Corporation
As defined by Section 2 of R.A. 11232 also known as the
“Revised Corporation Code of the Philippines”, “A
corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes, and
properties expressly authorized by law or incidental to its
existence.”
Characteristics of a Corporation
1) Separate legal entity – artificial being. A corporation
has a personality separate from that of its individual
owners. Thus, it may, under its corporate name, take, hold
or convey property to the extent allowed by law, enter
into contracts, and sue and be sued.
2) Created by operation of law. A corporation is generally
created by operation of law. It cannot be formed by just
mere agreement of the parties.
3) Right of succession. Irrespective of the death,
withdrawal, insolvency, or incapacity of the individual
members or shareholders, and regardless of the transfer of
their interest or share capital, a corporation can continue
its existence in perpetuity unless otherwise a shorter
period of existence is stated in the articles of
incorporation.
4) Power, attributes, properties authorized by law. A
corporation has only the power, attributes and properties
expressly authorized by law or incidental to its existence.
Being a mere creation of law, a corporation can only
exercise powers provided by law and those powers which
are incidental to its existence.
5) Ownership divided into shares. Proprietorship in a
corporation is divided into units known as share capital.
The buyers of this share capital are called shareholders or
stockholders and are considered owners of the business.
6) Board of directors. Management of the business is
vested in board of directors elected by the shareholders.
The board of directors is the governing body or decision-
making body of the corporation. The Revised Corporation
Code provides that the number of directors shall not be
more than fifteen (15), or if non-stock, the number of
trustees may be more than fifteen.
Advantages of a Corporation
1) The corporation’s power of succession enables it to enjoy
a continuous existence.
2) The continuity of corporate existence enables it to obtain
a strong credit line.
3) Large scale business undertakings are made possible
because many individuals can invest their funds in the
enterprise. This still holds true even if it is a One-Person
Corporation since that sole stockholder can decide to
invite investors without ending the life of the corporation.
4) The liability of its investors or shareholders is limited to
the extent of their investment in the corporation.
5) The transfer of shares can be effected without the need for
prior consent of other shareholders.
6) Its smooth operation is guaranteed because of centralized
management.
Disadvantages of a Corporation
1) It is not easy to organize because of complicated legal
requirements and high costs in its organization.
2) The limited liability of its shareholders may weaken its
credit capacity.
3) It is subject to rigid governmental control.
4) It is subject to more taxes.
5) Its centralized management restricts a more active
participation by shareholders in the conduct of corporate
affairs.
Classification of Corporation
1) As to Membership Holdings
a) Stock Corporation – a private corporation in which
the capital is divided into shares of stock and is
authorized to distribute corporate earnings to holders
on the basis of shares held. The owners of a stock
corporation are called stockholders or shareholders.
i. A stock corporation with only one incorporator
is called a One Person Corporation.
ii. A stock corporation with that is not a One
Person Corporation is called an Ordinary Stock
Corporation.
b) Non-stock Corporation – a private corporation in
which capital comes from fees paid by individuals
composing it. The owners of a non-stock corporation
are called members. This may be formed or
organized for charitable, religious, educational,
professional, cultural, recreational, fraternal, literary,
scientific, social civic services, or similar purposes.
2) As to Purpose
a) Public Corporation – a corporation that is organized
to govern a portion of the state (e.g. municipalities,
provinces).
b) Private Corporation – a corporation that is organized
for a private benefit, aim or end.
c) Quasi-public Corporation – a private corporation
which is given a franchise to perform functions of a
public character. Classified under this type are the
so-called public utility corporations such as
MERALCO and PLDT.
3) As to Compliance of Law
a) De Jure Corporation – a corporation which exists in
both law and fact. It exists in law because it has
complied with all the legal requirements; it exists in
fact because it actually operates as a corporation.
b) De Facto Corporation – a corporation which exists
only in fact but not in law. It does not exist in law
because of non-compliance with certain legal
requirements.
4) As to Law of Creation
a) Domestic Corporation – a corporation that is
organized under Philippine laws.
b) Foreign Corporation – a corporation that is
organized under the laws of other countries.
5) As to Extent of Membership
a) Open Corporation – a corporation whose ownership
is widely held by many investors, usually a private
stock corporation.
b) Close Corporation – a corporation whose shares of
stock are owned by a specified number of persons
(not exceeding 20), usually select members of a
family.
Components of a Corporation
1) Incorporators
- Incorporators are those stockholders or members
mentioned in the articles of incorporation as
originally forming and composing the corporation
and who are signatories thereof. Any person,
partnership, association or corporation, singly or
jointly with others but not more than fifteen (15) in
number, may organize a corporation for any lawful
purpose or purposes. Provided, that incorporators
who are natural persons must be of legal age.
2) Corporators
- They are those who compose a corporation, whether
as stockholders or shareholders in a stock
corporation or as members in a non-stock
corporation.
3) Stockholders or shareholders
- They are the corporators of a stock corporation.
4) Members
- They are the corporators of a non-stock corporation.
5) Promoters
- They are the persons who undertake to (a) form a
company based on a given project, (b) set it going,
and (c) take the necessary steps to accomplish the
purpose for which the corporation is organized.
6) Subscribers
- They are the persons who have agreed to take
original, unissued shares but will pay at a later date.
They may be incorporators or not and they may
eventually become shareholders the moment the full
payment of their subscriptions is made.
7) Underwriters
- They are those who undertake to dispose of the
shares to the general public.
Formation of a Corporation
1) Conceptualization or Promotion Stage – the incorporators
make preliminary arrangements to set up a tentative
working organization and to solicit subscriptions to raise
sufficient capital for the business.
2) Incorporation Stage – the process of formalizing the
organization of the corporation. This stage includes
drafting of the articles of incorporation, filing of the
articles of incorporation with the Securities and Exchange
Commission (SEC), and the issuance by SEC of a
certificate of incorporation. Note that unlike the old
Corporation Code, the Revised Corporation Code does
not require stock corporations to have a minimum capital
stock, minimum subscribed capital and minimum paid-up
capital.
3) Commencement Stage – the business should start its
operations within five (5) years from incorporation,
otherwise, its certificate of incorporation shall be deemed
revoked as of the day following the end of the five-year
period.
Article of Incorporation – enumerate the powers and
limitations conferred upon the corporation
By Laws – supplement the articles of incorporation. It
contains provisions for the internal administration of the
corporation
Corporate Records
1) Minutes book
2) Stock and transfer book
3) Books of accounts
4) Financial statements
Share Capital (Capital Stock)
 It is the amount fixed by the corporate charter to be
subscribed and paid in or secured to be paid in by the
shareholders of a corporation either in money or in
property, labor or services upon the organization of the
corporations or afterwards; and upon which it is to
conduct its operations.
Classes of Share Capital
 A corporation may issue two classes of share capital,
namely, ordinary share capital (common stock) and
preference share capital (preferred stock).
 When a single class of share capital is issued, it is an
ordinary share capital. Ordinary share capital entitles the
 holder to an equal or pro-rata division of profits without
any preference or advantage over any class of shares.
 Preference share capital, on the other hand, entitles the
holder to enjoy priority as to distribution of dividends
and distribution of assets upon corporate liquidation.
Dividends are corporate profits distributed to its
shareholders.
 Ordinary shares may be issued (1) with par, (2) without
par but with stated value, or (3) without par and without
stated value.
 Preference shares can only be issued either (1) with par,
or (2) without par but with stated value. Further, no-par
value shares shall be issued for a consideration of at
least P5.00.
Par Value Share Capital
 It has a nominal or face value stated on the face of the
stock certificate and in the articles of incorporation.
No-Par but with Stated Value Share Capital
 It has a nominal value stated in the articles of
incorporation but not on the face of the stock certificate.
No-Par, No Stated Value Share Capital
 It has no nominal value stated neither in the articles of
incorporation nor on the face of the stock certificate.
Preemptive Right
 It is shareholders’ right to maintain one’s ownership
interest in the corporation through purchase of
additional shares when new share capital is issued.
Legal Capital
 It is not an account title in corporation accounting. It is
the portion of the contributed capital that must remain in
the corporation to protect the interests of creditors. This
means, this cannot be returned to the shareholders, for
example as dividends, during the lifetime of the
corporation.
For par-value shares, total legal capital is equal to:
This means that we do not
Number of total issued shares xx
deduct the treasury shares.
This means that we ignore the
Add: Number of subscribed shares xx
subscriptions receivable, if any.
Total number of issued and
xx
subscribed shares
Multiplied by par-value per share xx
Legal Capital xx
As seen above, we do not include share premium in the
calculations.
For no-par-value shares, included in the legal capital is the
total consideration received from the issuance of the shares.
This means that for no-par-value shares with stated value, in
addition to the calculation above, we also include the share
premium or the payment in excess of the stated value.
Trust Fund Doctrine
 This is the basis of the concept of legal capital. It is not
enacted by law but is a legal principle that prohibits
corporations from returning or redistributing its legal
capital to its shareholders. Its purpose is to impose that
dividends should come from accumulated earnings, not
from capital.
Preference Share Capital (Preferred Stock)
 Before we proceed, it should be noted that the
preference on dividends does not necessarily mean that
preference shareholders are entitled to dividends every
year. This simply means that if dividends are declared,
they are to be paid first before the ordinary shareholders.
Variations of preference shares are as follows:
1) Cumulative preference shares – holders of this type are
entitled to receive dividends every year. If none is
declared for a particular year, the right to receive the
dividend shall accrue to next year. For example, this year,
dividends were declared but prior to this, there were 4
years with no dividend declaration. This means that there
are 4 years’ worth of dividends in arrears. So before the
ordinary shareholders are given their portion of the
dividends, the 4 years in arrears is paid first. Next, the
share of the preference shareholders for the year of
declaration is paid. With the remainder to be shared by the
ordinary shareholders. It should be noted, however, that
the liability for dividend, and the shareholders’ right to
receive such, is only acknowledged once there is dividend
declaration. Thus, the 4 years’ worth of dividends in
arrears is just noted, not recorded.
2) Non-cumulative preference shares – holders of this type
are only entitled to receive dividends on the years where
there is declaration. If there is no declaration, no
dividends in arrears are to be considered.
3) Participating preference shares – entitle holders to the
receipt of additional dividend after holders of both
preference and ordinary shares have been paid up to the
current year’s dividends (usually equal to the preference
percentage rate). The holders right to share in the extra
dividend depends on whether their preference shares are
fully participating or participating only up to a certain
amount of percentage.
4) Nonparticipating preference shares – entitle holders to
the receipt of dividends up to the current period only
(equal to the preference percentage rate). All extra
dividends are given to ordinary shareholders.
5) Convertible preference shares – entitle the holders the
option to exchange the shares from other securities of the
issuing corporation, normally ordinary shares.
6) Callable preference shares – entitles the issuing
corporation the right to buy-back or call the shares at a
specified price. In this type, the corporation determines
the time or date of redemption.
7) Redeemable preference shares – similar to a callable
preference share, except that the redemption is mandatory
and the date of redemption is fixed. Further, the holder
may have his/her share redeemed by the corporation at
his/her option.
Ordinary Share Capital (Common Stock)
 This represents residual ownership equity. The holders of
this class of share carry the greatest risk; however, they
ordinarily share in earnings to the greatest extent if the
corporation is successful. Although the right to vote is a
basic right of all shareholders, it is frequently given
exclusively to ordinary shareholders as long as dividends
are paid regularly to preference shareholders.
Authorized Share Capital
 This is the maximum number of shares (both preference
and ordinary shares) that a corporation may issue. This
is determined by multiplying the authorized shares by
the par or stated value of the share capital. Corporations
cannot issue shares more than the authorized shares
stated in the articles of incorporation. However, they
may increase their authorized shares and authorized
share capital by amending their articles of incorporation.
 Authorized share capital may be recorded under the
journal entry method or the memorandum entry method
(I personally recommend the memorandum method).
Memorandum Entry Method
Authorized to issue xxx shares of xxx share capital with a par
value of Pxxx.
Journal Entry Method
Unissued xxx Share Capital xxx
Authorized Share Capital xxx
Example: The Joyful Company was organized on January 1,
2020 with authorized capital as follows: 10,000 shares of 10%
preference share capital with a par value of P100 per share;
200,000 shares of ordinary share capital with a par value of
P10 per share.
Memorandum Entry Method
2020
Authorized to issue 10,000 shares of 10% preference share
Jan 1
capital with a par value of P100 per share
Authorized to issue 200,000 shares of ordinary share capital
with a par value of P10 per share
Journal Entry Method
2020
Jan 1 Unissued Preference Share Capital 1,000,000
Authorized Preference Share Capital 1,000,000
Unissued Ordinary Share Capital 2,000,000
Authorized Ordinary Share Capital 2,000,000
The amount recorded using the journal entry method is
obtained by multiplying the total number of authorized shares
by their par or stated value. Thus, this method is not applicable
for no-par, no stated value share capital.
Issuance of Share Capital
Shares may be issued in exchange of the following:
1) Cash
2) Non-Cash Assets
3) Services
4) Liability
5) Other Form of Securities
6) On Subscription Basis
Under the Revised Corporation Code, original share issuances
shall have a consideration of at least equal to par or stated
value. Consideration received above par or stated value is
credited to Share Premium. Consideration below par value,
that is for a discount, is prohibited.
Terms to consider:
a) Issued Shares – are shares that have been fully paid and
have been issued with a certificate of stock.
b) Treasury Shares – are issued shares but were
subsequently reacquired by the issuing corporation.
c) Outstanding Shares – are issued shares held by
shareholders. Simply, it is computed as issued shares less
treasury shares
d) Subscribed Shares – are shares that have been pledged to
be bought, or subscribed, but is not fully paid.
e) Subscription Receivable – is the amount still unpaid on
the subscribed shares. This is calculated by multiplying
the number of subscribed shares by the price per share
(may be equal to or more than par or stated value) less the
amount paid by the subscriber.
f) Watered Shares – are shares issued at a discount or
issued for inadequate or insufficient consideration or
consideration received less than oar value or stated value,
but share capital is issued as fully paid.
g) Secret Reserve – When the consideration received for
shares is understated, the share capital is said to contain
secret reserves.
 Issuance of Par Value Share and No-Par with Stated
Value Share (What will be shown in the following
sections will be for par value shares only. However, note
that this will also apply to no-par with stated value shares.
Note further that we will only show the entries for
memorandum entry method.)
Issuance for Cash
3: Fair value of land and shares cannot be reliably measured.
Land (at par value of shares – 10,000 × P10 ) 100,000
Ordinary Share Capital (10,000 × P10) 100,000
Issuance in Exchange for Services Rendered
When shares are issued in exchange of services rendered, the
hierarchy of measuring the shares issued are as follows:
1) Fair Value of Services Rendered
2) Fair Value of Shares Issued
3) Par Value of Shares Issued
The Happy Corporation issued 1,000 shares of its P10 par
ordinary share capital in payment for services of the lawyer
rendered during incorporation.

The Happy Corporation was organized on January 1, 2020 and
is authorized to issue 100,000 shares of P10 par value shares.
Subsequently, 25,000 shares were sold.
Case 1: Sold at par, or issuance price is P10.
Cash (25,000 × P10) 250,000
Ordinary Share Capital (25,000 × P10)
Case 2: The issuance price is P15 (above par).
Cash (25,000 × P15) 375,000
Ordinary Share Capital (25,000 × P10)
Ordinary Share Premium (25,000 × P5)
Issuance in Exchange for Non-Cash Assets or Property
When shares are issued in exchange of non-cash assets, the
hierarchy of measuring the shares issued are as follows:
1) Fair Value of Asset Received
2) Fair Value of Shares Issued
3) Par Value of Shares Issued
The Happy Corporation issued 10,000 shares of its P10 par
ordinary share capital in exchange for land.
Case 1: Fair value of land is P175,000.
Land (at fair value) 175,000
Ordinary Share Capital (10,000 × P10)
Ordinary Share Premium (175K – 100K)
Case 2: Fair value of land cannot be reliably measured. Fair
value of shares at the date of exchange is P15 per share.
Land (at fair value of shares – 10,000 × P15 ) 150,000
Ordinary Share Capital (10,000 × P10)
Ordinary Share Premium (150K – 100K)
Case 1: The services of the lawyer is valued at P25,000.
Organization Expense (at fair value) 25,000
Ordinary Share Capital (1,000 × P10) 10,000
Ordinary Share Premium (25K – 10K) 15,000
250,000 Case 2: Fair value of services cannot be reliably measured.
Fair value of shares at the date of exchange is P15 per share.
Organization Expense (at fair value – 1,000 × P15) 15,000
Ordinary Share Capital (1,000 × P10) 10,000
250,000 Ordinary Share Premium (15K – 10K) 5,000
125,000
Case 3: Fair value of services and shares cannot be reliably
measured.
Organization Expense (at par value – 1,000 × P10) 10,000
Ordinary Share Capital (1,000 × P10) 10,000
Issuance of Share Capital for Extinguishing Liability
When shares are issued for extinguishing liability, the
hierarchy of measuring the shares issued are as follows:
1) Fair Value of Shares Issued
2) Fair Value of Liability Extinguished
3) Carrying Amount of Liability Extinguished
100,000
The Happy Corporation issued 12,000 shares of its P10 par
ordinary share capital in exchange of its outstanding loan bank
75,000
loan of 130,000.
Case 1: Fair value of shares at the date of exchange is P15 per
share.
Loans Payable – bank (at carrying amount) 130,000
100,000 Loss on extinguishment of liability 50,000
50,000 Ordinary Share Capital (12,000 × P10) 120,000
Ordinary Share Premium (12,000 × P5) 60,000
Loss on extinguishment of liability is computed as: 5,000 × P15 = 75,000
Fair value of shares issued – Carrying amount of liability Note that subscription receivable is debited at subscription price.
(12,000 × P15) – 130,000 = 50,000
Ordinary Share Capital Subscribed is computed as:
Case 2: Fair value of shares cannot be reliably measured. Fair 5,000 × P10 = 50,000
value of loan is at P125,000. Note that this is credited at par value.
Loans Payable – bank (at carrying amount) 130,000
Ordinary Share Capital (12,000 × P10) 120,000 Ordinary Share Premium is computed as:
Ordinary Share Premium 5,000 5,000 × (P15 – P10) = 25,000
Gain on extinguishment of liability 5,000 Note that this is credited with the excess of the subscription price over
par value. Further, share premium is already recorded on the date of
subscription.
Ordinary Share Premium is computed as:
Fair value of liability – Par value of shares 2020
125,000 – (12,000 × P10) = 5,000 Jun 3 Cash (75,000 × 25%) 18,750

Ordinary Share Capital Subscription Receivable 18,750

Gain on extinguishment of liability is computed as:
Fair value of liability – Carrying amount of liability Jul 4 Cash (75,000 × 75%) 56,250
125,000 – 130,000 = (5,000) Ordinary Share Capital Subscription Receivable 56,250

Case 3: Fair value of shares and liability cannot be reliably

Ordinary Share Capital Subscribed 50,000
measured.
Ordinary Share Capital 50,000
Loans Payable – bank (at carrying amount) 130,000
Note that at the date of full payment, which is the date of
Ordinary Share Capital (12,000 × P10) 120,000
issuance, Ordinary Share Capital is credited at par. This is
Ordinary Share Premium 10,000
because, upon subscription, share premium has already been
recognized.
Issuance in exchange of other securities
Alternative entry on June 3, 2020:
This will be discussed in higher accounting subjects.
2020
Jun 3 Ordinary Share Capital Subscription Receivable 56,250
Sale of Share Capital on a Subscription Basis
Cash (75,000 × 25%) 18,750
Subscription is a contract between a subscriber (buyer of share Ordinary Share Capital Subscribed 50,000
capital) and a corporation (seller or issuer of share capital) Ordinary Share Premium 25,000
whereby the former purchases shares of stock of the latter with
the payment to be made at a later date. The corporation issues
the corresponding stock certificate upon full payment of  Issuance of No-Par, No Stated Value Share (Note that
subscription. This practice is a means of encouraging we will only show the entries for memorandum entry
subscribers to pay their unpaid subscription on time. method.)
When a share capital has no par value and no stated value,
On June 3, 2020, the Happy Corporation received subscription
the value assigned to the consideration received is the same
for 5,000 shares of its P10 par value ordinary share capital at
amount credited to the share capital account. Just remember
P15. A down payment of 25% was received and the balance
that no-par shares should not be issued below P5.
was paid in full on July 4, 2020.

2020
Issuance for Cash
Jun 3 Ordinary Share Capital Subscription Receivable 75,000 The Happy Corporation was organized on January 1, 2020 and
Ordinary Share Capital Subscribed 50,000 is authorized to issue 100,000 shares of nopar, no stated value
Ordinary Share Premium 25,000 ordinary shares. Subsequently, 25,000 shares were sold at P15.

Cash (25,000 × P15) 375,000

Ordinary Share Capital (25,000 × P15) 375,000

Ordinary Share Capital Subscription Receivable is computed as: Issuance in Exchange for Non-Cash Assets or Property
When shares are issued in exchange of non-cash assets, the
hierarchy of measuring the shares issued are as follows:
1) Fair Value of Asset Received
2) Fair Value of Shares Issued
3) Par Value of Shares Issued, but since the shares are
no-par, no-stated value, this one will be complicated
to determine. This will be discussed further in higher
accounting subjects.
The Happy Corporation issued 10,000 shares of its ordinary
share capital in exchange for land.
Case 1: Fair value of land is P175,000.
Land (at fair value) 175,000
Ordinary Share Capital
Case 2: Fair value of land cannot be reliably measured. Fair
value of shares at the date of exchange is P15 per share.
Land (at fair value – 10,000 × P15) 150,000
Ordinary Share Capital
Issuance in Exchange for Services Rendered
When shares are issued in exchange of services rendered, the
hierarchy of measuring the shares issued are as follows:
1) Fair Value of Services Rendered
2) Fair Value of Shares Issued
3) Par Value of Shares Issued, but since the shares are no-
par, no-stated value, this one will be complicated to
determine. This will be discussed further in higher
accounting subjects.
The Happy Corporation issued 1,000 shares of its ordinary
share capital in payment for services of the lawyer rendered
during incorporation.
Case 1: The services of the lawyer is valued at P25,000.
Organization Expense (at fair value) 25,000
Ordinary Share Capital
Case 2: Fair value of services cannot be reliably measured.
Fair value of shares at the date of exchange is P15 per share.
Organization Expense (at fair value – 1, 000 × P15) 15,000
Ordinary Share Capital
Issuance of Share Capital for Extinguishing Liability
When shares are issued for extinguishing liability, the
hierarchy of measuring the shares issued are as follows:
1) Fair Value of Shares Issued
2) Fair Value of Liability Extinguished
3) Carrying Amount of Liability Extinguished
The Happy Corporation issued 12,000 shares of its P10 par
ordinary share capital in exchange of its outstanding loan bank
loan of 130,000.
Case 1: Fair value of shares at the date of exchange is P15 per
share.
Loans Payable – bank (at carrying amount) 130,000
Loss on extinguishment of liability 50,000
Ordinary Share Capital (12,000 × P15) 180,000
Loss on extinguishment of liability is computed as:
Fair value of shares issued – Carrying amount of liability
12,000 × P15 – 130,000 = 50,000
175,000 Case 2: Fair value of shares cannot be reliably measured. Fair
value of loan is at P125,000.
Loans Payable – bank (at carrying amount) 130,000
Ordinary Share Capital (fair value of loan) 125,000
Gain on extinguishment of liability 5,000
150,000
Gain on extinguishment of liability is computed as:
Fair value of liability – Carrying amount of liability
125,000 – 130,000 = (5,000)
Case 3: Fair value of shares and liability cannot be reliably
measured.
Loans Payable – bank (at carrying amount) 130,000
Ordinary Share Capital 120,000
Issuance in exchange of other securities
This will be discussed in higher accounting subjects.
Sale of Share Capital on a Subscription Basis
Subscription is a contract between a subscriber (buyer of share
capital) and a corporation (seller or issuer of share capital)
whereby the former purchases shares of stock of the latter with
25,000
the payment to be made at a later date. The corporation issues
the corresponding stock certificate upon full payment of
subscription. This practice is a means of encouraging
subscribers to pay their unpaid subscription on time. The
difference between shares with par or stated value, and no-par,
15,000 no stated value shares is that the whole subscription price is
credited to share capital account.
On June 3, 2020, the Happy Corporation received subscription
for 5,000 shares of its no-par, no stated value ordinary share
capital at P15. A down payment of 25% was received and the
balance was paid in full on July 4, 2020.
2020
Jun 3 Ordinary Share Capital Subscription Receivable 75,000 Jun 15 Ordinary Share Capital Subscription Receivable 30,000

Ordinary Share Capital Subscribed 75,000 Ordinary Share Capital Subscribed 20,000

Ordinary Share Premium 10,000

Ordinary Share Capital Subscription Receivable is computed as:

5,000 × P15 = 75,000 Cash (30,000 × 60%) 18,000

Note that subscription receivable is debited at subscription price. Ordinary Share Capital Subscription Receivable 18,000

2020 Aug 31 Receivable from Highest Bidder 12,000

Jun 3 Cash (75,000 × 25%) 18,750 Ordinary Share Capital Subscription Receivable 12,000
Ordinary Share Capital Subscription Receivable 18,750

Sep 6 Receivable from Highest Bidder 500

Jul 4 Cash (75,000 × 75%) 56,250 Cash 500
Ordinary Share Capital Subscription Receivable 56,250

Sep 21 Cash 12,500

Ordinary Share Capital Subscribed 75,000 Receivable from Highest Bidder 12,500
Ordinary Share Capital 75,000

Ordinary Share Capital Subscribed 20,000

Note that at the date of full payment, which is the date of
issuance, Ordinary Share Capital is credited at subscription
price. This is because, when it comes to no-par, no stated
value share capital, no share premium is recognized.
Alternative entry on June 3, 2020:
2020
Jun 3 Ordinary Share Capital Subscription Receivable
Cash (75,000 × 25%)
Ordinary Share Capital Subscribed
Ordinary Share Capital 20,000
Note that in this case, the whole 2,000 shares were issued,
with 1,500 going to the highest bidder and the remaining 500
shares going to the defaulting subscriber. It should also be
noted that what was auctioned were the entire 2,000 shares,
56,250
not just the unpaid 40% or 2,000 × 40% = 800 shares. Due to
his delinquency, the defaulting subscriber only received 500
18,750
shares instead of the 60% he has paid or 2,000 × 60% = 1,200
75,000
shares.

Subscription Defaults Case 2: There were no highest bidder in the auction, that is, no
one was willing to pay for the 12,500 offer price. Thus, the
When a subscriber fails to pay his obligations after the
auctioned was terminated on September 21 with the
corporation has sent several notices to him, his subscribed
corporation paying for the offer price. Offer price here pertains
shares are declared delinquent shares. His subscription is
to the remaining receivable, plus interest on the receivable if
declared delinquent subscription. Such delinquent subscription
any, plus costs incurred to auction the delinquent shares.
is then offered for sale in a public auction and delinquent
shares are issued to the highest bidder. The highest bidder is
2020
the one who is willing to pay the unpaid subscription plus any
Jun 15 Ordinary Share Capital Subscription Receivable 30,000
expense incurred in connection with the delinquency sale and
Ordinary Share Capital Subscribed 20,000
is willing to receive the least number of shares.
Ordinary Share Premium 10,000

On June 15, 2020, the Happy Corporation received

subscription for 2,000 shares of its P10 par value ordinary Cash (30,000 × 60%) 18,000

share capital at P15. A down payment of 60% was received. Ordinary Share Capital Subscription Receivable 18,000
The final payment was due on August 15, 2020, but in spite of
the several notices sent to the subscriber, no payment has been Aug 31 Receivable from Highest Bidder 12,000
received. On August 31, the subscription was declared Ordinary Share Capital Subscription Receivable 12,000
delinquent and was offered for sale in public auction. On
September 6, expenses of P500 were incurred on connection Sep 6 Receivable from Highest Bidder 500
with the delinquency sale. Cash 500

Case 1: On September 21, the highest bidder was determined

Sep 21 Treasury Capital 12,500
and payment for 1,500 shares was received.
Receivable from Highest Bidder 12,500

2020
 Ordinary Share Capital Subscribed
Ordinary Share Capital
As seen here, all entries were just the same as with a highest
bidder. The only difference is the first entry on September 21.
What this means is that, the corporation has acquired the
whole 2,000 shares by paying the total offer price. Since this is
the case, no shares will be given to the defaulting subscriber.
Discussion for treasury shares, or shares already issued and
reacquired by the company, will be given on later discussions.
If you ask why were the shares still issued (as indicated by the
second entry on September 21), this is pursuant to the law
which states that if there is no highest bidder, the company
may pay the offer price and enter the transaction as that of
treasury shares.
Incorporation of a Partnership (With Goodwill)
If a partnership is incorporated, it is assumed that the old
partnership was purchased by the new corporation. If the total
market value of the shares issued to acquire the total assets of
the partnership net of its total liabilities (also known as total
net assets), there is Goodwill. Note that Goodwill is reflected
as a noncurrent asset and is not amortized. Instead, it will be
subjected for impairment testing annually. Impairment occurs
when the total book value of net assets is less than its market
value or recoverable amount. Impairment will be discussed in
higher accounting subjects.
20,000 The corporation is organized as the Winner Corporation and is
20,000 authorized to issue 100,000 shares of ordinary share capital,
par value P10. Twenty-five thousand (25,000) shares are sold
for P20. The corporation takes over the partnership assets
other than cash and assumes partnership liabilities in exchange
for 12,000 shares.
The following adjustments are to be made before taking over
the net assets:
a) The inventories are to be stated in their market value of
45,000.
b) The allowance for uncollectible accounts is to be
increased to P5,400.
c) Equipment is to be recorded at its current value of
P120,000.
The ordinary shares will be distributed as follows: Roberto,
9,000 shares; Remedios, 3,000 shares. Cash will be distributed
on the capital balances of the partners after distribution of the
shares. The ordinary share capital is selling at P15 per share on
this date.
Case 1: The books of the partnership will be used by the new
corporation.
Step 1 - Revalue the net assets of the partnership.
Merchandise Inventory (P45,000 – P25,500) 19,500
Accumulated Depreciation (to be reduced at 0) 30,000
Equipment (P120,000 – P90,000) 30,000

Allowance for Uncollectible Accounts (P5,400 – 3,000) 2,400

Roberto and Remedios are partner sharing profits and losses in
Roberto, Capital 46,260
the ratio of 3:2. They decided to retire from active
Remedios, Capital 30,840
participation in their business so they form a corporation to
take over the net assets of the partnership. The statement of
financial position of the partnership just prior to incorporation Net Revaluation is:
on January 1, 2020 is presented below. 19,500 + 60,000 – 2,400 = 77,100
Share of Roberto:
3
Roberto and Remedios Partnership
Statement of Financial Position 77,100 × =46,260
Januray 1, 2020 5
Share of Remedios:
Assets
Cash 45,000 2
Accounts Receivable 75,000 77,100 × =30,840
Less: Allowance for Doubtful Accounts 3,000 72,000 5
Merchandise Inventory 25,500
Equipment 90,000
Less: Accumulated Depreciation 30,000 60,000 Step 2 - Recognize Goodwill. This will increase capital
Total Assets 202,500
balances of partners.
Liabilities and Equity
Accounts Payable 60,000 Goodwill 20,400
Accrued Expenses Payable 15,000
Total Liabilities 75,000 Roberto, Capital 12,240
Roberto, Capital 90,000
Remedios, Capital 37,500 Remedios, Capital 8,160
Total Equity 127,500
Total Liabilities and Equity 202,500
 Case 2: New books are opened for the corporation.
Goodwill is computed as follows:
Net asset before adjustments (equal to equity) 127,500
Add: Net adjustment (Step 1) 77,100
Recorded in Partnership Books
Net asset after adjustment 204,600
Less: Cash (not included in the purchased business) 45,000 Step 1 - Revalue the net assets of the partnership.
Net assets excluding cash 159,600
Merchandise Inventory (P45,000 – P25,500) 19,500
Market value of shares issued 180,000
Accumulated Depreciation (to be reduced at 0) 30,000
Net assets excluding cash 159,600
Goodwill 20,400 Equipment (P120,000 – P90,000) 30,000

Allowance for Uncollectible Accounts (P5,400 – 3,000) 2,400

Roberto, Capital 46,260

Note that the rule on issuance of shares in exchange for non-
Remedios, Capital 30,840
cash assets does not apply to this. The reason is that, this is an
acquisition of a business and is governed by a different
accounting standard. Net Revaluation is:
19,500 + 60,000 – 2,400 = 77,100
Share of Roberto: Share of Roberto:
3
20,400 × 60% = 12,240 77,100 × =46,260
5
Share of Remedios:
Share of Remedios:
20,400 × 40% = 8,160
2
77,100 × =30,840
5
Step 3 - Record authorized share capital.
Authorized to issue 100,000 shares of P10 par value Step 2 - Recognize Goodwill. This will increase capital
ordinary share capital. balances of partners.
Goodwill 20,400
Step 4 - Record the issuance of share capital to partners.
Roberto, Capital 12,240

Roberto, Capital (9,000 × P15) 135,000 Remedios, Capital 8,160

Remedios, Capital (3,000 × P15) 45,000

Ordinary Share Capital (12,000 × P10) 120,000

Ordinary Share Capital [12,000 × (P15- P10)] 60,000 Goodwill is computed as follows:
Net asset before adjustments (equal to equity) 127,500
Add: Net adjustment (Step 1) 77,100
Step 5 - Record distribution of cash to partners based on Net asset after adjustment 204,600
Less: Cash (not included in the purchased business) 45,000
remaining capital balances. Net assets excluding cash 159,600

Roberto, Capital 13,500 Market value of shares issued 180,000

Net assets excluding cash 159,600
Remedios, Capital 31,500
Goodwill 20,400
Cash 45,000

Note that the rule on issuance of shares in exchange for non-

Roberto Remedios Total
Capital balances before adjustments 90,000 37,500 127,500 cash assets does not apply to this. The reason is that, this is an
Net adjustments 46,260 30,840 77,100
acquisition of a business and is governed by a different
Goodwill 12,240 8,160 20,400
Debit for share issuance -135,000 -45,000 -180,000 accounting standard.
For cash distribution 13,500 31,500 45,000

Step 3 - Record the receipt of share capital from the new

Step 6 - Record the issuance of ordinary shares to other corporation.
incorporators. Investment in Equity Instruments – Winner 180,000

Cash (25,000 × P20) 500,000 Accounts Payable 60,000

Ordinary Share Capital (25,000 × P10) 250,000 Accrued Expenses Payable 15,000

Ordinary Share Capital [25,000 × (P20- P10)] 250,000 Allowance for Uncollectible Accounts (P3,000 + P2,400) 5,400

Accounts Receivable 75,000

Merchandise Inventory (P25,500 + 19,500) 45,000

Equipment (P90,000 + P30,000) 120,000

Goodwill 20,400
Step 4 - Record the distribution of share capital to partners.
Roberto, Capital (9,000 ×P15) 135,000
Remedios, Capital (3,000 × P15) 45,000

Cash 180,000

Step 5 - Record distribution of cash to partners based on

remaining capital balances.
Roberto, Capital 13,500
Remedios, Capital 31,500

Cash 45,000

Roberto Remedios Total

Capital balances before adjustments 90,000 37,500 127,500
Net adjustments 46,260 30,840 77,100
Goodwill 12,240 8,160 20,400
Debit for share issuance -135,000 -45,000 -180,000
For cash distribution 13,500 31,500 45,000

Recorded in New Corporation Books

Step 1 - Record authorized share capital of corporation.
Authorized to issue 100,000 shares of P10 par value
ordinary share capital.

Step 2 - Recognize issuance of share capital in exchange for

the net assets of the partnership.
Accounts Receivable 75,000
Merchandise Inventory 45,000

Equipment 120,000

Goodwill 20,400

Accounts Payable 60,000

Accrued Expenses Payable 15,000

Allowance for Doubtful Accounts 5,400

Ordinary Share Capital (12,000 × P10) 120,000

Ordinary Share Capital [12,000 × (P15- P10)] 60,000

Step 3 - Record the issuance of share capital to other

incorporators.
Cash (25,000 × P20) 500,000
Ordinary Share Capital (25,000 × P10) 250,000

Ordinary Share Capital [25,000 × (P20- P10)] 250,000