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Property of Polytechnic University of the Philippines

Polytechnic University of the Philippines
College of Accountancy and Finance
Preview of the Chapter
CORPORATION

Introduction to Nature of a Corporation Classes of Share Capital Issuance of Share Capital

Corporation • Characteristics • Ordinary share capital
(common)
• Methods of recording
• Advantages  Memo entry
Organization and • Disadvantages • Preference share capital  Journal entry
(preferred)
Formation • Classes of corporation
 Cumulative
• Considerations in
exchange for share
• Components of a  Noncumulative capital
corporation
 Participating  Cash
• Steps in organizing
 Nonparticipating  Non-cash assets
• corporation  Convertible  Services
• Rights of a  Redeemable  Liabilities
stockholder
• Par value share capital  Other securities
• Corporate records • Share capital
• Stated value share capital
• No-par, no stated value subscription
share capital  Subscription default
Leandro C. Fua, M BA, CPA
Faculty

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Corporation Characteristics of a Corporation

A corporation is an artificial being created by
operation of law, having tile right of succession and
the powers, attributes and properties expressly
authorized by law or incident to its existence.
(Section 1, Corporation Code of the Philippines.)
 Separate legal entity
• A corporation is an artificial being with a personality that is 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 or be sued.
 Created by operation of law
• A corporation is generally created by operation of law. The mere
agreement of the parties cannot give rise to a corporation.

• 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.
• Owners are liable to corporate creditors up to the extent of what they
contributed

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Characteristics of a Corporation Characteristics of a Corporation
 Right of succession  Board of directors
• Irrespective of the death, withdrawal, insolvency, or incapacity of the • Management of the business is vested in a board of directors elected by
individual members or shareholders, and regardless of the transfer of their the shareholders.
interest or share capital • The board of directors is the governing body or decision- making body of
• a corporation can continue its existence up to the period of time stated in the corporation.
the articles of incorporation but not to exceed fifty years. • The Corporation Law provides that the number of directors be not less
than five but not more than fifteen.
• Powers, attributes, properties authorized by law.
• A corporation has only the powers, attributes and properties expressly
authorized by law or incident 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.

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Advantages of a Corporation Disadvantages of a Corporation

• The corporation’s power of succession enables it to enjoy a continuous
existence.
• The continuity of corporate existence enables it to obtain a strong credit line.
• Large scale business undertakings are made possible because many’
individuals can invest their funds in the enterprise.
• The liability of its investors or shareholders is limited to the extent of their
investment in the corporation.
• The transfer of shares can be effected without the need for prior consent of
other shareholders.
• Its smooth operation is guaranteed because of centralized management.
• It is not easy to organize because of complicated legal
requirements and high costs in its organization.
• The limited liability of its shareholders may weaken its credit
capacity.
• It is subject to rigid governmental control.
• It is subject to more taxes.
• Its centralized management restricts a more active participation by
shareholders in the conduct of corporate affairs.

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Classes of Corporation
 As to Membership Holdings
• 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 corporations
are called stockholders or shareholders
• 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.
Classes of Corporation
 As to Purpose
• Public corporation — a corporation that is organized to govern a portion of
the state (e.g. municipalities, provinces).
• Private corporation — a corporation that is organized for a private benefit,
aim or end.
• 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.

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Classes of Corporation As to Extent of Membership

 As to Compliance of Law • Open corporation
• De jure corporation — a corporation which exists in both law and fact. It • a corporation whose ownership is widely held by many investors, usually a
exists in law because it has complied with all the legal requirements; it private stock corporation.
exists in fact because it actually operates as a corporation.
• De facto corporation -. a corporation which exists only in fact but not in law. • Closely-held corporation or family corporation
It does not exist in law because of non-compliance with certain legal
requirements. • a private corporation in which 50% or more of its stock is owned by five (5)
persons or less.
 As to Law of Creation
• Domestic corporation — a corporation that is organized under Philippine
laws.
Other types of corporations
 parent or holding corporations
• Foreign corporation — a corporation that is organized under the laws of
other countries.  subsidiary corporations
 ecclesiastical corporations and lay corporations which are themselves
classified into other groups.

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Components of a Corporation Other Components of a Corporation
 Promoters
 Corporators – are the persons who compose the corporation • they are the persons who undertake to
whether as shareholders or members. a. form a company based on a given project,
b. set it going, and
a. Incorporators - they are the persons who originally formed the c. take the necessary steps to accomplish the purpose for which the
corporation and whose names appear in the Articles of Incorporation. corporation is organized.
They must be natural persons as distinguished from artificial persons.
 Subscribers
b. Stockholders or shareholders — they are the corporators of a stock • they are the persons who have agreed to take original, unissued shares
corporation. 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
c. Members — they are the corporators of a non-stock corporation. subscriptions is made.
 Underwriters
• they are those who undertake to dispose of the shares to the general
public.

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Articles of Incorporation By-Laws

• The Articles of Incorporation enumerate the powers and limitations
conferred upon the corporation by the government.
1. The name of the corporation;
2. The purpose or purposes for which the corporation is formed;
3. The place of the prixcipa1 office of the corporation;
4. The term of existence of the corporation, not exceeding fifty years;
5. The names, nationalities, and addresses of the incorporators;
6. The names of the directors who will serve until their successors are duly
elected and qualified in accordance with the by-laws;
7. The authorized share capital (authorized capital stock), the classes of share
capital (stocks) to be issued, and the number of shares and terms of each class
indicating the par value per share, if there is any;
8. The amount of subscriptions to the share capital (capital stock), the names of
the subscribers and the number of shares subscribed by each; and
9. The total amount paid on the subscriptions to the share capital (capital stock)
and the amount paid by each subscriber on his subscription.
• The by-laws of the corporation supplement the articles of incorporation.
It contains provisions for the internal administration of the corporation.
1. The date, place and manner of calling the annual shareholders’ (stockholders’)
meeting;
2. The manner of conducting meetings;
3. The circumstances which may permit the calling of special meetings of the
shareholders;
4. The manner of voting and the use of proxies; -
5. The manner of electing the directors and the number of directors;
6. The term of office of the directors;
7. The authority and duties of the directors;
8. The manner of selecting the corporate officers;
9. The authority and responsibilities of the officers;
10. The procedure for amending the articles of incorporation;
11. The procedure for amending the by-laws.

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Corporate Records Share Capital (Capital Stock)
The corporation generally maintains the following records to keep • It is the amount fixed by the corporate charter to be subscribed
track of its various transactions: and paid in or secured to be paid in by the shareholders of a
1. Record of all business transactions (journals, ledgers, vouchers, and corporation either in money or in property, labor or services upon
other supporting documents). the organization of the corporation or afterwards; and upon which it
2. Minutes of all meetings of directors. is to conduct its operations.
3. Minutes of all meetings of shareholders (stockholders).
4. Stock and transfer book Classes of Share Capital
a. Shareholders’ (stockholders’) journal — chronological and numerical 1. Ordinary share capital
record of stock certificates issued.  entitles the holder to an equal or pro-rata division of profits without any
b. Shareholders’ (stockholders’) ledger — alphabetical record of preference or advantage over any class of shares.
individual shareholders. -
c. Subscribers’ ledger — alphabetical record of individual subscribers.
2. Preference share capital
5. Optional and supplementary records  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

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Shareholders Basic Rights Ordinary Share Capital

1. To share in the distribution of corporate profit;
2. To share in the distribution of assets upon corporate liquidation;
3. To vote in shareholders’ meeting; and
4. To maintain one’s ownership interest .in the corporation through
purchase of additional shares when a new share capital is
issued. This is known as the pre-emptive right.
(Common Stock)
• A common stock or ordinary share capital represents residual
ownership equity.
• The holders of this class of share capital 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,

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Classes of Preference Share Capital Classes of Preference Share Capital
(Preferred Stock) (Preferred Stock)
Cumulative preference shares Participating preference shares
• entitle the holders to the receipt of previous years’ unpaid dividends (i.e., • Entitle the holders to the receipt of additional dividend after holders of both
dividends in arrears) before any payment can be made to ordinary preference and ordinary shares have been paid up to the current year’s
shareholders upon dividend declaration. dividend.
• This means that if dividend is not declared in a particular year, the right to • This means that the holders of preference shares have- the right to share
such dividend is not lost but carried forward to a subsequent year.
in extra dividends.
Non-cumulative preference shares Non-participating preference shares
• entitle the holders to the receipt of current dividends but not on the
previous years’ unpaid dividends. • entitle the holders to the receipt of dividends up to the current period only.
• This means that if dividend is not declared in a particular year, the right to • All extra dividends are given to holders of ordinary shares.
such dividend is’ lost.

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Classes of Preference Share Capital Types of Stock

(Preferred Stock)  A par value share capital
Convertible preference shares • has a nominal or face value stated on the face of the, stock certificate and
• entitle the holders the option to exchange the shares for some other in the articles of incorporation.
securities of the issuing corporation, normally ordinary shares.  A no-par but with stated value share capital
• has a nominal value stated in the articles of incorporation but not on the
Redeemable preference shares face of the stock certificate.
• entitle the issuing corporation the option to redeem or call the shares at a  A no-par, no stated value share capital
certain call price. • has no nominal value stated either in the articles of incorporation nor on
the face of the stock certificate.
 In our Corporation Code, a no-par share capital is to be issued for
a consideration of not less than five pesos (P5.00)

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Authorized Share Capital Recording Authorized Capital Stock
• The maximum number of shares (both preference and ordinary Memorandum Entry Method
shares) that a corporation may issue is termed as authorized
Authorized to issue XXX shares of XXX share capital with a par
shares.
value of PXXX
• The authorized share capital (authorized capital stock) is Journal Entry Method
determined by multiplying the authorized shares by the par or
stated value of the share capital. Unissued XXX Share Capital XXX
Authorized XXX Share Capital XXX
• A corporation cannot issue shares more than the authorized
The total amount recorded is computed by multiplying authorized
shares stated in the articles of incorporation. However, it may shares by the par or stated value of the share capital. Thus, this
increase its authorized shares and authorized share capital by method cannot be used if the share capital is a no-par and no-
amending its articles of incorporation. stated value stock.

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Illustrative Problem A Illustrative Problem A

 The Joyfill Company was organized on January 1, 2010, with
authorized share capital as follows: General Ledger
10% Preference Share Capital
• 10,000 shares of 10% preference share capital with a par value of P100 2010
per share Jan. 1 Authorized to issue 10,000
thares, par value P100
• 200,000 shares of ordinary share capital with a par value of P10 per share

Memorandum entry method

2010 10% Preference Share Capital
2010
Jan. 1 Authorized to issue 10,000 shares of 10% preference share
Jan. 1 Authorized to issue 200,000
capital with a par value of P100 per share.
shares, par value P10

1 Authorized to issue 200,000 shares of ordinary share capital

with a par value of P10 per share.

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Illustrative Problem A Issuance Of Share Capital
The journal entry method • A share capital may be issued in exchange for cash, non-cash
2010 assets, services, liability or other form of securities.
Jan. 1 Unissued Preference Share Capital 1,000,000
• It may be sold also on a subscription basis. A share capital issued
Authorized Preference Share Capital 1,000,000 to a shareholder is called an outstanding share.
1 Unissued Ordinary Share Capital 2,000,000 • A stockholders’ (shareholders’) ledger is used to maintain records
Authorized Ordinary Share Capital 2,000,000 affecting the shareholding of each shareholder such as transfer or
Authorized Preference Share Capital Authorized Ordinary Share Capital sale of share capital.
2010 2010
Jan. 1 1,000,000.00 Jan. 1 1,000,000.00
• Shares issued to shareholder, on the other hand, are recorded in
the stock certificate book.
Unissued Preference Share Capital Unissued Ordinary Share Capital
2010 2010
Jan. 1 1,000,000.00 Jan. 1 1,000,000.00

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Subscription of Share Capital Journal Entry for Issuance of Share Capital

Publication date: 13 Oct 2019 Memo Entry Method Journal Entry Method
 Issuance for Cash  Issuance for Cash
US IFRS & US GAAP guide 10.9 Cash 000,000 Cash 000,000
• Receivables from shareholders are generally required to be presented as Ordinary Share Capital 000,000 Unissued Ordinary Share Capital 000,000
contra-equity under US GAAP, whereas under IFRS they might qualify for Share Premium - Ordinary 000,000 Share Premium - Ordinary 000,000
presentation as an asset. • Subscription of Share Capital • Subscription of Share Capital
• Subscriptions Receivable is a shareholders’ equity account. It is presented in Subscription Receivable 000,000 Subscription Receivable 000,000
the statement of financial position as a deduction from the related subscribed Subscribed Share Capital 000,000 Subscribed Share Capital 000,000
ordinary shares, however, when it is collectible within one year this may be Share Premium - Ordinary 000,000 Share Premium - Ordinary 000,000
shown as a current asset. It is debited for the total proceeds of the • Full collection of subscription price and • Full collection of subscription price and issuance
subscriptions to the ordinary shares and credited for the collections on issuance of Share Capital Certificate of Share Capital Certificate
subscriptions. Cash 000,000 Cash 000,000
• https://viewpoint.pwc.com/content/pwc- Subscription Receivable 000,000 Subscription Receivable 000,000
madison/ditaroot/us/en/pwc/accounting_guides/ifrs_and_us_gaap_sim/ifrs_and_us_gaap_sim_US/chapter_10_financ
ial_US.html Subscribed Share Capital 000,000 Subscribed Share Capital 000,000
Share Capital 000,000 Unissued Share Capital 000,000

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Illustrative Problem B Illustrative Problem B
Issuance for Cash Issuance for Cash – Case 1
 The Happy Corporation was organized on January 1, 2020 and is  Memo Entry Method
authorized to issue 100,000 shares of P10 par value ordinary Cash 250,000
shares. Subsequently, 25,000 shares were sold. Ordinary Share Capital 250,000
25,000 shares x P10 = P250,000
• Case 1— The issuance price is P10 (at par)
• Case 2— The issuance price is P15 (above par)  Journal Entry Method
• Case 3 — The issuance price is P8 (below par) Cash 250,000
Unissued Ordinary Share Capital 250,000
25,000 shares x P10 = P250,000.

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Illustrative Problem B Illustrative Problem B

Issuance for Cash – Case 2 Issuance for Cash – Case 3
 Memo Entry Method  Memo Entry Method
Cash 375,000 Cash 200,000
Ordinary Share Capital 250,000 Discount on Ordinary Share Capital 50,000
Ordinary Share Premium 125,000 Ordinary Share Capital 250,000
25,000 shares x P15 = P375,000 25,000 shares x p 8 = P200,000
25,000 shares x P10 = P250,000 25,000 shares x P10 = P250,000
25,000 shares x P 5 = P125,000 25,000 shares x P 2=P50,000
 Journal Entry Method  Journal Entry Method
Cash 375,000 Cash 200,000
Unissued Ordinary Share Capital 250,000 Discount on Ordinary Share Capital 50,000
Ordinary Share Premium 125,000 Unissued Ordinary Share Capital 250,000
25,000 shares x P15 = P375,000 25,000 shares x P 8 P200,000
25,000 shares x P10 = P250,000 25,000 shares x P10 = P250,000
25,000 shares x P 5 = P125,000 25,000 shares x P 2 = P 50,000

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Illustrative Problem C Illustrative Problem C
Issuance In Exchange for Non-cash Assets or Property Issuance In Exchange for Non-cash Assets or Property
• The Happy Corporation issued 10,000 shares of its P10 par  Case 1 The land has a fair value of P175,000
ordinary share capital in exchange for land. Land 175,000
Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 100,000
• Case 1 — The land has a fair value of P175,000 Ordinary Share Premium 75,000
• Case 2 — The land has no known market value. The fair value of ordinary 10,000 shares x P10 = P100,000
share capital on the date of exchange is P15. P175,000—Pl00,000 = P 75,000
 Case 2 The land has no known market value. The fair value of ordinary share capital on the
date of exchange is P15.
Land 150,000
Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 100,000
Ordinary Share Premium 50,000
10,000 shares x P15 = P150,000
10,000 shares x P10 = P100,000
10,000 shares x P 5 = P 50,000

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Illustrative Problem D Illustrative Problem D

Issuance In Exchange for Services Rendered Issuance In Exchange for Services Rendered
• The Happy Corporation’ issued 1,000 shares of P10 par ordinary  Case 1 The services of the lawyer is valued at P25,000
share capital in payment for the services of the lawyer rendered Pre-Operating Expenses 25,000
during incorporation. Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 10,000
Ordinary Share Premium 15,000
• Case 1 — The services of the lawyer is valued at P25,000. 1,000 shares x P10 = P 10,000
• Case 2 — There is no known fair market value for the services of the P 25,000 — Pl0,000 = P 15,000
lawyer. The fair market value of the ordinary share capital issued is P15  Case 2 There is no known fair market value for the services of the lawyer. The fair market
per share. value of the ordinary share capital issued is P15 per share
Pre-Operating Expenses 15,000
Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 10,000
Ordinary Share Premium 5,000
1,000 shares x P 15 = P 15,000
1,000 shares x P 10 = P 10,000
1,000 shares x P 5 = P 5,000

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Illustrative Problem E Illustrative Problem E
Issuance of No-par, but with Stated Value Share Capital Issuance of No-par, but with Stated Value Share Capital
• The Happy Corporation was organized on January 1, 2010 and is  Case 1 - Issuance For Cash - The issuance price is P10 (at stated value)
authorized to issue 100,000 shares of P10 stated value ordinary Cash 250,000
share capital. Subsequently, 25,000 shares were sold. Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 250,000
25,000 shares x P10 = P250,000
• Issuance for Cash
 Case 2 - Issuance For Cash - The issuance price is P15 (above stated value)
• Case 1 – The issuance price is P10 (at stated value) Cash 375,000
• Case 2 – The issuance price is P15 (above stated value) Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 250,000
• Case 3 – The issuance price is P8 (below stated value) Ordinary Share Premium in Excess of Stated Value 125,000
25,000 shares x P15 = P375,000
25,000 shares x P10 = P250,000
25,000 shares x P 5 = P125,000

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Illustrative Problem E Illustrative Problem F

Issuance of No-par, but with Stated Value Share Capital Issuance of No-par, but with Stated Value Share Capital
 Issuance For Cash - Case 3 - The issuance price is P8 (below stated value) • The Happy Corporation issued 10,000 shares of its P10 stated
Cash 200,000 value ordinary share capital in exchange for land.
Discount on Ordinary Share Capital 50,000
• Issuance in Exchange for Non – Cash Assets or Property
Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 250,000
25,000 shares x P 8 = P200,000 • Case 1 – The land has a market value of P175,000.
25,000 shares x P10 = P250,000
• Case 2 – The land has no known market value. The fair market value of
25,000 shares x P 2 = P 50,000 ordinary share capital on the date of exchange is P15.

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Illustrative Problem F Illustrative Problem G
Issuance of No-par, but with Stated Value Share Capital Issuance of No-par, but with Stated Value Share Capital
 Issuance in Exchange for Non – Cash Assets or Property – Case 1 - The land has a market
value of P175,000 • The Happy Corporation issued 1,000 shares of P10 stated value
Land 175,000 ordinary share capital in payment for the services of the lawyer
Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 100,000 rendered during incorporation.
Ordinary Share Premium in Excess of Stated Value 75,000 • Issuance In Exchange for Services Rendered
10,000 shares x P10 = P 100,OCO
P 175,000 - P 100,000 = P 75,000 • Case 1 – The services of the lawyer is valued at P25,000.
 Issuance in Exchange for Non – Cash Assets or Property – Case 2 - The land has no known • Case 2 – There is no known fair market value for the services of the
market value. The fair market value of ordinary share capital on the date of exchange is P15. lawyer. The fair market value of the ordinary share capital issued is P15
Land 150,000 per share.
Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 100,000
Ordinary Share Premium in Excess of Stated Value 50,000
10,000 shares x P15 = P150,000
10,000 shares x P10 = P100,000
10,000 shares x P 5 = P 50,000

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College of Accountancy and Finance

Illustrative Problem G Illustrative Problem H

Issuance of No-par, but with Stated Value Share Capital Issuance of No-par, No Stated Value Share Capital
 Case 1 - Issuance In Exchange for Services Rendered - The services of the lawyer is valued • The Happy Corporation was organized on January 1, 2010, and is
at P25,000
authorized to issue 100,000 shares of no-par, no stated value
Pre-Operating Expenses 25,000
Ordinary share capital. Subsequently, 25,000 shares were sold at
Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 10,000
P15 per share.
Ordinary Share Premium in Excess of Stated Value 15,000
1,000 shares x P10 = P 10,000 • Issuance for Cash
P 25,000 — Pl0,000 = P 15,000
• The entry to record the sale follows:
 Case 2 - Issuance In Exchange for Services Rendered - There is no known fair market value
for the services of the lawyer. The fair market value of the ordinary share capital issued is P15 Cash 375,000
per share. Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 375,000
Pre-Operating Expenses 15,000 25,000 shares x P15 = P375,000

Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 10,000
Ordinary Share Premium in Excess of Stated Value 5,000
1,000 shares x P 15 = P 15,000 1,000 shares x P 10 = P 10,000
1,000 shares x P 5 = P 5,000

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Illustrative Problem I Illustrative Problem I
Issuance of No-par, No Stated Value Share Capital Issuance of No-par, No Stated Value Share Capital
• The Happy Corporation issued 10,000 shares of its ordinary share  Case 1 - Issuance in Exchange for Non – Cash Assets or Property – The land has a market
value of P175,000
capital in exchange for land.
Land 175,000
• Issuance in Exchange for Non-cash Assets or Property. Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 175,000

• Case 1 – The land has a market value of P175,000.  Case 2 - Issuance in Exchange for Non – Cash Assets or Property – The land has no known
• Case 2 – The land has no known market value. The fair market value of market value. The fair market value of ordinary share capital on the date of exchange is P15.
ordinary share capital on the date of exchange is P15. Land 150,000
Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 150,000
10,000 shares x P15 = P150,000

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Illustrative Problem J Illustrative Problem I

Issuance of No-par, No Stated Value Share Capital Issuance of No-par, No Stated Value Share Capital
• The Happy Corporation issued 1,000 shares of its ordinary share  Case 1- Issuance in Exchange for Non – Cash Assets or Property – The services of the
lawyer is valued at P25,000
capital in payment for the services of the lawyer rendered during
Pre-Operating Expenses 25,000
incorporation.
Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 25,000
• Issuance In Exchange for Services Rendered
 Case 2 - Issuance in Exchange for Non – Cash Assets or Property – There is no known fair
• Case 1 – The services of the lawyer is valued at P25,000. market value for the services of the lawyer. The fair market value of the ordinary share capital
issued is P15 per share
• Case 2 – There is no known fair market value for the services of the
lawyer. The fair market value of the ordinary share capital issued is P15 Pre-Operating Expenses 15,000
per share. Ordinary Share Capital (Unissued Ordinary Share Capital, for Journal method) 15,000

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Illustrative Problem K
XYZ Corp., organized on January 1, 2020, was authorized to issue 1,000,000 no-par value
ordinary shares and 200,000 with par value preference shares. The ordinary share has a stated
value of P10 while the preference share has a par value of P100.
The following share capital transactions took place during January:
a. The incorporators issued for cash 300,000 ordinary shares at stated value.
b. The corporation received subscriptions for 150,000 ordinary shares at P 15 per share and
35,000 preference shares at P110 per share. The subscribers paid 30% of the subscription
price. The remaining 70% is payable within sixty days from date of subscription.
c. XYZ Issued for cash 95,000 preference shares at P115 per share.
d. XYZ received merchandise inventory from investors in exchange for 60,000 ordinary shares.
The inventory had a fair value of P650,000.
e. A lawyer received 20,000 ordinary shares for incorporation services rendered. The fair value
of such services is P 250,000.
f. XYZ issued 40,000 ordinary shares in exchange for equipment valued at P550,000
g. The corporation received the balance due from the subscribers of 50,000 ordinary shares in
(b) and issued the corresponding share certificates.

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College of Accountancy and Finance

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