INTERMEDIATE ACCTG 2 (by:

MILLAN)
Introduction
• The Philippine Corporation Code defines a corporation as “an
artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.”
• A corporation is formed by at least 5 but not exceeding 15
natural persons, all of legal age and a majority of whom are
residents of the Philippines.
• The entity’s articles of incorporation must be authorized by
the Securities and Exchange Commission (SEC).

INTERMEDIATE ACCTG 2 (by:

MILLAN)
 Introduction (Continuation)
• The articles of incorporation states, among other things, the entity’s
authorized capital stock, which is the maximum number of shares that
the entity can issue. Any excess share issued is deemed illegal. In order
to issue shares in excess of the authorized capital stock, the entity must
amend its articles of incorporation.
• To amend the articles of incorporation, a majority vote of the board
plus a vote by shareholders representing at least two-thirds (2/3) of
the outstanding share capital is needed. After ratification, the
amended articles of incorporation are filed with the SEC and shall
become effective only upon approval by the SEC.
• At least 25% of the entity’s authorized capitalization should be
subscribed and at least 25% of the total subscription must be paid upon
subscription. In no case shall the paid-up capital be less than five
thousand pesos (₱5,000).
INTERMEDIATE ACCTG 2 (by:
MILLAN)
Components of Stockholders’ Equity

INTERMEDIATE ACCTG 2 (by:

MILLAN)
• The following transactions affect the accounting for a
corporation’s equity:
1. Authorization, subscription, issuance, acquisition,
reissuance and retirement of shares
2. Origination of other equity instruments, such as share
options, detachable warrants, and equity component of
compound financial instruments.
3. Distributions to owners
4. Transactions giving rise to “other components of equity”
5. Recapitalization and Quasi-reorganization

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Accounting for share capital

1. Memorandum method - Only a memorandum is made for the

authorized capitalization. Subsequent issuances of shares are
credited to the share capital account.

2. Journal entry method - The authorized capitalization is

recorded by crediting “authorized share capital” and debiting
“unissued share capital.” Subsequent issuances of shares are
credited to “unissued share capital.”

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Classes of share capital

• Share capital is basically classified into two, namely:

1. Ordinary share capital (common stock); and
2. Preference share capital (preferred stock).

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Four basic rights of ordinary shareholders

1. Right to attend and vote in shareholders’ meetings

2. Right to purchase additional shares (also known as
preemptive 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

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Share premium

• Share premium (additional paid-in capital) arises from various

sources which include the following:
1. Excess of subscription price over par value or stated value.
2. Excess of reissuance price over cost of treasury shares issued.
3. Issuance or origination of other equity instruments, such as share
options, detachable share warrants, and equity components of
compound financial instruments.
4. Distribution of “small” stock dividends.
5. Quasi-reorganization and recapitalization.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Legal capital

• Legal capital is the portion of contributed capital that cannot

be distributed to the owners during the lifetime of the
corporation unless the corporation is dissolved and all of its
liabilities are settled first. Legal capital is computed as follows:
1. For par value shares, legal capital is the aggregate par value
of shares issued and subscribed.
2. For no-par value shares, legal capital is the total
consideration received or receivable from shares issued or
subscribed. Total consideration refers to the subscription price
inclusive of any amount in excess of stated value.
INTERMEDIATE ACCTG 2 (by:
MILLAN)
Share issuance costs

• “The transaction costs of an equity transaction are

accounted for as a deduction from equity to the
extent they are incremental costs directly
attributable to the equity transaction that otherwise
would have been avoided.” (PAS 32.7)

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Treasury shares

• Treasury shares (treasury stocks) are an entity’s own shares that

were previously issued but are subsequently reacquired but not
retired. Under the Corporation Code, an entity may reacquire its
previously issued shares only if it has sufficient unrestricted
retained earnings.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Accounting for treasury shares

• The cost method is used in accounting for treasury

share transactions. Under this method, the reacquisition
and subsequent reissuance of treasury shares are
recognized and derecognized, respectively, at cost.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
INTERMEDIATE ACCTG 2 (by:
MILLAN)
Retirement of shares

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Stock rights

• Stock rights are issued to existing ordinary shareholders in

relation to their preemptive rights. The stock rights enable
existing shareholders to protect their current ownership
interests by acquiring new shares issued by the corporation
before such shares are offered to new investors.
• Stock rights are recorded through memo entry only because
stock rights are issued to existing shareholders without
consideration. An entry is made only when the rights are
exercised or recalled.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Donated capital
1. Donation from shareholders – recognized directly in equity
(i.e., credited to share premium).
2. Donation from the government – recognized as government
grant (see discussion in Intermediate Financial Accounting Part
1B).
3. Donation from other sources – recognized in profit or loss (i.e.,
income) when (a) the conditions attached to the donation are
fulfilled or reasonably expected to be fulfilled, (b) the donation
becomes receivable, and (c) the criteria for asset recognition is met.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Donated capital (Continuation)

• Cash – recognized at the amount of cash received or receivable.

• Noncash assets – recognized at the fair value of the noncash
assets
• Entity’s own shares – initially recorded through memo entry.
Donated capital is recognized only when the donated shares are
subsequently reissued. This is because no asset is generated
from the donated shares until they are subsequently reissued. If
the donated shares are not to be resold, the entity should effect
a formal reduction of its authorized capital by retiring the
shares received.
INTERMEDIATE ACCTG 2 (by:
MILLAN)
INTERMEDIATE ACCTG 2 (by:
MILLAN)