POSSIBLE QUESTIONS: member or both.

Whilst,
incorporators are those corporators
that are originally forming and
Shareholder’s Equity composing the corporation such that
they are mentioned in the articles of
1. Define a corporation. incorporation.
- a corporation is an artificial being B. Shareholders and members
created by operation of law that has the right Shareholders- these are the owners
of succession, attributes, power and of shares in a stock corporation.
properties expressly authorized by law and Whilst, members are those
incident to its existence. corporators of a non-stock
- juridical entity, meaning this entity corporation.
exists apart from the members and
shareholders. Not totally a person but the law 6. Explain:
treats this as one. a. Minutes book
-can sue and be sued, life is 50 years -minutes of the meeting or agenda
(renewable), incorporators 5 to 15 b. Stock and transfer book
-records name of shareholders, installments
paid and unpaid by shareholders including
2. Explain the organization of a corporation. dates of payment , any transfer of share and
-since corporation is created by dates thereof, by whom and to whom made.
operation of law, thus, it won’t come into c. Book of accounts
existence by mere agreement of individuals -record of the business; journal and ledger
as in the case of partnership. Being said, it d. Subscription book
needs the approval or authority of the state. -book of printed blank subscription; a book
- RA 11232 or Revised Corporation sold by subscription usually thru personal
Code; lawful purpose solicitation of agent
-General Prof Partnership are not e. Shareholders ledger
allowed to enter into corporation -subsidiary of share capital issued containing
-Stock corporation is one which has the # of shares issued to each shareholders
capital stock divided into shares. Non-stock is f. Subscribers ledger
the opposite. -subsidiary of subscription receivable account
containing the individual subscription of
3. What are the contents of Articles of subscribers
Incorporation. g. Share certificate book
-It is a formal document filed with a -book of printed blank share certificates; list
government body to legally established the of every share in a company, numbered in
creation of a corporation. (refer to book) order, with the name of the current owner of
every single share
4. What are by-laws?
-rules of action adopted by the 7. What is organization cost?
corporation for internal government and for -represents costs incurred in forming or
the gov’t of its officers, shareholders or organizing a corporation
members -include: (a) legal fees from incorporation like
-shall be filed to SEC within 1 month drafting of articles of incorporation and by-
from the date of incorporation. laws and corporation registration; (b)
-failure to do so results to the liability incorporation fees; (c) share issuance costs
of the corporation for the revocation of its like printing of stock certificates, cost of stock
registration and transfer book, underwriting and
promotional fees, accounting and legal fees
5. Distinguish between: related to issuance of shares
A. Corporator and incorporators
Corporator- composes the
corporation either shareholder or
8. What is the accounting treatment of or property or service at the organization of
organization cost? the corporation
-start up costs like legal and secretarial costs -the amounts fixed in the articles is called
shall be recognized as expense when ‘authorized share capital’
incurred - a share represents the interest or right of a
-CLEARCUT: all organization cost shall be shareholder in the corporation
expensed immediately except share issuance
costs. 13. What are the basic rights of a
shareholder?
9. Explain the meaning of shareholders 1) To share in the earnings of the
equity. corporation
-residual interest of owners in the net assets 2) To vote in the election of directors and
of the corporation form the excess of assets in the determination of certain
over liabilities corporate policies
-or simply the claim of shareholders against 3) To subscribe for addt’l shares issues
the assets (right of pre-emption or stock right or
pre-emptive right)
10. What are the elements that constitute 4) To share in the net assets of the
the shareholders equity. Give their corporation upon liquidation
equivalent IAS term.
14. Distinguish between:
Capital stock Share capital
a. Share capital and authorized share
Subscribed capital Subscribed share
capital
stock capital
Share capital refers to the amount of
Common stock Ordinary share capital
investment shareholders have made in the
Preferred stock Preference share
capital company whereas Authorized share capital is
Addt’l paid-in capital Share premium the maximum amount of funding that the
Retained earnings Accumulated profits corporation is legally authorized to issue. THE
(deficit) (losses) COMPANY IS NOT AUTHORIZED TO ISSUE
Retained earnings Appropriation reserve SHARES BEYOND THE AUTHORIZED SHARE
appropriated CAPITAL.
Revaluation surplus Revaluation reserve
Treasury stock Treasury shares b. Share certificate and a share
Share represents the interest or right of a
shareholder in the corporation and is
11. Explain the treatment of deposits on evidenced by a share certificate, whereas
subscription to a proposed increase in share certificate is the instrument or
authorized capital. document that evidences the ownership of a
-may be reported as part of shareholder’s share. This is issued only until the
equity as a separate line item in the equity subscription is fully paid.
sections
-It is a cash or cash equivalent payment made c. Par value share and no par value share
by a subscriber to an applicant and the Par value share is that specific value fixed in
escrow agent prior to the release of escrow the articles of incorporation and appearing on
during development or construction of a the share certificate; purpose is to fix the
continuing care retirement community. minimum issue price of the share.
No par value share is that without any value
appearing on the face of the share certificate.
12. What is the meaning of “capital stock” or It should be noted though that no par value
“share capital”. still has a stated value which is equivalent for
-amount fixed in the articles of incorporation the minimum consideration of not less than 5
to be subscribed and paid in or secured to be pesos.
paid in by the shareholders either in money
15. Explain the two classes of share capital. 19. Explain the two methods of accounting
-Ordinary share capital, ordinary for share capital.
shareholders have the same rights and Memorandum method, no entry made to
privileges; enjoy no preference over each record the authorized share capital.
other WHEN SHARE CAPITAL IS ISSUED, IT IS
-gives the 4 basic rights of a shareholder CREDITED TO SHARE CAPITAL ACCOUNT.
-no fixed return on investment because their
returns are dependent on the performance of Journal entry method, the authorization to
the corporation issue share capital is recorded by debiting
Preference Share Capital, preferences are unissued share capital and crediting
granted to the shareholders; preferences authorized share capital.
pertain to the preference shareholders’ WHEN SHARE CAPITAL IS ISSUED , IT IS
claims on dividends and net assets in the CREDITED TO THE UNISSUED SHARE CAPITAL
event of liquidation. ACCOUNT.
-have a limited or fixed return on investment
20. Explain the accounting for the issuance
16. Define legal capital. of:
-portion of the paid in capital arising from a. Par value share
issuance of shares capital which cannot be When shares with par value are sold, the
returned to the shareholders in any form proceeds shall be credited to the share
during the lifetime of the corporation capital account to the extent of the par value,
with any excess being reflected as share
17. How much is legal capital? premium.
-the amount of legal capital:
b. No-par value share
A. If par value share, the aggregate par value When shares are sold without par value, the
of the shares issued and subscribed proceeds shall be credited to the share
*aggregate PV= par value of a stock capital account to the extent of the stated
multiplied by the number of authorized value, excess is credited to share premium.
shares
21. May the share capital be issued at less
B. If no par value share, the total than par or stated value? Explain.
consideration received from shareholders -Revised Corporation Code prohibits the issue
including the excess over the stated value of a share at a discount.
-when a share is sold at discount, the
discount is not considered a loss to the
issuing corporation but the shareholder is
18. What is the trust fund doctrine? held liable therefor.
-holds that the share capital of a corporation -the issue is not void, but the agreement to
is considered a trust fund for the protection pay such is illegal and cannot be enforced
of creditors -the issue is not canceled but shareholder
-it is illegal to return such legal capital to must pay for the discount= DISCOUNT
shareholders during the lifetime of the LIABILITY; accounted for separately.
corporation -the prohibition applies only to original
-but, the corporation may pay dividends to issuance not to the subsequent transfer.
shareholders up to the balance of retained
earnings; ILLEGAL TO PAY DIVIDENDS WHEN
THE ENTITY HAS DEFICIT

Minimum paid-up capital must not be less

than 5,000 pesos.
22. Explain the accounting for share capital 25. Explain the treatment of joint costs
issued for non-cash consideration. related to the issuance and listing of new
-fair value of the property received, and shares, and listing of old existing shares.
must be determined by the stockholders or -pas 32, par 38 requires that transaction costs
the BODs and shall seek the approval of the that relate jointly to the concurrent listing
SEC and issuance of new shares and the listing of
-shares shall not be issued in exchange of old shares shall be allocated between the
promissory note or some future service newly issued and listed shares and the newly
listed old shares, PAS 32 provides no guidance
-for equity settled share-based payment, as to the basis of allocation
entity shall measure goods and services BUT, PIC concluded that joint costs shall be
received and the corresponding increase in allocated pro rata on the basis of outstanding
equity directly at the fair value of the goods newly issued and listed shares and
and services received, BUT, if it cannot be outstanding newly listed old existing shares.
reliably estimated, then the entity will
measure it indirectly at the fair value of the Examples:
equity instruments issued a. Audit and other professional advice
relating to prospectus
-ORDER OF PRIORITY FOR MEASUREMENT: b. Opinion of counsel
A. Fair value of the non-cash consideration c. Tax opinion
received d. Fairness opinion and valuation opinion
B. Fair value of the shares issued e. Prospectus design and printing
C. Par value of the shares issued
26. What is the meaning of “watered share”?
23. Explain the treatment of share issuance -watered share is share capital issued for
costs. inadequate or insufficient consideration
-this shall be deducted from equity, net of -consideration is less than par or stated value
any related income tax benefit; but the share capital is issued as full paid
-EFFECT: asset is overstated and capital also
-THUS, share issuance costs shall be debited is overstated
to share premium arising from share issuance -this is illegal that’s why the shareholder is
liable for the amount of discount by debiting
IF, share premium is not substantial to discount on share capital and a credit sa
absorb such costs, then the Phil corresponding asset
Interpretations Committee posited that it
shall be debited to share issuance costs as 27. What is secret reserve?
contra equity or a deduction of the ff order of -opposite of watered share; this arises when
priority: asset is understated and liabilities are
A. Share premium from previous share overstated and understatement of capital.
issuance
B. Retained earnings 28. When does a secret reserve arise?
a. Excessive provision for depreciation,
24. Explain the treatment of costs of public depletion, amortization and doubtful
offering of shares. accounts
-PIC concluded that costs related to stock b. Excessive write down of receivables,
market listing, or those that aren’t inventories and investments
incremental costs directly attributable to the c. Capital expenditures are recorded as
issuance of new shares, shall be recorded as outright expense
expense in the income statement. d. Fictitious liabilities are recorded
-the cost of listing shares are not considered as
costs of an equity transaction since no equity
instrument has been issued. THUS, it shall be
expensed immediately. (eg., road show
presentation & public relations consultant’s fees)
29. What is the treatment of a delinquent 32. Explain fully a redeemable preference
subscription? share.
-RCC provides that the BODs may at any time -pas 32, par 18, this is a pref share that
declare due and payable unpaid subscriptions provides for mandatory redemption by the
issuer for a fixed or determinable amount at
-this declaration is called call, expressed in a a future date;
board resolution stating the date fixed for
payment of unpaid subscriptions -type of pref share that gives the holder the
right to require the issuer to redeem the
-if the shareholder breaches or does not pay instrument for a fixed or determinable
the date fixed, then he/she is declared amount at a future date; option of the holder
delinquent and the delinquent share will be
sold at a public auction to the highest bidder -current or non-current liability
-dividend paid is treated as interest expense
30. Who is the highest bidder?
-person willing to pay the offer price of the -the difference between the redemption price
delinquent shares for the smallest number of and the financial liability is accounted for as
shares. gain or loss on redemption
OFFER PRICE:
a. Balance due on the subscription 33. What is the main distinction between a
b. Interest accrued on the subscription due callable preference share and a redeemable
c. Expenses of advertising and other costs preference share?
of sale -callable pref share:
1) Redemption at a specified price at the
31. What is a callable preference share? option of the corporation
-one which can be called in for redemption 2) Has no fixed redemption date since
(claim) at a specified price at the option of dependent man sa issuer
the corporation (issuer) 3) Equity component
4) If naay difference sa redemption price
-has no definite redemption date because and sa other appropriate accounts kay
this is dependent on the call of the issuer magcredit ra sa share premium related
sa ordinary shares
-equity instrument rather than a financial
liability because the option of the issuer does -redeemable pref shares:
not satisfy the definition of a financial liability I. Mandatory redemption at the
preference of the holder to require the
-when preference shares are called in at more issuer for a redemption
than the original issue price of the pref II. Has a fixed redemption date
shares, the excess is debited to retained III. Liability component
earnings; excess will be charged to (a) share IV. Has gain or loss on redemption
premium from the original issuance of the
pref, (b) retained earnings. 34. What is a convertible preference share?
-a pref share that gives the holder the right to
-if called less than the the original issue price, exchange the holdings for other securities of
difference is simply credited to share the issuing corp
premium related to ordinary shares
-may be converted into ordinary share if the
performance of the company are successful
for a reason that earnings on ordinary share
are unlimited
-may also be converted into bonds which is
actually a change of equity from that of an
owner to that of a creditor, but normally it is
converted into ordinary.
35. Explain rights issue and share warrants.
-rights issue and share warrants somehow
has the same relationship with that of shares Treasury Shares
and a share certificate, why?
37. Define treasury shares.
Rights issue “stock right” is granted to -are an entity’s own shares that have been
existing shareholders to enable them to issued and then reacquired but not canceled.
acquire new shares at a specified price during
a specified period. Whereas, share warrants 38. Distinguish treasury shares from
is the certificate that evidences the unissued shares.
ownership of the rights issue. Treasury shares can be legally reissued at a
discount without any liability, whilst unissued
-the share warrants contain the number of shares must be issued at least at par or stated
shares the holder may purchase as well as the value.
exercise price; normally, exercise price is less BOTH ARE EQUITY ITEMS.
than the current market value of such shares.
39. What are the requisites in order that
36. Explain the accounting for issuance of shares can qualify as treasury?
preference share with share warrants.
- when share warrants are issued together REQUISITES TO QUALIFY AS TREASURY SHARES:
with preference shares, there is actually a
sale of two securities- the pref shares and a. The shares must be the entity’s own
share warrants. shares
-thus, ang kwarta na madawat or b. The shares must have been issued
consideration received shall be allocated originally.
between the pref share and share warrants c. The shares are reacquired but not
on the basis of their market value. canceled.
*if canceled, it is called retired shares
ENTRY TO RECORD ISSUANCE OF
PREFERENCE SHARES AND WARRANTS: 40. What is the legal limitation on the
Cash acquisition of treasury shares?
Pref Share Capital -the RCC provides that no corporation shall
Share Premium redeem, repurchase or reacquire it own
Share warrants outstanding shares unless it has an adequate amount of
unrestricted retained earnings
*the share warrants outstanding is reported
as part of share premium -thus the corporation can only acquire
treasury shares to the extent of retained
SUBSEQUENT ENTRY: EXERCISE OF SHARE earnings balance
WARRANTS
Cash -if insufficient but then allowed to purchase,
Share warrants outstanding that is tantamount to indirectly returning
Ordinary share capital capital to shareholders, w/c is clearly a
Share premium violation of the trust fund doctrine.

*if wa na exercise, share warrants -in order to preserve legal capital, the
outstanding is simply closed and credited to retained earnings must be appropriated to
share premium the extent of the cost of treasury shares, and
*kung dili known ang market value sa warrants, the same must not be declared as dividend
you just simply deduct the selling price sa until the treasury shares are subsequently
allocated price na nakuha sa pref shares reissued
*if both have no market value, market value
sa ordinary share ang gamiton
ACCOUNTING FOR TREASURY SHARES: Par value method, also known as retirement
Cost method is used in accounting method. Another method in accounting
treasury shares because of the legal limitation treasury shares.
on the acquisition of treasury shares However, this method is not acceptable
Treasury shares shall be recorded at because of the legal requirement that
cost, regardless whether acquired below or “retained earnings must be appropriated to
above par or stated value the extent of the cost of treasury shares”

41. Explain the measurement of treasury 44. Explain the accounting procedures for
shares when acquired for cash? the retirement of treasury shares when the
retirement results in a gain or loss.
-if treasury shares are acquired for cash, the If treasury shares are subsequently retired,
cost is equal to the cash payment the share capital account is debited at par or
stated value and the treasury shares is
42. Explain the measurement of treasury credited at cost.
shares when acquired for non-cash
consideration. If gain (par or stated value exceeds cost of TS),
-if acquired for non-cash consideration, pas such gain is credited to share premium from
32 does not provide explicit guidance treasury shares.

-if treasury shares are acquired for non-cash Ordinary share capital
consideration, the cost is usually measured Treasury shares
by the carrying amount of the non-cash asset Share premium-treasury shares
surrendered

Treasury shares are initially recorder at cost If loss (cost of treasury shares exceeds the par
of acquisition. or stated value), such loss is debited to the ff
order of priority:
Subsequently, the treasury shares may be a. Share premium from original issuance
reissued or sold at cost, more than cost or b. Share premium from treasury shares
below cost. c. Retained earnings

Reissuance at cost: Note: share premium from the original

Cash issuance is canceled on a pro rata basis in the
Treasury shares absence of a specific amount identified with
the treasury shares.
More than cost:
Cash DISCLOSURE OF TREASURY SHARES:
Treasury shares
Share premium a. The number of shares held in the treasury
b. The restriction on the availability of
Below cost: retained earnings for distribution of dividends
Cash equal to the cost of treasury shares.
Retained earnings COST OF TREASURY SHARES SHALL BE
Treasury shares DEDUCTED FROM SHAREHOLDERS EQUITY.

43. What is the treatment of gain or loss on

the reissue or resale of treasury shares?
-the gain from sale of treasury shares shall
not be credited to income but recognized
directly in equity as share premium
-the loss on sale of treasury shares is debited
to share premium, but if the balance is
exhausted- it is charged to retained earnings
45. Is donated share a treasury share? 49. When may assessment on shareholders
-these are shares received by the entity from be levied?
the shareholders by way of donation Assessment may be levied on shareholders
-YES, this is a treasury share and may when shares are originally issued at a
therefore be reissued at any price w/o discount or when the corporation is in dire
discount liability need of financial assistance.
ENTRIES:
46. Explain the accounting for donated Cash or share assessment receivable
shares. Discount on share capital
donated shares are secured w/o cost, thus Or
the entities A,L and E are BUT the number of Cash or share assessment receivable
outstanding shares is reduced. Share premium-assessments
HOWEVER, reissue or resale of donated
shares increases assets and donated capital 50. Explain recapitalization.
or share premium. Occurs when there is a change in the capital
structure of the entity such that old shares
47. What is the meaning or “Treasury share are canceled and new shares are issued.
subterfuge”?
Occurs when excessive shares are 51. Enumerate six types of recapitalization.
issued for a property with the understanding a. Change from par to no par
that the shareholders will subsequently b. Change from no par to par
donate a portion of their shares c. Reduction of par value
May then be reissued at a discount d. Reduction of stated value
w/o liability of the shareholder e. Split up
Resale or reissue of treasury donated f. Split down
shares is not credited entirely to donated
capital 52. Explain the accounting for change from
The sale price shall be used in no par to par value and vice versa.
correcting the overvalued asset and share
capital; creates a “water” Change from par to no par
1. Land Entry if lower ang par pag recapitalize:
Donated capital
2. Cash Ordinary share capital
Land Share premium
Donated capital Ordinary share capital
Share premium-recap
48. Explain the accounting for donation of
capital from shareholders and non- If higher ang par:
shareholders.
Shareholders- shall be recorded at the fair Ordinary share capital
value with the credit going to donated Share premium
capital Retained earnings
Ordinary share capital
Non-shareholders- gifts or grants of funds,
generally subsidies; shall be recorded at the *if stated value of the new share is > the
fair value when received of receivable original issue, the difference is charged to
retained earnings since it is capitalized
*if items are not subsidies, the offsetting *changes in the par value of share capital
credit shall be a liability account until shall be charged or credited to share
restrictions are met, IF MET, capital gifts or premium
grants are transferred to income *if increases in share capital exceed share
premium, the excess is charged to retained
earnings
Change from no par to par value share: Retained Earnings
If lower ang pag change:
1. Meaning of retained earnings.
Ordinary share capital Retained earnings is the cumulative
Ordinary share capital balance of the net income or loss for the
Share premium-recap period, dividend distribution, prior period
errors, changes in accounting policy,
If higher: reclassification of some components of other
comprehensive income and other capital
Ordinary share capital adjustments.
Retained earnings
Ordinary share capital 2. Distinguish between appropriated and
unappropriated retained earnings.
53. Explain the accounting for reduction of Unappropriated retained earnings represent
par or stated value. the portion of retained earnings which is free
and can be declared as dividends.
Reduction of par value: Appropriated retained earnings is one which
Ordinary share capital has been restricted and therefore is not
Share premium available for dividend declaration.

Reduction of stated value: 3. What is a deficit.

Ordinary share capital When retained earnings has a debit balance it
Share premium is said to be deficit.

54. Explain share split and reverse share split. 4. What is the meaning of dividends?
Split up or share split proper Are distribution of earnings or capital to the
Original shares are called in for shareholders in proportion to their
cancellation and replaced by a larger number shareholdings.
of shares but there is a reduction in the par
or stated value. 5. Distinguish between dividends out of
Purpose is prompted mainly by a earnings and dividends out of capital.
desire to increase the number of outstanding Dividends out of earning
shares for the purpose of effecting a -legally diri jud dapat kuhaon ang
reduction in unit market price. retained earnings
For it to call share split, THERE MUST -if the entity has deficit, it is illegal to
NOT BE ANY CHANGE IN THE AMOUNT OF pay for dividends or if mo declare silag
THE SHARE CAPITAL OF THE ENTITY, ONLY dividends in excess of the retained earnings
THE # OF SHARES AND THE PAR OR STATED balance kay ma violate man ang trust fund
VALUE. doctrine
ONLY MEMORANDUM ENTRY IS -BUT, SEC approves the declaration
REQUIRED. of stock dividends from the premium on par
value share
Split down or reverse share split
Original shares are canceled and Date of declaration- authorization of the BOD
replaced by a smaller number of shares but the payment of dividends
there is an increase in the par or stated value. Date of record- stock and transfer book is
closed, only those recorded are entitled to
receive, NOT ENTRY.
Date of payment- payment date of dividend

Recognition of dividend
Liability for dividend must be
recognized at the date of declaration.
Dividends out of capital c. Liability dividends in the form of bond
When capital is returned to and scrip
shareholders, it is called dividends out of Scrip dividend a formal note as evidence of
capital or liquidating dividend. indebtedness to pay some future money.
This occurs when the entity is in the Declaration:
state of dissolution or liquidation. RE
Wasting asset corporation may Scrip div payable
declare dividends w/c are in part out of Redeemed:
earnings and part out of capital. Scrip div payable
This rules is wasting asset doctrine, Interest expense
wasting asset entity can declare dividends not Cash
only to the extent of retained earnings
balance but also to the extent of Bond dividend
accumulated depletion balance. Declaration:
Accumulated depletion is accounted Retained earnings
for as debit to capital liquidated and Bond div payable
therefore a deduction from SHE. Issuance:
Bond div payable
Dividends as expense Bonds payable
Normally, dividends are debited to Semi-annual interest:
retained earnings. Interest expense
BUT, declaration of an equity Cash
instrument classified as financial liability are Redemption:
recognized as interest expense on a bond. Bonds payable
Ex: redeemable pref shares Cash

6. Enumerate the common forms of d. Share dividends or bonus issue

dividends.
a. Cash dividend 7. What are property dividends?
Most common type, this normally These are dividends in kind or
implies the distribution of cash. distribution of dividends out of earnings in
Expressed in: the form of non-cash assets to owners.
I. Certain amount of pesos per share
II. Certain percent of the par or stated value
8. Explain the measurement of property
When cash dividends are declared, we set up dividend payable.
a current liability at the date of declaration by Property dividend payable is
debiting retained earnings or dividends and measured initially at the fair value of the
crediting dividends payable. non-cash asset to be distributed on the date
of declaration and is increased or decreased
Retained earnings/ Dividends as a result of the changes in fair value at the
Dividends payable year end and the date of settlement.
Settlement of property dividend
When paid: payable, the difference of C/A of the dividend
payable and the C/A of asset distributed shall
Dividends payable be recognized in profit or loss.
Cash The offsetting debit or credit is
through retained earnings.

b. Property dividends
9. Explain the measurement of non-cash 11. Explain stock or share dividends.
asset distributed as property dividend. Are distributions of the earnings of
An entity shall measure a non- the entity in the form of the entity’s own
current asset classified for distribution to shares.
owners at the lower of carrying amount and When SD are declared, retained
fair value less cost to distribute. earnings are capitalized or transferred to
If the fair value less cost to distribute share capital.
is lower than the carrying amount, the Assets remain the same, Share
difference is impairment loss. dividends only create a change in the
ENTRIES: component of SHE- decrease retained
At declaration and increase or decrease earnings but increase share capital.
Retained earnings Ordinary share dividends= ordinary
Dividends payable to ordinary
Special share dividends= ordinary to
At settlement preference shares
Dividends payable
Asset 12. How much retained earnings should be
Gain on distribution of PD capitalized when stock dividends are
declared?
If loss:
If share dividend is less than 20%, amount to
Dividends payable be capitalized is the fair value on the date of
Loss on distribution of PD declaration.
Asset Small share dividend, does not reduce the
market price for outstanding shares.

If it is more than 20%, amount to be

capitalized is the par or stated value.
Large share dividend, reduces the market
price of OS.

10. Explain the declaration of dividend with If SFP is prepared prior to issuance of share
a choice of non-cash asset or cash. dividend, the share div payable is added to
The entity shall estimate the dividend share capital.
payable by considering both the fair value of It should not be classified as liability since it
each alternative and the associated does not reduce assets.
probabilities.
At the end of the reporting period Share div payable
and at the date of settlement, shall adjust the Share capital
dividend payable based on the alternative
chosen through retained earnings. 13. Explain fractional stock dividends.
ENTRIES: Issuing share dividends not by full but
Cash alternative by fractions.
Dividends payable Steps to which entity may take:
Cash a. The entity may issue warrants for the
Retained earnings fractional shares and give holders
Non-cash alternative enough time to accumulate sufficient
Dividends payable warrants for a full share.
Inventory b. The entity may pay cash in lieu of
Gain on distribution of PD fractional share.
Payment of cash is possible only if
the source of share dividends is retained
earnings. If the source is share premium, it is
illegal.
ENTRIES: c. When share dividends are declared by
Declaration: closely held entities.
Retained earnings Retained earnings shall be capitalized only to
Share div payable the extent of par value or stated value.
Issuance:
Share div payable
Share capital 16. May dividends be accounted for as
Fractional warrants outstanding expense?
Expired: Yes if it is an equity instrument
Fractional warrants outstanding classified as a financial liability such as
Share capital redeemable pref shares. Dividends are
Share premium accounted as interest expense.

14. May treasury shares be declared as share

dividends?
Yes, treasury shares may be declared Appropriation and Quasi-reorganization of
as share dividends. Retained Earnings
TS may be reissued as dividends in
w/c case the cost of treasury shares shall be 17. Explain the appropriation of retained
charged to retained earnings. earnings.
Authors believe this shall be In order to limit or restrict the
accounted as share dividend since the payment of dividends (mag gikan sa retained
obligation is not to convey cash but to reissue earnings), the entity may transfer a portion
its own share capital. of unappropriated retained earnings to
Substance over form. appropriated retained earnings.
ENTRIES:
Declaration: 18. Explain the three kinds of appropriation
RE of retained earnings.
Share div payable Legal appropriation
Payment: Legal capital cannot be returned to
Share div payable the shareholders until the entity is dissolved
Treasury shares and liquidated.
If it acquire its own share, it must
15. Explain the treatment of the ff: have enough retained earnings balance,
a. When shareholders elect to receive otherwise the acquisition is illegal.
cash instead of stock dividends Retained earnings appropriated for
The amount to be charged to treasury shares - portion of the retained
retained earnings should be equivalent to the earnings that must be appropriated equal to
optional cash dividend. the cost of treasury shares.

b. When stock dividends are declared on Contractual appropriation

proposed increase in authorized share Arise from the fact that terms of the
capital. bond issue and preference share issue may
-Seek approval of the SEC. pose restriction on the payment of dividends.
-When not approved: shall not
reflect in SFP, but should be disclosed in the Purpose is to ensure the payment of
notes. the bonds and the redemption of the
-when approved: new authorized preference shares.
share capital may be presented, share
dividend may be shown part of issued share Account titles: retained earnings
capital and disclosure is still necessary. appropriated for sinking fund or bond
redemption & retained earnings
appropriated for redemption of pref shares
Voluntary or discretionary appropriation f. Retirement of treasury shares
A matter of discretion of the if results to loss, the excess of the loss over
management, when entity wishes to to the share premium from the original issue
preserve funds for plant expansion, covering and share premium from treasury shares is
possible losses or contingencies. charged to retained earnings.
Account titles: There is a loss when cost of treasury
A. Retained earnings appropriated for plant shares exceed the par value of the shares
expansion retired.
B. Retained earnings appropriated for g. Reclassification of components of OCI
increase in working capital h. Recognition of share issuance cost
C. Retained earnings appropriated for If the share premium from current and
contingencies previous issue is insufficient to absorb the
cost, the difference is charged against
ACCOUNTING FOR APPROPRIATION: retained earnings.

-Establishment of appropriation- i. Call of preference share

Retained earnings If the call price exceeds the original issue
R. Earnings appropriated price of the pref shares, excess is charged to
retained earnings.
-if not necessary, just reverse-
R earnings appropriated j. Conversion of preference shares to
Retained earnings ordinary shares
Excess of the par value of original share over
19. What is a statement of retained earnings. preference shares is charged to retained
Statement of retained earnings earnings.
shows the changes affecting directly the
retained earnings and relates income 21. Explain the meaning of the term
statement to SFP. “reserves”
This is no longer required in financial Somewhat same with retained
statements but is part of SCE. earnings and this is also part of the equity.
Can be distributable or
20. What are the usual items that affect nondistributable equity.
directly retained earnings? Distributable is like the
unappropriated RE which can be distributed
a. Net income or loss as dividends w/o violation of legal capital.
Net income added, loss deducted. Nondistributable is appropriated RE
in which is not to be returned to shareholders
b. Prior period errors during the lifetime of the entity.
Understated net income, added to the beg
balance of RE
Overstated net income, deducted to the beg 22. What are the items that may be included
balance of RE in the caption “non-distributable reserves”?
Inclusions of distributional:
c. Dividend distributions a. Share premium reserve
Deducted to RE. Excess of the par or stated value
b. Appropriation reserve
d. Change in accounting policy Technically, retained earnings appropriated.
Same effect with that of prior period errors. c. Asset revaluation
Technically, revaluation surplus.
e. Appropriation of retained earnings This is the excess of the fair value of the
Deducted to the unappropriated retained revalued property over the carrying amount.
earnings d. OCI reserve
If canceled, add back to unappropriated RE.
 26. What is a quasi-reorganization?
23. What is a statement of changes in equity? A permissive but not mandatory
Formal statement showing procedure in which a financially troubled
movements in the elements of shareholders entity restates its account and establishes a
equity. fresh start.
Presentation: A procedure of restating assets,
a. Total comprehensive income for the liabilities and capital in conformity with fair
period value for eliminating a deficit.
b. Each component of equity, effects of
changes in accounting policies and
correction of errors 27. What are the two ways of accomplishing
c. Each component of equity, reconciliation a quasi-reorganization?
between the carrying amount at the Recapitalization
beginning and end of the period, Revaluation of PPE
separately disclosing changes
28. What are the circumstances that would
24. What items are disclosed in the justify quasi-reorganization?
statement of changes in equity? a) When a large deficit exists
I. Profit or loss b) When approved by shareholders and
II. Each item of OCI creditors
III. Transactions with owners in their c) When the cost basis of accounting for
capacity as owners showing PPE becomes unrealistic.
separately contributions by and d) When a “fresh start” appears to be
distribution to owners desirable or advantageous
NOTE: quasi-reorganization needs approval of
the SEC.

25. What are the components of 29. What are the SEC requirements for a
comprehensive income? quasi-reorganization? AIARRLQ
1. Net income or loss a) Appraisal must be made by an
2. OCI which comprises items of income and independent expert or specialist
expense that are that are not recognized in b) Increase in the value of PPE is credited
profit or loss as required or permitted by to revaluation surplus
PFRS c) Adjustments to “other” assets like
a) Unrealized gain or loss on equity inventory, investments and intangible
investment designated at fair value thru asset are made thru retained earnings
OCI d) Resulting deficit from reorganization is
b) Unrealized gain or loss on debt offset against revaluation surplus.
investment measured at fair value thru e) RE subsequent to quasi-reorganization
OCI shall be restricted to the extent of the
c) Gain or loss from translating financial deficit wiped out and therefore cannot
statements at a foreign corporation be declared as dividend.
d) Change in revaluation surplus f) Losses subsequent to quasi-
e) Unrealized gain or loss from derivative reorganization cannot be charged to the
contracts designated as cash flow hedge remaining revaluation surplus
f) Remeasurements of defined benefit plan, g) Quasi-reorganization shall be disclosed
such as actuarial gain or loss for at least 3 yrs the date, mechanics,
g) Change in fair value attributable to the purpose, and effect.
“credit risk” of a financial liab
irrevocably designated at fair value thru
profit or loss.
 5. What are share options?
Share-based Compensation- Share Options Enables employees to acquire shares
of the entity at a specified period upon
fulfillment of certain conditions at a
1. Define a share-based compensation plan. specified price.
Compensation arrangement by the Part of remuneration package, in
entity where by employees will receive addition to their cash salary and employment
shares of capital in exchange for their service benefits.
or the entity incurs liabilities to them for the
price of its shares.
This drives the performance of 6. What are the two methods of measuring
employees. the compensation under the share option
plans?
2. Explain the common feature of a share- Fair value method
based compensation plan. Compensation is equal to the fair
Compensation plan are a common value of the share option on the
feature of employee remuneration for date of grant.
directors, senior executives and other key
employees. Intrinsic value method
Companies are able to attract and Compensation is equal to the
retain the services of qualified and intrinsic value of the share option.
competent individuals if the level of Intrinsic value is the excess of the
remuneration is sufficient. market value of the share over the
There is a relationship option price.
between remuneration and performance. Note: only used when the fair value method
cannot be reliably measured.
3. What are the two share-based
compensation plan under PFRS 2?
Equity-settled 7. Explain briefly the fair value method of
Entity issues equity instruments in measuring share-based compensation.
exchange for the service received. Fair value method
Example is share options. Compensation is equal to the fair
value of the share option on the
cash-settled date of grant.
Entity incurs a liability for the
services received and that liability is 8. Explain briefly the intrinsic value method
based on the entity’s equity of measuring share-based compensation.
instrument Intrinsic value method
Example is share appreciation right. Compensation is equal to the
intrinsic value of the share option.
Intrinsic value is the excess of the
4. Explain briefly “equity settled” share- market value of the share over the
based compensation. option price.
Note: only used when the fair value method
Equity-settled cannot be reliably measured.
Entity issues equity instruments in
exchange for the service received.
Example is share options.
9. Explain the recognition of the fair value of
the share options as compensation expense. 11. Explain share-based payment
There are two scenarios: transactions in which the employees of a
Vest immediately subsidiary are granted rights to the equity
On grant date, entity shall recognize instrument of the parent.
compensation as expense in full with Share options granted to the
corresponding increase in equity. employees of the subsidiary shall be
ENTRY: measured at the fair value of the share
Salaries-share options option.
Share option outstanding ang increase sa equity nagpasabot sa
contribution ni parent sa FS ni subsidiary.
Year-end:
Cash 12. Explain the procedures wherein the
Share option outstanding entity modified the vesting condition on
Ordinary share capital which equity instruments were granted.
Share premium
1. PFRS 2 AG, entity shall continue to account
Do not vest immediately for the equity instruments based on the
Compensation is recognized as original condition and vesting period at the
expense over the service period or vesting date of grant.
period. Or simply stated, on the exercise date. If the modification is beneficial
ENTRY: (meaning exercise price is reduced), entity
Salaries-share options shall include the increase in fair value as
Share option outstanding additional compensation.
Increase in fair value mao ni ang diff
Cash between FV of modified equity instruments
Share option outstanding and FV of the original equity instrument, both
Ordinary share capital estimated at date of modification.
Share premium I. Compen based on orig
II. Compen based on modified
10. Explain the accounting procedure if an
entity cancels or settles share options during 2. Par B44, entity shall continue to recognize
the vesting period. compen based on the orig condition as if the
This is acceleration of vesting. modification had never occurred under the ff:
a) The entity kay mo recognize syag
expense as if ang expense kay na a) The modification reduces the fair value
recognize sya over the remainder of the of the equity instruments
vesting period b) The modif is not beneficial (exercise
b) Ang gibayad sa employees sa price increases)
cancellation or settlement kay
considered as repurchase of equity
interest, pasabot ana kay deduction
from equity.
If the payment exceeds the fair value
of the share option exceeds, ang excess
recognize nimos expense.
ENTRY ON CANCELLATION:
Dr share option outstanding & Salaries,
Cr Cash
 Share-based Compensation- Share 5. Explain the measurement of
Appreciation Right compensation arising from share
appreciation right.
Fair value of the liability and until
1. Explain fully a cash settled share-based not settled, shall be remeasured at every
payment transaction. year-end.
Maka incur si entity og liability for Fair value of the liability is equal to
the services received from employees based the excess in market value of the share and
sa entity’s own equity instruments. the predetermined price for a stated number
Shall be measured at the fair value of of shares over a definite vesting period.
the liability.
Until masettle si liability, entity shall The amount is known only on
remeasure the fair value of the liability at exercise date, not on the date of grant.
each reporting period and at the date of
settlement reflecting any changes in the fair
value recognized thru profit or loss. 6. Explain the recognition of compensation
arising from share appreciation right.
a. Vest immediately
2. Distinguish cash settled share-based The compensation is recognized
payment transaction from an equity settled immediately at the date of grant.
share-based payment transaction.
Cash settled creates liability, while equity b. Does not vest immediately
settled creates equity or increases share Compensation is recognized over the
capital. service or vesting period
Both are compensation. ENTRY:
Salaries
3. What is a share appreciation right? Accrued salaries payable
Entitled ang employees to receive
cash equal to the excess of the market value Settlement:
of the share and the predetermined price for Accrued salaries payable
a stated number of shares. Cash
Basta kay liability ni siya sa entity
labaw nag mo exercise ang employee. MODIFICATION FROM CASH TO EQUITY
SETTLED

4. Distinguish a share appreciation right from PFRS 2, par B44 as amended:

a share option. 1. Ang equity settled share based payment
In terms of measurement, share kay measured at the fair value of the equity
appreciation right is equal to the excess in instrument on the modification date and is
market value of the share and the recognized in equity.
predetermined price for a stated number of 2. Ang liability para sa cash settled as of
shares whilst, share option is measured at modification is derecognized.
fair value method or intrinsic method 3. The diff between the carrying amount of
whichever is reliable. the liability and the amount of equity is
In type, share app is cash settled and recognized immediately in profit or loss.
share option is equity settled. ENTRIES:
SAR creates liability, SO creates Cancellation of liability and recording the
equity. share option:
Accrued salaries payable
Salaries
Share options outstanding
7. What is a “cash and share alternative”
granted to an employee? 9. What is the treatment of a share and cash
Uban nga share based payment kay alternative if the entity has the choice of
maka choose ang employees if unsay gusto settlement?
madawat such as in cash or share alternative. Entity ang naay choice:
There is no accounting problem.
Cash alternative- cash payment equal sa Entity shall account the instrument
market value of a certain number of shares initially either as liability or equity, but not
subject to conditions. both.
Share alternative- equity shares ang ihatag sa Thus, if naa sa entity ang choice, ang
employees instrument is not a compound financial
instrument.
Ang accounting diri magdepende unsay gi
choose ni employee.

ENTRIES:
CASH ALTERNATIVE
Accrued salaries payable 10. What is the treatment of a share and cash
Share option outstanding alternative if the employee has the choice of
Cash settlement.
Share premium The entity shall issue a compound
financial instrument.
SHARE ALTERNATIVE It shall be accounted for as partly
Accrued salaries payable liability (cash) and partly equity (share).
Share option outstanding
Share capital Equity component is the fair value of the
Share premium whole compound financial instrument minus
the fair value of the liability component, sa
rason nga ang equity kay residue man jud na
8. What is the meaning of “phantom shares” pirmi.
in a share and cash alternative granted to an
employee?

Phantom share plan that gives employees the

right to receive cash payment on a future
date.
A set number of company shares x current
share price.
The amount is tracked in the form of
hypothetical units known as phantom that
mimic the price of the stock.