Corporations

Definition
• 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 incident to its existence
 Advantages
• Capital –large amount of resources can easily be acquired by selling the shares through
the investment market
• Liability to corporate creditors –shareholder is limited only to the extent of his/her
investment
• Transferability of interest –after shares are issued to a shareholder, these shares may be
transferred to others through the stock market
• Continued existence –has unlimited life
• Skilled management –may be managed by a team of professionals hired to oversee the
daily operation of the firm
Disadvantages
• Tax Liability –taxed 25% on their income
• Legal requirement –subject to government scrutiny more than the sole proprietorship
and partnership forms of business to protect the large number of investors and the large
amount of capital involved
• Lack of control –shareholders have no direct or active control over the affairs of the
corporation as they are not all directly involved in its daily operation
 Corporate Structure

Owners Shareholders

Policy Makers Board of Directors

Manager
President

Vice President for Vice President for Vice President for For Vice President for For
Marketing Production Finance Human Resources
 Kinds of Corporation

• Private –owned and organized for a private purpose/objective

 Two kinds: stock & non-stock corporation

• Public –government corporation organized for the accomplishment of its public functions such
as national government, provincial, city or municipal government
• Close –family corporation or one which stock is held by a selected few and not open to any
person
• Open –one where stock is listed in the stock market available for purchase by any one person
or entity
 Kinds of stocks
1. As to value
 Par value stock –one in which a fixed value is stated in the certificate of stock and in the articles of
incorporation. Serves as a minimum basis for the amount of contribution of a shareholder
 No par value stock –one without a designated value stated in the stock certificate but it cannot be
sold at less than P5 as provided in the Corporation Code

2. As to right
 Common stock or ordinary share –stock issued by a corporation which entitles the owner to a
pro rate dividend without any priority or preference over any other stockholders
 Preferred stock –stock with preferential rights or claims over the common stock
Legal Capital
• Minimum permanent investment from the shareholders
• To illustrate, assume:
a. X Corporation issued 1,000 shares of stock with a par value of P100 in exchange
for P120,000 cash. Although total cash investment is P120,000, only P100,000 is
considered as legal capital
b. X Corporation issued 1,000 shares of no par value stock in exchange for P120,000
cash. Legal capital is P120,000
Rights of a shareholder
1. Right to share in the corporate profits at the discretion of the Board of Directors
2. Right to vote and attend annual stockholders’ meeting
3. Right to share in the distribution of assets upon liquidation of the business
4. Right to purchase additional shares of stock whenever there is an increase in the
authorized capital stock
Incorporation Requirement
1. The law permits any number of natural persons not less than five and not more than
fifteen, to form a private corporation. They must be legal age, majority of them
residents of the Philippines

2. At least 25% of the authorized capital stock, as stated in the articles of incorporation,
must be subscribed and at least 25% of these subscriptions must be paid.

To illustrate, assume that the authorized capital stock is P2,000,000. Then 25% of
P2,000,000 or P500,000 must have been subscribed and 25% of P500,000 or P125,000
must have been paid.
Shareholders’ equity
• It is the owners’ equity section of a corporation’s statement of financial position
• the residual interest of owners in the net assets of a corporation measured by the excess of
assets over liabilities
• Two major components:
1. Share Capital (contributed or paid-in capital) –reflects the amount of resources
received by corporation as a result of investment by shareholders, donations or
other share capital transactions
2. Retained earnings –amount of capital accumulated and retained through the
profitable operations of the business
Components of Shareholders equity
 Share Capital
• refers to the paid-in capital representing the amount of the total par or stated value of the
shares issued. It represents the portion of authorized capital stock that has been fully paid.

• Classes of share capital

1.Ordinary share capital –equity instrument that is subordinate to all other
classes of equity instruments

2.Preference share capital –equity instruments that give the holder certain
preferences over ordinary shareholders
 Share Capital
• Authorized Share Capital –number of authorized shares indicates the maximum number of shares
the corporation can issue as specified in the article of incorporation

• Issued Share Capital –shares which have been sold and paid for in full

• Subscribed Share Capital –portion of authorized share capital that has been subscribed but not yet
fully paid

• Outstanding Share Capital –issued shares, which are in the hands of the shareholders

• Treasury Stock –shares acquired by the corporation but not retired and are therefore, waiting to be
reissued at a later date
Accounting for Issuance of Share Capital
WITH PAR

Issuing Share Capital at Par

• Proceeds should be credited to the share capital account to the extent of the par value of
the shares, with any excess being reflected as share premium

• Illustration: Narsan Holdings is authorized to issue P1,000,000 ordinary shares divided

into 10,000 shares, with a par value of P100 per share. The diversified company issued
on cash basis 2,000 shares at par. The share issuance entry will be:
Cash 200,000
Ordinary Shares 200,000
Accounting for Issuance of Share Capital
Issuing Share Capital above Par

Illustration: Suppose the 2,000 shares were sold at P150 per share, the entry follows:

Cash 300,000
Ordinary Shares 200,000
Share Premium 100,000
Accounting for Issuance of Share Capital
WITHOUT PAR

Issuing No-Par Share Capital

Illustration: Morning Star Travel is a domestic corporation engaged in the business of organizing
tour packages for Asian and European visitors to the Philippines. The company which is located at
J. Bocobo St., Manila, has two classes of shares –preference shares and no-par ordinary shares.
5,000 shares were issued for P85,000. The entry to record the issue of these no-par shares will be:

Cash 85,000
Ordinary Shares 85,000
Accounting for Issuance of Share Capital
WITHOUT PAR

Issuing No-Par Share Capital with Stated Value

Illustration: Suppose that Morning Star Travel’s no-par ordinary shares have a stated value of P20. The company
issued 5,000 shares at P25 per share. The entry will be:

Cash 125,000

Ordinary Shares 125,000

Alternatively, the excess proceeds over stated value may be credited to share premium

Cash 125,000

Ordinary Shares 100,000

Share Premium 25,000

Subscription of Shares
There are times when a corporation sells its shares directly to investors on subscription basis. The subscription contract is
a legally binding contract which provides for the number of shares subscribed, the subscription price, the terms of
payment and other conditions of the transaction.

Illustration: Warranty Auto Shop Inc. is a quality car care center located at St. Paul St., San Antonio Village, Makati City.
Assume that 5,000 shares of P10 par value ordinary shares of the company were sold on subscription at P12 per share on
Sept. 1, 2018 to Ashley Langga. Subscription installments of P24,000 and P36,000 will be due on Sept. 16 & 30,
respectively

Subscription receivable 60,000

Subscribed Ordinary Shares 50,000
Share Premium 10,000

Cash 24,000
Subscription Receivable 24,000

Cash 36,000
Subscription Receivable 36,000

Subscribed Ordinary Shares 50,000

Ordinary Shares 50,000
Delinquent Shares
• These are the shares sold to the person who is willing to pay the “offer price” which included
the full amount of the subscription balance plus accrued interest, cost of advertisement and
expenses of auction sale in exchange for the smallest number of shares. The person is
referred to as the highest bidder
• Illustration: Assuming the same facts as above except that the subscriber failed to settle part
of his subscriptions in the amount of P48,000. After complying with the legal procedures
pertaining to delinquency sale, a public auction was held. The offer price is P56,000
including P3,000 accrued interest and P5,000 expenses of sale. Three bidders are willing to
pay the offer price, namely:
Nanette Virtudazo
Loida Cardenas
Felipe Niza
 Delinquent Shares
Virtudazo is the highest bidder. The 5,000 shares are deemed fully paid. Ashley Langga, the original
subscriber, gets 700 shares and Virtudazo received 4,300 shares

Subscription receivable 60,000

Subscribed Ordinary Shares 50,000
Share Premium 10,000

Cash 12,000
Subscription Receivable 12,000
 Delinquent Shares

Receivable from Highest Bidder 3,000

Interest Revenues 3,000

Receivable from Highest Bidder 5,000

Cash 5,000

Cash 56,000
Receivable from Highest Bidder 8,000
Subscription Receivable 48,000

Subscribed Ordinary Share 50,000

Ordinary Share 50,000
 Delinquent Shares

If there is no bidder, the corporation may bid for the delinquent shares and the total amount due shall be
credited as paid in full in the books of the corporation. These shares shall be considered as treasury shares

Treasury Stock 56,000

Receivable from Highest Bidder 8,000
Subscriptions Receivable 48,000
Share Issuance for Non-Cash Considerations
Issuing Shares for Assets
The proceeds is recorded at an amount equal to the following in the order of priority:
1. Fair market value* of the non-cash consideration received
2. Fair market value of the share capital issued
3. Par or stated value of the share capital issued

*Fair market value –estimated amount that a willing seller would receive from a financially capable buyer for the
sale or exchange of the asset in a free market
Share Issuance for Non-Cash Considerations
Illustration:
APL Construction & Development Corporation is a medium-sized closely held
company based in Quezon City. A group of Taiwanese investors would like to acquire
shares of the company because of its tremendous earnings potential. After much
thought on the part of its president, Az Penaflorida, the investors were allowed to
make investments. One of the considerations given was a tract of land in Iloilo City
with a fair market value of P1,000,000.
The entry to record the issue of 900 shares of P1,000 par ordinary shares in exchange
for the land:

Land 1,000,000
Ordinary Shares 900,000
Share Premium 100,000
Share Issuance for Services or Outstanding Liabilities
When shares are issued for services in connection with the incorporation, the account
Organization Expense may be debited at an amount equal to the fair market value of such
services

Illustration: Dynasty BookSource Asia Inc. engaged the services of a promoter during its
formation and organization. The corporation issued 800 shares of P100 par value of ordinary
shares for the services. The fair market value of such services is P100,000

Organization Expense 100,000

Ordinary Shares 80,000
Share Premium 20,000
Assignment:

Read and study the Two Methods of Accounting for Share

Capital
 Purchase of Treasury Stock
• Cost method is used, whether the share is acquired below or above par value or stated value
• The purchase of treasury share does not decrease the number of shares issued, only the outstanding shares
decrease
• Effect of the purchase is to decrease both total assets and total SHE

Illustration: Sea Wind is a world class resort in Boracay Island. The operations have been successful. To
consolidate control over the enterprise and thus avoid a corporate takeover by outsiders, the board of directors
decided to minimize outstanding shares by purchasing 1,500 shares with a par value of P1,000 for P2,000

Treasury Stock 3,000,000

Cash 3,000,000
 Reissuance of Treasury Stock
• At cost –assume that treasury stock were subsequently reissued at cost

Cash 3,000,000
Treasury Stock 3,000,000

• Above Cost –assume that all treasury stock were reissued at P2,500 per share

Cash 3,750,000
Treasury Stock 3,000,000
Share Premium-Treasury 750,000

 Below Cost –assume that the 1,500 treasury shares were reissued at P1,500 per share

Cash 2,250,000
Retained Earnings 750,000
Treasury Stock 3,000,000
 Retirement of Treasury Stock
The shares purchased may be subsequently retired. The Ordinary Shares account is reduced by its par value. The number of
shares issued is reduced by the stock retired. The treasury stock account is credited at cost. Retirement may result in a “ gain”
or “loss”

With Gain on Retirement: Assume that Sea Wind purchased the treasury shares for P750 per share

Ordinary Shares 1,500,000

Share Premium 375,000
Treasury Stock 1,125,000

With Loss on Retirement: Assume that a total of 10,000 shares have been issued at P1,500 per share prior to the purchase of
treasury shares. Sea Wind purchased 1,500 treasury shares for P2,000 per share; these were not reissued and were ultimately
retired

Ordinary Shares 1,500,000

Share Premium 750,000
Retained earnings 750,000
Treasury Stock 3,000,000
 Donated Capital
Contributions, including shares of the corporation, received from shareholders should be recorded at the fair market value of the
items received, with the credit going to share premium. If significant, such contributions may be designated as donated capital

If the donation is in the form of shares of the corporation, the account share premium or donated capital is credited at the time the
shares are reissued

Illustration: Jocker’s Food Industries received a new service van from its major shareholder as a gift. The donated asset has a cash
price of P350,000.

Service vehicle 350,000

Donated Capital 350,000

Illustration: Assume instead that Jocker’s Food Industries received 500 of P100 par value ordinary shares from its major shareholders
as a gift

“Received 500 ordinary shares as donation”

These donated shares are essentially treasury stocks which may be reissued at any price

Assume that the 500 shares were issued at P80 per share

Cash 40,000
Donated Capital 40,000