50363412 actpaco manalo unit 7

7/30/2019 50363412 ACTPACO Manalo Unit 7

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Introduction to Corporation Accounting

CORPORATION - 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 (New Corporation Code of the Philippines). A corporation is anentity created by law that is separate and distinct from its owners and its continued

existence is dependent upon the corporate statutes of the state in which it is incorporated.

Characteristics of a Corporation

The characteristics that distinguish a corporation from proprietorships and partnershipsare:

1. Separate legal entity A corporation is an artificial being with a personality

separate from that of its individual owners (i.e., the corporation has separate legal

existence from its owners).

2. Created by operation of law A corporation is generally created by operation of

law. The mere agreement of the parties cannot give rise to a corporation.

3. Right of succession A corporation continues to exist notwithstanding thewithdrawal, death, insolvency or incapacity of the individual owners. Changes in

the ownership structure do not dissolve a corporation this means that the

corporation can have a continuous life.

4. Powers, attributes, properties expressly authorized by law Being a creation oflaw, a corporation can only exercise powers provided by law and powers which

are incidental to its existence.

5. Ownership divided into shares Proprietorship in a corporation is divided intounits known as shares of stocks. Ownership is shown in shares of share capital,

which are transferable units.

6. Board of Directors (BOD) Management of the business is vested in a board ofdirectors elected by the stockholders. The BOD is the governing body or decision-

making body of the corporation.

7. The stockholders have limited liability.

8. It is relatively easy for a corporation to obtain capital through the issuance of

stock.

9. The corporation is subject to numerous government regulations.

10. The corporation must pay an income tax on its earnings, and the stockholders are

required to pay taxes on the dividends they receive: the result is double taxation.

Marivic Valenzuela-Manalo 1


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Distinction between Partnerships and Corporations

Partnership Corporation

1. Formed by at least two persons. Initially formed by at least five persons.

2. Starts with agreement among partners; maybe formed orally. Starts with the issuance of a certificate ofincorporation issued by SEC

3. Unlimited liability Limited liability

4. Limited life Unlimited life

5. Transfer of equity of a partner needs theconsent of all the partners.

Stocks can be transferred from onestockholder to another without getting the

consent of the other stockholders.

6. Partner is an agent of the partnership. Stockholders do not act as agents of thecorporation.

Classes of Corporation

A. According to Purpose

1. Public a corporation formed to render government service

2. Private a corporation formed for a private purpose, aim or benefit.

3. Quasi-public a private corporation which is given a

franchise to perform functions of a public character.

B. According to Law of Creation

1. Domestic a corporation that is organized under Philippine laws.

2. Foreign -- a corporation that is organized under the laws of other countries.

C. According to Membership Holdings

1. Stock a corporation in which the capital is divided into shares of stock and isauthorized to distribute dividends to the holders of such shares. A stock

certificate is a physical evidence of the shares of stock. Stock corporations are

generally profit-oriented.

2. Non-stock - a corporation in which capital comes from fees or contributions

given by individuals. No part of its income is distributed as dividends and anyprofit shall be used to further the purpose(s) of the corporation. Non-stock

corporations are generally non-profit in nature.

D. According to the Extent of Membership

1. Open a corporation whose ownership is widely held by many investors.



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2. Closely held or family a corporation in which 50% or more of its stock is

owned by five persons or less.

Components of a Corporation

1. Incorporators persons who

originally formed the corporation and whose names appear in the Articles ofIncorporation. They must be 5 but not more than 15 natural persons. They

should not artificial persons.

2. Stockholders or shareholders owners of a stock corporation.

3. Members persons who gave fees or

contributions to a non-stock corporation.

4. Corporators persons who compose

the corporation whether as stockholders or members.

5. Promoters persons who undertake

the necessary steps and procedures to organize the corporation.

6. Subscribers persons who agreed to

buy shares of stock but will pay at a later date.

7. Underwriters persons whoundertake to sell the shares of stocks to the general public.

Advantages of a Corporate Form of Business

1. Unlimited life. The corporations power of succession enables it to enjoy a

continuous existence.

2. The continuity of corporate existence enables it to obtain a strong credit line.

3. Bigger source of capital may be raised because many individuals invest funds inthe corporation.

4. Stockholders enjoy limited liability. Liability of stockholders is limited to the

extent of their investment in the corporation.

5. Ease of ownership transferability - shares of stocks may be transferred without the

consent of the other stockholders.

6. The corporation has the capacity to act as a legal entity.

7. Centralized management under the Board of Directors.

Disadvantages of a Corporate Form of Business

1. Difficulty in formation. It is not easy to form because of complicated legal

requirements and high costs in its organization.

2. The limited liability of the stockholders weakens or limits its credit capacity.

3. It is subject to more governmental control.



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4. There is possibility of abuse of power by the Board of Directors because

centralized management restricts active participation by stockholders in the

conduct of corporate affairs.

5. Corporations activities are limited by the articles of incorporation.

6. It is subject to more taxes.Legal Requirements in Organizing a Corporation

The process of organizing a corporation consists of three stages:

1. Promotion makes preliminary arrangements and solicits

subscription to raise sufficient capital for the business. The following are the pre-

incorporation requirements:a. At least 25% of the authorized share capital as stated in the articles of

incorporation must be subscribed.

b. At least 25% of total subscriptions must be paid upon subscription.

2. Incorporation formalizes organization of the corporation by filing with SEC thenecessary documentary requirements such as articles of incorporation andtreasurers affidavit attesting compliance to the pre-incorporation requirements.

Upon approval, SEC issues a certificate of incorporation, the date of which is

considered as the date of registration or incorporation.

3. Commencement of the business the business should start its business within twoyears from the date of incorporation.

Costs incurred in connection with the formation of the corporation are recorded as

an expense. Examples of organization costs are filing fees, cost of printing stock

certificates, promoters commission and legal fees. Any one of the following account

titles may be used in recording organization costs:

1. Pre-operating Costs

2. Organization Expense

3. Organization Costs

Articles of Incorporation

The Articles of Incorporation enumerates the powers and limitations conferred upon the

corporation by the government. It includes the following information:

1. The name of the corporation;

2. The purpose or purposes for which the corporation is formed;3. The place of the principal office of the corporation;

4. The term of existence of the corporation, not exceeding 50 years;

5. The names, nationalities and addresses of the incorporators;

6. The names of the directors who will serve until their successors are duly electedand qualified in accordance with the by-laws;



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7. The authorized share capital, the classes of stocks to be issued and the number of

each class of stock indicating the par value if there is any;

8. The amount of subscription to the share capital, the names of the subscribers andthe number of shares subscribed by each;

9. The total amount paid on the subscriptions and the amount paid by each

subscriber on his subscription.

By-Laws

The by-laws of a corporation contain provisions for the internal administration of thecorporation. The by-laws should be filed within one month from the date of issuance of

the certificate of incorporation. The by-laws normally include the following:

1. The date, place and manner of calling the annual stockholders meeting;

2. The manner of conducting meetings;

3. The circumstances which may permit the calling of special meetings of thestockholders;

4. The manner of voting and the use of proxies;

5. The manner of electing the directors;

6. The term of office of the directors;

7. The authority and duties of the directors;

8. The manner of selecting the corporate officers;

9. The procedures for amending the articles of incorporation and by-laws.

Corporate Books and Records

The corporation generally maintains the following books of accounts and records:

1. Journals and Ledgers;

2. Minute books for meetings of stockholders;

3. Minute books for meetings of Board of Directors;

4. Stock and Transfer book - contains record of all stock, the names of stockholders

or members alphabetically arranged; the installment paid and unpaid on all stocks,

for which subscription has been made, any sale or transfer of stock.

Classes of Stock

1. Par value a share of stock that is given a definite or fixed value in the articles ofincorporation.

2. No par value a share of stock that has no fixed value; it may not be issued for

less than P5.00.



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3. Ordinary share the basic issue or ordinary/common type of shares. The ordinary

share entitles the holder to the following basic rights:

a. Right to vote in stockholders meeting;

b. Right to share in corporate profits (dividends);

c. Right to share in corporate profits upon liquidation;

d. Right to purchase additional shares of stocks in the event that thecorporation increases its share capital (pre-emptive right).

4. Preference share - entitles the holder to some specific preferences over the

ordinary share such as

a. Preference as to payment of dividends;

b. Preference as to distribution of assets upon liquidation.

Terms Commonly Used in Corporation Accounting

1. Authorized shares - refer to the maximum number of shares which may beissued by a corporation as set forth in the articles of incorporation.

2. Issued shares represent shares which were issued to stockholders in the past

which at present may or may not be in the hands of stockholders.

3. Unissued shares shares which have never been issued and are available for

issuance in the future.

4. Outstanding shares the total shares of stocks issued to subscribers or

stockholders, whether or not fully or partially paid (as long as there is a bindingsubscription agreement) except treasury shares.

5. Treasury shares - shares which have been issued and fully paid for butsubsequently reacquired by the issuing corporation by purchase or by donation..

6. Subscribed shares shares which investors have contracted to acquire.

7. Subscription -is a contract between a subscriber (buyer of stock) and a corporation( issuer of stock) whereby the former purchases shares of stocks of the latter with

the payment to be made at the later date.

8. Certificate of stock - a written acknowledgment by the corporation of the

stockholders interest in the corporation and its net assets.

9. Share Premium/Paid in capital in excess of par value/stated value - this account is

credited for contribution in excess of par or stated value.

10. Pre-emptive right - the right of a stockholder to maintain his ownership interest inthe corporation trough purchase of additional shares when new capital is issued.



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Unit 7ACCOUNTING FOR CORPORATION FORMATION

Accounting for Share Capital/Transactions

Forming a Corporation

The formation of a corporation involves (a) filing an application with theSecurities and Exchange Commission (SEC), (b) paying an incorporation fee, (c)

receiving a charter (articles of incorporation), and (d) developing by-laws.a. Costs incurred in forming a corporation are called organization costs.b. These costs include fees to underwriters, legal fees, state incorporation fees,

and promotional expenditures.

c. Organization costs are expensed as incurred.

Ownership Rights of Stockholders

When chartered, the corporation may begin selling ownership rights in the form

of shares of stock. Each share of ordinary share gives the stockholder the followingownership rights:a. To vote for the board of directors and in corporate actions that require

stockholder approval.

b. To share in corporate earnings through the receipt of dividends.

c. To maintain the same percentage ownership when additional shares of ordinaryshare are issued (preemptive right).

d. To share in assets upon liquidation (residual claim).

Stock Issue Considerations

Authorized stock/share is the amount of stock/share a corporation is allowed to sell as

indicated by its charter.a. The authorization of share capital does not result in a formal accounting entry.

b. The difference between the shares of stock authorized and the shares issued is

the number of unissued shares that can be issued without amending the charter.

A corporation has the choice of issuing ordinary share directly to investors or

indirectly through an investment-banking firm (brokerage house). Direct issue is typical

in closely held companies, whereas indirect issue is customary for a publicly heldcorporation.

Par value share/stockis share capital that has been assigned a value per share in

the corporate charter. It represents the legal capitalper share that must be retained in thebusiness for the protection of corporate creditors.

No-par share/stock is share capital that has not been assigned a value in the

corporate charter. In many states the board of directors can assign a stated value to the

shares, which becomes the legal capital per share. When there is no assigned stated

value, the entire proceeds are considered to be legal capital.



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The primary objectives in accounting for the issuance of ordinary share are to (a)

identify the specific sources of paid-in capital and (b) maintain the distinction between

paid-in capital and retained earnings.

When par value ordinary share is issued for cash, the par value of the shares is

credited to Ordinary share and the portion of the proceeds that is above or below parvalue is recorded in a separate paid-in capital account.

When no-par ordinary share has a stated value, the stated value is credited toOrdinary share. When the selling price exceeds the stated value, the excess is credited to

Paid-in Capital in Excess of Stated Value. When no-par stock does not have a stated

value, the entire proceeds are credited to Ordinary share.

Basic Share capital Transactions

There are 5 basic share capital transactions:

1. Authorization records the maximum number of shares a corporation is

authorized to issue.2. Sale of stocks a stockholder buys stocks and pays immediately in full. Stock

certificate is issued to the stockholder.3. Subscription a subscriber enters into a contract to buy shares of stock.

4. Collection a subscriber pays his subscription either partially or in full.

5. Issuance of certificate if a subscription is fully paid; a stock certificate is issuedto the subscriber.

Share capital

Share capital may be paid by the stockholder or subscriber in the form of1. money/cash

2. property record the value of the property using the following amounts:

a. fair value of the property receivedb. fair value of the shares of stock, whichever is clearly determinable;

c. par value of the shares of stock

3. labor or services record the cost of the labor or services using the fair value ofthe services rendered.

Important:

When shares of stock are issued forservices or non-cash assets, cost

is either the fair market value of the consideration given up or theconsideration received, whichever is more clearly determinable (Weygant, et

al, 2006).

Share capital may be issued

1. at par

2. at a premium at an amount more than the par value. The amount in excess ofpar value is treated as share premium.



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Share capital cannot be issued at a discount or an amount less than par under the

Philippine setting.

When the value assigned to the asset received is greater than the par value times the

number of shares issued, such issuance is called watered stock. The overstatement is

done to comply with the requirement of the law that the stock should not be issued at less

than its par value. When the value of the asset received is understated, the stock is said tocontain secret reserves.

Accounting Methods to Record Share capital Transactions

1. Memo entry method

2. Journal entry method

Pro-forma Entries Par Value Stock Subscribed or Sold at Par

Transaction Memo Entry Method Journal Entry Method

Authorization Authorized to issue _____ shares with a

par value of P___.

Unissued share capital xxx

Authorized share capital xxx

Sale Cash xxxShare capital xxx

Cash xxxUnissued share capital xxx

Subscription Subscriptions receivable xxx

Subscribed share capital xxx

Subscriptions receivable xxx


Collection Cash xxxSubscriptions receivable xxx

Cash xxxSubscriptions receivable xxx

Issuance of

certificate


Share capital xxx



Pro-forma Entries Par Value Stock Subscribed or Sold at a Premium

Transaction Memo Entry Method Journal Entry Method

Authorization Authorized to issue _____ shares witha par value of P___.

Unissued share capital xxxAuthorized share capital xxx

Sale Cash xxx

Share capital xxx

Share premium xxx

Cash xxx


Share premium xxx



Share premium xxx



Share premium xxx

Collection Cash xxxSubscriptions receivable xxx

Cash xxxSubscriptions receivable xxx

Issuance of

certificate


Share capital xxx





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Special Notes:

1. The Subscription Receivable account title is always recorded at subscription pricescomputed as follows:

Subscriptions receivable = subscribed shares x subscription price

2. Subscribed Share capitaland Share capitalaccounts are always recorded/creditedat par value.

3. Share Premium/Paid in Capital in Excess of Paris recorded/credited at amount in

excess of par computed as follows:Paid in capital in excess of par = (Subscription price par value) (subscribed shares)

Accounting for Two Classes of Stock

The two classes of stock are ordinary share and preference share. Ordinary share entitles

the holder to the four basic rights of a stockholder. Preference share is generally issuedwith par value and with a dividend rate. Voting right is frequently given exclusively to

ordinary shareholders. The pro-form entries to record share capital transactions for twoclasses of stock are the same. However, the account titles must be labeled as to whetherit is common or preferred. The following account titles may be used.

Ordinary Preference

Subscriptions receivable ordinary Subscriptions receivable preference

Subscribed ordinary share Subscribed preference share

Share premium- ordinary Share premium-preference

Ordinary share Preference share

Accounting for No Par Shares

No par shares do not have a definite or fixed value.

1. No par shares are recorded using the memo entry method only.

2. The entire consideration received by the corporation for its no par value shares

shall be treated as capital and shall not be liable for distribution as dividends.

3. Preferred shares which are preferred as to assets can be issued only with par

value.

4. Banks, trust companies, public utilities, buildings and loan associations, insurancecompanies cannot issue no-par stocks.

5. No par value shares may not be issued at an amount less than P5 per share.

6. While no par value shares do not carry a nominal value in the certificate, a selling

price may be assigned. This value is called stated value. Stated value should not

be less than P5 per share.



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Pro-forma Entries: No Par Value Stock (Memo Entry Method)

Transaction No Stated Value With Stated Value

Authorization Authorized to issue _____ shares, nopar.

Authorized to issue _____ shares, nopar with a stated value of P___.

Sale Cash xxx

Share capital , no par xxx

Cash xxx

Share capital, no par xxx

Share premium stated value xxx





Share premium-

Pxx stated value xxx

Collection Cash xxx


Cash xxx


Issuance of

certificate


Share capital , no par xxx


Share capital, no par xxx

Incorporating a Partnership

A partnership may incorporate after considering the many advantages of a corporate form of

business. It is advisable that new set of books is used by the newly formed corporation.

Steps or procedures in converting a partnership into corporate form of business

Books of the Partnership Books of the Corporation1. Finish the accounting cycle. 1. Record authorized capital sock.

2. Revalue the assets and liabilities using

the Capital Adjustment account.

2. Record the subscription of incorporators.

3. Close the balance of the Capital

Adjustment account to the partnerscapital accounts in accordance with

their profit and loss ratio.

3. Record the transfer of the assets and

liabilities of the partnership to thecorporation. This serves as the payment

of the subscription of the partners who

became incorporators.

Accounts receivable is transferred

at gross amount together with the

allowance for bad debts.

Depreciable assets are transferred at

net carrying amount.

4. Close the accounts of the partnershipexcept the capital accounts.

4. Record the issuance of stocks toincorporators.

5. Record the receipt of stocks.

6. Record the distribution of stocks.



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Pro-forma Entries: Books of the Partnershipa. Adjust the existing partnership books

Date P A R T I C U L A R S P/R

Increase in the asset value with no contra-asset account

Asset X X X X

Capital adjustment X X X X

Decrease in the asset value with no contra-asset account

Capital Adjustment X X X X

Asset X X X X

Increase in the asset value with contra-asset account

Contra-asset X X X X

Capital adjustment X X X X

Decrease in the asset value with contra-asset account

Capital adustment X X X X

Contra-asset X X X X

Close Capital adjustment account withdedit balance

Rose, Cpital X X X X

Guada, Capital X X X X

Cpital adjustment

X X X X

Close Capital adjustment account with credit balance

Capital adustment X X X X

Rose, Capital X X X X

Guada, Capital X X X X

Note: These adjusting entries are similar to year-end adjustments. The only difference is that the

Capital Adjustment account replaces all the nominal accounts which is eventually

closed to the individual capital accounts of the partners.

DEBIT CREDIT



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Accounting for Delinquent Subscription

There are instances when a subscriber cannot pay in full the amount he subscribed

to. Payment of the balance on subscription may either be specified in the contract of

subscription or in lieu thereof may be subject to call by the Board of Directors.

According to the Corporation Code of the Philippines, if

within thirty (30) days from the said date, no payment is

made; all stocks covered by said subscription shall thereuponbecome delinquent and shall be subject to sale.

When a subscriber fails to pay his subscription on the call date, the corporation sends

several notices to remind him of his obligation. If no payment was made by thesubscriber, his subscription is declared as delinquent subscriptions and the subscriber is

called a defaulting subscriber. And these delinquent stocks are offered for sale in a

public auction.

1. The sale of the delinquent stocks is advertised to have possible buyers/bidders.All expenses incurred relating to the sale of the delinquent shares will be charged

or debited toReceivable from Highest Bidderaccount since this amount will

eventually be collected to the highest bidder together with the unpaid balance ofthe subscription.

2. An auction sale is conducted where a highest bidder is chosen.

3. The sale of the delinquent subscription is issued to the highest bidder.

4. The highest bidderis the one who is willing to pay the unpaid balance of the

subscription plus accrued interest plus all expenses related to the sale and who is

willing to receive the least/smallest number of shares.

5. Once the subscription is fully paid, all subscribed shares are issued. Shares arefirst given to the highest bidder. The excess shares are given to the defaulting

subscriber.

6. If there is no bidder, all of the delinquent shares will be issued in the name of the

corporation. Such shares are considered treasury shares. The defaultingsubscriber does not get any share of stock.



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Pro-forma Entries using the Short Method of accounting for delinquent stocks

a. Record the subscription

Date P A R T I C U L A R S P/R

Subscription receivable X X X XSuscribed share capital X X X X

Cash X X X X

Subscription receivable X X X X

No entry

Receivable from highest bidder X X X X

Cash X X X X

Cash X X X X

Subscribed share capital X X X X

Receivable fro highest bidder X X X X

Subscriptions receivable X X X X

Share capital X X X X

OR

Treasury stock X X X X

Subscribed share capital X X X X

Receivable fro highest bidder X X X X

Subscriptions receivable X X X X

Share capital X X X X

e. The highest bidder pays and corresponding stock certificates are issued

f. If there is no bidder at all

DEBIT CREDIT

b. Record partial collection

c. Corporation sends several notices but no payment was made by the subscriber

d. The corporation incurred costs related to the selling of the delinquent shares

Illustrative problem:

Assume that Joseph subscribed 250 shares of Ordinary share at P25.00 (P20.00 is

the par value). After paying 50% on his subscriptions, he defaulted. Due process wastaken and the shares were declared delinquent. Advertising and other cost including

those advances made by the corporation amounted to P500.00

At the public auction, bids from Mary, Clare and Luisa were received. Mary bid

230 shares; Clare for 240; and Luisa for 245 shares. The highest bidder paid the

amount due and stock certificate was issued by the corporation.

REQUIRED: Record the above transactions.


50363412 actpaco manalo unit 7

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