Introduction To Corporations: Dr. Ronnie G. Salazar, Cpa, Mba
Introduction To Corporations: Dr. Ronnie G. Salazar, Cpa, Mba
Introduction To Corporations: Dr. Ronnie G. Salazar, Cpa, Mba
Civil corporation –
established for
business or profit
According to their legal right to
corporate existence
Organization Stage
Incorporation Stage
Commencement Stage
Articles of Incorpo
- Name of corp.
- Specific purpose
- Location of busi
- Term of existenc
- Incorporators R
- Authorized shar
By-laws – refers to the rules and
and regulations adopted by the
corporation administering its
internal government.
Includes the following:
1. Time, place and manner of calling a meeting.
2. Manner of voting and use of proxies
3. Manner of electing BOD
4. Qualifications, duties and compensations of
directors or trustee, officers and
employees.
5. Procedure of amending Articles of Inc.
and By-Laws.
Corporate Name
1. Should not be identical with or similar to one
already registered.
2. Must have at its suffix “INC” or “Incorporated”
unless it includes the word “Corporation” as part
of its corporate name.
3. If subsidiary of foreign corporation, the word
(PHIL.) or (PHILIPPINES) in parenthesis should
be affixed to the corporate name.
4. The word(s) “Maharlika” or “Barangay” is strictly
prohibited.
Shareholder’s Journal
Subscriber’s Ledgers
Components of stockholders
equity
Share Capital or Capital Stock xxx
Subscribed Capital Stock (xxx)
Share premium or Additional Paid-In Capital xxx
Treasury Shares (xxx)
Equity Reserved xxx
Accumulated Profits or Losses (R/E) xxx
Total Stockholders Equity XXX
Shareholder’s Equity
Contributed Capital:
Share Capital Pxxx
Subscribed share capital Pxxx
Less: Subscription Receivable xxx xxx xxx
Reserves:
Share premium in Excess of Par Value xxx
Share premium from Treasury Shares xxx
Accumulated Profits & Losses – Appro. xxx
Revaluation Surplus xxx xxx
Accumulated Profits and Losses – Unrestricted xxx
Less: Treasury Share at Cost xxx
Total Shareholder’s Equity Pxxx
Stockholder’s Equity – Sub Sections
1. Contributed Capital – the first sub- A. Share Premium Reserve – also known as
section of the shareholder’s equity consist “additional paid in capital” excess of the par
the following elements. value or stated value.
A. Share Capital – refers to the portion of
the paid-in capital representing the B. Revaluation Reserve – also known as “
amount of the total par or stated value of Revaluation Increment in Property” “ Asset
the shares issued. Revaluation Reserve”. This is the excess of
B . Subscribed Share Capital – refers to value of plant assets as a result or appraisal
the portion of the share capital that a over net book value.
prospective investor agreed to subscribe
but nit yet paid-in-full and therefore, still C. Accumulated Profit (Losses) Reserve – it is
unissued. the portion of the Accumulated Profit and
C. Subscription Receivable – refers to the Losses that is appropriated for plant
unpaid portion of the share capital that a expansion, purchase of Treasury Shares, etc.
prospective investor has agreed to
subscribe.
3. Accumulated Profit (Losses)
Unappropriated – known as Retained
2. Reserve – second sub-section of the Earnings, this account represents the
shareholder’s equity. cumulative income and expense from the
start it operates up to the present.
Capital stock -
the amount specified in the articles of
incorporation paid in, or procured to be
paid in for carrying on of the business of
the corporation.
Capital Stock
Outstanding capital stock –
Authorized capital stock – this is
refers to the total shares of
the total of shares which a
stock issued to subscribers or
corporation is allowed to issue if
stockholders, whether or not
the shares have par value.
fully or partially paid.
Issued the share certificates Subscribed share capital 600,000 Subscribed share capital 600,000
for 6,000 shares which are Share capital 600,000 Unissued share capital 600,000
fully paid.
Cash subscription for 5,000 Cash 500,000 Cash 500,000
shares Share capital 500,000 Unissued Share capital
500,000
Statement Presentations
Memorandum Method Journal Entry Method
Share Capital, P100 par, 40,000 Authorized Share Capital ,P100par
Shares authorized, 11,000 shares issued 1,100,000 40,000 shares 4,000,000
Subscribed share capital, 4,000 shares 400,000 Unissued Share Capital
Subscription receivable (300,000) 29,000 shares (2,900,000)
Shareholder’s Equity 1,200,000 Issued Share Capital 1,100,000
Subscribed Share Capital
4,000 shares 400,000
Subscription receivable (300,000)
Shareholder’s Equity 1,200,000
Illustration
January 1, 2014 - Coca-Cola Corp. is authorized to issue 30,000 shares of
Ordinary Shares at a par value of P50 per share.
January 5, 2015 – Coca-Cola Corp. sold its 5,000 ordinary shares for cash.
Case 1 - Issued at par value
Case 2 – Issued at P60 per share
January 30, 2015 – Coca-Cola Corp. issued 2,000 ordinary share to Grace Poe on
subscription basis and collected 25% down-payment. The balance is payable on.
February 15, 2015.
Issuance of two (2) shares of stocks
On January 1, 2014, Cola Cola Corp. is authorized to issue 10,000 shares of
10% Preference Shares at a Par Value of P100 per share and 30,000 shares
of Ordinary Shares at a par value of P50 per share.
“ No-Par Value shares with stated value” are shares without any
nominal value printed in the share certificate but with stated value.
Cash 227,500
Subscription Receivable 227,500
Entry:
Cash 120,000
Ordinary Share Capital 120,000
Accounting for Issuance of Share Capital
Example: Cola-Cola Corporation issued its 2,000 shares to Mr. Mar Roxas
with a par value of P50 in exchange for a land. Assuming that equity per
share has a fair market value of P55 and the land has the fair market
value of P250,000.
Case I – Fair Market Value of property received is given:
Entry: Land 250,000
Ordinary Share Capital 100,000
Share Premium – O/S 100,000
Continuation -
Case II – Fair market value of the property received is not given
Example:
Cola-Cola Corporation issued its 2,000 shares @ P50 par to Atty.
Richard Portun for payment of legal services rendered which has the fair
market value of P120,000. The fair market value of the share is P65.
Entry:
Organization Expense 120,000
Ordinary Share Capital 100,000
Share Premium – O/S 20,000
Example:
Cola-Cola Corporation issued its 2,000 shares @ P50 par in
exchange for San Miguel, Inc. 2,100 shares. The fair market value of the
share is P 55 while that of San Miguel, Inc. is P60.
Entry:
Investment in Equity Securities – San Miguel, Inc. 126,000
Ordinary Share Capital 100,000
Share Premium – O/S 26,000
Direct Costs for Share Capital Issuance
Share issuance costs - are direct expenses incurred in
selling share capital. It includes printing costs, legal fees,
documentary stamps, costs of promoting the issue,
registration and other regulatory fees.
Issuance:
Cash 130,000
Ordinary Share Capital 100,000
Share Premium 30,000
Direct Cost:
Share Premium or APIC 20,000
Cash 20,000
Continuation
Using the same illustration, if direct cost is P40,000 and
the share premium or additional-paid in capital is P30,000
Entry:
Share Premium 30,000
Legal Expense 10,000
Cash 40,000
Cost of public offering of shares
“cost that relate to stock market listing, or
otherwise are not incremental costs directly
attributable to the issuance of new shares,
shall be recorded as expense in the income
statement”
Includes;
a. road show presentation
b. public relations consultant’s fees
Joint Costs
- These are costs that relate jointly to the concurrent listing and
issuance of new shares and listing of old existing shares
- Includes:
- Audit and other professional advice relating to prospectus
- Opinion of counsel
- Tax opinion
- Fairness opinion and valuation reports
- Prospectus design and printing
- Allocations:
prorata on the basis of outstanding newly issued and listed
shares and outstanding newly listed old existing shares
Illustration
An entity undertakes an initial public offering or IPO for the listing
and issuance of 700,000 new shares and listing of 300,000 old
existing shares.
The entity incurred the following costs:
Documentary stamp tax 25,000
Fairness opinion and valuation report 125,000
Tax opinion 100,000
Newspaper publication 200,000
Listing fee 300,000
Other joint cost 275,000
Computations
Cost of public offering
Listing fee 300,000
Joint Costs
Fairness opinion and valuation report 125,000
Tax opinion 100,000
Other joint costs 275,000
Total 500,000
Joint Costs
Share premium 350,000
Stock listing fee 150,000
Cash 500,000
Watered share
- Is share capital issued for inadequate or insufficient
considerations
- The consideration received is less than par value or stated
value, but the share capital is issued as fully paid.
- Asset and capital is overstated
Example:
Land with a fair value of at P800,000 is received for
P10,000 shares of P100 par value. To create a water in the share
capital, the issuance of 10,000 shares is recorded as fully paid as
follows:
Land 1,000,000
Share capital 1,000,000
To correct:
Discount on share capital 200,000
Land 200,000
Secret reserve
Arises when the asset is understated or liability is overstated with a
consequent understatement of capital. Arises from:
1. excessive provision for depreciation, depletion,
amortization and doubtful accounts.
2. excessive write-down of receivables, inventories and
investments
3. Capital expenditures are recorded as outright expense
4. Fictitious liabilities are recorded.
January 30, 2015 – Coca-Cola Corp. issued 2,000 ordinary share to Grace
Poe on subscription basis and collected 25% down-payment. The balance is
payable on. February 15, 2015
Feb. 15, 2015 – Let us assume that Grace Poe defaulted her subscription of
2,000 at a par after paying 25% down-payment. Her 2,000 share are considered
delinquent.
Issuance of Certificate:
Subscribed Share Capital 100,000
Ordinary Share Capital 100,000
Callable preference shares
- Is one which can be called in for redemption at a specified price at the option
of the corporation.
- “equity instruments”
- Called at more than the original issuance price of the preference shares, the
excess is debited to Retained Earnings
- The excess of the call price over the par value of the preference shares is
charged to the following:
a. Share premium from the original issuance of the preference share
b. Retained earnings
- Called in at less than original issuance price – credited to share premium
related to ordinary shares.
Illustration
An entity issued 10,000 callable preference shares with par value of
P100 at P120 per share.
- Gives the holder the right to require the issuer to redeem the
instrument for a fixed or determinable amount at a future date.
- Has the legal form of an equity instruments but meets the definition
of a financial liability
2019
Jan. 1 Redeemable preference shares 6,000,000
Accrued interest payable 615,000
Cash 6,615,000
Convertible preference shares
Is one which gives the holder the right to exchange the holdings for
other securities of the issuing corporation.
May convert into bonds which is actually a change of equity from that of
an owner to that of creditor.
Entry
Case I Case 2
Case I
The preference shares is converted into ordinary shares in the ratio of one
preference share for three ordinary shares.
Case 2
The preference shares is converted into ordinary shares in the ratio of one
preference share for five ordinary shares.
Incorporation of a Partnership Business
Step 1 – Partnership Book - Revalue the partnership assets and recognize all
liabilities by way of adjusting entries as of the date of incorporation.
Step 2 – Partnership Book - Record the transfer of the adjusted value of the
assets and liabilities which are termed as “net assets” is debited to Receivable
from_________Corporation”. The amount of the Receivable from Corporation
account is equal to the capital balances of all partners.
DEBIT CREDIT
Cash 70,000
Accounts Receivable 60,000
Allow. For Doubtful Accounts 5,000
Merchandise Inventory 115,000
Delivery Equipment 120,000
Acc. Depreciation 40,000
Accounts Payable 20,000
Robert, Capital 80,000
Ana, Capital 40,000
Mandro, Capital 60,000
Bogie, Capital 50,000
Oscar, Capital 70,000
Total 365,000 365,000
Rambo Corporation (corporate name of Rambo Partnership) is authorized to issue 5,000 ordinary
shares with par value of P 100 per share.
Continuation
Step I – Partnership Book – revaluation of the assets and recognition of liabilities are recorded.
Step II – Partnership Book – Record the transfer of assets and liabilities as follows;
Cash 70,000
Accounts Receivable 60,000
Merchandise Inventory 115,000
Delivery Equipment 80,000
Allowance for Doubtful Accounts 5,000
Accounts Payable 20,000
Subscription Receivable – Ordinary 300,000
d. To record issuance of Share Capital Certificate to the partners who are now incorporators.
Devaluation of Assets:
Cash 170,000
Accounts Receivable 240,000
Merchandise 381,600
Furniture & Fixtures 140,000
Allowance for Doubtful Accounts 30,000
Accounts Payable 400,000
Corpuz, Loan 30,000
Receivable from Kalahi, Corp. 471,600
Cash 200,000
Accounts Receivable 430,000
Car (net) 850,000
Furniture & Fixtures (net) 400,000
Allowance for Doubtful Accounts 50,000
Accounts Payable 150,000
Notes Payable 200,000
Receivable from Senate Janitorial, Corp. 1,480,000
Shareholder’s Equity
Contributed Capital:
Share Capital:
Ordinary Shares, authorized to issue 5,000
shares par value, P100. Issued 3,000 shares P 300,000
Reserved:
Share Premium on Ordinary Shares 15,000
Shareholder’s Equity
Contributed Capital:
Share Capital:
Ordinary Shares, authorized to issue 5,000
shares par value, P100. Issued 3,000 shares P 300,000
Reserved:
Share Premium on Ordinary Shares 15,000
Reserved:
Share Premium on Ordinary Shares 15,000
Outstanding shares – refers to shares that were issued and fully paid
and at the time of dividend declaration are still in the possession of the
shareholders’.
Subscribed par value shares – provided they are not delinquent are
also entitled to received dividends.
Cash Dividends
Cash dividends may be expressed as follows:
a. As a certain percentage (%) of a par or stated
value
b. As a certain peso amount per share.
Illustration:
The board of Directors of Buhangin Corp. at their
meeting on August 1, 2015 has declared a 10% cash
dividend to shareholders of record on Sept 30 payable
on Oct. 31, 2015. 10,000 shares were issued and
outstanding with a par value of P50 per share.
Computations of dividends
Issued & outstanding shares 10,000 Par value per share P 50
X Par value per share P5 X % of dividends declared 10%
Share Capital P 500,000 Dividends declared per share P5
X % of dividends declared 10% X no. of shares outstanding 10,000
Amount of dividends declared P 50,000 Amount of dividends declared 50,000
Illustration:
The following data were taken from the record of Banahaw Corp.
10% Preference Share, P100 par, 1,000 shares were
issued and outstanding P100,000
Ordinary Shares, P50 par, 3,000 shares were issued
and outstanding 150,000
Accumulated Profits (losses):
Appropriated fro Plant Expansion P 80,000
Unappropriated or Free 120,000 200,000
Of the unappropriated or free Accumulated Profit (losses) of P120,000, P90,000 was
declared as cash dividends in 2015. No cash dividends were declared and paid in the
past two (2) years.
Preference Shares are cumulative & non-participating
Ordinary Dividends:
Balance P60,000 P60,000
As distributed P30,000 P60,000 P90,000
Ordinary Dividends:
Balance P80,000 P80,000
As distributed P10,000 P80,000 P90,000
Declaration: Entry
Accumulated Profits (losses) xxx
Share dividends distributable xxx
Distribution: Entry
Share dividends distributable xxx
Share capital xxx
Illustration:
Magara Corporation, a corporation with listed shares, declares a 10%
share dividend. It has 10,000 shares issued and outstanding with a par value of
P100. On the date of declaration, the market value per share is P105.
Entry: Declaration:
Accu. Profit (Losses) 105,000
Share Dividends Distributable 100,000
Share Premium from Share Dividends 5,000
Distribution:
Share Dividends Distributable 100,000
Ordinary Share Capital 100,000
Large Share Dividends
Declaration of share dividends of more than 20%
Valuation of dividends: Par value at the time of declaration
Illustration:
Magara Corporation, a corporation with listed shares, declares a 25% share
dividend. It has 10,000 shares issued and outstanding with a par value of P100. On
the date of declaration, the market value per share is P105.
Entry: Declaration:
Accu. Profit (Losses) 250,000
Share Dividends Distributable 250,000
Distribution:
Share Dividends Distributable 250,000
Ordinary Share Capital 250,000
Liquidating Dividends
- Are those dividends declared and paid out
of capital. In other words, liquidating
dividends are return of capital to investing
shareholders.
Share Splits
Split-Up Split – Down
Mahogany Corporation has 20,000 ordinary shares Mahogany Corporation has 20,000 ordinary
issued and outstanding at par value of P100 for shares issued and outstanding at par value of
P2,000,000. The Board of Directors finally decided P100 for P2,000,000. The Board of Directors finally
to “split-up” the shares “five for one”. decided to “split - down” the shares “one for five”.
Par Value = P2,000,000 / 100,000 = P20 Par Value = P2,000,000 / 4,000 = P500
Total Ordinary Share Capital = P2,00,000 Total Ordinary Share Capital = P2,00,000
Scrip Dividends
- They are actually deferred cash dividends. These are being declared when a
corporation has sufficient Unrestricted Accumulated Profits (Losses) to
warrant declaration but does not have enough cash to pay dividends.
- They are written promise to pay certain amount of money at future date.
When interest-bearing, interest is paid at maturity date.
Entry: Declaration:
Accumulated Profits (Losses) 50,000
Scrip Dividends Payable 50,000
Payment:
Scrip Dividends Payable 50,000
Interest Expense 6,000
Cash 56,000
Interest = Principal x Rate x Time = P50,000 x 12% x 1) = P 6,000
Property Dividends
- are dividends declared which are payable in terms of non-cash assets.
Declaration: Entry:
Accumulated Profits (Losses) 30,000
Dividends Payable in Shares of DEF Corp. 30,000
Distribution: Entry
Dividends Payable in Shares of DEF Corp. 30,000
Investment in Share of DEF Corp. 30,000
Treasury Shares
- are corporation’s own shares which are already issued and fully pad for by
the shareholder’s were later reacquired but not cancelled.