Corporation

Corporation defined:
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 exists
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 my may 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 nonstock 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 incorp 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. On the other hand, 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
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:
Number of total issued shares* xx
Add: Number of subscribed shares** xx
Total number of issued and subscribed shares xx
Multiplied by par-value per share xx
Legal Capital xx
 *This means that we do not deduct the treasury shares
**This means that we ignore the subscriptions receivable, if any

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 non 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 are just noted, not
recorded.
2. Non-cumulative preference shares – holders of this type are only entitled to received 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.

There are different combinations that can be formed from the four types mentioned above. This
will be discussed further in the next chapter.
 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
Jan 1 Authorized to issue 10,000 shares of 10% preference share 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

Note that 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

Note that 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:
Issued Shares – shares that have been fully paid and have been issued with a certificate of stock.
Treasury Shares – are issued shares but were subsequently reacquired by the issuing corporation.
Outstanding Shares – are issued shares held by shareholders. Simply, it is computed as issued shares less
treasury shares
Subscribed Shares – are shares that have been pledged to be bought, or subscribed, but is not fully paid
Subscription Receivable – this 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.
Watered Shares – 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.
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

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 x 10) 250,000
Ordinary Share Capital (25,000 x 10) 250,000

Case 2: The issuance price is P15 (above par)

Cash (25,000 x 15) 375,000
Ordinary Share Capital (25,000 x 10) 250,000
Ordinary Share Premium (25,000 x (15-10)) 125,000

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

Example:
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 x 10) 100,000
Ordinary Share Premium (175,000 – 100,000) 75,000

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 x 15) 150,000
Ordinary Share Capital (10,000 x 10) 100,000
Ordinary Share Premium (150,000 – 100,000) 50,000

Case 3: Fair value of land and shares cannot be reliably measured.

Land (at par value of shares – 10,000 x 10) 100,000
Ordinary Share Capital (10,000 x 10) 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

Example:
The Happy Corporation issued 1,000 shares of its P10 par 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 (1,000 x 10) 10,000
Ordinary Share Premium (25,000 – 10,000) 15,000

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 of shares – 1,000 x 15) 15,000
Ordinary Share Capital (10,000 x 10) 10,000
Ordinary Share Premium (150,000 – 100,000) 5,000

Case 3: Fair value of services and shares cannot be reliably measured.

Organization Expense (at par value of shares – 1,000 x 10) 10,000
Ordinary Share Capital (1,000 x 10) 10,000

Issuance of Share Capital for Extinguishing Liability

When shares are issued in exchange of services rendered, 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

Example:
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 x 10) 120,000
Ordinary Share Premium (12,000 x (15-10)) 60,000
*Fair value of shares issued – Carrying amount of liability = 12,000 x 15 – 130,000 = 50,000
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 (12,000 x 10) 120,000
Ordinary Share Premium* 5,000
Gain on extinguishment of liability** 5,000
* Fair value of liability – Par value of shares = 125,000 – 12,000 x 10 = 5,000
**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 (12,000 x 10) 120,000
Ordinary Share Premium (130,000 – 120,000) 10,000

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 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.

Example:
On June 3, 2020, the Happy Corporation received subscription for 5,000 shares of its P10 par 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
June 3 Ordinary Share Capital Subscription Receivable* 75,000
Ordinary Share Capital Subscribed** 50,000
Ordinary Share Premium*** 25,000

*5,000 x 15 = 75,000, note that subscription receivable is debited at subscription price.

**5,000 x 10 = 50,000, note that this is credited at par value
***5,000 x (15-10) = 25,000, 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.

Cash (75,000 x 25%) 18,750

Ordinary Share Capital Subscription Receivable 18,750

July 4 Cash (75,000 x 75%) 56,250

Ordinary Share Capital Subscription Receivable 56,250

Ordinary Share Capital Subscribed 50,000

Ordinary Share Capital* 50,000
*Note that at the date of full payment, which is the date of issuance, Ordinary Share Capital is credited at
par. This is because, upon subscription, share premium has already been recognized.

Alternative entry on June 3, 2020

2020
June 3 Ordinary Share Capital Subscription Receivable 56,250
Cash (75,000 x 25%) 18,750
Ordinary Share Capital Subscribed 50,000
Ordinary Share Premium 25,000

Issuance of No-Par, No Stated Value Share (Note that we will only show the entries for memorandum
entry method)
When a share capital has no par value and no stated value, the value assigned to the consideration
received is the same amount credited to the share capital account. Just remember that no-par shares
should not be issued below P5.

Issuance for Cash

The Happy Corporation was organized on January 1, 2020 and is authorized to issue 100,000 shares of no-
par, no stated value ordinary shares. Subsequently, 25,000 shares were sold at P15 per share

Cash (25,000 x 15) 375,000

Ordinary Share Capital (25,000 x 15) 375,000

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.

Example:
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 (at fair value of land) 175,000

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 x 15) 150,000
Ordinary Share Capital (at fair value of shares – 10,000 x 15) 150,000
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, 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.

Example:
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 (at fair value of services) 25,000

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 of shares – 1,000 x 15) 15,000
Ordinary Share Capital (at fair value of shares – 1,000 x 15) 15,000

Issuance of Share Capital for Extinguishing Liability

When shares are issued in exchange of services rendered, 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

Example:
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 (Fair value of shares issued - 12,000 x 15) 180,000
*Fair value of shares issued – Carrying amount of liability = 12,000 x 15 – 130,000 = 50,000

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 liability – 125,000) 125,000
Gain on extinguishment of liability** 5,000
**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 (at carrying amount of liability) 130,000

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 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, no stated value shares is that the
whole subscription price is credited to share capital account.

Example:
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
June 3 Ordinary Share Capital Subscription Receivable* 75,000
Ordinary Share Capital Subscribed* 75,000

*5,000 x 15 = 75,000, note that subscription receivable is debited at subscription price, same with the Ordinary Share
Capital Subscribed

Cash (75,000 x 25%) 18,750

Ordinary Share Capital Subscription Receivable 18,750

July 4 Cash (75,000 x 75%) 56,250

Ordinary Share Capital Subscription Receivable 56,250

Ordinary Share Capital Subscribed 75,000

Ordinary Share Capital* 75,000
*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
June 3 Ordinary Share Capital Subscription Receivable 56,250
Cash (75,000 x 25%) 18,750
Ordinary Share Capital Subscribed 75,000
Subscription Defaults
When a subscriber fails to pay his obligations after the corporation has sent several notices to
him, his subscribed shares are declared delinquent shares. His subscription is declared delinquent
subscription. Such delinquent subscription is then offered for sale in a public auction and delinquent
shares are issued to the highest bidder. The highest bidder is the one who is willing to pay the unpaid
subscription plus any expense incurred in connection with the delinquency sale and is willing to receive
the least number of shares.

Example:
On June 15, 2020, the Happy Corporation received subscription for 2,000 shares of its P10 par value
ordinary share capital at P15. A down payment of 60% was received. The final payment was due on August
15, 2020, but in spite of the several notices sent to the subscriber, no payment has been received. On
August 31, the subscription was declared delinquent and was offered for sale in public auction. On
September 6, expenses of P500 were incurred on connection with the delinquency sale.

Case 1: On September 21, the highest bidder was determined and payment for 1,500 shares was
received.
2020
June 15 Ordinary Share Capital Subscription Receivable (2,000 x 15) 30,000
Ordinary Share Capital Subscribed (2,000 x 10) 20,000
Ordinary Share Premium (2,000 x (15-10) 10,000

Cash (30,000 x 60%) 18,000

Ordinary Share Capital Subscription Receivable 18,000

Aug 31 Receivable from Highest Bidder 12,000

Ordinary Share Capital Subscription Receivable 12,000

Sept 6 Receivable from Highest Bidder 500

Cash 500

21 Cash 12,500
Receivable from Highest Bidder 12,500

Ordinary Share Capital Subscribed 20,000

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, not just the unpaid 40% or 2,000 x 40% = 800 shares. Due to his delinquency,
the defaulting subscriber only received 500 shares instead of the 60% he has paid or 2,000 x 60% = 1,200
shares.
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 auctioned was terminated on September 21 with the corporation paying for the
offer price. Offer price here pertains to the remaining receivable, plus interest on the receivable if any,
plus costs incurred to auction the delinquent shares.

June 15 Ordinary Share Capital Subscription Receivable (2,000 x 15) 30,000

Ordinary Share Capital Subscribed (2,000 x 10) 20,000
Ordinary Share Premium (2,000 x (15-10) 10,000

Cash (30,000 x 60%) 18,000

Ordinary Share Capital Subscription Receivable 18,000

Aug 31 Receivable from Highest Bidder 12,000

Ordinary Share Capital Subscription Receivable 12,000

Sept 6 Receivable from Highest Bidder 500

Cash 500

21 Treasury Capital 12,500

Receivable from Highest Bidder 12,500

Ordinary Share Capital Subscribed 20,000

Ordinary Share Capital 20,000

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.
Example:
Roberto and Remedios are partner sharing profits and losses in the ratio of 3:2. They decided to retire
from active 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 on January
1, 2020 is presented below.

Roberto and Remedios Partnership

Statement of Financial Position
January 1, 2020

Assets
Cash 45,000
Accounts Receivable 75,000
Less Allowance for Uncollectible Accounts 3,000 72,000
Merchandise Inventory 25,500
Equipment 90,000
Less Accumulated Depreciation 30,000 60,000
Total Assets 202,500

Liabilities and Equity

Accounts Payable 60,000
Accrued Expenses Payable 15,000
Total Liabilities 75,000
Roberto, Capital 90,000
Remedios, Capital 37,500
Total Equity 127,500
Total Liabilities and Equity 202,500

The corporation is organized as the Winner Corporation and is 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 are 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 (45,000-25,500) 19,500
Accumulated Depreciation (to be reduced to 0) 30,000
Equipment (120,000 – 90,000) 30,000
Allowance for Uncollectible Accounts (5,400 – 3,00) 2,400
Roberto, Capital* 46,260
Remedios Capital* 30,840

*Net revaluation = 19,500 + 60,000 – 2,400 = 77,100

Share of Roberto = 77,100 x 3/5 = 46,260
Share of Remedios = 77,100 x 2/5 = 30,840

Step 2: Recognize Goodwill. This will increase capital balances of partners

Goodwill* 20,400
Roberto, Capital* 12,240
Remedios, Capital* 8,160

*Net Asset before adjustments (equal to equity) 127,500

Add: Net adjustment (see step 1) 77,100
Net Asset after adjustment 204,600
Less Cash (not included in the purchased business) 45,000
Net Assets excluding cash 159,600

Market Value of Shares Issued (12,000 x 15) 180,000

Net Assets excluding cash 159,600
Goodwill 20,400

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

Share of Roberto = 20,400 x 60% = 12,240

Share of Remedios = 20,400 x 40% = 8,160

Step 3: Record authorized share capital

Authorized to issue 100,000 shares of P10 par value ordinary share capital

Step 4: Record the issuance of share capital to partners

Roberto, Capital (9,000 x 15) 135,000
Remedios, Capital (3,000 x 15) 45,000
Ordinary Share Capital (12,000 x 10) 120,000
Ordinary Share Capital (12,000 x (15-10)) 60,000
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

Step 6: Record the issuance of ordinary shares to other incorporators

Cash (25,000 x 20) 500,000
Ordinary Share Capital (25,000 x 10) 250,000
Ordinary Share Premium (25,000 x (20-10)) 250,000

Case 2: New books are opened for the corporation

Recorded in partnership books
Step 1: Revalue the net assets of the partnership
Merchandise Inventory (45,000-25,500) 19,500
Accumulated Depreciation (to be reduced to 0) 30,000
Equipment (120,000 – 90,000) 30,000
Allowance for Uncollectible Accounts (5,400 – 3,00) 2,400
Roberto, Capital* 46,260
Remedios Capital* 30,840

*Net revaluation = 19,500 + 60,000 – 2,400 = 77,100

Share of Roberto = 77,100 x 3/5 = 46,260
Share of Remedios = 77,100 x 2/5 = 30,840

Step 2: Recognize Goodwill. This will increase capital balances of partners

Goodwill* 20,400
Roberto, Capital* 12,240
Remedios, Capital* 8,160

*Net Asset before adjustments (equal to equity) 127,500

Add: Net adjustment (see step 1) 77,100
Net Asset after adjustment 204,600
Less Cash (not included in the purchased business) 45,000
Net Assets excluding cash 159,600

Market Value of Shares Issued (12,000 x 15) 180,000

Net Assets excluding cash 159,600
Goodwill 20,400
Note that the rule on issuance of shares in exchange for non-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.

Share of Roberto = 20,400 x 60% = 12,240

Share of Remedios = 20,400 x 40% = 8,160

Step 3: Record the receipt of share capital from the new corporation
Investment in Equity Instruments - Winner 180,000
Accounts Payable 60,000
Accrued Expenses Payable 15,000
Allowance for Doubtful Accounts (3,000 + 2,400) 5,400
Accounts Receivable 75,000
Merchandise Inventory (25,500 + 19,500) 45,000
Equipment (90,000 + 30,000) 120,000
Goodwill 20,400

Step 4: Record the distribution of share capital to partners

Roberto, Capital (9,000 x 15) 135,000
Remedios, Capital (3,000 x 15) 45,000
Investment in Equity Instruments – Winner 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 investment distribution (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 x 10) 120,000
Ordinary Share Capital (12,000 x (15-10)) 60,000

Step 3: Record the issuance of share capital to other incorporators

Cash (25,000 x 20) 500,000
Ordinary Share Capital (25,000 x 10) 250,000
Ordinary Share Premium (25,000 x (20-10)) 250,000