FINANCIAL ACCOUNTING

&
REPORTING
(Fundamentals)

ACCOUNTING FOR
CORPORATION

Chapter 13: Partnership Dissolution (FAR by

: Millan)
 Chapter 15
Accounting for Corporations
Learning Objectives
1. State the components of shareholders’
equity.
2. Account for the initial issuances of shares of
stocks.
3. Account for treasury shares.
 Corporation
• The Philippine Corporation Code defines a corporation as “an
artificial being created by operation of law, having the right of
succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.”
• A corporation is formed by at least 5 but not exceeding 15
natural persons, all of legal age and a majority of whom are
residents of the Philippines.
• The entity’s articles of incorporation must be authorized by
the Securities and Exchange Commission (SEC).
 Articles of Incorporation
• The articles of incorporation states, among other things, the entity’s
authorized capital stock, which is the maximum number of shares that
the entity can issue.
• Any excess share issued is deemed illegal. In order to issue shares in
excess of the authorized capital stock, the entity must amend its
articles of incorporation.
• To amend the articles of incorporation, a majority vote of the board
plus a vote by shareholders representing at least two-thirds (2/3) of the
outstanding share capital is needed.
• After ratification, the amended articles of incorporation are filed with
the SEC and shall become effective only upon approval by the SEC.
• At least 25% of the entity’s authorized capitalization should be
subscribed and at least 25% of the total subscription must be paid
upon subscription.
• In no case shall the paid-up capital be less than five thousand pesos
(₱5,000).
 Shareholders’ Equity
• It is the residual interest in the assets of a corporation after
deducting all its liabilities.
• It is equivalent to “Owner’s Equity” of a sole proprietorship
and “Partners’ Equity” of a partnership.
Components of Stockholders’ Equity
• The following transactions affect the accounting for a
corporation’s equity:
1. Authorization, subscription, and issuance of shares
2. Acquisition and reissuance of treasury shares
3. Retirement of shares
4. Donated capital
5. Distributions to owners (Dividends)
 Accounting for share capital
• Memorandum method
 Only a memorandum is made for the authorized
capitalization.
 Subsequent issuances of shares are credited to the share
capital account.
 The more commonly used method.

• Journal entry method

 The authorized capitalization is recorded by crediting
“authorized share capital” and debiting “unissued share
capital.”
 Subsequent issuances of shares are credited to “unissued
share capital.”
 Accounting for share capital
• Authorized share capital
 Represents the maximum number of shares fixed in the
entity’s authorized articles of incorporation that can be
subscribed and issued to shareholders.
• Unissued share capital
 Represents the portion of the authorized share capital not
yet issued and is still available for subscription and
issuance
• Subscription
 A contract between the purchaser of shares (investor) and
the issuer (corporation) in which the purchases promises
to buy shares of the issuing company’s stock.
 Accounting for share capital
• Subscription receivable
 Represents the unpaid portion of the subscription price
 It is presented as a deduction from the related subscribed
share capital
• Subscribed share capital
 Represents the portion of the authorized share capital that
is subscribed but not yet issued.
• Share capital
 Represents the portion of the authorized share capital that
is already issued.
• Share certificate
 Document that evidences the ownership of a share
Illustration 1:
1. On January 1, 2023, ABC Corporation received authorization from SEC to
issue share capital of P1,000,000 divided into 10,000 shares with par value
per share of P100.
2. Of the total authorized share capital, 25% was subscribed at par value and
25% of the total subscription was paid at subscription date
3. On February 1, 2023, ABC Corporation received full payment for 2,000
subscribed shares and issued the related share certificates.
4. On February 28, 2023, ABC Corporation received cash subscription for
1,000 shares at par value

Required: Prepare journal entries using (a) Memorandum method and (b)
Journal entry method
Illustration 2
XYZ Corporation was incorporated at the start of the the current period
The following were XYZ Corporation's share capital transactions during the
year:
a. SEC approved XYZ's authorized capitalization of P3,000,000 divided into
100,000 shares with par value of P30 per share.
b. 25% of the authorized capitalization was subscribed at par value and 25%
of the subscrption price was paid on subscription date.
c. Received full payment for 10,000 subscribed shares and issued the related
share certificates.
d. Received cash subscrition for 15,000 additional shares at a subscription
price of P40 per share.
e. Received subscription for 10,000 additional shares at a subscription price of
P50 per share
f. Collected the full payment on the subscription in "e" above and issued the
related share certification.

Required:
1. Prepare journal entries under (a) Memorandum method and (b) Journal
entry method
2. Prepare the shareholders' equity of XYZ Corporation as of the end of the
period.
 Classes of share capital

• Share capital is basically classified into two, namely:

 Ordinary share capital (common stock); and
 Preference share capital (preferred stock).
 Four basic rights of ordinary shareholders

1. Right to attend and vote in shareholders’ meetings

2. Right to purchase additional shares (also known as preemptive
right or stock right)
3. Right to share in the corporate profits (also known as right to
dividends)
4. Right to share in the net assets of the corporation upon liquidation
 Share premium

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

various sources which include the following:
1. Excess of subscription price over par value or stated
value.
2. Excess of reissuance price over cost of treasury shares
issued.
3. Issuance or origination of other equity instruments,
such as share options, detachable share warrants, and
equity components of compound financial instruments.
4. Distribution of “small” stock dividends.
5. Quasi-reorganization and recapitalization.
 Legal capital
• Legal capital is the portion of contributed capital that cannot be
distributed to the owners during the lifetime of the corporation
unless the corporation is dissolved and all of its liabilities are settled
first. Legal capital is computed as follows:
1. For par value shares, legal capital is the aggregate par value of
shares issued and subscribed.
2. For no-par value shares, legal capital is the total consideration
received or receivable from shares issued or subscribed. Total
consideration refers to the subscription price inclusive of any amount in
excess of stated value.
 Share issuance costs

• “The transaction costs of an equity transaction are accounted

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

• Treasury shares (treasury stocks) are an

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

• The cost method is used in accounting for treasury share

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

1. Donation from shareholders – recognized directly

in equity (i.e., credited to share premium).
2. Donation from the government – recognized as
government grant.
3. Donation from other sources – recognized in
profit or loss (i.e., income) when (a) the conditions
attached to the donation are fulfilled or
reasonably expected to be fulfilled, (b) the
donation becomes receivable, and (c) the criteria
for asset recognition is met.
 Donated capital (Continuation)
• Cash – recognized at the amount of cash received or receivable.
• Noncash assets – recognized at the fair value of the noncash
assets
• Entity’s own shares – initially recorded through memo entry.
Donated capital is recognized only when the donated shares are
subsequently reissued. This is because no asset is generated
from the donated shares until they are subsequently reissued. If
the donated shares are not to be resold, the entity should effect
a formal reduction of its authorized capital by retiring the
shares received.