ACN 4127: CORPO On Jan 1, DEF Company was authorized to issue

15%, cumulative and fully participating 10,000

Accounting for Preferred and ordinary shares
preference shares at a par value of P100 and
Ordinary shares 20,000 ordinary shares of no par but with a stated
value of P50. The incorporators subscribed to 25%
Advantages:
of the preferred shares and 30% of the ordinary
✗ Right to vote shares at stated value. A 25% downpayment is
required for both classes with the remainder due in
✗ Right over residue dividends and assets two equal installments on Feb 15 and March 15.
after the preferential claims has been
satisfied Jan 1 Subscription Receivable – Preference
250,000
Preference shares
Subscription Receivable – Ordinary
Investors believe these shares to be: 300,000
1. Less risky than the ordinary shares Subscribed Share Capital –
2. Have a higher rate of return higher than the Preference 250,000
ordinary shares Subscribed Share Capital – Ordinary
3. Have a fixed rate of dividend amount 300,000

4. Enjoy preferential rights over distribution of subscription of 25% authorized preference

dividends and assets shares and 30% authorized ordinary shares

Over Dividends: shares are given priority Jan 1 Cash 137,500

claims in the distribution of dividends as against Subscription Receivable – Preference
ordinary and carry privileges such as being 62,500
cumulative or participating
Subscription Receivable – Ordinary
Over Assets: shares are given priority claims 75,000
in the distribution of corporate assets over the
ordinary share once corporation is liquidated. payment of the required 25% paid
subscription for incorporation
Authorization of shares
Sale of ordinary shares above stated value
On Jan 1, DEF Company was authorized to issue
15%, cumulative and fully participating 10,000 On Jan 5, DEF Company issued 200 ordinary shares
preference shares at a par value of P100 and for cash at P55
20,000 ordinary shares of no par but with a stated Jan 5 Cash 11,000
value of P50. The incorporators subscribed to 25%
of the preferred shares and 30% of the ordinary Share Capital-Ordinary 11,000
shares at stated value. A 25% downpayment is Issued 200 ordinary shares at P55 for cash
required for both classes with the remainder due in
two equal installments on Feb 15 and March 15. Sale of Preference shares in exchange for property

Jan 1 Authorized to issue 10,000 15% cumulative On Jan 10, DEF Company issued 400 preference
and fully participating preference shares at P100 shares in exchange for a machinery worth P50,000
par and 20,000 ordinary shares of no par, stated Jan 10 Machinery 50,000
value of P50
 Share Capital-Preference On Feb 5, DEF Company issued 1,000 preference
40,000 (P100*400) shares for cash at P110
Share Premium – Preference 10,000 Feb 5 Cash 110,000
Issued 400 preference shares in exchange Share Capital- Preference
for machinery 100,000
Subscription of ordinary shares above stated value Share Premium – Preference 10,000
with a downpayment
Issued 1,000 preference shares at P110 for
On Jan 15, 400 shares were subscribed at P60 with cash
50% downpayment
Collection of subscription balance and issuance
Jan 15 Subscription Receivable - Ordinary 24,000
On Feb 15, first installment payment from the
Subscribed Share Capital - Ordinary incorporators was received
24,000
Jan 1 Subscription Receivable – Preference
Received subscription for 400 shares at P60 250,000
Subscription Receivable – Ordinary
300,000
Cash 12,000
Subscribed Share Capital –
Subscription Receivable - Ordinary
Preference 250,000
12,000
Subscribed Share Capital – Ordinary
To record 50% downpayment
300,000
Collection of subscription balance and issuance
subscription of 25% authorized preference
On Jan 30, balance for the 400 shares subscribed shares and 30% authorized ordinary shares
on Jan 15 were collected in full
Jan 30 Cash 12,000
Feb 15 Cash 206,250
Subscription Receivable - Ordinary
Subscription Receivable –
12,000
Preference (250,000*.75*.5) 93,750
Collected subscription balance on Jan 15 in
Subscription Receivable – Ordinary
full
(300,000*.75*.5) 112,500
Collected first installment of incorporators’
Subscribed Share Capital - Ordinary 24,000 subscription
Share Capital - Ordinary Subscription of ordinary shares at stated value
24,000 with a downpayment
Issuance of the fully-paid subscribed shares On Feb 22, 1,400 ordinary shares were subscribed
on Jan 15 at stated value with P20,000 downpayment
Sale of Preference shares above par Feb 22 Subscription Receivable - Ordinary 70,000
 Subscribed Share Capital – Ordinary Mar 5 Cash 30,000
70,000
Subscription Receivable – Ordinary
Received subscription for 1,400 ordinary 30,000
shares at stated value
Collected P30,000 from Mar 7 subscriptions
Collection of subscription balance and issuance
Cash 20,000
On Mar 15, second installment payment from the
Subscription Receivable – Ordinary incorporators was received and stock certificates
20,000 were issued
To record downpayment Feb 15 Cash 206,250
Subscription of Preference shares above par with Subscription Receivable –
a downpayment Preference (250,000*.75*.5) 93,750
On Feb 28, 1,000 shares were subscribed at P105 Subscription Receivable – Ordinary
with 25% downpayment (300,000*.75*.5) 112,500
Feb 28 Subscription Receivable - Preference Collected first installment of incorporators’
105,000 subscription
Subscribed Share Capital -
Preference 100,000
Mar 15 Cash 206,250
Share Premium – Preference
Subscription Receivable –
5,000
Preference (250,000*.75*.5) 93,750
Received subscription for 1,000 shares at
Subscription Receivable – Ordinary
P105
(300,000*.75*.5) 112,500
Collected second installment of
Cash 26,250 incorporators’ subscription
Subscription Receivable - Preference Collection of subscription balance and issuance
26,250
On Mar 15, second installment payment from the
To record 25% downpayment incorporators was received and stock certificates
Collection of subscription balance were issued

On Mar 5, P30,000 payment from Feb 22 Jan 1 Subscription Receivable – Preference

subscribers were received 250,000

Feb 22 Subscription Receivable - Ordinary 70,000 Subscription Receivable – Ordinary

300,000
Subscribed Share Capital – Ordinary
70,000 Subscribed Share Capital –
Preference 250,000
Received subscription for 1,400 ordinary
shares at stated value Subscribed Share Capital – Ordinary
300,000
 subscription of 25% authorized preference
shares and 30% authorized ordinary shares
Mar 15 Subscribed Share Capital – Preference
250,000
Subscribed Share Capital – Ordinary
300,000
Share Capital – Preference
250,000
Share Capital – Ordinary
300,000
issuance of the original subscription from
incorporators
Legal capital
✗ Aggregate Value of the Par Value of all
issued par value shares
✗ Aggregate Value of the Par Value of all
subscribed par value shares
✗ Aggregate of the Cash and the Value of any
contributions paid for all issued No Par
Value shares, including payments in excess
of stated value
Share Capital, At Par Pxxx
Subscribed Share Capital, At Par xxx
Total Value, No Par Shares xxx
Total Legal Capital Pxxx
This is the minimum amount that cannot be
distributed to shareholders as this will serve as a
protection for the corporate creditors in
accordance to the Trust Fund Doctrine.
Trust fund doctrine is a principle of judicial
invention which says that corporate assets are held
as a trust fund for the benefit of shareholders and
creditors and that the corporate officers have a
fiduciary duty to deal with them properly.
Accounting for other classes of shares
Delinquent shares
✗ Unpaid stock subscriptions upon call date or
date fixed by the Board of Directors
✗ There is a 30-day window from subscription
date or call date within which subscriber
should pay before the whole subscription
becomes delinquent
✗ May be sold in a public auction to the
highest bidder
✗ The highest bidder is the one who is willing
to pay the unpaid balance of the
subscription plus accrued interest plus all
expenses related to the sale and is willing to
receive the smallest number of shares.
✗ Excess shares are issued to the defaulting
subscriber.
Subscription of ordinary shares at par value with a
downpayment
On April 1, C subscribed to 200 ordinary shares at
par of P50 with a 25% down payment. Balances will
be paid on April 30 and May 31.
April 1 Subscription Receivable - Ordinary 10,000
Subscribed Share Capital – Ordinary
10,000
Received subscription for 200 ordinary
shares at par value
Cash 2,500
Subscription Receivable – Ordinary
2,500
To record downpayment
Collection of first installment on subscription
On April 30, first payment from April 1 subscribers
were received
April 1 Subscription Receivable - Ordinary 10,000
 Subscribed Share Capital – Ordinary Collection of bid and issuance of shares
10,000
On July 1, AB’s payment for the delinquent shares
Received subscription for 200 ordinary were received and shares were issued
shares at par value
July 1 Cash 4,775
Due from Highest Bidder
Apr 30 Cash 3,750 4,550
Subscription Receivable – Ordinary Interest Income
3,750 225
Collected first payment from Apr 1 To close the balance of delinquent shares
subscriptions
Interest is based on a 6% rate for delinquent
Default on subscription payment shares
On May 31, C defaulted in payment. The shares
were offered in a public auction and the following
Subscribed Share Capital-Ordinary 10,000
bids were received:
Share Capital-Ordinary
AA made a bid for 180 shares
10,000
AB made a bid for 150 shares
Issued shares to C for 50 shares and 150
AC made a bid for 160 shares shares for AB

Selling Costs for the Public Auction amounted to Case 2: No bidder

P800
In case there is no bidder, the corporation may bid
Analysis: and reacquire the shares

The highest bidder will be AB since he is June 30 Treasury Shares

willing to pay for the least amount of shares. He 4,550
will now pay the defaulted amount plus interest
Due from Highest Bidder
and selling costs.
4,550
Recording of bid and payment of selling costs
Reacquisition of delinquent shares
On June 30, delinquent shares were offered to the
public
Subscribed Share Capital-Ordinary 10,000
June 30 Due from Highest Bidder 3,750
Share Capital-Ordinary
Subscription Receivable – Ordinary 10,000
3,750
Issued shares to the corporation
To close the balance of delinquent shares
In this case, no shares will be issued to the
Due from Highest Bidder 800 defaulting subscriber.
Cash 800 Treasury shares
Charge bidder for payment of selling costs
at the public auction
 ✗ Shares previously issued and subsequently
reacquired
✗ Reduces the Assets and Shareholder’s
Equity by the same amount
✗ No voting rights and Dividend Rights
✗ Ways of Reacquiring:
✗ Right of redemption
✗ Purchasing the stock in an open
market
✗ Donation
✗ This is a contra-equity account
✗ Reacquisition of shares is limited only to the
available retained earnings. e.g. Retained
Earnings is P50,000, shares can only be
reacquired up to P50,000.
✗ Retained Earnings are appropriated for all
treasury shares. This will be restricted and
not available for dividend distribution. Such
restriction will only be reversed if the
treasury shares are resold or retired. If a
total of 12,000 shares were reacquired,
entry for appropriation is as follows:
Retained Earnings 12,000
Appropriated Retained Earnings-
Treasury 12,000
Appropriation of retained earnings
Why repurchase stocks?
✗ This can be resold at a reasonable price,
below par or above par as fixed by the
Board.
✗ This can be used for compensation to
employees
✗ Rate of Return may be improved because of
lesser outstanding shares
✗ It can be retired
✗ It shows that the corporation has more than
adequate resources to fund its own
operations without shareholder investment.
Recording of Treasury shares
Cost Method
Regardless of whether the shares are par value or
no par value shares, treasury shares are recorded
at the amount paid by the corporation.
Example: AA Corp has issued 40,000 shares for a
total Share Capital of P1,000,000 and Share
Premium of P50,000. Retained Earnings is at
P20,000. 400 shares with par value of P25 and
issued for P35 were reacquired by the corporation
at P30.
Treasury Shares 12,000
Cash 12,000
Repurchase of 400 shares at P30/sh
Example: Of the 400 shares reacquired, 200 shares
were sold again above cost for P32.
Cash(200 x P32) 6,400
Treasury Shares(200 x P30) 6,000
Share Premium-Treasury Shares
400
Resell of 200 shares at P32/sh
Example: Of the 400 shares reacquired, 100 shares
were sold again below cost for P20.
Cash(100 x P20) 2,000
Share Premium-Treasury Shares 400
Retained Earnings 600
Treasury Shares(100 x P30) 3,000
Resell of 100 shares at P20/sh
Reselling below cost: Amount in difference of cost
and resell price should be debited first to Share
Premium from Treasury Stocks until it is zero and
the remaining to Retained Earnings
Example: Of the 400 shares reacquired, 100 shares ✗ The shares reduce the number of
were retired. authorized shares by the company
Share Capital(100 x P25) 2,500 ✗ If the intention of the company in
Share Premium 125 reacquiring its shares is to immediately
retire or cancel the shares, Share Capital
Retained Earnings 375 should be debited instead of Treasury
Treasury Shares(100 x P30) 3,000 Shares

Retirement of 100 shares ✗ If the treasury stock is no par with stated

Share Premium is computed based on the
proportion of retired shares to the issued shares:
2,500/1,000,000 x 50,000
Retirement:
✗ Share Capital at par > Treasury at cost,
credit difference to Share Premium-Retired
Shares
✗ Share Capital at par < Treasury at cost,
difference to:
✗ First to Share Premium of original
issuance, proportionately
✗ Then to Share Premium-Treasury
Shares
value, its acquisition as treasury shares is
recorded at cost price. When retired, Share
Capital is also debited at cost price.
Recording of retirement of shares
Example: There are 25,000 shares issued, P20 par,
with a corresponding Share Premium of P75,000.
The company purchased and immediately retired
2,500 shares at P26.
Share Capital(2,500sh x P20) 50,000
Share Premium 7,500
Retained Earnings 7,500
Cash(2,500 x P26) 65,000
Retirement of 2,500 shares

✗ Lastly to Retained Earnings Share Premium is computed based on the

Par Value Method
Treasury shares are recorded at par
Example: 400 shares with par value of P25 and
issued for P35 were reacquired by the corporation
at P30.
proportion of retired shares to the issued shares:
50,000/500,000 x 75,000
Example: There are 25,000 shares issued, P20 par,
with a corresponding Share Premium of P75,000.
The company purchased and immediately retired
6,000 shares at P16.

Treasury Shares 10,000 Share Capital(6,000sh x P20) 120,000

Share Premium 2,000 Cash(6,000 x P16) 96,000

Cash 12,000 Share Premium-Retired Shares

24,000
Repurchase of 400 shares at P30/sh
Retirement of 6,000 shares
Donated capital
Retired shares
✗ Shares
✗ Repurchased and canceled by a corporation
 ✗ Refer to shares received by the Paid-in Capital from Donated Stock
corporation by way of donation from 1,500,000
shareholders.
Received land as donation from Love
✗ Memorandum entry upon receipt of Foundation
donation Paid-in Capital from Donated Stock 45,000
✗ Upon sale, a debit to Cash and Cash 45,000
Credit to Donated Share Capital
Paid taxes
✗ It represents an increase in
Additional Paid-In Capital when sold

✗ Assets

✗ Refer to assets received by the

corporation by way of donation from
shareholders or some other parties.

✗ Recorded at Fair Market Value

(FMV) at receipt of donation

✗ All expenditures related to donation

is a decrease to donated capital
Recording of donated shares
Example: On June 25, there are 200 shares
received from shareholder AC. On July 3, these
were sold for P50/sh.
June 25 Memorandum Entry:
Received 200 shares in way of donation from
shareholder AC
July 3 Cash 10,000
Donated Share Capital
10,000
Sold donated shares
Example: On June 25, Love Foundation donated a
piece of land to Heart Corporation. The land has a
FMV of P1,500,000 and taxes amounting to
P45,000 were paid.
June 25 Land
1,500,000