Corporation Hand Out - Revised
Corporation Hand Out - Revised
Corporation Hand Out - Revised
Corporation
Artificial being
created by law
Having the right of succession, and
powers, attributes, and properties expressly authorized by law or incident to its existence
RA11232
- The Revised Corporation Code of the Philippines - the law governing the corporations in the Philippines.
Major Classifications
Stock Corporation - are those which have capital stock divided into shares and are authorized to distribute to the
holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held.
Non-stock Corporation -is one where no part of its income is distributable as dividends to its members, trustees or
officers. Any profit accruing to the corporation, whenever necessary or proper, be used for the furtherance of the
purpose or purposes for which the corporation was organized.
Corporations Created by Special Laws or Charters. - created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code,
insofar as they are applicable.
STEP 2:
Incorporation involves filing the articles of corporation with the Securities and Exchange Commission (SEC)
together with treasurer’s affidavit, statement of financial position, certificate of bank deposit, and certificate as to
the name of the corporation; payment of filing and publication fees; and ultimately the issuance by the SEC of the
certificate of incorporation.
Note: Generally, the corporation does not acquire its juridical personality until the SEC issues to it its
certificate of incorporation.
STEP 3:
Formal organization and commencement requires the adoption of by-laws and the election of the board of
directors (BOD) and of administrative officers including taking such other steps to enable it to transact the
legitimate business or accomplish the purpose for which it was created.
Note: If a corporation does not formally organize and commence the transaction of its business within five
(5) years from the date of its incorporation, its corporate powers shall cease and the corporation shall be
deemed dissolved.
However, if a corporation has commenced business but subsequently becomes continuously inoperative for a
period of at least five (5) years, the same shall be a ground for the suspension or revocation of its certificate of
incorporation.
5. Organization Costs
1. Preliminary expenses incurred upon forming a corporation including legal fees, incorporation fees and share
issuance costs.
2. Generally, organization costs shall be expensed as incurred with the exception for share issuance cost which shall
be debited to share premium arising from share issuance with any excess to retained earnings.
Components of a Corporation
Corporators - Corporators are those who compose a corporation, whether as stockholders or shareholders in a stock
corporation or as members in a nonstock corporation.
Incorporators - are those stockholders or members mentioned in the articles of incorporation as originally
forming and composing the corporation and who are signatories thereto
Note: Number and Qualifications of Incorporators. – 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 natural persons who are licensed to practice a profession, and partnerships or
associations organized for the share of the capital stock of the corporation. (6a) purpose of practicing a profession,
shall not be allowed to organize as a corporation unless otherwise provided under special laws. Incorporators who are
natural persons must be of legal age. Each incorporator of a stock corporation must own or be a subscriber to at least
one (1) share of the capital stock. A corporation with a single stockholder is considered a One Person Corporation as
described in Title XIII, Chapter III of this Code.
Shareholders/Members -shareholders are corporators in stock corporation while members are corporators of a non-
stock corporation.
Subscribers -are persons who have agreed to take and pay for original, unissued shares of a corporation formed or to
be formed.
Director(s)/Trustee(s) -one (1) to fifteen (15). A one person corporation shall have one (1)
director/trustee. Every director must own at least one (1) share of voting stock.
Rights of a Shareholder
Vote in elections for directors and on actions requiring shareholder approval.
Share in company’s profits through the receipt of dividends.
Preemptive right to keep the same percentage of ownership when new shares are issued.
Residual claim to share in assets upon liquidation in proportion to their holdings.
Typical Records used by a corporation
1. Minutes book - Contains the minutes of the meetings of the directors and stockholders.
2. Stock and transfer book - A record of the names of shareholders, installments paid and unpaid by shareholders and
dates of payment, transfers of shares and dates thereof.
3. Shareholder’s ledger - Subsidiary record of share capital issued indicating the number of shares issued to each
shareholder.
4. Subscriber’s ledger - Subsidiary record of subscriptions made indicating the individual subscriptions of the
subscribers.
Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. (IFRS 13 par. 9)
/ACT1102
Accounting for Delinquent Subscriptions
- When the subscriber fails to settle the subscriptions in full on the date specified in the subscription contract or in the call
made by the board of directors, the subscribed shares are declared delinquent.
The remedy of the corporation in this case is to dispose of the shares in a public auction for the account of the
delinquent subscriber. These shares will be sold to the highest bidder -the person who is willing to pay the
“offer price” which includes 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.
er share on Oct. 17, 2010 to Kanor. Subscription installments of P7,000 and P8,000 will be due on Nov. 1 and 15, respectively.
s ensuing financial problems. After complying with the legal procedures pertaining to delinquency sale, a public auction was held. The offer price is P12,000 including P5
dder, agreeing to pay the full price of P12,000 for the smallest number of shares. Consequently, the 1,000 shares are deemed fully paid. Kanor, the original subscriber, gets 400 sh
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 corporation. These shares shall be considered as treasury shares.
Book value per share = Total Shareholder’s Equity ÷ No. of shares outstanding
Retained Earnings
- The account Retained Earnings represents the firm’s accumulated profit or loss, including prior-period adjustments less
the dividends declared and other amounts transferred to the contributed capital accounts.
- A debit balance in retained earnings account is referred to as a deficit.
1. Among the common transactions affecting retained earnings are summarized below in the form of increases
(credits) and decreases (debits) to the account.
RETAINED EARNINGS
Current Loss Current Profit
Dividends Adjustments for
Treasury Share Correction of prior
Transactions period errors (PAS
Share Capital 8)
Retirement
Adjustments for
Correction of prior
period errors (PAS 8)
/ACT1102
2. The list is not exhaustive because the other items affecting retained earnings account will be dealt with in a
Financial Accounting course.
3. Appropriation of retained earnings - Retained earnings may be appropriated for legal and business reasons.
The account “Retained earnings - appropriated” shall be credited and debited from “Retained earnings -
unappropriated” account, with the total retained earnings account unaffected.
Business reason (voluntary) - a corporation may appropriate portion of retained earnings for valid business
reasons such as expansion or significant capital expenditures.
Business reason (contractual) - Long term debt contracts may restrict retained earnings as condition for
loan.
Legal reason - a corporation shall appropriate portion of its retained earnings equal to the cost of the
treasury shares it has reacquired.
22. Dividends
- A dividend is a distribution of corporate income to the shareholders on a pro rata basis. They are distributed out of
accumulated earnings of the corporation, except for a liquidating dividend which represents a return of the
shareholder’s investment.
- Dividends may take the form of cash, noncash assets (property dividends), scrip or liability dividends, or share
dividends (corporation’s own share capital or bonus issue).
The important dates concerning dividends are:
a. Date of Declaration. The date when the BOD formally approves and announces the dividend. This is date
that the reduction in retained earnings is recognized or recorded in the accounts.
b. Date of Record. A list of current shareholders who will be entitled to the dividend is prepared and the
dividend payment is based on this list. No journal entry is made on this date.
c. Date of Payment/Distribution. On this date, an entry is made to record the settlement of the dividend either by
payment of cash or distribution of noncash assets or the company’s own share.
1. Cash Dividends -this is the most common type of dividend. For a cash dividend to occur, a corporation must
have retained earnings and adequate cash to pay the dividend. It may be expressed as a percentage of the
par value or as a peso amount per share. On the date of declaration, a current liability is recognized in the
accounts with a corresponding charge (debit) to retained earnings or dividends account. If the latter account
is used, it is closed to retained earnings account at the end of the accounting period.
2. Property Dividends -dividend that is payable in assets rather than cash. Property dividend may also be in the
form of equity or debt securities held in other companies. Distribution of Treasury shares as dividends is
also considered as a property dividend and not as a share dividend.
3. Share Dividends (Bonus Issue) -is a pro rata distribution of a corporation’s own shares to its shareholders.
Unlike cash and property dividends, a bonus issue does not affect total assets and total shareholder’s
equity because it simply represents a transfer of capital from retained earnings to contributed capital.
a. Small Share Dividend -when the number of shares represents LESS THAN 20% of the shares
Of Theory and Page 4 of
Accounts
/ACT1102
previously outstanding, the basis of the measurement would be the current market value of the
additional shares to be issued.
b. Large Share Dividend -when the proportion of the additional shares issued is 20% OR MORE, the
amount capitalized is equal to the par or stated value of the share capital.
4. Scrip Dividends -this arises if a corporation has adequate retained earnings to meet the legal dividend
requirements but has insufficient funds to justify a current cash dividend.
The corporation then, declares a scrip dividend where it issues promissory notes -called scrip
-requiring the corporation to pay dividends at some future date. Scrip dividends usually carry interest,
and the interest that accrues on scrip dividends are recorded as interest expense.
Share splits
- A share split involves the issue of additional shares according to the percentage ownership of shareholders This results
in a reduction in the stated value per share
e.g., a 2-for-1 split means that one share with a value of P10 will be exchanged for 2 shares each with a
value of P5.
- A share split does not affect the total equity of the company
- The purpose of a share split is to increase the marketability of the shares by lowering the market price per share.
- A share split does not affect the balance in shareholders’ equity accounts and therefore a formal journal entry is not
required.
Of Theory and
Accounts
Page 5 of
/ACT1102
REQUIRED:
1. Journalize the transactions above using:
a. Memorandum entry method
b. Journal entry method
2. Present the shareholder’s equity portion to be shown on the entity’s statement of financial position under
a. Memorandum entry method
b. Journal entry method
b. Nortek Corporation exchanged 50,000 shares of its P200 par value share for a land. A few months ago, the land
was appraised by an independent appraiser at P8,000,000. Nortek is currently trading at the Philippine Stock
Exchange (PSE) at P280 per share.
c. Atty. Pao received 2,000 ordinary shares of P200 par value from Secador Corp. after rendering legal services in
getting the corporation organized. The fair value of such services is reliably determined to be P250,000.
d. Dientes Corp. issued 10,000 shares of its P200 par ordinary share to Atty. Harvey as compensation for 1,200
hours of legal services performed. Atty. Harvey usually bills P500 per hour for legal services. On this date of
issuance, the share was selling at a public trading at P280 per share.
Liabilities P 90,000
Django, Capital 200,000
P290,000
Fair values at December 31, 2013 are as follows:
Current assets P170,000
Equipment 200,000
Liabilities 90,000
On January 2, 2014, Django Services was incorporated with 5,500, P10 par value, ordinary shares issued.
REQUIRED:
Prepare the journal entry to account for above transaction on the books of the corporation.
REQUIRED:
Prepare the journal entry to record the above transaction.
REQUIRED:
Prepare the journal entries to account for:
a) Issuance of shares
b) Incurrence of organization cost
Preference share (P100 par), P2,500,000; share premium in excess of par-preference, P750,000; Ordinary share (P10 par),
P5,000,000; share premium in excess of par-ordinary, P2,800,000; Subscribed ordinary share, P65,000; Accumulated
profits and losses, P2,000,000; and Subscription receivable-ordinary, P350,000.
Of Theory and
Accounts
Page 8 of
CASE B
The shareholder’s equity of Aranque Inc. revealed the following information on December 31, 2012:
Preference share (P80 stated value), P1,200,000; share premium in excess of stated value-preference, P900,000; Ordinary
share (P15 stated value), P3,000,000; share premium in excess of stated value-ordinary, P2,800,000; Subscribed ordinary
share, P80,000; Accumulated profits and losses, P1,950,000; and Subscription receivable-ordinary, P200,000.
REQUIRED:
Compute for the legal capital based on each of the case above.
REQUIRED:
1. Journalize above transactions.
2. Who was the highest bidder?
3. How many shares were actually issued to (a) Olive and to the (b) highest bidder?
REQUIRED:
Provide the entries required to record the reacquisition and the subsequent resale of the share using the:
REQUIRED:
Prepare the journal entries to record above transactions.
Ordinary share capital, 60,000 shares, P100 par; Share premium, P60,000; Retained earnings, 2,000,000 and Treasury
shares, 5,000 at cost of P140 each.
REQUIRED:
Present the shareholder’s equity portion to be shown on the entity’s statement of financial position.
REQUIRED:
1. Prepare the journal entries to record:
The receipt of the donated shares
a.
The subsequent sale of the donated shares
b.
2. How would the donated capital be accounted for in the shareholder’s equity of Pashmina?
REQUIRED:
Compute for the total contributed capital for December 31, 2012.
REQUIRED:
Journalize above transactions relating to retirement of treasury shares. (Treat each case independently).
REQUIRED:
What should be the total Share Premium as of December 31, 2012?
Jan. 7 Articles of incorporation are filed with the Philippine SEC. SEC authorized the issuance of
10,000 shares of P50 par value preferred stock and 200,000 shares of P10 par value common
stock.
Jan. 28 40,000 shares of common stock are issued for P14 per share.
Feb. 3 80,000 shares of common stock are issued in exchange for land and buildings that have an
appraised value of P250,000 and P1,000,000, respectively. The stock traded at P15 per share on that
date on the over-the-counter market.
Feb. 24 2,000 shares of common stock are issued to Specter and Ross, Attorneys-at-Law, in payment for
legal services rendered in connection with incorporation. The company charged the amount to
organization costs. The market value of the stock was P16 per share.
Sep. 12 Received subscriptions for 10,000 shares of preferred stock at P53 per share. A 40 percent down
payment accompanied the subscriptions.
Oct. 1 Reacquired 5,000 ordinary shares for a total cost of P80,000
Nov. 5 Reissued 3,000 ordinary shares at P18 per share.
Dec. 10 Shareholders holding an aggregate of 5,000 shares donated their shares to Lindsay. The
company was able to reissue them at P12 per share.
Dec. 31 Profit and loss summary to be closed to retained earnings amounted to P300,000 (credit).
REQUIRED:
1. Prepare journal entries to record the foregoing transactions.
2. How much is the contributed capital?
3. How much is the share premium as of December 31?
4. How much is the total shareholder’s equity as of December 31?
5. How much is the legal capital?
PROBLEM 17. Comprehensive
Casio Corp. registered with SEC and was authorized to issue 120,000 ordinary shares at P15 par value per share.
During the first year of operations, 40,000 shares were sold at P28 per share. 600 shares were issued in payment of a
current operating debt of P18,600. In the first year, the net income was P142,000.
During the year, dividends of P36,000 were paid to shareholders. At the end of the year, total liabilities were P82,000.
Use the given data to compute the following items at the end of the first year (show all computations):
/ACT1102
REQUIRED:
(1) Total liabilities and shareholders' equity
(2) Shareholders' equity
(3) Contributed capital
(4) Issued share capital (par)
(5) Outstanding share capital (par)
(6) Unissued share capital (number of shares)
(7) Share premium
REQUIRED:
Compute the book value per share as of December 31, 2014 of Dancing Queen Co.?
b. During the May 31, 2014, the Board of Directors of Cool Corporation declared a 10% dividend, payable
September 30, 2014, to shareholders of record July 31, 2014. The entity has 10,000 shares issued and
outstanding with par value of P100. Give the journal entries on (a) May 31, (b) July 31, and (c) September 30.
c. Libra Co.’s board of directors decided to declare a dividend on June 30, 2014 to be distributed on August 1,
2014. The company will give inventories worth P1,500,000 to its shareholders of record July 10, 2014. Give
the journal entries on (a) June 30, (b) July 10, and (c) August 1.
d. Twins Corporation declared on July 1, 2014 dividends to its stockholders of record as of September 1, 2014.
However, due to shortage of cash, the corporation issued scrip dividends at the time of declaration
amounting to P100,000 with 12% interest payable on December 31, 2014. Give the journal entries on (a)
July 1, (b) September 1, and (c) December 31.
The Board of Directors declared a “bonus issue” on March 1, 2014 to be distributed on April 1, 2014. Fair
value of shares is P14 per share.
Prepare the entries on March 1, 2014 and April 1, 2014 assuming the company declared (a) 20% issue and
(b) 10% issue.
f. The company holds 15,000 shares in treasury costing P7.00 each with market value of P12 per share. The
BOD declared such treasury shares as dividend on February 14, 2014 to be issued on May 1, 2014. Prepare
the journal entries to record the foregoing transactions.
Of Theory and
Accounts
Page 10 of
/ACT1102
Total shareholder’s equity P8,000,000
No dividends are in arrears up to December 31, 2012. The company declared P1,000,000 dividend at the end of 2014 at the
appropriate rate for preference shares and the remainder to ordinary.
REQUIRED:
Determine the allocation of the dividend to (1) preference and (2) ordinary, assuming the following cases independently:
Of Theory and
Accounts
Page 11 of
c. Preference share is cumulative and participating.
d. Preference share is cumulative and participating up to 12%.
PROBLEM 21. Allocation of Dividends - more than one class of preference shares
The shareholder’s equity in the statement of financial position on December 31, 2014 of Quijones Corporation showed the
following:
Class “A” Preference share capital, 10% P50 par, 40,000 shares P2,000,000
Class “B” Preference share capital, 14% P50 par, 20,000 shares P1,000,000
Ordinary shares capital, P100 par, 30,000 shares 3,000,000
Share premium 500,000
Retained earnings 2,500,000
Total shareholder’s equity P9,000,000
No dividends are in arrears up to December 31, 2012. The company declared P1,100,000 dividend at the end of 2014 at
the appropriate rate for preference shares and the remainder to ordinary. Determine the allocation of the dividend to
(1) preference and (2) ordinary assuming both class of preference shares are cumulative and participating.
**END OF MATERIAL**
“The more you sweat during peacetime, the less you bleed in war”
-Sun Tzu
REFERENCES: