry to record the admission of the new
partner. Compute for the total parhrership capital after thc
admission. Show awesome solutions.
b. Have your answers checked by the other sub-group in your
i g*rogp_ 9j four,
Battle #3: (Perfect score - 4 points)
* Assume that instead of admitting the new partner, partner 2
withdraws from the partnership. partner 1 purchasgs thc
interest of Partner 2 for ?
a. Provide the journal entry to record the withdrawal of partner
2. Compute for the total partnership capital after partner 2,s
withdrawal. Show solutions like they were prepared
humans, notmonkeys.
b, Hayg yoJl---------------Ianswgrs checked by the other sub-group.
i Battle Royale: (Perfect score - S points)
* Assume (from Battle #3 above) that the partnership
Partner 2 instead.
a. Provide the journal entry to record the withdrawal of partner
2. Compute for the total partnership capital after partner 2,s
withdrawal. Make solutions the Fra Luca pacioli way, not Fra
Luka Gaga.
b: H3_vg you_J ansrvgrs checked by the other sub-group.
,
1. State the order of priority in the settlement of claims in cases
of liquidation.
1 a..gl"t f.. tt-t" tlq"{ation of a partnership.
Liquidation
Liquidation is the termination of business operations or the
winding up of affairs. It is a process bt, which
1. assets are converted into caslu
2. liabilities are settled, and
3. any remaining amount is distributed to the owners.
Liquidation may be either aoluntary (e.g., per agreement of
partners of a solvent partnership) or inaoluntary (e.g., bankruptcy).
Conversion of non-cash assets into cash
The conversion of assets into cash is referred to as "realization"
while the settlement of claims bf creditors and owners is referred
by to as "liquidation." However, the term liquidation is used in a
broader sense to include the entire winding up process.
The winding up process starts with the conversion of non-
cash assets into cash. As such, the timing of the "realization" of
non-cash assets determines the manner on which the "liquidntiont'
payn (i.e., payment of claims) is carried out.
Methods of liquidation
Liquidation may be accomplished either through:
1. Lump-sum liquidation - all of the non-cash assets of the
partnership are sold simultaneously or within a very short
 476
Chapter 14 l' o r tner ship Liq u idati on
iir

period of time' The proceeds are

then used to
settre first alr of
the liabilities, and any remaining Lump-sum Iiquidation vs. lnstallment liquidation
amount is paid to the
partners und,ey a lutwP-sum payment fhe following are the procedures in the accounting for lump-sum
(i'e'' one-time or singlt'
payment). I iquidation and installment liquidation:
L

Lump-sum liquidation is possible

when there 1S;il
contracted buyer of all of th; Installment
non_cash assets of thc
partnership or the assets are sold
on a ,,package deal,, basis.
I. All of the non-cash assets 1. Some of the non-cash assets
are converted to cash. are converted to cash.
Instalrment riquidation in most
- cases, it would take somc The totnl gain or loss on 2. The cawying amount of any
time before arl the assets of a business
are converted into cash, the sale is allocated to the unsold non-cash asset is
In such case, the partners' claims
are settred on an insta*menr, partners' capital balances considered as a loss,. This is
basis as cash becom
but only after all partnership based on their P/L ratios. allocated to the partners,
liabilities are fully.i;#'"'ole' capital balances based on
When financial statr s are prepared during
i^* -^-.^-, arl.the
i:x3,::.I11*':. .assets
.;'*;;;.**# ;; tht,
3. Actual liquidation expenses 3.
their P/L ratios.
Actual and estimated future
e, estimJ; ;;il;.;.:
r:,::::: 2Y :::,.,,to serr)e and
ab aru s (i
t z, e

au riab,ili;;;;ffi;#:;
are allocated to the liquidation expenses are l
l

1,,:_,:i,::,:1:.,r:
::::::-::,.i1.""::.
preseni
rhe use or r,isto.i.,i
value, or other measllrement
;;;;ffi:; parb:rers' capital balances
based on their PIL ratios.
allocated to the partners,
capital balances based on
I

ii
bas.ls aPpropriate only
when the entity L"u- concern. 'u their PIL ratios.
**r
4. The liabilities to outside 4. The liabiliti es to otttside
I

Settlement of claims creditors are fully settled. creditors are partially or

The available cash of the partnership fully settled.
the following order of priirity:
I is used
"- to settle claims using
The liabilities to inside 5. The liabiliti es to inside
1. Outside creditors cr editors are fully settled. creditars are partially or
2. Inside creditors (e.g., payables to partners) fully settledbut only after
3. Owners, capital balances the full settlement of the
liabilities to or.ttside creditors.
Right of offset
As shown above, a loan payable
6. Any remaining cash is 6. If both the liabilities to
to a partner has a higher priority distributed to the or,rmers in outside and inside creditors
over the partner,s capital balance.
However, the legal right ot full settlement of their are fully settled, any
offset allows a deficit in a partner,s
capital account to be offset by interests. remaining cash less cash x(t
a loan payable to that partner.
aside for future liqulitt lotr
expenscs is tl irllll'rrlr', I l,i
thc trwttrr ,, r,t l)i, I l,tl
st,llh'tttr.trl,,l llr, tr lrrlr ri.,1
 478
str*18 P ar tne rship Liq uida t io n

Illustration 1: Lump-sum vs. Installment liquidation Step 1: Compute for the gnin or loss on the ssle
Use the follozuing information for the next tzoo independent cases:
a) Collection on accounts receivable 50,000 l

Fact pattern lr) Sale of inventory 70,000 I

On ]anuary 1.,20x1, the partners of ABC Co. decided to liquidatt, c) Sale of equipment 250000
their parhrership. The following information was made availabre :
d) liquidation expenses (2,000)
Net cash proceeds 368,040
l

Cash 20000 Less: Carrying amount of non-cash assets

lill
Accounts receivable 60,000 (60K Accounts receivable+ 120K Inventory + 300K Equipment) (480,000)
l

Inveniory 120,000 Totnl loss on sale Q12,AA0)

Equipment 300,000
Total s0o000
Step 2: Allocate the gain or loss to the partners' capital balances (include l

Accounts payable 30,000 their right of offset)

l

Payable to B 20,000 il
A, Capital (2A%) 100,000
A (20"/") B 6A%) C (500/,) Totals
B, Capital (30%) 150000
Capital balances 100,000 150,000 200,000 450,000
C, Capital (50%) 200,000
Payable toB (rigltt of ffiet) 20,000 20,000

Totsl
Total 104,004 u0,000 200,a00 470,000
500,000
Allocation of loss LI

[112K x (20%;30% & 50%)]

(22,400) (33,600) (56,000) (112,000)
Amts. receizted by the partners 77,600 136,400 144,00A 358,000 i

Case #1: Lump-sum liquiclation l

hrforrnation on the conversion of non-cash assets is as follows: To check the accuracy of our answer, let us identify if the
a. F50,000 was collected on the accounts receivable; the balance total amouzf distributed to the partners is equal to the amount of
;

is uncollectible. cash available for distribution to owners:

b. ?7A,000 was received for the entire inventory.
c. The equipment was sold for P250,000. Beginning balance of cash 20,000
4, PZ000liquidation expenses were paid. Net proceeds from ihe sale of non-cash assets 369,000
Less: Payment to outside creditors (30,000)
Requiremenf; Determine the amounts of cash distributed to thc Cash aztsilable for distibution to parhrcrs 358,000
i
partners in the final settlement of their interests.
Notice that the cash available for distribution to partrers
Solutiort: of P358,000 is equal to the total amount received by the partners.

L
 Chapter,! nl

{
o' F q
o-
(JJ
o' N
J st!
'!D
ilr

S
The pertinent entries are as follows: l,
) r\:J
llr
s)
0)
p-b'a ill
1@
lan. Cash 368,000
,t ) o aS
1,
g
ur ra' tl
Loss on sale (inclusiae of liquidation expenses) 112,000 (, B
20xl
o o
U)
(t 5o
Receivables 50,000 o
;l

r,
Inventory 120,000 a- a =C I

. Equipment 300,000 .)
x
(D
p-
o
.) o
,\x ilii

to rercrd the renlization of non-cash hssets p. E o OR

o a
o.
lan.
1,
A, Capital 22,40A 4
{a
D
(D
a
o
I
20x1
B, Capital 33,600 (D
tli

C, Capital 56,000 q) l;
OJ 5lr
ell
(,l lx NJ
O o
Loss on sale 112,000 Oo
O O (D
ilr
to close the loss on sale to the respectiae cupilal O o O I.Y
C)
O
O t-.
balnncrs of lhe partncrs fi

Ion. Accounts payable 30,000 z

u a
1, @ I

Cash 30,000 O I !, \J
20x1 O rl
C)
(!
(D.
to record the settlcmeri of litzbilities to oulsida D5 li
creditors r9
F*> d ir

lan. Payable to B 20,000 (/J o .{ ;i, O

1,
Cash 20,000 s} ! t-.'
O
20x1
. to record the settlement of liabilifu to irtside
tg€ I l

(D lO) xjl.
cretlitor lJg
ls !)
Ian. A, Capital 77,644 +l lll. ,o
1, NJ
O $ s- lo li

20x-l
B, Capital 176,400 O <l(, il
O IE
()
C, Capiial 1"14,000 l

Cash 308,000
1]l
to record tlrc settlernent o.f the partners' capital
].
nla nccs O Gn
Gi\' li

O c\$ ti
O ti

We can prepare a formal report on the liquidation through thc l

stat ement of li qui da ti on. s $l lnr

$
* (Jl 6 a'lo
a slg.
A stntement of liquidation is a financial report that o\ o\ O
highlights lhe realizatior (receipts from asset disposals) and tht'
rF
C>
isl l5
O
O
(>
O
O
dE.E
liquidation (settlement of creditors' and partners' claims) of o
partnership *: itr
NJ s)
A A O
c) Gn
Qs-
c) O l- H.
482 Chapter I :T P ar tner sh ip Liq u il nt ion l

Case i2: Instsllment liquidation b. Wsald non-cash assets are considered as losses to be
l

Use the fact pattern above but assume that the partnership will bc allocated also to the partners' capital balances.
liquidated over a prolonged period of time. Distributions to thtr lir

partners will be made as cash becomes available. Information ort To simplify our solution, the total gain or loss to be allocated i

the conversion of non-cash assets is as follows: to the partners' capital balances is computed simply by t,

a. 75% o{ the accounts receivable was collected for only P30,000, comparing the net proceeds and the carnling amlwil of all non-
b. Half of the inventory was sold for P40,000. cash assets, uthethet sold. or nat.
i

c. Equipment with carrying amount of F200,000 was sold for ,l

P12O000.
d Actual liquidation expenses of P2,000 were paid. Step 2: Allacate the gain or loss to the partners' capitalbalsnces (inclttde
ril
e. Estimated future liquidation expenses totaled P1,000. their right of offset)
f. F9,000 cash was retaineci in the business for potential
unrecorded liabilities and anticipated ex A Qa%) B (30%) , C (\aW Totals
Capital balances 100,000 150,000 200,000 450,000 1i

Requirement: Determine the amounts of cash distributed to tho Payable to B 20,000 20,000
partners from the partial realization of partnership assets. TotaI 100,000 170,004 200,400 470,004
Allocation of loss
Solution: [302Kx QA%;30%&50%)] (60,400) (90,600) (151,000) (302,000)
Amts. receiocd bu the partners 39,600 79,400 49,000 168,000 i

Step 1": Compute far tlrc gain or lass tli

a) Collection on accounts receivable 30,000 Checking:

b) Sale of inventory 40,000 Beginning balance of cash 20,000
c) Sale of equipment 120,000 Net cash proceeds (net of all costs and cash retentions) 178,000 l

d) Actual liquidation expenses (2,000) Payment to outside creditors (30,000)

e) Estimated liquidation expeflses (1,000) Cash aaailable for distrtbufion to partners 168,040
0 Cash rctained for future expenses (9,000)
Net cash proceeds L78,0U)
Less: Carrying amount of all non-cash assets ffiSummary: Lump-sum snd lnstallment Liquidatiott
(60K Accounts receivable+ 120K Inventory + 300K Equipment) (480,000) Step #L: Compute for the net proceeds. Deduct ail expenses, whether
Tatal loss (302,000) paid or not, as well as any cash retention for future costs.
Step #2: Compute for the gain or loss by comparing the net
1 Nofcs: proceeds with the total carrying amount of non-cash assets,
(F The procedure above is similar to the procedure used in whether sold or not.
lump-sum liquidatiory with the following additional concepts: Step #3: Allocate the gain or loss to the partners' interests. Any
a. Expected future expenses are recognized immediately as residual amount in a partner's capital balance represents
the settlement of his interest in the partnershi
losses to be allocated to the partners' capital balances.
484 Chapter 14
U
I P artnership Li q uidatiott

Marshalling of assets Cash 20,000

As mentioned earlier, one of the characteristics of a partnership is Accounts receivable 60,000
"unlimited liability." This is because the personal assets of the Inventory 120,000
general partners are subject to the claims of partnership's creditors Equipment 300,000
in case of partnership insolvenry. Total 500000
The legal doctrine of marshalling of assets is applied when
Accounts payable
the parfirership and some of the partners arle insolaent. The 30,000
Payable to B 20,000
following are the rules when applying this doctrine:
1. First, any available assets of the partnership are used to settle { Capital (20%) 100,000
B, Capital (30%) 150,000
the partnership's liabilities.
2. Second, in case the assets of the partnership are insufficient to C Capital (50%) 200000
pay all liabilities (i.e., insolvenry), the solvent general partners Totst m
are required to provide additional funds from their personal
assets. Case #1: All partners
personolly solvent
&re
The claims to the personal assets of a partner are ranked All of the partners are personally solvent. Information on the
in the following order: conversion of noncash assets.is as follows:
a. Those owing to persoral creditors of the partner. a. P10,000 was collected on the accounts receivable; the balance
b. Those owingto partnership creditors. is uncollectible.
c. Those owing topartnersby way of contribution. b. P5,000 was received for the entire inventory.
c. The equipment was sold for p53,000.
3. Third, in case some partners are insaktent (or limited d. F2,000 liquidation expenses were paid.
parhrers), their capital deficiency is offset to the capital
balances of the other partners. If after allocating the capital Requirement: Determine the amounts of cash distributed to the
deficiency of an insolvent (or limited) partner, a solvent partners in the final settlement of their interests.
partner's capital balance results to a negative amoun! the
solvent partner is required to provide additional contribution. Solutiott.:

Step 1": Compute for the gain or loss

Illustration: Insolvency of partnership
Use the following information for the next two independent cases: a) Collection on accounts receivable 10,000
On January 1",2Ax')., the partners of ABC Co. decided to liquidate b) Sale of inventory 5,000
their partnership. The following information was made available: c) Sale of equipment s3 000

Net cssh proceeds 66,000

Less: Carrying amount of all non-cash assets
60K Accounts receivable+ 120K Tn 480,
Total lass (414,000)
486 Chapter l4 P ar tnership Li qui dntiort

Step 2: Allocste the gain or loss to the Ttartners' capitnl bslances (include Step 2: Allocate the gain or loss to the partners' capitalbalances (include
their right of offset) their right of offset)

A(20W B(30y") C(50,/") Totals A (20,/.) B $0,A C $oy") Totals

Capital balances 100,000 150,000 200,000 450,000 Capiial balances 100,000 1s0,000 200,000 450,000
Payable to B 20,000 20,000 Payable to B 20,000 20,000
Total rc0,a00 u0,a00 200,a00 470,000 Totnl 100,000 770,000 2aa,000 470,0a0
Allocation of loss Allocation of Ioss
lalaK x (20"/,; 30% & 50%)l (82,800) (124,200) (202000) (414,000) W14Kx(20%;30't,&50%)l (82,800) {124,200) (207,000) (414,000) li
Totqls 77,2A0 45,800 (7,000) 56,000 Totals L7,200 45,800 (7,000) 56,000 i

Additional cantribution of C 7000 7,000 Allocation of capital

I

Amts, receiaedblt the partners 17,244 45,840 63,000 deficiency to the other partners i

lTKx (20"/"150",1,; & 30"1,150o/")1 Q,800) (4,200)

l

7000
Amts. teceiaed bA the peytners 1"4,400 41,640 56,000
Since C is perconally salaent, he is required to providc
additional contribution to cover his capital deficienry.
Since C is personally insolztenf, his capital deficiency is
Checking allocated to the other partners with positive capital balances. The
Beginning balance of cash 20,000 allocation is based on the solvent partners' P/L ratios [e.g., allocation
Net proceeds 66,000 to A: 20"/" A's interest * {20% A' s interest + 30"/" B's interest)l .
Additional contribution by C 7,000
Less: Payment to outside creditors (30,000) Checking:
Cash aaailable for distribution to partners 63,000 Beginning balance of cash 20,000
Net proceeds 66,000
Less: Payment to outside creditors (30,000)
Case #2: Some parhters are persanally insoloent Cash aaailable for distribution to partners 56,000
Use the same information, except that C is insolaent.

Requirement; Determinp the amounts of cash distributed to thc Safe payments schedule and Cash priority program
parhrers in the final settlement of their capital accounts. The computations presented earlier for installment liquidation
may be presented in a fnrmal manner through either:
So!ution: 1. Safe payments schedule; or
2. Cash priority program
Step 1: Compute for the gain or loss
(See 'Case #1' above.) The basic purpose of these schedules is to preaent
ooeryflyments to partners during installment liquidation.
 488
lhapterr-q P artnerslilTt Li quidation

Safe payment schedule

The safe payment schedule shows how much cash can be,,safely,,
paid to the partners during installment liquidation, which avoids
any overpayment.
The preparation of this schedule requires ihe application
of the safire concepts as those we have applied earlier, namely:
a. Unsolil non-cash assets are treated as /oss; and
b. Expected future liquidation cosfs and potential unrecorded
liabilities are recognized immediately as losses.
The sum of (a) and (b) above is referred to as "maximunt
loss possible."
The safe payment schedule may be used as supporting
information ta a Statement af liquidation.
lanuary 20x1:
The following transactions occurred inlanuary 20x7:
a. 75% of. the accounts receivable was collected for only F30,000.
b. Half of the inventory was sold for F40,000.
c. Equipment with carrying amount of P20O000 was sold for
P12O000.
d. P2,000 liquidation expenses were paid. Estimated future
liquidation expenses totaled F1,000.
e. P9,000 cash was retained in the business for potential
unrecorded liabilities and anticipated expenses.
Requirement; Prepare the safe payment schedule on Jan. 31, 20x1.
Solution:

Illustration: Safe payment schedule First, the actual /oss on realization of assets is determined as
On January 1,20x1, the partners of ABC Co. decided to liquidatc follows:
their partnership. The following information was made available:
Cash 20,000 Loss on collection of accourrts receivable [30K - (60K x 75%)] (15,000)
Accounts receivable 60,000 Loss on sale of inventory [40K - (120K x 50%)] (20000)
Inventory 120,000 Loss on sale of equipment (120K - 200K) (80,000)
Equipment 300,000 Actual liquidation experrses (2,000)
Totgl 500,000 Actual lass on realization - fan.20x1 (717,000)

Accounts payable 30,000 Nexf, the maximum loss possible is computed as follows:
Payable to B 20,000
A, Capital (20%) 100000 Carrying amount of unsold non-cash assets
B, Capital (30%) 150,000 200K)
(60K x 25%) + (120K x 50%) + (300K - (175,000)
C, Capital (50%) 200,000 Estimated future liquidation costs (1,000)
Total 500,000 Cash set aside for potential unrecorded liabilities (9,000)
Maximum loss possible (185,00A)
The partnership will be liquidated on an installment basis.
Distributions to owners will be made as cashbecomes available.
 s!..8 P ar tner ship Li qu id ati on 491

Finally, the safe payment schedule is prepared as follows:

ABC Co.
Safe payment schedule
January 31,20x1,
Capital balances before
liouidation
Totnl interest - lan. 1,20x1 100,000 170,000
Allocation of loss on
The ending balance of cash represents the P1,000 and
P9,000 cash set aside for future costs.
Februarg 20x1:
C (50y") Total The following transactions occurred in Febrttary 20x1:
- 20,000
a. P1O000 was collected on the remaining accounts receivable;
the balance was deemed uncollectible.
200,000 450,000
b. The other half of the inventory was sold for P20,000.
c. The remaining items of equipment were sold for P30,000.

realization - Ian. 20x1

d. P10,000 liquidation expenses and previously unrecorded
liabilities were paid.
76,600 134,940 1,41,504 353,000
Allocation of maximum
e. The lisuidation ended on February 28,24x1.
loss possible - Tan. 20x1
Fir st inst allment p ay m ent Requirement: Prepare the safe payment schedule on Feb. 28,20x1..
to oartnerc - Ian.2Ax1
Solution:

Notice that when preparing a safe payment schedule, tlrt' On final settlement, there is no need to comPute.for the maximum
acttral and estimated losses are computed separately. Tlro loss possible.
computations presented earlier, where we did zof compute for
these losses separately, are just a simplification of tlro Loss on collection of accounts receivable [10K - (60K x25'k)l (5,000)
computation for distributions to the parhrers. If you use tht, Loss on sale of inventory [20K - (120K x 50%)] (40,000)
simplified method, you should be able to come up with the samt Loss on sale of equipment (30K - 100K) (70,000)
amounts of distributions to tlrc partners. Actual liquidation expenses (10,000)
Actual loss on realization - Feb.20xL a25,000)
The balance of cash is reconciled as follows:
Cash
|an.1,20xL
Collection of accounts Payment for
receivable liquidation expensc$
Payment to outsider
Sale of inventory creditors
1st installment
Sale of equipmerrt payment to partners
1nn.31,20x1"
 Chapter 14
T I

ABC Co. I

$Er OE jrD9)
Safe payment schedule ?= r'= I

February 28,20x'1, o oii

==s
!liNs o^i
5i l+
ro
-:-D)
D|:rI
D Y-rD
I

5o Av' 56 ,!.@
(D I X'6 I

Aeq%) B (j0"/,) C(50%)

I !i3 | o o -, x I

Total n!
(\ If ii-ots 1l o iox' I

PayabletoB - 20,000 - 20,000 tD

{ tv 0, :i { q 9lD
50
lD

Capital balances before

N)
o
vr;
a9r"
q) p. i\6-O -
I
I
tCo ts o 4 o
|'J a
liquidation 100,000 150,000 ?99,A00___:{50400*.. N
|t
@
oO a
4
o 5b) I

Total interest - Jan. 1,20x1 100,000 170000 200,000 470,000 ) ^g

i_r 9.
6 o-9 I

Allocation of loss on a a o a I
I
reaiization -fan.20x1 (23,400) (35,100) (58,500) o d l
(112000) (t 9)
C' I
D
H
First installment payment o
to partners - Jan.20x1 (39,600) (79,400) (49,000) (168,000) r1
o ) H
rrt
I

ol
I

Total interest - Feb. 1, 20x1 37,000 55,500 92,500 L85,000 a: I.J

{l
Or c' urH iv vt
Allocation of loss on I
s)S 9J5 @-*
=FJ n rol
reaiization - Feb. 20x1 (25,000) (32500) (52500) (125,000) OQ o b
'66l
xl
I

.= o OI
Final installment o.v)
I 6
:
Rv

\ l* \ -O@ zt'
I

pattners
I

pa.ltffient to 72,A00 78,000 30,000 60,000 t^

\
IB H -S
oil
I

l(,l
t\
to
IN
{n tq
t' )..
(Jloro
o OO P
EB I d
l9
lo
lo €.l- sg El
The balance of cash is reconciled as follows:
ol f!
s
Cash
l

o(N l-tl > H*r

'Ft
Fl s.
E

Feb.L 2Ax1 t, l'

[EI 8t I
a
I
l*:r F ';B
$E
I

Collection 0f accounts Payment for

l
I
I
lgo los
receivable liquidation expenses
I

I I EI
arl
I

I {l
Sale of inventory I
I
l^l.l NJ l! N)
Ils6 "uR' r'.ll
I I
I
IO C) O O]
Final payment to t, loo I O N
O l:- o
Sale of equipment partners
I
I loo la x
I

Feb.28,20x1 I
I
t- I

t^ t^ t^
I

\ ln
I

IHH
loo
N l-u'
l!..,
lN CIJ
j-l I\O t(})\
ln\
(}\
b. ro\
_Bg
AX ls. F
los loo O g5 tr
The statement of liquidation in February is shown below:
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494 Chapter
T
14 | Partnership Liquidation

Cash priority program B, Capital (30%) 150,000

Another method of ensuring that there are no overpayments to C, Capiial (50%) 200,000
the partners is by preparing a "cash priority program', or ,,cash Total 500,000
diskibution program." This schedule determines which partner
shall be paid first and which parhrer shall be paid lasf after all thc The partnership wiil be liquidated on an installment basis and
liabilities are settled. This schedule can be prepare d euen prior to distributions to the partners will be made as cash becomes
the sale of any asset. available. l

The preparation of this schedule requires the application i

of the same concepts as those we have applied earlier, namely: Even prior to the sale of any assef we can determine the llrr

a. Unsold non-csslt nssets are treated as /oss; and amount of minimum safe payments to the partners (when or
b. Expected future liryidntion costs and potential rnrecordatl as cash becomes available) by preparing a cash piority I

liabilities are recognized immediately as losses. program. This is prepared as follows: i

I

iii
An additional procedure when preparing a cash priority First, the maximum loss absorption capacities (MLAC) of the
program is to rank the partners in accordance to their maximunt parkrers are determined. This will be the basis in ranking the
loss absorytion capacity. The
partner with the highest maximum loss partners according to their priority over cash payments.
absorption capacity shall be paid first. The partner with the lorueql lir
maximum loss absorption capacity shall be paid last. Tht, A B C
maximum loss absorption capacity is computed as follows: (20w $a'7; (30"/,)
Payable to B 20,0m
Maximum loss Total partner's interest in the partnership-
_
- Capital balances before
absorption capacity Partner's P/L percentage
liqg!{ation 100,000 150,000 200,000
Totsl btterest in the partnership 100,000 170,000 200,000
pivide by : P lL percentage 2A% ' 3AY,,
Illustration: Cash priority program 50Y,,

On January 1",20x1., the partners of ABC Co. decided to liquidatr, Max. los s ab sorption cap acitr.y 500,000 566,667 400,000
their partnership. The following information was made available:
Rhnk of payment
Cash 20,000
Accounts receivable 60,000
krventory 120000 Second, the partners' MLAC are equalized. This will be the basis
Equipment 300,000 in preparin g the ca sh prio ri ty p r o gram.
Totnl 500,000

Accounts payable 30,000

Payable to B 20,000
{ Capital (20%) 100,000
 Chapter 14
T ! P ar tn er ship Li q u i d a t io t t

A (20v,) B Go%) c (30%,) f. P9,000 cash was retained in the business for potential
Rank of paument 2nd 1st 3rd unrecorded liabilities and anti ci pated expenses.
Maximum loss absorption capacity 500,000 566,667 400,000
Difference between 1st and 2nd (66,667) llequiremenf: Determine the cash payments to the partners on
Balance 500000 500,000 400,000 January 31,20x1using a cash priority program.
Diferezce between 1st, 2nd grd 3rd (100,000) (100,000)
40a,000 400,004 400,000 Solutiott:
l

Third, the cash priorities are computed by multiplying thtt The amount of cash available for distribution to the partners on
dffirences above by the respective partners' P/L ratio. January 31,20xi is computed as follows:

Cash Brioitv proqram a) Collection of accounts receivable 30,000

A Q0%) B (30Yo) c (s0%) b) Sale of inventory 40,000 I

Rank of paument 2nd Lst 3rd c) Sale of equipment 120,000

1stpriority t66,667 x 30%) 20,000 d) Payment for liquidation expenses (2,000)
2nd priority (100K x 20% & 30%) 20,000 30,000 e) Cash set aside for estimated liquidation expenses (1,000)
Totals 20,000 50,004 f) Cash se! qetained for potential future costs (9,000)
I

i Net praceeds 178,000

I
The cash priority prlgranx above means that when caslt Add: Cash balance, beg. {xe [Jatauce Strcct abooe) 20,000
becomes available: Less: Accounts patlable Get Balnrce Slrcct ahore) (30,000)
t
1. B ispaid P2O000 firs! C a s,h*ao ail sb I e f o r di stributi o t! t o p artn e r s 1"68,000
2. Next, A and B are paid P20,000 and F30,000, respectively; and
h
I 3. Any rcmaining cash zuill be distrtbutud to all partners baseil Using the cash priority program, the amounts of diskibutions to
t
on their PIL ratio. the partners on fanuary 31,20x1are determined as follows:

t
I * Applications of the cash priority program A B C
I.
Q0'/r) (30%) (50"/r) Tatal
Aaailable cash - lan.31,2Ax1 168,000
January 2Ax1:
All.ocstiort:
The following transactions occurr ed in I aruary 20x1:
1st priority 20,000 (20,000)
a. 75% of. the accounts receivable was collected for only P30,000. 2nd priority 20,000 30,000 (50,000)
b. Half of the inventory was sold for P40000. Bslance 98,000
c. An equipment with carrying amount of P200,000 was sold for Payment after priorities
P120,000.
[e8Kx (20%;30% &50%)] 1e,6aa 29,400 49,0a0 (99,000)
P2,000 iiquidation expenses were paid.
1. st installment p aqment 39,600 79,400 49,000
Estimated future liouidation ex totaled P1,000.
 Chapter 14 Pa r tnersh i 7t Liq u id at ion

'-e Afier A and B are allocated their cash priorities, any balance is Using the cash priority program, the amounts of distributions to
allocated to the partners based on their respective profit or the partners onFebruary 2S,2Ax1 are determined as follows:
t:j]]n",s
(F H: computed above are equat to the amounts A B C
computed in the previous
illustrations for "safe pnyment (20w GA'/") (30Y.) Total
schedule" and'Case #2: Installment liquidation' . Aaailable for cash - Feb. 28, 20x1 60,000
Allacation:
Payment after priorities
60K x ;30% e.50%)1 12,000 18,000
February 20x1:
Final installment 12,000 $,400
nsactions occurred in Februanl 20x1:
The following transactio
a. collected on the remaining accounts receivable;
P10,000 was collecte
the balance wasas deemed
deer uncollectible.
b. The other halff of the inventory was sold for F20,000.
c, The remaining items included in the equipment account are
g item
sold for P30,000.
d. rtion expenses and previously unrecorded
P10,000 liquidation
raid.
liabilities were paid.
e. The liquidation proc
process ended on February 28,20x1".

Requiremenfs: Determine the cash payments to the partners on

February 28,2Ax1, using a cash priority program.

a) Collection of accounts receivable 10,000

b) Sale of inventory 20,000
c) Sale of equipment 30,000
d) Payment for liquidation expenses (10,000)
Net proceeds 50,000
Add; Casfu - -Feb. 1, 2011 (p1K and r9K cash set aside onlan. 31) 10,0{)
Cash aaailable for distibution to partners 60,000
 Chapter
Chapter 14: Summary
. Liquidstinit is the terminaiion of business operations or the
winding up of affairs.
. Order of priority in the settlement of claims in cases of
liquidation: (1) Outside creditors; (2) Inside creditors; and (3)
Owners' capital balances.
In case of partnership insolvency, the rule of marshalling ,T
assets is applied. Under this rule, only the excess of a
partner's personal assets over his personal liabilities can be
used to settle partnership debt. Any capital deficienry of an
insolvent partner is absorbed by the solvent parhrers.
Accounting procedures when computing for the setilement of
the partners'interests in cases of liquidation:
Step #1: Compute for the net proceeds. Deduct all expenses,
whether paid or nof as well as any cash retention for
future costs.
Step #2: Compute for the gain or loss by comparing the net
proceeds with the total carrying amount of non-cash
assets, whether sold or not.
Step i3: Allocate the gain or loss to the partners' interests. Any
residual amount in a partner's capital balance
represents the settlement of his interest in the
parbrership
. Under the cash priority progrilm, when all of the priorities are
paid, any remaining cash distribution is allocated to the
rtners based on their respective P/L ratios.
14 P artnership Liquidation 501
PROBLEMS
PROBLEM 1: TRUE OR FALSE
Fact pnttcrn:
You and I are partners. Our partnership business has total assets
of F10 and total liabilities of ?2. My capital balance is P4 while
yours is P4. We share in profits and losses equally. We decided to
liquidate our business because we want to retire and tour around
the moon.
1. After selling all our assets, we have a cash balance of P9. The
amount of cash that we can divide among ourselves is F9.
2. Continuing #1 above, the amount of cash that you will receive
as final settiement of vour interest is F3.5.
Fact pattern:
Your cat and my dog are partners. Our pets' partnership business
has total assets'of P20 and total liabilities of P8. Your cat's capital
balance is P7 while my do5;'s capital balance is P5. Our pets share
in profits and losses equally. Our peis decided to liquidate their
business because they also want to retire and tour around the
moon.
3. After selling all their assets, our pets have a cash balance of
P1B. The arnount of cash that our pets can divide among
themselves is P10.
4. Continuing #3 above, the amount of cash that your cat will
receive as final settlement of its interest is F6.
5. Continuing #3 above, the amount of cash that my dog will
receive as final settlement of its interest is P4.
PROBLEM 2: COMPUTATION S
Use the following informatiott for the next six itdeperd.ent cases:
Fact pattem
The partners of ABC Co. decided to liquidate their partnership.
ABC Co.'s statement of financial position is showrr below:
r 542 Chapter
T
14 I P ar tn er ship Li quidat ion

Cash 50,000 f. F10,000 cash was retained in the business for potential
Accounts receivable 150,000 unrecorded liabilities and anticipaied ex
:

Inventory 300,000
i
Equipment 750,000 Requirement: Determine the amounts of cash distributed to the
t
t Total 1,250,000 partners from the partial realization of partnership assets.
t
!r

It Accounts payable 100000 Case #3: All partners are solaent

Payable to A 50,000 Use the fact pattern above. All partners are solaezf. Information
I A, Capital (40%) 40o000 on the conversion of non-cash assets is as follows:
t B, Capital (40%) 450,000 a. 50% of the accounts receivable was collected for only P20,000.
t C, Capital (20%) 25O000 b. One-fourth of the inventory was sold for P10,000.
II Total 1,250,040 c. Equipment with carrying amount of P200,000 was sold for
h
P50,000,
t
Case #1: Lump-sum liquiilation d. Actual liquidation expenses of P2,000 were paid.
Information on the conversion of non*cash assets is as follows: e. Estimated future liquidation expenses totaled P3,000.
t a. P130,000 was collected on the accounts receivable; the balanct, t. F10,000 cash was retained in the business for potential
is uncollectible. unrecorded liabilities and anticipated exDenses.
P200,000 was received for the entire inventory.
The equipment was sold for F590,000. Requirement; Determine the amounts of cash distributed to the
F5,000 liquidation expenses were paid. partners from the partial realization of partnership assets.

Requirement: Determine the amounts of cash distributed to thc
partners in the final settlement of their interests.
Case #2: Installment liquidation
Use the fact pattem above but assume that the partnership will bc
liquidated over a prolonged period of time. Distributions to thc
partners will be made as cash becomes available. Information orr
the conversion o{ non-cash assets is as follows:
a. 50% of the accounts receivable was collected for only P60,000.
b. One-fourth of the inventory was sold for P40,000.
c. Equipment with carrying amount of P200,000 was sold for
P220,000.
d. Actual liquidation expenses of P2,000 were paid.
Estimated fu ture liquidation totaled P3,000.
Csse #4: Some partnets frre insoloent
Use the fact pattern above. Partners A and B are insolaent.
Information on the conversion of non-cash assets is as follows:
a. 50% of the accounts receivdble was collected for only F20,000.
b. One-fourth of the inventory was sold for P10,000.
c. Equipment with carrying amount of P20O000 was sold for
P50,000.
d. Actual liquidation expenses of P2,000 were paid,
e. Estimated future liquidation expenses totaled P3,000.
f. F10,000 cash was retained in the business for potential
unrecorded liabilities and anticipated ex
Requiretrent; Determine the amounts of cash distributed to tlre
partners from the partial realization of partnership assets.
 Chapter 14 P artner ship Liquidation

Case #5: Cash priarity prograry * Preltaration of Schedule l. Information on the conversion of non-cash assets is as follows;
ReqtLirement; Prepare a cash priority program prior to the sale of a. P130,000 was collected on the accounts receivable; the balance
qny noncash assets to determine which partners will be paid first is uncollectible.
before the others, and the amounts of those payments. b. P200,000 was received for the entire inventorv.
C, The equipment was sold for P590,000.
Case t6: Applicstion of Cash prioity progrnm d. P5,000liquidation expenses were paid.
Information on the conversion o{ non-cash assets is as follows:
a. 50% of the accounts receivable was collected for only F60,000. Requirement: Determine the amounts of cash distributed to the
b. One-fourth of the inventory was sold for P40,000. partners in the final settlement of their interests.
c. Equipment with carrying amount of P200,000 was sold for
?220,000. 2.Use the fact pattern above but assume that the partnership
d. Actual liquidation expenses of P2,000 were paid. will be liquidated over a prolonged period of time.
e. Estimaied future liquidation expenses totaled P3,000. Distributions to the partners will be made as cash becomes
f. P1O000 cash was retainecl in the business for potential available. Information on the conversion of non-cash assets is
unrecorded liabilities and anticipated expenses. as follows:
a. B0% of the accounts receivable was collected for only p60,000.
b. 9A% of the inventory was sold for P40,000.
PROBLEM 3: COMPUTATIONS C. Equipment with carrying amoutlt of F600,000 was sold for
tlse th.e follozoittg information for tlrc next si:l- independent cases: P220,000.
Fact pattenr d. Actual liquidation expenses of P2,000 were paid.
The partners of ABC Co. decided to liquiclate their partnership. e. Estimated future liqr.ridation expenses totalecl p3,000.
ABC Co.'s statement of financial position is shown below: f. F10,000 cash was retained in the business for potential
unrecorded liabilities and anticipated expenses.
Cash 40,000
Accounts receivable 200,000 Requirernent: Determine the amounts of cash distributed to the
Inventory 300,000 partners from the partial realization o{ partnership assets.
Equipment 800,000
Totnl 1,340,000 3. Use the fact pattern above. Al1 partners are soluent.
Information on the conversion of non*cash assets is as follows:
Accounts payable 100,000 a. 80% of the accounts receivablc was collected for only p40,000.
Payable to A 50,000 b. Three-fourths of the inventory was sold for p20,000.
A, Capital (50%) 600,000 C, Equipment with carrying amount of P500,000 was sold for
B, Capital (40%) 420,000 P130,000.
Capital (10%) 770,000 d. Actual liquidation expenscs of P2,000 were paid.
-_C,
Total 1",340,000 e. Estimated future liquidation expenses totaled F3,000.
 Chapter 14
I 1 Parttrership Liquidntion

f. P10,000 cash was retained in the business for potential

unrecorded liabilities and anticipated expenses. PROBLEM 4: MULTIPLE CHOICE
1. A and B decided to liquidate their partnership business. The
Requirement: Determine the amounts of cash distributed to the statement of financial position of the business shows the
parhrers from the partial realization of parbrership assets. following information:

4. Use the fact pattern above. Partner B is insolvenf. Leformation Assets Liabilities A. Capital $A%\ B, Capital (50%\
on the conversion of non-cash assets is as follows: 100,000 20000 40,000 40,000
a. 80% of the accounts receivable was collected for only P40,000.
b. Three-fourths of the inventory was sold for P70,000. The partners were able to convert all assets into p9O000 cash. How
c. Equipment with carrying amount of F50O000 was sold for much did B receive from the final settlement of his interest?
P130,000. a. 30,000 c.28,000
d. Actual liquidation expenses of P2,000 were paid. b. 35,000 d.36,667
e. Estimated future liquidation expenses totaled P3,000.
{. P10,000 cash was retained in the business for potential 2. A and B decided to liquidaie their parhrership business. The
unrecorded liabilities and anticipated expenses. statement of financial position of the business shows the
following information:
Requirement; Determine the amounts of cash distributed to the
partners from the partial realization of partnership assets. Assets Liabilities A, Capital (50%\ B, Capital (50,/,)
200,000 89,000 70,000 50,000
5. priority program priar to the sale
Requireruent; Prepare a cash
of any noncash assets to determine which partners will be The parhrers were able to convert all assets into F18O000 cash.
paid first before the others, and the amounts of those How much did A and B receive from the final settlement of their
payments. interests, respectively?
a. 5O000;50,000 c.74,000;30,000
6. Information on the conversion of non-cash assets is as follows: b. 60,000;40,000 d..56,667;43,333
a. 80% ofthe accounts receivable was collected for only P60,000.
b. 90% ofthe inventory was sold for F40,000. J. Partners A, B and C decided to liquidate their partnership. A
c. Equipment with carrying amount of P60O000 was sold f<lr summary of the partnership's statement of financial position is
P220,000. shown below:
d. Actual liquidation expenses of P2,000 were paid.
e. Estimated future liquidation expenses totaled P3,000. Cash 50,000
t. P10,000 cash was retained in the business for potential Noncash assets 1,200,000
unrecorded liabilities and anticipated expenses. Total 1,250,000

Requirement: Determine the cash diskibutions to thg partners Accounts payable 100,000
using the cash priority program in Case #5 above.
 Chapter
T
14 ' Partnership Liquidntiorr

Payable to A 50,000 A11 the noncash assets were sold for F870,000. The partnership
A, Capital (40%) 40o000 paid F12,000 liquidation expenses.
B, Capital (40%) 450,000
C, Capital (20%) 250,000 5. How much is the carrying amount of the noncash assets? i

Totnl L25A,000 a. 744,000 c.980,000

b. 860,000
l

d. 1,020,000
Three-fourths Q/$ of the noncash assets were sold for F920,000,
The parhrership paid P5,000 transaction costs on the sale. How 5. How much is the loss on the sale of noncash assets, including
the effect of liquidation expenses?
I
much cash did C receive from the settlement of the partners'
interests? a. 98,000 c. 120,000 ii"
a. 163,000 c. 193,000 b. 112,000 d.122,A00
b. 186,000 d.205,000 il,
7. How much cash did A receive from the settlement of the
4. Partners A, B and C decided to liquidate their partnership. A partners' interests?
iii'
summary of the partnership's statement of financial position is a. 775,600 c.749,600 ri

shown below: b. 183,400 d.128,4A0 il

Assets Liabilities Equity B. Partners A, B and C decided to liquidate their partnership. A

Cash Noncash A QO"A B $A'/,) C (50%) summary of the partnership's statement of financial position is
20000 480,000 30,000 100,000 170000 200,000 shown below:

Half of the noncash assets were sold for p37O000. The partnership Assets Liabilities Equity
paid P2,000 liquidation expenses. How much cash did B receivc Cash Noncash A'(200/a\ B $A%) C (50"/,)
from the settlement of the partners' interests? 20,000 490,000 30,000 100,000 17A,000 200,000
a. 763,400 c. 139,600
b. 168,000 d.136,4A0 Gre-ihird of the noncash assets were sold for P70,000. The
partnership paid p&000 liquidation expenses. Parhrer C is
Use the following information for the next three questions: insolvent. How much cash did A receive from the settlement of
Partners A, B and C decided to liquidate their partnership. A the partrers' interests?
summary of the partnership's statement of financial position is a. 12,4A0 c. 13,600
shown below: b. 16,900 d. 12,800

Use the follozuing irrformntion

Assets Liabilities Equity for the next twa questiorts:
Cgsh Noncash A QA"/') B (30"/,) C (50"1) Partners A, B and C decided to liquidate their parinership. A
160,000 ? 90,000 200,000 370,000 480,000 summary of the partnership's statement of financial position is
shown below:
510 Chapter 14 P ar tn er sh ip Li quid atio n 511

Cash 50,000 Cash

Noncash assets 1,200,000 Accounts receivable
Totsl 1,250,000 Inventory

Accounts payable 100,000 Totsl Assets

Payable to A 50,000
A, Capital (50%) 540,000 Accounts payable
B, Capital (30%) 360,000 Payable to Partner
C, Capital QA"/r) 200,000 Partner 1, Capital (_%)
TotaI 1,250,000
Total Liabilities and Equitu
9. If a cash priority program is prepared, which partner is paid
first and how much is the total payments to that partner NOTE: BE SURE THAT YOUR BALANCE SHEET IS BALANCEU.
before all partners will share on the available cash based on
their profit or loss raiios? You decided to liquidate your business. You were able to realize
a. Av P20,000 c. B, F96,000 the noncash assets as follows:
b. B, F90,000 d. B, p60,000 Accounts receivable
Inventory
10. Three-fourths (314) of the noncash assets were sold for Equipment
P920,000. The partnership paid F5,000 transaction costs on thc Less: Liquidation expenses
sale. How much cash did,A receive from the settlement of the
parbrers' interests under the cash priority program? Requirements:
a. 447,500 c.493,500 a. Compute for the final cash distributions in settlement of your
b. 386,500 d.306,500 interests in ihe parkrership. Please show solutions in good
form.
b. Have your answers checked by the other sub-group in your
PROBLEM 5: CLASSROOM ACTIVIT} group of four.
INSTRUCTIONS: - The perfect score is 10 points. You will be deducted 2
1. Form a group of four (4) study partners. points for each mistake. However, the minimutrn score that
2. Subdivide your group into two - (two partners in each sub- you can have is 0.
group). We will do an accounting battle! - PRIZE: The winning sub-group in this battle will be
3. Imagine you and your study partner are business parhrers. dubbed "The Defenders of the Accounting Equation." The
4. Fill-in the boxes/blank lines below. losers will be ridiculed as the "The Contra Asset
Accounts."
The balance sheet o{ your partnership is as follows:
 Chapter
Chapter 15
Accounting for Corporations
Learning Objectives
1. State the components of shareholdersl equity.
2. Account for the initiat issuances of shares of stocks.
3. Account for treasurv shares,
lntroduction
As mentioned earlier, the accounting for assets and liabilities
remains the same regardless of the form of a business organization
(i.e., sole proprietorship, partnership, corporation or cooperative)
- what dranges is the accounting for equity.
Corporation
The Philippine Corporation Code defines a coryorntio,rt as "an
artificial being cr'eated by operation of law, having the right ol
succession and the powers, attributes and properties expressly
authorized by law or incident to its existence."
A corporation is a separate legal entity distinguished fronr
its owners (i.e., shareholders or members). It is formed through an
operatiorr of law and not by mere agreement between the owners. Il
has the right of succession, meaning it continues to exist
notwithstanding the withdrawal, cleath, insolvency or incapacity
of the individual owners, and is dissolved only again through an
operation of law. The operations of a corporatiorr are subject to a
higher degree of government regulation compared to other forms
of businesses.
Organization of a corporation
Some of the provisions of the Corporaiion Code regarding tht'
organization of a corporation are highlighted below:
15 Acc ount in g for Coryora titt n s 513
A corporation is formed by nt least S but not exceeding 1b
natural persons, aii of iegal age and a majority of whom are
residcnts of the l)hilippines.
The entity's srticles of incorparnfion must be authorizeci by the
Securities and Exchange Commission (SEC).
The articles of incorporation states, among other things, the
corporation's autlnrizetl cnpitat slock, which is the maximum
number of shares that ihe corporation can issue. Any excess
share issued is deemed iliegal. In order to issue shares i'
excess of the authorized capiial stock, the corporation must
amend its articies of incorporation.
To amend the articles of incorporation, a majority oote of the
board plus n aote by sharelnklers represeilting at ieast tzuo-tkirds
(2/3) of the outstanding share capiinlis neecled. After ratification,
the amended articles of incorporation are filed with the sEC
and shall become effective oniy upon SEC,s approval.
At ieast 25"/o of the corporatio*'s authorized capitaiization
must be subscribed and at least 25% of the total subscription
must be paid upon subscriptron. The paid-up capital cannot be
less than five thousand pesos (p5,000).
Shareholders' equity
shareholders' equity is the resiclual interest in the assets of a
corporation afier deducting all its liabilities. This is the equivalent
of the "ouzner's equity" in a sore proprietorship and the aggregate
of partners' capital balances in a partnership.
The components of the shareholders, equity include the
following:
o Shore capitnl (Capitnl stoclc)
Preference share capita[ (preferred stock)
Ordinary share capital (Common stock)
Subscribed share capital (Subscribed capital stock)
Subscription receivable (as s decluction)
Share dividends distributable (Stock dividencl s pa ya b I c )
Capital liquidated (ss a deduction)
 514 Chapter 15 Ac courttin g Co r p or at io ns
for

Share premium (Additional paid-in capital) Illustration: Memorandum method us. )ournal entry method
o Retained eantings (appropriated and unappropriated) Authortz e d c apitali z ation
c Other components of equity* 1. On January 1,20xL, ABC C.. received authorization from the
o Trcasury shorcs (Treasuru stock) SEC to issue share capital of p1,000,0000 divided into 10,000
shares with par value per share of p100.
* "other components of equifu" is discussed ir-r lrigher accounting studies, so right now
we don't need to worry about this. The rest are discrrssed in the srrcceeding sections of
this bnok.l g
The authorized share capital recorded under each of the two
methods as follows:
The following transactions affeci the accounting for a
corporation's equity: Memoranclum method fournal antra method
a. Authorizatiory subscription, and issuance of shares Memo entry * :-ne awthoy'vzed Unissued share capital lM
b. Acquisition and reissuance of treasury shares capLtaLLzatLow Ls ?t_,ooo,ooo Authorized share capital 1M
d,LvLded, Lwt> j-o,oaa shares wfth par
c. Retirement of shares vaL,,u per share af ?too.
d. Donated capital
e. Distributions to owners (Dividends)
of shares fixed in the entity's authorized articles CIf
Accounting for Share capital incorporation that can be subscribed and .issued to
An enti$ accounts for its share capital using one of the following: shareholders.
1". Memorundum method - Only a memorandum is made for the
authorized capitalization. subsequent issuances of shares are authorized share capital not yet issued and is still available for
credited to the share capital account. subscription and issuance.
2. laurnal entry method - The authorized capitalization is
recorded by crediting "authorizecl shsre capital,, and debiting
"unisstted share capital." Subsequent issuances oI shares are Subsertpfion
credited to "unissued share capital.,' The difference between 2. Of the total authorized share capital, 25Y" was subscribed at
the two accounts represents the issued share capital. par value and 25Y" of the total subscription was paid al
subscription date.
dO The more commonly used method in practice is the
memornndum method. ournal entru method
Cash 1tu x2so/,x2s"/,) 62.5K Cash lrux 25%x2s%) 62..rilr
Subscription receivable* 1 82.5K Subscription receivablc I tl7, r,
1..-

Subscribed share capitat 250K Subscribed sharc rirpil,rl .'',( rl.

(1Mx25%) (1Mx 25%)
*
lzso,ooo - ez,soo = 1s15oo)
 ,I
516 Cha ptu.r 15 1 Accttunting .for Co4torations 517

*-,'Notice that same entry is made under both methods. "Shsre capital" is credited (under memorandttrn method) and
"lJrtissued share capital" is debited (under iournal entry method)

- a contract between the purchaser of shares (ire',

Subscriptior, only upon the issuance of shares.
investor) and the issuer (i.e., corporation) in which the Under the Corporation Code, shares'(and share certificates)
(:'

purchaser promises to buy shares of the issuing company's are issued to subscribers only upon full payment c"'f the
stocks. sr"rbscription price.
Subscription receizsable - represents the unpaid portion of the The Corporation Code prohibits the issuance of shares in
subscription price. Subscription receivable is presented as a exchange {or promissory notes or future services. The
deduction from the related subscribed share capital, i.e., contru corporation must receive first the full consideration before
equity account. shares are issued.
Subscvibed share capital - represents the portion of tlrc
authorized share capital that is sr-rbscribed but not yet issued'
Cash subscription
4. On Februa ry 28,20x1, ABC received cash subscription for
Collection of subsciption receiaable & Issuance of shates 1,000 shares at par value"
3. On February "1.,2Ax1", ABC Co. received full payment for 2,000
subscribed shares and issued the related share certificates' Memorandummethod Ioumal antru method
Cash lr,oooxFloo) 100K Cash (i,ooo x Ploo) 100K
Share capital 100K Unissued share capital 100K

Subscriotionreceivable 150K a;' Notice that "Share cnpital" ('Unissued share capital') is directly
Subscribed share capital 200K Subscribed share capital 200K credited (debited) for cash subscriptions.
Share capital 200K Unissued share capital 200K

*Subscription price of 2,000 shares (2,000 x P100 par) 200,000 * The share capital of ABC Co. as of February 28, 2Ax1. is shown
Portion already paid (P200,000 x 25%) (5_0,000), below:
Bglance collected L50,000
Memorandum method I Journal entry method

Share capital 300,000 | Authorized share capital 1,000000

capital that is already issued.
Subscribed sh. capital (700,000)
capital 50,000 | Unissued share
Subs. receivable (37,500) | Issued share cnpital 300,000
of a share.
Subscribed share capital 50,000
Subscription receivable (32500
I Nofes;
capitril 312,500 | Totql Shnre capital
Totsl Slmre
-j1!899-
r 518 Chapter l5 Accotmtin g for Cory orations s19

Thus, a shareholder who holds more shares normally will have

/i.. The " suhscription receiaable" is presented as deduction.
l The preemptive right (right of preemption) protects
i
R d@ Most companies use the memorandunr methpd. As suctr, only
a
!
this method willbe used in the succeeding illustrations.
l shareholder's knowledge.
i
t Classes of Share capital
F
II Share capital is basically classified into two, namely:
i
a. Ordinary share capital (Common stock); and
I
i
b. Preference share capital (Preferred stock).
t
I Ordinary shares
Ordinary shares (common stock) represent the residual corporatc
interest that bears the ultimate risk of loss and receives thc
benefits of success. Ordinary shareholders are guaranteed neither
dividends nor assets upon dissolution but they generally control
the management of the corporation and tend to profit most if thc
corporation is successful.
If an entity has only one class of share capital, il
necessarily is an ordinary share capital. The Corporation Code
prohibits the issuance of only preference shares without ordinary
shares.
Ordinary shareholders, generally, enjoy the same rights
with no preference over other shareholders. The following are the
faur basic riglrts of ordinary shareholders:
1. Right to attend and vote in shareholders' meetings
Z. Right to purchase additional shares (also known as preemptiut,
right or stock right)
3. Right to share in the corporate profits (also known as right to
dividends)
4. Right to share in the net assets of the corporation upon
liquidation
For stock corporations, voting rights are normally
conferred to shareholders in proportion to their shareholdings,
more voting rights.
shareholders from involuntary dilution of their ownership
interests. Without this right, an ownership interest may be
reduced by the issuance of additional shares without the
Some corporations have more than one type of ordinary
shares, such as "Class A" and "Class B" ordinary shares. In such
cases, one class of ordinary shares (normally 'Class A,' but not
always) will have more voting rights than the oiher class. The
class that has more voting rights is sometimes called "super
voting" shares. One purpose of issuing "super voting" shares is to
give key company insiders (e.g., founders and executives) greater
control over the company's voting rights. This enables them to
control corporate policies and management decisions.
Preference shares
Prcference shares (prefewed stacks) are sharcs that give the
holders thereof certain preferences over other shareholders. Such
preferences may include priority claims over (a) dividends and/or
(b) net assets of the corporation in the event of liquidation. In
exchange for such preference(s), preference shareholders sacrifice
certain inherent rights of ordinary shareholders (e.g, voting rights
over election of directors and officers). One purpose of issuing
preference share is to broaden investor appeal thereby increasing
the corporation's opportunity to generate equity financing.
Share premium
Share premiurh (additional paid-in capital) arises from various
sources which include the following:
a. Excess of subscription price over par value or stated value.
b. Excess of reissuance price over cost of treasury shares issued.
c. Distribution of "small" stock dividends.
 Chaptcl l1
I Accourtting for Corporations

Par value and No-par value shares

Illustration:
1, ABC Co. started operations on January \,2Ax1.lts authorizeel
capitalization is P1,000,000 divided into 10,000 shares with par
value per share of P100. ABC Co. receives cash subscripti<xrs
for 5,000 shares at F120 per share.
2. On January 31, 20x1., ABC receives subscription ior 2,000
shares at P160 per share.
A pnr aalue share is one with a peso value fixed in the articres of
incorporation. The purpose of which is to fix the amount of
issuance price. A par value share cannot be issued below its par
value. The par value appears on each share certificate issued.
A no-par ttslue slmre is one ruithout a peso valr_ie fixed in the
articles of incorporation. However, a no-par value share has a
stated aalue (issued value) which is also indicated in the articles of
incorporation but not on the share certificate issued. par value and
no-par value shares are distinguished by the presence or absence
of a value per share on the share certificate issued. under the
Corporation Code, no-par value sharcs shoulcl not bc issucd for a
consideraLion less than five (P5) pcsos per share. The ..xcess of
subscription price over the stated value is credited to share
premium.

F.xamTtla:
An entity issues 5,000 shares with stated value of p100 per share
for P120 per share. The issuance is recc.rrded as follows:
l Nofes:
'iF 'Shnre cnpital' and 'subscribed shsre capital' are credited at par Dntt' Cash 1s,ooo x
p12o)
600,000
aalue regardlcss of the subscription price. Share capital (5,000 x p100) 500,000
Share premium is credited st tlrc subscriTttion date even f.or Share premium [5,000 x (p120 - p100)] 100,000
subscriptions which are not yet paid; provided that, it is
probnble that the total subscription price will be collected. lJnder the Corporation Code, ordinnry shares may be ill,
ABC Co.'s total cantributed capital as of January 31,20x1 is issued as either par or no-par value shares. However, preference
computed as follows: shares should only be issued as par value shares. llr

Share capital 500,000

Subscribed share capital
Subscri ption receivable
Share premium (100K + 120K)
Total contrib uted capital
200,000 Legal capital
(320,000) Legal capital is the portion of contributed capital that cannot be
220,000 diltrlbuted to the owrrers during the lifetime of the corporation
600,004 unless the corporation is dissolved and all of its liabilities are
settled first. Legal capital is based on the concept of trust fund
doctrine which states that the share capital of a corporatior"r is a
r 522 Chapter I5 A ccottttting for Co rp or ation s

trust fttnd held for the protection of its creditors. Legal capital is
computed as follows:
a. For Ttar aalue shsres, legal capital is the aggregate par value ol
shares issued and subscribed.
b. For no-par anlue shares, legal capital is the total consideratiott
received or receivable from shares issued or subscribed. Total
consideration re{ers to the subscription price inclusiae of any
amount in excess of stated value.
Preference shares can only be issued as par value shares. Thus,
tlre share premium of the preference shares is nat included.
Share issuance costs
Issuing shares entails expenditures, such as regulatory fees, legal,
accounting, and other professional fees, commissions and
underwriter's fees, printing costs of certificates, and documentary liltr;

stamp tax and other transaction taxes. lt1r,ri

Illustration: Legal capital These expenditures, called 'share issuance costs', are
The equity section of ABC Co.'s statement of financial positiort deducted from any resulting share premium from the issuance. If
riliii
shows the following information: share premium is insufficient, the excess is charged to retained
earnings. lrili

6% Preference share capital, P100 par value 200,000 ii|

Share premium * preference share capital 50,0()(l Illustration:
Ordinary share capital 800,00() On January 2Ax1, ABC Co. issued 1,000 shar:es with par value of
1.,

Share premium - ordinary share capital 300,000 P100 for P120 per share. Share issuance costs amounted to F5,000.
Subscribed share capital - ordinarv 100,000 Llltl

Subscription receivable - ordinary share capital (50,000) The entries are as follows:
Retained eamings 400,000 lan.1, Cash 1t,ooo x P12o) 120,000
20x'l
Share capital (1,000 xp100) 100,000

Requirements; Compuie for the legal capital assuming: Share premium [1,000 x (P120 - P100)] 20,000
lan. L,
Share premium
a. The ordinary shares arcpar value shares; and 20x1
5,qaa
Cash
b The ordinary shares are no-par value shares. 5,000

Xr
Solulions:
Treasury shares
Par No-par
Treasury shares (trensury stocks) are an entity's own shares that
6% Preference share capital, P100 par value 200,000 200,00()
Ordinary share capital 800,000 800,00{t
were previously issued but are subsequently reacquired but not
i
Share premium - ordinary share capital 300,000 retired. Under the Corporation Code, an entity may reacquire its
100,000 100,0(nl previously issued shares only if it has sufficient unrestricted
Le*al capital L,100,000 1,400,0011 retained earnings.

Accounting for treasury shares

1 Nofes:
rtr In case Treasury shares are accounted for using ihe cosf methad. Under
of
no-par ualue shares, legal capital includes the .sharr
premium af ordinary shares.
ihis method, the reacquisition and subsequent reissuance of
treastrry shares are recorded at cost.
524 Chapter 15 Acco r n t ing for Corp o rn tion s

Treasury shares are presented as deductian in thc

shareholders' equity (i.e., contra equity account). When treasury shares are reissued, the related
appropriated retained eamings are reverted back to unrestricted
Illustration: retained earnings.
On January L,20x1, the statement of financial position of ABC Co.
shows the following information:
ll
Case #2 - Reissuance at more than cost
Share capital @100 par value) 800,000 On September 1,2Ax1, ABC reissues the 1,000 treasury shares at
Share premium 160,000 7r40.
Rctained eamings 540.00Q
Tot nl shareltolders' cquity 1S!0-0w Sept.1 Cash 1r,ooo x P14o) 140,000
20x'l
Treasury shares (1,000 x p90) 90,000
.:' On July 7,20xL, ABC reacquires 1,000 shares at P90. Share premium - tressaru shares 50,000
Sept. 1 Retained earnings * appropriated 9O000
20x1
luly 1, Treasury shares (1,000 x P90) 90,000 I{etained earnings - unrestricted 90,000
?0xl
Cash 90,000
lul11 1, I{etained earninS;s - unrestricted 90,000 When treasury shares are reissued at more than the
20x7
Retained earnings - appropriated 90,000 reacquisiti.on cost/ the excess of the reissuance price over the cost
is credited to "Sh.nre ytrentiurn - treasury sltares." This forms part of
(net of the entity's total share premium.
to owners, and other adjustments) which
losses, distribution
are retained in the business and not yet distributed to the
shareholders. Total retained earnings mav consist of: Case #3 - Reissuance at below cost
a. Unrestricted * the portion of retained earnings that is On September 1, 2Ax1, ABC reissues the 1,000 treasury shares at
available for future distribution to the shareholders. P60.
b. Appraprinted (Restrictecl) ihe portion of retained
earnings that is not avallable for distribution unless the SeSrt. 1 Cashlt,oooxt60; 60,000
restdction is subsequently reversed. 20x7
(al Share premium treasury shares
-
lbl Retained eaneings 30.000
Case #1: Reissuance at cost Treasury shales (1,ooo x p9o) 90,000
On September 1,'20x1, ABC reissues the 1,000 treasury shares at Sept. l Retained earnings - appropriated 90,000
20x7
H0. Retained earnings - unrestricted 90,000

Sept.1 Cash 1t,ooo x rloy 90,000 When treasury shares are subsequently reissued at below
?0r"1
Treasury shares (1,000 x P90) 90,000 the reacquisition cost, the excess of the cost over the reissuance
Stpt.1 Retained earnings * appropriated 90,000 price is debited to the following in the arder of priority:
20x1
Retained eaminss - unrestricted 90,000
r 526 Chapter 1,5 Account ing for Corporations

a. Any balance in "share premium - treasury shflyes,, arising Retained eamings 53s.000
from the same class of share capital. Totnl shareltolders' equity uQa,aw
b. If the balance in "share premium - treasury shares,, is
insufficient or if it has no outstanding.balance, any excess is Case #1-: Retirement cost less than Original issuance price
debited to retained earnings. ABC reacquires 1,000 shares at F80 per share on L,-20xL and
luly
retires them on September 1, 20x1.
ln the illushation
above, since ABC Co. cloes not havc
"Share pr.emium - treasuty shares," the P30,000 excess (i.e., F90,000 1- Reacauisition
reacquisition cost - P50,000 reissuance price) is debited to Juttl 1,20x1 Treasury shares (1,000 x P80) 80000
"Rctained earnings." Cash 80,000

t.1 - Retirement
Retirement of shares Sept. Share capital (1,ooo x ploo) 100,000
Shares are considered retired if .they have been reacquircd and 1,,
Share premium - original issuance (1,000 x p20*) 20,000
20x1
cancelleil according to Securities and Exchange Commission (SEC) Treasury shares (1,000 x p80) 80,000
regulations. Unlike for treasury shares which can be subsequently Share premium - retirement 40,000
reissued, retired shares cannot be reissued anymore.
To simplify the illustration, jou.mal entries for the appropriatior-r of retained eamings
When shares are retired, the total par aalue and the related and the reversal thereof are ign<.rred.
share Ttremium of the retired shares are remoued from the books clf
accounts. Any clifference between the total amount removed and
the retirement cost is accounted for as follows: *The share premium from issuance is computed as
1. If the par value and related share premium of the retirec{ follows:
shares exceed the retirement cosf the difference is credited to
"Slutre premium - retirement." Total share premium before retirement P160,000
2. If the par value and related share premium of the retirecl Dirtide by: Total issued shares before retirement
shares are less than the retirement cost, the difference is (P800,000 Share capital + P100 par value) 8,000
debited to the following in the order of priority: Share premium per share from original issuance Fz0
a. Share premium - treasury sltnrcs
b. Retgined earninss
Case #2- Retireme nt costgreater thanoriginal rssuance Pflce
Illustration: Retirement of shares * ABC reacquires 1,000 shares at Pl40 on July 1, 20x1 and
On January 7,20x1, the statement of financial position of ABC Co, imme di at ely r etire s them.
shows the following information:

Share capital (P100 par value) 800,000

Share premium 160,000
Share premium - treasury shares s,000
 528 Chapter Acco un g pora
15 tin
frtr C or t io n s

should effect a formal reduction of its auihorized by

retiring the shares received.

When shares are reacquired and immediately retired, Illustration 1. Cash and Noncash donations from shareholders
there is nq: need to set up a treasury share accouni. The par value ABC Co. received cash of P100,000 and larrd with fair value of
and related share premium of the retired shares are immediately P500,000 and historical cost of F30O000 from a shareholder. No
debited, with a corresponding credit to ,,Cash,,. conditions are attachcd to the donation.

,[u No/ice tlmt in the nccourtting

for trensury shsres and retirement of
shares, retsined eantings may be decreased but teaer increcsc.d.

Donated capital
Donated capiial arises from gifts received by the corporation from Illustration 2: Donated shares received from shareholders
nonreciprocal transactions. Donated capital may arise from the ABC Co. received 1,000 shares with par value of p100 and fair
following:
value of P120 per share from a shareholder as donation.
1. Donations from shareholders - these are credited to share
premium. The receipt of the shares is recordecl through memo entry as
2. Donations from the goaernrnenf * these are recognized
as follows:
government grants. (Gorerrnnent grnnts ,re discussetr in rnteruediart
Accountiug 7.) "RiceLved L,ooo shares wLth par vaLvte o{ ?too fror* a sharehoLder as
J. Donatior-rs from other sources - these are recognized as dowatLow.'
income whe, (a) the conditions attached to the donation are
fulfilled or are reasonably expectecl to be fulfilled, (b) the Subsequently, ABC Co. reissues the 1,000 donated shares at P130
donation becomes receivable, and (c) the criteria for asset per share.
recognition are met.
Date Cash 1t,ooo x p13o) 130,000
Donationsf affi shsreholders may be in the form of: Share premium * donated capital 130,000
a. Cash recognized at the amount of cash received or
rcceivable.
b. Nonmsh assets - recognized at the
fair oalue of the noncash
assets
c. E,tity's own shsrcs - initially recorded through fixe?flo entry.
Donated capital is recognized oniy when the donated shares
are subsequently reissued. This is because no asset is
generaied frorn the donated shares until they are subsequently
reissued. If the donated shares are not to be resord, the entity
530 Chapter t5 AC( rti rt t i t,N Jttr Lorpt rn!ittni

Chapter Summary
The authorized capitalization is accounted for using (a) Prn forma entries lor retirerneni of shares:
mr:mornndutrl metlwd or (b) journrtl entry method' The more
(n) Retirewent nt hclow original issunnce
commonly used method is the memorandum method" price Dr. Cr.
The excess of issuance price or subscription price over the Share capitai (ar par oi. stareci vair.rc) XX
aggregate par value (stated value) of shares issued or Share preuriurn - originai issuance XX
subscribed is credited to the share premium account. Treasury shares (at cosi) / Cash xx
For a par ualue sltarcs, legal capital is the aggregate par value Share prernium - retirement XX
of shares issued and subscribed. For flo-psr aalue shares, legal
capital is the total consideration received (receivable) from lletirement at uboae original issuance
(b)
pice
shares issued (subscribed). Share capital (at par or stated value) XX
Share issuance costs are deducted from share premium. Share premiurn - original issuance XX
(1) Share premiurn - TS
Treasuty shares are an entity's own shares that were XX
(2/ Reiained e;rnings
previously issued but are subsequentiy reacquired but not XX
retired. Treasurv shares are accounted for at cost. Treasury shares (at cost) / Cash

Pro forma entries for treasu share transactions:

(a) Acquisition of treasury shares

Treasury shares (at cost)
Cash zed only uptln rhcir rerssuarrce.

(b) Reissuance of treasury shares at abooe cost

Cash xx
Treasury shares (at cost) PROBLEMS
Share premium - TS
PROBLEM 1: TRUE OR FALSE
(c) Reissuance of treasary shares below cost 7 If a corporation receives share subscriptions, wherein pay.r(,.r
Cash xx for the subscription price is deferred, the corporatiorr rt,r.,r,r,,
(1) Share premium - TS XX the transaction through the ,,Share capitai,' account.
(2) Retained earnings xx 2. The "share capital" and "subscribed share capital" ir(,(.rrrlr,
Treasury shares (at cost) can be used interchangeably when accorrrrlirrll tlr rr
corporation's share transactions.
*In addition to the above entries, an appropriation ol retained earnings nrtrl
reversal thereof shoulcl also be made in accordance with the Corporatiorr
Co<1e.
 Chapter 15
3. The "Share capital" and "subscribed share capital" accounts
are credited at par value or stated value regardless of the
subscription price.
lJse the follawing information for the wxt fiae questions:
You and I are the accountants of A Corporation. Our company's
authorized capitalization is P100M divided into 100M shares with
par value per share of P1.
4. If our company issues 10,000 shares for P5 each, we will
recognize a share premium of P5O000.
5. Our company can issue shares at a subscription price that is
below P1.
6. Our company can issue more than 100M shares without
amending its articles of incorporation.
7. If our company receives share subscription for 20,000 shares at
P15 per share, we will most likely recognize the related share
premium on subscription date rather than on the collection
date.
B. We will issue the related share certificates on the subscription
in #7 above only after our company receives the full payment
thereon.
9. In the accounting for treasury shares and retirement of shares,
retained eamings may sometimes be increased.
10. lzVhen retiring shares at a cost above the shares' original
issuance price, the excess of the retirement cost over the
aggregate par value and the related share premium from
original issuance is debited first to any balanc e in t}re Sltore
prcmium - Treasury account. If the balance of that account is
insufficient or if there is no balance in that account, any excess
is debited to the Rrfain ed earnings account.
Accolr t tt i n.g Jor Corporations
PROBLEM 2: JOURNAT ENTRIES
Memorandum method vs. Journal entry method
1. Entity A was incorporated at the start of the current period.
The following were Entity A's share capital transactions
during the year:
a. The SEC approved Entity A's authorized capitalization o{
P3,000r000 divided into 100,000 shares with par value of
P30 per share.
b. Twenty-five percent {2501,) of the authorized capitalization
was subscribed at par vaiue and twenty-five percent {25%)
of the subscription price was paid on subscription date.
Received fulI payment for 1O000 subscribed shares and
issued the related share certificates.
d. Received cash subscription for 15,000 additional shares at
a subscription price of P40 per share.
e, Received subscription for 10,000 additional shares at a
subscription price of P50 per share.
f. Collected the full payment on the subscription in'e' above
and issued ihe related share certificates.
Requirements:
a. Provide the journal entries under (1) Memorandum metlwd and
(2) lournnl entry rnethod.
b. Prepare the shareholders' equity of Entity A as of the end of
the period.
Share issuance costs
2. Entity A issued 2,000 shares with par value of P10 for F60 per
share. Share issuance costs amounted to p8,000. How much is
the net share premium arising from the share issuance?
Provide the journal entry.
Accounting for Treasury shares
Use the follou,ing inforuration
for the next three questions:
Entity A's statement of financial position as of the beginning of tlrc
period shows the following information:
 534 Chapter 15 At:cou nting for Corp or at i o ns

Donations from shareholders

Share carrital (F20 par value) 1,000,000 8. Entity A receives the following cio,ations from a shareholder
Share premium 460,000 on December 25,20x7:
Retained earnings 540,000 a. Cash of P500.000.
T o t cl shsr eltol d. ers' e quitrl 2-00A.A0:0 b. Equipment with historical cost of F900,000 and fair value of
P700,000.
3" Entitv A reacquires 5,000 shares for p30 each. provide the c. 10,000 shares with par value of P100 and fair value of p210.
journal entries, including the related app'opriation of retained The shares were reissued on lanuary S, Z0x2 for p220 each.
earnings.
Provide the iournal entries.
Case 1: Reissuance of treasury shares abaue cost
4. Entity A reissues 1,000 treasury shares for p45 each. provide
the journal entries, including the related reversal of PROBTEM 3: )OURNAL ENTRIES
appropriation of retained earnings. 1,. Entity B was incorporated at the start of the current per:iod.
The following were Entity B's share capital transactions
Case 2: Reissuance of treasury shsres belozo cost during the year:
5. Entity A reissr-res 1,000 shares for p20 each. provide the journal a. The SEC approved Entity B's authorized capitalization of
entries, including the related reversal of appropriation of P10000,0000 divided into 1,000,000 shares with par value
retained earnings. of Pl0 per share.
b. Fifty percent (50%) of the authorized capitalization was
Accounting for Retirement of shares subscribed at par value and twenty-five percent (75%) ot
Entity A's statement of financial position as of the beginning of the the subscription was paid on subscription date.
period shows the following information: c. Received full payment for 250,000 subscribed shares ancl
issued the related share certificates.
Share capital (p20 par value) 1,000,000 d. Received cash subscription for 50,000 additional shares for
Share premium 250,000 P15 per share.
Retained r'arnings 750.000 e. Received subscription for 100,000 additional shares for F20
Totnl slm rcholrlcrs' tqui tV per share.
?&pqepa
t. Collected the full payment on the subscription in ,e, abovr,
Case 1: Retirement cost less than Original issuatnce price and issued the relaied share certificates.
6. Entity A reacquires 5,000 shares at par value and immediately
retires them. Provide the journal entry. Requirements:
a. Provide the journal entries under (7) Memoranduut
Case #2: Retirewent cost gyeater than Originnl issuance price (2) lournal entry nrethod.
7. Er-:tity A reacquires 5,000 shares at p50 each and immediately b. Prepare the shareholders' of Entitv B as
retires them. Provide the journai entry. 'the
period.
 Chapter 15 Ac count in g fLt r Co rp or atio n s

6. Entity B reacquires 1,000 shares at F11 per share and

2. Entity A issued 3,000 shares with par value of F100 for F140 immediately retires them. Provide the journal entry.
per share. Share issuance costs amounted to P6 per share. How
much is the net share premium arising from the share 7. Entity B reacquires 1,000 shares at F15 per share on January 1,
issuance? Provide the joumal entry. 20x1 and retires them on March l, Z}xl. Provide the journal
entries (you may ignore entries for the automatic
Use thefollowing information for the next three questions: appropriation of retained earnings).
Entity B's statement of financial position as.of the beginning of the
period shows the following information: B. Entity B receives the following donations from a shareholder
on February 1.4,2Ax1:
Share capital (P10 par r.alue) 1,000,000 r Cash of P200,000.
Share premium 20o000 r Building with historical cost of p3,000,000 and fair value of
Retained earnings 180.000 P900,000.
Total sharehalders' e quity 1;89,00! r 20,000 shares with par value of F10 and fair value of ?22.
The shares were reissued on July 5, Z0x2 for p32 each.
3. Entity A reacquires 1,000 shares for P30 each. Provide the
journal entries, including the related appropriation of retained Provide the journal entries.
earnings.

4. Entity A reissues 500 treasury shares for P40 each. Provicie the PROBLEM 4: MULTIPLE CHOICE
- joumal entries, including the related reversal of appropriation 1. Entity A received a subscription for 2,000 shares at p1B per
of retained earnings. share on March 31,20x7. Entity A's shares have a par value F5
per share. Entity A collected the subscription receivable on
5. Entity B reissues 500 shares for P20 each. Provide the journal May 15, 20x1. Which of the following statements is correct?
entries, including the related reversal of appropriation of a. Entity A should credit share premium for p13,000 on
retained earnings. March 31,2Ax1.
b. Entity A should credit share premium for p26,000 on
Use the fallowing information for the next two questions: March 31,2Ax1.
Entiiy B's statement of financial position as of the beginning of the c. Entity A shoulcl credit share premium for p13,000 on May
period shows the following information: "15,20x1.
d. Entity A should credit share premium for ?26,A0A on May
Share capital (F10 par value) 1,000000 15,20x1.
Share prcmium 200,000
Retained earnings 180,000 2. Entity A has the following share capital transactions during;
T a t al shsreholdeis' e quity u39-Ag) the year:
538 Chapter l5
o Issued 10,000 shares with par value of P10 per share for a
total consideration of P160,000.
. Received share subscriptions for 20,000 shares at a
subscription price of P22 per share. Only half of the
subscriptions were collected by the end of the year.
How much is lhe total share premium arising from the share
transactions above?
a. 60,000 c.300,000
b. 320,000 d. 180,000
3. Entity A was incorporated on January 1, 20x1 with an
authorized capitalization is P1,000,000 dividecl into 100,000
shares with par value o{ P10 per share. The following were the
share-related transactions of Entity A during the year:
. Cash subscriptions of 30,000 shares at Pl2 per share.
o Subscriptions of 40,000 shares at PIB per share. Seventy-
five percent of the subscription price was collected during
the year.
How much is the Entity A's total shareholclers' equity after
recording the transactions above?
a. 900,000 c.54O000
b. 680,000 d.360,000
4. Entity A's total shareholders' equity was p900,000 before
recording the following share transactions:
e Received cash subscriptions for 10,000 shares lvith par
value of P1 at P14 per share. Share issuance gosts
amounted to P2,000.
. Received subscriptions for 20,000 sirares at P20 per share.
Twen$-five percent down payment was collected on
subscription date.
r Collected the remaining unpaid subscription price of
15,000 subscribed shares and issued the related share
certificates. Share issuance costs amounted to F3,000.
Accou rt ti ng Car1t or ati a trs
Jor
How much is the balance of Entity A,s total shareholders'
equity after recording the transactions above? (Hint: Prepaing
jor.trnal entries makes this prctblem easier to sokte.)
a. 1,490,000 c. 1,360,000
b. 1,510,000 d. 1,610,000
5. On February 26,20x1, Entity A acquires 10,000 of its own
shares for F3 per share. The shares have a par vaiue of p1 and
were seiling in the stock market at F4 per srrare on this date.
To record the reacquisition, Entity A should
a. debit Treasury shares u..o,rrri for F30,000.
b. credit Treasury shares account for p3O000.
c. debit Share premium account for p10,000.
d. credit Treasury shares account for p4e000.
6. Two years ago Entity A reacquired 2,000 of its own sharcs
with par value of p100 per share for p240,000. Today, Entity A
reissues half of the treasury shares at F160 per share. The
journal entry to record the reissuance includes which of the
follow,ing?
a. Credit to Retained enrnings - unrestricfed account for
P24O000
b. Debit to Treaw.ry shares account for p12O000
c. Credit to Share premium - treaxty shares for p80,000
d. Credit to Share premium - treauuy shares for p40,000
7. Entity A reacquires 1e000 of its ovrn shares for p50. The
shares have par value of p10 ancl were originany issued at p15
per share. Subsequently, Entity A reissues the 10,000 shares at
P48 per share. The joumal entry to record the reissuance
involves which of the following?
a. Debit to Retained eantings for F20,000
b. Credit to Cssh for F480,000
c. Debit to Share pretniurz for p50,000
d. Debit to Treasury shnrcs for p500,000
540 Chapter 15

B. Entity Areacquires 10,000 of its own shares for p50. The

shares have par r.alue of P10 and were originally issued at F15
per share. Subsequently, Entity A reissues half of the
reaccluired shares at PSil per share and retires the other half.
The journal enky to record the retirement of the shares
incltrdes which of the following? (Hint: prouide the enh.ies.fttr both thc
reissr;gnce aud the retiren rct tt.)
a. Debit to Retained carnings for P175,000
b. Credit to Slure premium - retirement for p40,000
c. Debit to SharL: premirmt for p50,000
d. Debit to RetairLed earnings ior p135,000

9. Entity Areacquires 1,000 of its own shares for p25 and

immediately retires them. The shares have ;'rar value of F10
and were originally issued at F30 per share. 1'he journal entry
to record the retiremeni of the shares includes which of the
following?
a. Debit to Re tained t:n*ings for P5,000
b. Credit to TreasrLry shares for P30,000 oa

c. Credit t<t Sknre capitnl for p10,000 a)

o
d. Credit to Shnre ytrenium - retirentent for p5,000 ,
n
:
o
o
10. Entity A receives 20,000 shares with par valne of P100 and fair
value of P210 on November 2,2Ax1. The shares have fair value
of ?220 per share on December 31,20x1. How much additional
capital is recognized in Entity A's December 31, 20x1 balance
sheet as having resuiied from the r:eceipt of the donated li,
shares?
a. 2,000,000 c.4,400,000
b. 4,2AA,A0A d.0

PROBLEM 5: CLASSROOM ACTIVITY

You are the acconntant o{ PLTT Company. You have received the
following supporting documents for recording.

UI
il-
 542 Chapter l5 Accounttng for Diuidends

PLTT Co. issued ten of the share certificate sh,wn above to ABC
Chapter 16
Co.
Accounting for Dividends
ffi
&*f,{H.fit f!*, A{{oxnt {t*$}e
a.*ne
ABC Cer" i}x#i}ffiI$ffiffirffi{r*Ii
1?06&S?S
{earning Ofijective
Oate ?-Jan-?*xI 1. Account for dividends.
Fay to the .

^+ Pilllprl|{E Lot{G ?Alot'ts TIL$it0ilE c0, tr*s,eya"ro Retained earnings

In sole proprietorships, profits or losses are closed to the "Owner's
P*stls Forty-five $ix Hundred f$1r0{r
I equity" account. Distributions to the owrrer are initially recorded
,g, BANx or
#.d+
rxt q."l;t:t&**:r- in the "Oury1er's drawings" account and then closed to the
PHtilpPtNE lstAN05
"Owner's equity" account at the end of the period. The same
applies to partnerships, except that profits or losses (and
drawings) are closed to the partners' respective equity accounts.
For corporations, profits or losses and distributions to the
owners are recorded in the "Retnined eanings" account.
Retsined earnings represent the cumulative profits (net of
losses, distribution to owners, and other adjustments) which are
retained in the business iurd not yet distributed to the
sharehoiders. Total retained eamings rnay consist of:
rt s s,,rm g m Fqgll:flvE TltotjsAll0, $tx HUXBaES
a. L{nrestricted * the portion of retained earnings that is available
for future distribution to the shareholders.
b. Appropriated (1?estricted) * the portion of retained eamings that
is not available for distribution uniess the restriction is
.rrrt$ of,,ryQ$( ar*6qlqg*l*-*$&t#e"r&ju!trJrl1i&{5t&r(tr|l{d&*xgftlr subsequently reversed.
Appropriations of retained eamings do not mean that
Questian: What should you do?
a corresponding cash fund has been set aside. Appropriations
only indicate amounts that are not available for diskibution to
the onmers.

When the retsined earnings account has a negatiae balance

(i.e., debit balance), it is described in the financial statements as
"deficit."
I 544 Chapter 16 Accou ntin.g far Dioidencls

When total sharelwlders' equity has a negatioe balance (such

as when liabilities exceed assets), it is described in the financial Share capitaf P100 par value 800,000
statements as " capital deficiency." Subscribed share capiLal 220,000
Share premium 100,000
Retained eamings 524,044
Dividends
Treasury shares (at cost of P120 per share) (144,000)
Distributions to shareholders are called diuidends.Dividends may
Totul sharehol drrs' qu ity L,500,000
be in the form of:
1. Cash diaidends - distributions in the form of cash.
2. Property diaiilends - distributions in the form of noncash
assets.
Shares issued (Pfi00,000 + P100 par) 8,000
3. Share dioiclenils - distributions in the form of the entity,s ozirr
Shares subscribed (P220,000 + P100 par) 2,204
shares.
Treasury shares (Pl44,000 + P120 cost) (1,200)

Dates relevant to the accounting for dividends Owtstnnding shsres 9,000

a. Date of declnratian - the date when the board of directors
formally announces the distribution of dividends.
b. Date of record - the date on which the stock and transfer book
of the corporation is closed for registration. Only those who Orrtstanding shares 9,000
are listed as of this date are entitled to receive dividends. Muttiytty &y: Diviclends per share p50
c. Date af distribution - the date when the dividends declared are Total cosh diuidends ?450,A0A
distributed to the shareholders.
The pertinent entries are as follows:

Accounting for cash dividends AStril 1,20x1 Retainecl earning;s (or Dividends*) 450,000
Cash dividends are the most common form of distribution to (Date of
Cash dividends payable 450,000
ilecl&ration)
owners. Cash dividends may be declared as a certain amount per
April 15,2011
share or as a certain percentage of the par value of the shares. (Date of recoril) No entry
orrly outstanding shares are "entitled . to dividends. May 7,20x1 Cash dividends payable 4s0,000
outstanding slmres are shares issued p/us subscribed shares minus (Date of Cash 450,000
distribution)
treastrry shares.

"Alternatively, the "dividends" account may be debited in lieu of "retained

Illustration:
On April 1,2Ax7, the board of directors of ABC Co. declared a F50
dividend per share to shareholders of record as of April LS, Z}xl,
for distribution on May 1, 20x1. The shareholders, equity of ABC
Co. on April 1, 20x1 is as follows:
earnings." The "dividends" account may be used if diwidends are declared
more than once within a year (e.g., semi-annual or quarterlv dividends). The
"dividends" account is closed to retained eamings at year-end, similar to ihe
"drawings" account in sole proprietorships and parhrerships.
 546 Chapter 16 Acco tin g D iuidends
u n far

Accounting for property dividends

The accounting for property dividends involves highly technical The share clividends declared are analyzed as follows;
concepts, which I think are not in keeping with the scope of this 1. Share diuidends daclared: "1 sh. for every 10 shares helc1,,
book (i.e., fundamental concepts). Accordingly, I have decided to 2. Rntio:1/10
omit this topic. The accounting for property dividends is 3. Puccntagc:10o/o
discussed in lntermediate Accounting 2. 4. Conclusion: The share dividends are,,sma.ll.,,
5. Accounting: At fair oalue; credit share prernium for the
excess of fair value over par value.
Accounting for share dividends
Share dividends are accounted for as follows: / T1'te otrlstnndirtg sltnrtsare complrted as follows:
a. If the share dividends declared are "small," meaning less than
2A% of the outstanding shares, the share dividends are Shares issued (P800,000 + P100 par) 8,000
accounted for at fair a:alue. Shares srrbscribed (P220,000 + P100 par) 2,240
Retained earnings is debited for the fair oalue ofthe share Treasury shares (P144000 + P120 cost) (1,200)
dividends on declaration date. The difference between the fair Outstanding slmres 9,000
value and par value is creditcd to share premium.

b. If the share dividends declared are "lflrge," meaning 20Yo ar compr.rted as follows:
more of the outstanding shares, the shares are accounted for at
par aalue. Outstanciing5 shares 9,000
Retained earnings is debited for the par aalue of the share Multiplq /ly; Dividends declared u10
dividends. Accordingly, no share premium arises" Number of shares declared as dividencis 900
Multiply by: Fair aalue per share 740
Illustration "Small" share dividends
1:
Total share cliCIidends
__ paary_
Orr April L, 2Ax1, ABC Co. declared share dividends of "1 share
for every 10 shares held" to shareholders of record as of April 15,
The nent entries are as follows:
20x1, for distribution on May 1,20x1. The fair value per share on
April 1,20x1 Retained earnings (900 sh. x p140)
declaration date is F140. ABC's shareholders' equity immediately Q6,00a
(Date af
Stock dividends payable 90,000
before the dividend declaration is shown below: declaration)
(9i10 sh. r Pl()t)par valLre)
Share premirrm 36,000
Share capital, P100 par value 80o000 April 15,20x1
(Date of record) No entry
Subscribed share capital 220,000
Share premium . 100,000
May 1,20x1
(Date of
Stock dividends payable 90,000
Retained eamings 524,000 Share capital 90,000
clistibution)
Treasury shares (at cost of P120 pe.r share) (144,000)
Tot al shareholders' equity
**lI00!g!_
 548 Chapter 16 Accountiu g .fbr Ditt irlend s

The shareholders' equity as of April l, 20x1- immediately 2. Rntio:115

be and a the declaration is shown below: 3. Pcrcttrtnge:20"u
Bcfore , After lncreascl 4. Canclusion: The share dividends are "leffge."
I

declaratiort (Decrease)
5. Accortnting: At par aalue; no share premium arises.
Share capital 800,000 i
"declaration 800,000
Subscribed sh;rre capital , 220,000 220,000
Stock diaidends payable gA,000
. 90,a(n
Sharepremitrm : 100,000 | 't36,000
36,000
earnings
Retairred ' 524,000 3gg,000 (L26,0A0)
Shares issued (P800,000 + Pl00 par) 8,000
Treasury shares ', \144,000) t144,000)
Shares subscribed (P220,000 + P100 par) 2.,200
Treasury shares (?144,000 + P120 cost) (1,200)
Totnlsltarclroldcrs'eqtrity i 1,500,000 I,500,000
Outstandiug slmres ** j!90
f Nofcs;
lr Share dividends do not affect totnl shsreholders, equity. A diaidends distributable is
portion of the r'etained eamings is just transferred to the share computed as folltrws:
capital and share premium accounts.
Outstanding shares 9,000

account is an adjunct equity account (i.e., addition to equity) Multiply by: Dividends declared 7ls
and zof a liability accollnt, Number of shares deciared as dividends 1,800
Muttiply by: Par value per share 100
Total share diaidends 184,00A
Illustration 2: Accounting for "Lange,, share dividends
On April \ 2Ax1, ABC Co. declared share dividends of ,,1 share The pertinent entri es arei
for every 5 shares held" to shareholders of record as of April 15, April 1,20x7 Retained earnings (1,800 x P100) 180,000
20x1, for distribution on May 7,20x1. The fair value perchur* or., (Date of
Stock dividends payabie 180,000
ileclaration)
declaration date is P140. ABC's shareholders' equity immediately April 15,20x1
before the dividend declaration is shown below: (Date of recorel) No entry
Mnu 1,20x1 Share dividends payable 180,000
(Date of
Share capital, P100 par value 800,000 Share capital 180,000
distribution)
Subscribed share capital 220,AA0
Share premium :100,000
Retained earnings 524,000 Treasury shares declared as dividends
Treasury shares (at cost of P120 per share) 044,0a0) When treasury shares are declared as dividends, the accounting
To t al sh areltol dars' ary i t y
r 1,500,000 procedures. for "small" or "Large" share dividends do not apply.
lnstead, the cosf method is used. "Retained eamings" is debited
for the cost of the treasury shares declared. No share premium
1. Shsre diztidends declared: "1 sh. for every 5 shares held,, arises.
 t
550 Chapter 16 Accounting for Diaidends

Mny 1,20t1 Stock dividends payable 108,000

(Date of
Illustration: Treasury shares 108,000
distributian)
On April 1., 2Ax1, ABC Co. declared sharc dividends of "1 share Mny 1,20x1 Treasury shares * appropriated 108,000
for every 10 shares held" from its treasury shares, to shareholders
Treasury shares * unrestricted 108,000
of record as of April 15,20x1, for clistribution on May 1,20x1. The to rerlersc the restyiction on the
fair value per share on declaration date is P140" ABC's trctsurrl slnres isstud as ditidetds
shareholders' equity immediately before the dividend declaration
is shown below:
Preference shares
Share capital, P100 par value Pre{erence shares have one or both of the following preferences
800,000
Subscribed share capital over ordinary shares:
2?0,0a0
Share premium 100,000
1. Preference in the distribution of assets case of corporate
Retaincd eamings 524,000
liquidation (preferred as to assets)
Treasury shares (at cost of Pl20 per share) $44,A00)
2. Preference in the distribution of (preferred as to
Total slmrehalders' equ ity ditidends)
1,500,000

Preference over assets

Upon corporate liquidation ancl after the creditors' claims
(liabilities) are settled, preference ,shares that are prefewecl as to
Shares issued (P800,000 + P100 par) 9,000
assets are settled first and any remaining amounf is paid to the
Shares subscribed (F220,000 + F100 par) 2,200
ordinary shareholders.
Treasury shares (P144000 + P120 cost) (1,200)
If the preference share s are not prefered as to assets, the
Outstanding shares 9,000
remaining amount after settlement of liabilities is shared
proportionately by the preference and ordinary shareholders.
Pre{erence shares that are "preferred as to assets" are
normally entitled ta a liquidatiott anlue. Liquidation aalue pertains
Outstanding shares 9,000 to the amount wllich preference shareholders are entitled to
Multiply hy: Dividends declared 1,110 I
receive in case of corporate liquidation. The liquidation value is
Number of shares declared as dividends 900 usually more than ihe par value of the preference shares.
Multiply by: Cost per treasnry share 124 In case where the net assets of the corporation after
Total share diuidends *_J!!,0a9_ settlement of creditors' claims are insufficient to pay the
liquidation value, the preference shares wili be entitled only to the
The tinent ent rles are as follows: remaining nct assets. Consequently, none will be paid to the
April 1,20x1 Retained earnings (900 sh. x P120) 10&000 ordinary shareholders, but they wlllnot be obliged to provide any
(Date of
Stock dividends payable 108,000 additional capital. This is in accordance with the "limited liability"
declamtion)
April 15,20x1 characteristic of a corporatiory in which the personal assets of the
(Date of record) No eniry
owners are not subject to corporate claims.
 t
552 Chapter l6
Preference over diviclends
When dividends are declared, preference shares that are
"preferred as to di.tidends" are paid first before ordinary
shareholders.
Pre{erence over dividends may be:
1. Noncumulatiae - a noncurnulatiue preference share is one which
the dividend entitlement {r:r a year is forfeitecl when
dividends are not declared in that vear.
2. Cumulatiae - a cumukttiae preferettce shqre is one which the
dividend entitlement accumulates each year until paid.
Accumulated unpaid dividends are disclosecl as rliuidends in
arrefrrs but not accrued as liability unless the dividencls are
declared.
J. Nonpartici9tating - a nonparticipating preference share is one
which is entitled only to a fixed amount of dividends.
4. Participating - a pnrticipating preJbrerLce share is one which is
entitled to an amount in excess of the fixed amount of
dividends.
The amount of participation is computed after both the
preference and ordinary shares are allocatecl their basic
diaidends.
. The basic dividend of cumulatiae preferued shares
includes dividends in arrears.
. The basic dividend of noncumulatkte preferred shares
includes only the current-year dividend entitlement.
. The basic dividend of ordinary shareholders is equal to the
aggregate par value of the ciutstanding ordinary shares
multiplied by the ltrt:ferutce rttte. I{ there is more than one
class of preference shares with different preference rates,
the lozoest prefercnce rate is uscd to compnte for the basic
dividend of ordinar.z shareholders.
Acco u r rtittg Jor Diui d en d.s
Any excess of the dividends declared after deducting the
basic dividends is the amount subject to participation which
is allocated depending on the nature of participation of the
preference shares.
Participating preference' shares may be either:
a. Fully participating - participates on a pro rata basis
(based on aggregate par values of outstanding shares)
with ordinary shareholders.
b. Partially participatirug - participates only up to a certain
atyount or percentage
Preference shares may have more than one dividend
preference. For exampie, preference shares may be both
cumulative and participating.
The diviclend entitlement of preference shares may be
expressed as:
a. Percentage of par aalue (flxed rate based on par value). For
example, a "12Y" preference shnre" with par value o{ p100 is
entitled to a dividend of P12 (72% x P100) when dividends are
declared.
b. Specific monetary amount per share. For example, a "FS
preference slure" with par value of P100 is entitled to a
dividend of P5 when dividends are declared.
+'. In the absence of evidence to the contrarp preference shares
are presumed to be "preferred as to dividends', with dividend
o f " n o ncumul atia e an d n o np articip ating.,'
pre ference
Illustration 1: Dividends on preference shares
ABC Co. declared Pi,800,000 cash dividends to its preference and
ordinary shareholders in 20x3. No diviclends have been declarecl
since 20x1. ABC's shareholders' equity immediately before the
dividend declaration is as follows:
 t
554 Chapter 16 Accouriing for Diuidends

10% Preference $hare capital, P200 par 2,000,000 Total dividends declared 1,800,000
Ordinary share capital, P100 par 8,000,000 Allocntion:
Retained earnings 5,000,000 O Allocation to preference shares (P2M par x 70o/o x 3 yrs.6) 600,ooo
T a t al shnr ehol der s' equi ty Jla0p=0Qa @ Excess allocated to ordinary shares (p1.8M - p600K) 1,200,004
As allocated
Requirements: Compute for the diviclends received by ihe
preference shareholders and ordinary shareholders, respectively, (b)
All the unpaid dividends from 20x1 to 20x3 are paid because the preference
under each of the independent cases below.
slrares arc cutttulalite.

Case #1:Noncamulatiue and Nonparticipating

Case #3: Noncumulatiue and Fully Participating
The preference shares ate nonclutlulatiue and nonparticipating.
The preference shares ate noncuntulatiuc and fully participating.

+r For participating preference sltarcs, rpc. r$ill obserzte. the follaruing

Step L: Provide the dividends of the preference shares first.
steps in the nllocation of diztidends:
- If the preferences sharc's are flana.tmulatizse, provide
one-ye a r d ividends only. Step 1: I'rovide' the diviclends of the preference shares first.
- If
the preferences shares are cumulatiae, provid.e all - If the preferences shares are noflcumulatio4 provide
dividends in arrears. one-y ear dividends only.
S;tep 2-1 An;r exces_q i9 paid !o_ the ordinaly shareholde-1s, - If the preferences shares are cumulatiae, provide all
'
dividends in arrears.
Step 2: Provide, the basic clivicle,nds of the ordinary shares using
Total dividends declared I,800,000 the preference share rate.
Allocatiott: Step 3: Allocate the excess dividends after deducting the amounts
0 Allocation to preference shares (F2M par x l}ol, x 1 yr.r"t) 200,000 computed in StcTts 1 €t 2 abave to the preference and
O Excess allocated to ordinary shares (F1.8M- p200K) 1,600,000 ordinary shares pro rata based on the aggregate par values
As allocsted gf the- oytsllnding qhaleq,

tn) OnlI the current year dividend is paid because the preference shares are Total dividends declared 1,800,000
notrcumulatiae. The unpaid dividends from previous years are forfeited. Allocntion:
O Basic allocation to preference sh. leztr,t par x 10% x 1yr.) 200,000

O Basic allocation to ordinary sh. leaM par x L0o/o1tct 800,000

C ase #2: Cumulative and N onp articipating Excess stthiect to ytarticipntian (1.8M * 200K - B}AK) 800,000
The preference shares are cumulatitse and nonpnrticipating.
@ Participation of preference sh. (pB00K r 2M Ttar
+ 10M ltnr)@) 160,000
@ Participation of ordinary sh. rpgoo( x 8M par + 10M pafitet 640,000
As allocsted
 'tr
556 Chapter 16 Ac counting Di.it i dend s
for

(")
* The. total divide,ds received by each class of shares are as
Basic allocation to ordinary shares: (pBM aggregate par value of ordinary follows:
shares 'seru sharehol.derc' equity nboae'x 10% preference rate) = FB0A,A00.

Preference shares: (F600,000 basic + Fg0,000 participation) 680,000

(dlI'articipation of PS:
[F800K excess x F2M aggregate ..u1r" of preferer-rcc
pr;1 Ordinary shares: (F800,000 basic + F320,000 participat 1,120,000
shares 'sce ,harelrttldos' cqtrity ohott" + (F2M ag$regnte par-r,alue of preferenct,
Total diaide,nds
shares + F8M aggregate par value of ordinary shares)l = p16A,00A.

{e} larticipation of os: [F800K ('\cess x Fr{M aggregaie par value ot ordinary
shares + (F2M aggregate par value of preference shares + FgM aggregate par Case #5: Cumulatitse and Participating up to 160/o
valuu of ordjnar_v shares) j - ?b10.000. The preference shares are cuntulatiue cnd ltttrticiltatinu up to 76oh.

* The total dividends received by each class o[ shares are as Total dividends declared 1,900,000
follows: A!locat ittn:

O Basic allocation to preference sh. (pztvl par x 10%, x 3 yrs.) 600,000

Preference shares: (F20e000 basic + p16O000 participation) 360,000
@ Basic allocation to ordinary sh. laSv par x I0oz,)
Ordinary shares: (p800,000 basic + F640,000 parriciparion 1,440,000
800,000
Totsl diaidends 400,000
@ Participation of preference sh. k16% - 10%) x ?2M yarl {t't 120,000
@ Excess allocated to ordinary sh. (p400K- ?120K) 280,000
Case #4: Cumulatioe and Fully participating As allocsted
The preference shares are cufirulatioe and
fitlly ltartictpating.
(r)
When preference shares arc participating only up to a certain
Total dividends declared 1,800,000 percentage (i.e., partially participating), the participation is
Allocstion: computed as the excess of the participation pcrcentage over the
O Basic allocation to preference sh. lazM par x t0% x 3 t1rs,) 600,000 fixed dividend rate multiplied by the aggregate par value of
@ Basic allocation to ordinary sh. lrsu par x 10%) prefercnce sharcs ou tstand ing.
80o000
tpot ion I t.8M - 6t)()K * 8(Dkt 400,000
@ Participation ofpreference sh. (paO0fx 2Mpar+ t\Mpar)
* The total dividends received by each class of shares are as
80,000 follows:
@ Participation of ordinary sh. (p+00rx BMpar * 10Mpar) 320,000
As allocated Preference shares; (F600,000 basic + p120,000 participarion) 720,090
Ordinary shares: (F800,000 basic + p280,000 partit ipation) 1,0g0,000
Notice tl-rat the ordinary shares are allocated o.ly one year Totol diuidends 1,804,A00
dividends regardless of diviclends in arrears.
 'E;
Chapter .16 Accottn ting for Diitidends

Illustration of preference shares

2: More than one class
ABC Co. declared P4,000,000 cash dividends to its preference and 10% PS: (F500000 6nsi6 + F235,000 parficipatior.r) 835,ooo
ordinary shareholders in 20x3. No dividends have been declared 12% PS: (F720,000 basic + ?705,000 participatior"r) L425,404
since 20x1" ABC's shareholders' equity immediately before O{dinary share-!; (F800,000 basic + p940000 participation) 1,49-000
dividend declaration is as follows: Totql dioidends 4,000,000

10% Preference share capital, F200 par, cumliatiae

nnd pnrticipating 2,000,000 Liquidating dividends
12% Preference share capital, P300 par, noncumulatizte 6,000,000 Liquidating diuidends are dividends declared out af capital, rather
ard Ttnrlicipating than from retained earnings. Liquidating dividends are normally
Ordinary share capital, P100 par 8,000,000 declared only upon corporate liquidation. However, the wastitrg
Retained eamings 4,000,000 asset doctrine permits wasting asset corporations (i.e,, those who
T otal shareltolders' eq uity 2CI00CI000 are engaged in mining mineral resources)to dedare dividends out
of capital during their existence.
Requirement; Compute for the dividends to be received by each of There may be instances where unirfictttional liquidating
the different classes of share capital. diuidends occur such as when dividends are declared out of
retained eamings that is overstated. When unintentional
Soltttion: liquidating dividends are subsequently discovered, a correcting
entry is made to adjust the retained earnings and other affected
Total dividends declared 4,000,000 accounts.
Allocation:
O Basic allocation to 10o/o PS lrztvt par x 10% x 3 yrs.) 600,000
Illustration:
On December 91, 20x1, ABC Co, declares P1,000,000 cash
O Basic allocation ta12"la PS (eeMpar x12'/"x1.yr.) 72A,000
dividends to shareholders of record as of january 15, 20xZ for
@ Basic allocation to ordinary sh. (pgu par xlaYg(E 800,000 distribution on Janrrary 31, 20x2. Since ABC is rLndergoing
Excesssubiecttoporticipation(4M*600K*720K-800K) 1,88A,000 liquidation, BAYo of the dividends declared are liquidating
@ Participation of L0% PS {p1.880M x 2M par, 16Mpar) 235,000 dividends.
@ Participation of 12o/oPS tpt.880M x 6M par- l6M pnr) 705,000
The periinent entries are as follows:
@ Participation o{ ordinary sh.. (il.880M x BM par + 15h{ par) 940,000
As nllocated
Det. 31,20x1 Capital liquidated (1M x 8o96) 800,000
(Date of
Retained earnings (1M x 20'1,) 200,000
(d The lawer preference rate is used in the allocation of basic decluration)
Cash dividends payable 1,000,000
dividend to ordinary shares. Jnn.15,20x2
(Date ofrtcord) No entry

* The-total dividends received by each class of shares are as lan. 3'1,20x2

(Date oj
Cash dividends payable 1,000,000
follows: Cash 1,000,000
tlistr[bution)
 il
Chapter 16 Accounting for Diztidends 561

The memo entry to record the split up is as follows:

Dividends declared in excess of the balanie of unrestricted
retained eamings are considered liquidating dividends. 2qooo shares vtLth ?ar vaLwe o{ Pso as a resvLt oi a "z-for-t'
"tssr,,.sd
Liquidating dividends are charged to the capital liquidated split of ro; o c o oLr,l shar es v,tiih 7 a r v aLwe c{ P:,o o -"
account which is a deduction from total shareholders' equity (i.e.,
contra equity account). Case #2: Split down
ABC declares a "1-for-2 rez)erse sknre split."

Share split
The memo entry to recofd the split down is as follows:
Share splits may be in the form of:
1. Split up or share split "tsstLe.cl Soao shares v,tLth par ttaLvte S ?2oo aE a resu-Lt $ a.
2. Split dor,rm or reverse share split yeve{se share sVLLt o{ to,ooo oLd, shares wlth pniltaLu'"a of Ptoo."

Split up occurs when old shares are cancelled and

In both cases above, the aggregate par value of the shares
replaced by a larger number of new shares but with a reduccd par
bcfore and afterthe share split is unaffesfsfl;
ualtte ktntad t,aluc) per share.
Entities may use share split as an equity financing tool.
Before After split After split
Share split increases the number of shares available for issuance
share snlit down
while decreasing the fair value per share. This is because, after a 20,000
No. of shares outstanding 10,000
share split, the fair value of the entify's net assets will be divided ?100 P50
Par value
by a larger number of outstanding shares. With a decreased fair ?1.,000,000 pl,aa},000 ?1,000,000
value per share, the entity's shares become more affordable tcr
poLential investors.
Split down is the opposite of split up whereby old shares
are cancelled and replaced by a srnaller ntnnber of new shares but
with an increased par aalue (ststed ztnlue) per share.
Share splits affect only the number of cutstanding shares
and par value per share. They do not aflect assets, liabilities,
equity, or the aggregate par value of issued shares. Share splits are
recorded only through tnewa entry.

Examples: Split up and Split down

ABC Co. has 10,000 shares with par value per share cif P100.

(qss #7: Sptit u1:

ABC Co. declares a "2-for-1 share split."
 V
562 Chapter 16 Accornting for Dittidends

Chapter l6: Summary PROBLEMS

. The yeleaant dates in the accounting for dividends are: (a)
date ofdeclaratiory (b) date of record, and (c) date of PROBLEM 1: TRUE OR FALSE
distribution. Journal eniries are macle only on the dates of 1. The profits and losses of a corporation as well as the
' declaration and distribution. distributions to the owners are recorded in the Retained
only outstanding shares are entitled to dividends. outstnncling carnitrgs accoun t.
shayes - Issued slmres + Subsuibed shares Trenxty shares.
- 2. When a corporation declares dividends, the retained earnings
Dividends are measured as follows: account is debited for the value of the diviciends declared on
a. Cash dividends - amount of cash dividend declared. the date of record.
b. Share divide.r"rds: 3. Preference shares that are preferred as dividends are paid
i. "Smnll" (less tlmn 20%) -fair value ol the shares declared. first before the ordinary shareholders cases of corporate
ii. "Lnrge" QA% or nnre) -par value of the shares declared. liquidation.
Stock diaidatds payable is an adjunct equity accounf not a 4. Preference shares thai are preferred as to dividends are paid
liability accourrt. on a pro rata basis with the ordinary shareholders when
Treasury slmres declared as dividends are accounted for at cost. dividends are deciared.
t Noncumulatizse preference shsres are entitled only to current- 5. Preference shares that are participating but noncumulative are
year dividends. Cumulatiae preference shnres are entitled to entitled to dividends in arrears.
dividends in arrears.
Nonparticipating preference shares are entitled only to their
I basic dividends. After they are paid iheir basic dividends, any PROBTEM 2: COMPUTATIONS
excess dividend is paid to the orc{inary shareholders. Accounting for dividends
Fully participating preference shares are entitled to a pro rata Use the follouting infonnation for tlte next
i four questions:
i share with the ordinary shares, based on aggregate par values, The shareholders' equity of Entity A on September 1, 20x1
i
after both the preference shares and ordinary shares receive follows:
I

i
their basic dividends. If there is more than one class of
preference shares, the basic dividend of ordinary shareholders Share capital, P10 par value 1,000,000
is computed using the lowest pre{erence dividend rate. Subscribed share capitai 200,000
The participation of partially participating, preference shares Share premium 400,000
is computed based on the excess of the participation rate over Retained earnings 650,000
the fixed preference dividend rate. Treasury shares (P15 cost per share)
Total shareholders' equity 2,100,000

Case L: Cash diaidends

1. Entity A declares cash dividends of p2 per share on September
15,20x1to shareholders of recorcl as of September Zl,i}xl, tor
 .|r

564 Chapter'15 A cco tn in g fo r

t D ir_ti d en tls

distribuiion on September 30, 20x1. provide the journal Case #1: Noncumulatiue and Nonparticipating
entries. 5. How much are the respective shares of the preference and
ordinary shareholders on the dividends declared if the
Case 2: "Small" share diaidends preference shares are floncttt?tulatiue and nonp art icipating?
2. Entity A declares a "1 for 20 share dividends,, on September
75, 20xL to shareholders of record as of September 2L,20x1, for Case fi2: Cumulatiae aud Nonparticipating
distribution on septernber 30, 20x1. The fair values per share 6. How much are the respective shares of the preference and
were F14, P15 and P14.80, on September 15, 21 and 30, ordinary shareholders on the dividends declared if the
respectively. Provide the journal entries. preference shares arc a.Lm ulat iT e an d nonyt ar ticilt at in g?

Case 3: "Lflr5qe" share diaidends

fully participating
Case #3: Noncumulatioc and
3. Entify A declares a "1. for 4 share diviclends,, on September 15, 7. How much are the respective shares of the preference and
20x1 to shareholders of record as of September 21, 20x7, for ordinary shareholders on the dividends declared if the
distribution on september 30 20x1. The fair values per share preference shares are nonc,rnulafiae
were P14, F15 and P14.80, on September 15, 21 and 30,
and lully participating?
respectively. Provide the journal entries. Case #4: Cumulatiue and Fully participating
B. How much are the respective shares of the preference and
Case 4: Treasury sharcs declared qs shsre diaidends ordinary shareholders on the dividends declarecl if the
4. Entity A declares a "7 for 20 share dividends,, out of treasury preference shares are urmrilntiae
shares on September 15, 20x1 to shareholders of record as of
anrl fully participating?
September 21, 20x1, for distribution on September 30, 20x1. Case #5: Cumulatiae and Participating up to L|"/o
The fair vaiues per share were p14, p15 and p14.BO on 9' How m.rch are the respective shares of the preference and
September 15, ?1 and 30, respectively. provide the joumal" ordinary shareholders on the dividends declarecl if the
entries. preference shares arc *nnulatiue and pnrticipnting up to llyo?
Accounting for dividends on preierence shares More than one class of preference shares
Use the follozuing information
for the next fiae questions: 10. Entity A declared P1,200,000 cash dividends to its preference
Entity A declared F600,000 cash dividends to its preference and and ordinary shareholders in 20x3. No dividends have been
ordinary shareholders in 20x3. No dividends have been declared declared since 20x7. Entity A,s shareholders, equity
since 20x1. Entity A's shareholders' equify immediately before the immediatelybeforedividenddeclarationisasfol1ows:
dividend declaration is as follows:
10% Preference share capitaf curnulntipe & participating 500,000
10% Preference share capital, P200 par 500,000 14% Preference share capitaf nonctutniative & participating 300,000
Ordinary share capital, P100 par 1,000,000 Ordinary share capitaf p100 par 1,000,000
Retained earnings 5,000,000 Retained earnings 4,700,000
Totsl slrnreholders' equitv
6ea@ To tal shareholders' equ ity 6.500-Q00
 .Br

566 Chapter 16 Accoun ting ftir Diitiden ds

?26, on May 15, 21 and 31, respectively. provide ihe

Requiremant; Compute for the dividends io be received by each o{ entries.
the dif{erent classes of share capital.
4. Entity A declares all the treasury shares as dividends on May
Liquidating dividends 15, 2Ax1 to shareholclers of record as of May 21, Z}xl, for
11. On December 31,, 20x1, Entity A declares P500,000 cash distribution on May 37, z}xi. The fair values per share were
dividerrds, 75o/o of which are out of capital rather from ?24, P25 and ?26, on May LS, Zl and 31, respectively. provide
reiained earnings.' Provide the journal entry on the date of .the journal entries.
declaration.
tlse ttrcfollowing informatiort
for the ncxt fioe questians:
Entity A declared P1,200,000 cash dividends to its preference and
PROBLEM 3: COMPUTATIONS ordinary shareholders in 20x3. The dividends in arrears are three
Use the follozuing information for the next four questions: years/ including the current year. Entity A's shareholders'equity
The shareholclers' equity of Entity A on May 1,20x7 is as follows: immediately before the dividend declaration is as foilows:

Share capital, F20 par value 2,800,000 10% Preference share capital, P20 par 1,000,000
Subscribed share capi tal 400,000 Ordinary share capital, P10 par 2,000,000
Share premium 400,000 Retained eamings 5.000.000
Retained eamings 1,700,000 T otal slmreholders' equity &000.aq0
Treasury shares (P25 cost per share) (350,000)
To tnl shareholde rs' e quity 4,950,000 5. How much are the respective shares of the preference and
ordinary shareholders on the dividends declared if the
1" Entity A declares cash dividends of P5 per share on May 15, preference shares are noncumltlntize md n onp articipating?
20x1. to shareholders of record as of }y'.ay 27, 20x1, for
distribution on May 31,20x1. Provide the journal entries. 6. How much are the respective shares of the preference and
ordinary shareholders on the dividends declared if the
2. Entity A declares a "1, for 10 share dividends" on May 75,2Ax7 preference shares are cumulntiae and nonparticipating?
to shareholders of record as of May 21, 20xL, for distribution
on May 31,2Ax1. The fair values per share were P24, P25 and 7. How much are the respective shares of the preference and
P26, on May 15, 21 and 31, respective,ly. Provide the journal ordinary shareholders on the dividends declared if the
entries. preference shares are noficumulatiue cnd
futty Ttnrticipating?

Entity A declares a "1. for 5 share dividends" on May 15,20xI B. How much are the respective shares of the preference and
to shareholders of record as of May 27,20x1, for distribution ordinary shareholders on tl-re dividends cleclared i( the
on May 31, 20x1. The fair values per share were F24, P25 and preference shares are cumulntiae nnd fully pcrticipating?
 t
568 Chapfer 16 Accounting for Diaideuds

3. lAtrhich of the following causes a change in the amount of

9. How much are the respective shares of the preference and shareholders' equity?
ordinary shareholders on the dividends declared if the a. Share dividends c. Issuanceof shares for cash
preference shares are cumtilatiae and participating up trs 15ok? b. Split up d. Split down

10. Entity A declared P2,400,000 cash dividends to its preference 4. Which of the following may not increase the balance of the
and ordinary shareholders in 20x3. No dividends have been share premium account?
declared since 20x7. Entity A's shareholders' equity a. subscription of shares above stated value
immediately before dividend declaration is as follows: b. reissuance of treasury shares at more than their
reacquisition cost
10% Preference share capital, cuffiulatioe s Ssarticipnting 1,000,000 c. split up
12% Preference share capital, nonamtulatiue & participating 1,000,000 d. issuance of "small" share dividends
Ordinary share capital, P100 par 2,000,000
Retained eamings 4,700,000 5. Which of the following is not a liability account?
Total shareholders' equity SZ00P00 a. Accounts payable c. Current tax payable
b. Utilities payable d. Stock dividends payable
Requirenrcnt; Compute for the dividends to be received by each of
the different classes of share capital. 6. When allocating dividends to preference shares and ordinary
shares and there are two types of preferences shares, both
11. On December 37, 20x1, Entity A declares P100,000 cash participating but with difJerent dividend rates, ihe basic
dividends. Immediately before' the declaration, Entity A's dividends on the ordinary shares are computed using
retained eamings had a balance of P90,000. Provide the journal a. the lower preferred dividend rate.
entry 0n the date of declaration. b. the higher preferred dividend rate.
c. the average preferred dividend rate.
d. any of these
PROBTEM 4: MULTIPLE CHOICE
1. Cash dividends payable or stocks dividends payable is 7. Which of the following is not a conka equity account?
credited on the a. Capital liquidated c. Subscriptions receivable
a. date of dividend declaratir-rn. c. date of record. b. Treasury shares d. Subscribed share capital
b. date of dividend distribution. d. any of these
The "Dividends" account is most similar to a
2. Entity A has 30,000 shares outstanding. If Entity A declares a. Drawings account. c. Owner's capital accorlnl
3,000 share dividends, the share dividends will be accounted b. Partners' capitai account. d. None of these
for
a. at cost. c. at fair value. 9. The stockholders' equity section of Entity A's statement of
b. at par value. d. at unfair value. financial position shows the following information:
570 Chapter 16 Account ing for Div i den d s

PROBLEM 5: MULTIPLE CHOICE

Share capital, 10,000 authorized shares, F100 par value 880,000 Use the follozoing information for the next tlree questions:
Subscribed share capital 120,000 After colleg€, you and some of your batchmates put up a
Share premium 200000 corporation called "T-accoun! Inc." Your company is engaged in
Retained earnings L41A,AA0 the apparel business, mainly in the production of T-shirts which
Treasury shares (at cost of F130 per share) (390,000) are sold worldwide. Your product endorsers include a number of
"[ ot al shsr ehol d er s' e quity 2,224,000 celebrities from Hollywood. Your company has an authorized
capitalization of 100,000 shares with par value per share of p10.
How many outstanding shares does Entity A have? Your company issued 80,000 shares but has subsequentiy
a. 9,000 c. 7,000 reacquired 10,000 shares for P120 per share. Currently, your
b. 8,800 d. 10,900 company has unpaid share subscriptions of 1,000 shares
(subscribed by me). Today, your shares are selling in the stock
10. On January 1,20x1, Entity A received authorization from the rnarket at P650 per share.
SEC to issue share capital of P1,000,0000 divided into 10,000
shares wiih par value per share of F100. The following 1. If your company declares 15,000 share dividends today, how
transactions affected Entity A's equity during the period: much will be debited to retained eamings?
. Of the total authorized share capital,25o/o was subscribed a. 150,000 c.840,000
at par value and 25% af the total subscription was paid at b. 9,750,a00 d.6.980,00
subscription date.
. On March L 2Ax1, Entity A received full payment for ihe 2. If your company declares share dividends. of "1 share for
subscribed shares. every 10 shares held" today, how much will be debited to
o On April28, 20x1, Entity A received cash subscription for retained earnings?
1,000 shares at par value. a. 77,400 150,000
. Entity A earned profit of P1,200,000 for the year. b. 4,615,000 2,986,534
. On December 31, 2Ax7, Entity A declared cash dividends
of P200 per slrare. 3. If your company declares half of the treasury shares held as
share dividends, how much will be debited to retained
How much is the cash dividends payable? earnings?
a. 1,200,000 c.880,000 a, 600,000 c.50,000
b. 950,000 d.700,000 b. 3,250,000 d.345,733.48
 il
572 Chapter 16 Accoun t ilry for Db i tl en d s

Use the follozuittg itformation

far the next two questions: c. 1"47333 19,203
You and I won an accounting quiz bee in college and have d. 800,000 4,0()0
invested the prize money in ABC Co. You acquired 1,000
preference shares while I acquired 1,000 ordinary shares. Today, 7. If the pref-erence shares are cumulstiae and partiriT:ating
ABC Co. declared casl'r dividends of p12M. ABC Co.'s equity (dividends in arrears are five years, including the current
structure before the dividend declaration is as follows: year), how much dividends (gross of tax) will we receive from
our respective investments?
10% Preference share capital, F200 par 1,000,000 Yotr Me
Ordinary share capital, P1 par 2,000,000 a. 96,883 46,554
Retained earnings 15.000,000 b. 953,333 3,967
Totsl shnyeholders' equity 1B.000.000 c. 934,667 13,333
d. 164,667 99,333
4. If the preference shares are noficuruulatiue and. nonparticipating,
how much dividends (gross of tax) will we receive from our 8. You and your friend won an accounting quiz bee in college; I
respective investments? won a "balut-eating" contest. We all invested our prizes in the
You Me shares of stocks of XYZ,Inc. Or-rr shareholdings are as follows:
a. 20,000 5,950 r You: 1,000 10% cumulLttiue and ptnrticipafirrg preference
b. 23,333 4,667 shares
c. 20,000 5,500 o Friend: 1,000 12% nLtilutnrulotiae auLl nonpnrticipnting
d. 18,333 zcpcJ preference shares
. Me: 5,000 ordinary shares
5. If the preference shares are cumulatiae and nonparticipating
(dividends in arrears are five years, including the current The dividends in arrears are iour years. Today, XYZ, Inc.
year), how much dividends (gross of tax) will we receive from declared total cash dividends of P6M. XYZ, Inc.'s
our respective investments? shareholders' equity before the clividerrd declaration is as
Yau Me follows:
a. 78,333 16,321
b. 10o000 5,75A 10'lo Preference share capital, P100 par 2,000,000
c. 59,667 8,333 1.2"/"Preference share capital, P200 par 4,000,000
d. 60,000 5,850 Ordinary share capital, F10 par 6,000,000
Retained eamings _8,000.000
5. If the preference shares ate noflcln?tulntiae and participating, Tatal shareholders' equi ty zqaaaeaa
how much dividends (gross o{ tax) will we receive from our
respective inveshnents? If XyZ, Inc. declares a total cash dividends of P6M today, how
You Me much dividends (gross of tax) will we receive from our respective
a. 96,333 37,667 investments?
b. 984,566 912,933
 t
574 Chapter 16

You Friend Me
a. 96,883 76,333 46,667
b. 91,500 24,400 30,750
c. 93,500 18,900 JJ/JJJ
d. 64,667 28,000 98,333

9. Entity A has an authorized capitalization of P1,0090000

divided into 100,000 shares with par value per share of F10.
Entity A has issued 75,A00 shares but subsequently reacquired
5,000 shares. Entity A has outstanding subscribed share capital
of P20,000. If Entity A declares a "2-for-1 share split" or a "7-for-
2 retterse share s1tlit," how many replacement shares will be
issued to the shareholders and how much will be the new par
value?
Split up Split down
a. 144,000; PS 35,000; P2o
b. 200,000; P5 50,000; P20
c. 36,AAA;P20 144,400; FS
d. 50,000; P20 200,000; P5

10. Entity A's going concern is in doubt. On December 31,20x1,

Entity A declared P6t)0,000 cash dividends. No dividends have
been declared since 20x1. Entity A's shareholders' equity
immediately before the dividend declaration is as follows:

Ordinary share capital, P100 par 1,000000

Share premium 200,000
Retained earnings 500.000
T ot al shar eh o ider s' e qu ity 1.Z00,zu

The entry to record the dividend declaration includes which of the

following?
a. Debit to retained earnings for P600,000
b. Debit to capital liquidated for P600000
c. Debit to retained earnings for P100,000
d. Debit to capital liquidated for P100,000