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Accounting-for-Corporation

BS Accountancy (University of Baguio)

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CORPORATION ACCOUNTING

A corporation is a legal entity that is separate and distinct from its owners, who are known as
shareholders.

Shareholder’s Equity

It is the residual interest of owners in the net assets of a corporation measured by the excess
of assets over liabilities. The Shareholder’s Equity section is composed of:

Share capital issued XX

Subscribed share capital XX

Less: Subscriptions receivable XX XX

Share premium:
Share premium excess over par XX

Share premium - Treasury shares XX

Share premium conversion
option –
convertible bonds payable XX
Donated capital XX
Share premium warrants outstanding XX
Share premium options outstanding XX XX

Total paid in capital XX

Retained earnings - unappropriated XX

Retained earnings - appropriated XX XX

Revaluation surplus XX

Unrealized gain or (Loss) on FVTOCI XX

Total XX
Less: Treasury shares( at cost) XX
Total shareholders’ equity XX

Shareholders’ equity is divided into two parts: share capital and retained earnings, also known as the
contributed capital and the earned capital.

LEGAL CAPITAL

Legal capital is the portion of paid in capital which cannot be returned to stockholders in any
form (cash, property or
stock dividends) during the lifetime of the corporation.

FORMULA:
1. With par value: Share capital issued XX
Add: Subscribed share capital XX
Total Legal Capital XX

2. No par value : Share capital issued XX

Add: Subscribed share capital XX

Paid in capital in excess of stated value XX
Total Legal Capital XX

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ORGANIZATION COSTS AND EXPENSES RELATED TO SHARE CAPITAL

Organization cost represents costs incurred in forming or organizing a corporation. These

costs include:
1. Legal fees in connection with the incorporation – includes drafting of articles of incorporation
and by-laws and corporation registration.
2. Incorporation fees
3. Share issuance cost – direct costs to sell share capital which normally include the following: a.
Legal fees
b. CPA fees
c. Underwriting fees and commissions
d. Cost of printing certificates
e. Documentary stamps
f. Filing fees with SEC
g. Cost of advertising and promoting the issue

Organization costs, except for share issuance costs, shall be recognized as expense in the
first year of operations.

According to PAS 32 paragraph 35, “transaction costs of an equity transaction shall be

accounted for as a deduction
from equity, net of any related income tax benefit.” Therefore, stock issuance cost shall be debited to
the following:
1. Share Premium from issuance
2. Retained earnings if there is no share premium from issuance or if the share premium from
issuance is not sufficient.

Management salaries and other indirect costs related to the sale of share capital should be
expensed outright. Recurring cost of maintaining shareholder’s records and handling ownership
transfers such as registrar agent fees shall be charged as expense in the period incurred.

CONTRIBUTED CAPITAL

Contributed capital is the amount shareholders paid, or contributed, to the corporation in

exchange for shares of ownership. This includes share capital, which can consist of both common
and preferred shares. All corporations must issue common shares, whereas they can choose whether
or not to issue preferred shares.

Contributed capital can also include other sources of capital as a result of share transactions,
known as additional
contributed capital.

Two kinds of shares: Ordinary and Preference. These shares may with par or without par.

ACCOUNTING FOR SHARE CAPITAL TRANSACTIONS

Two Methods:
1. Memorandum Method – Under the memorandum method, memorandum entry is to be made
when the corporation is authorized to issue shares of stocks. The company credits the share
capital when shares are issued.
2. Journal entry Method – Under the journal entry method, a journal entry debiting Unissued
Share capital and crediting Authorized Share capital is made when the corporation is
authorized to issue shares of stocks. When shares are issued, the Unissued Share capital
account is then credited.

Memorandum Method Journal Entry Method

At capital authorization Memo entry indication the Journal entry to

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capital authorization. effect the

capitalization:
Dr. Unissued Share Capital
Cr. Authorized Share
Capital
Equity account credited at Share Capital Unissued Share Capital
every issuance of share
capital
Journal entry at every Dr. Asset / Dr. Asset /
issuance of share capital Liability Cr. Share Liability Cr. Share
Capital Capital

ISSUANCE OF SHARE CAPITAL

Measurement Considerations:

1. If issued for cash, the amount of cash received.

2. If issued in consideration for a non current asset - Share capital shall be recorded at an
amount equal to the following (in the order of priority):
a. Fair value of noncash consideration Received
b. Fair value of share capital Issued.
c. Par or stated value of share capital Issued.
3. If issued in exchange for liability
Items classified as debt for equity swap under IFRIC 19 (in order of priority):
a. Fair value of share capital issued
b. Fair value of liability extinguished
c. Carrying amount of liability extinguished
4. If issued at a lump sum or basket price
If the shares have fair value, use the relative fair value or proportional method
Under the relative fair value or proportional method, the lump-sum price shall be allocated
using their relative fair values.
If only one of them has an available fair value, use the incremental method. Under the
incremental method, the share with known fair value will have that value and any remainder
on the issue price is allocated to the share with unknown fair value.

Accounting problems in the issuance of share capital:

1. Issued at par or stated value
a. If issued at par, issue the share capital. Pro-forma entry:
Dr. Consideration Received (Asset/Liability)
Cr. Share Capital / Unissued Share Capital
2. Issued below par or stated value
a. The difference is treated as a reduction in equity called “Discount on Share Capital”.
Pro-forma entry: Dr. Consideration Received
Dr. Discount on Share Capital
Cr. Share Capital / Unissued Share Capital
3. Issued above par or stated value
a. The difference is treated as a share premium. Share premium is an addition to the
equity. Pro-forma entry: Dr. Consideration Received (Asset/Liability)
Cr. Share Capital / Unissued Share Capital
Cr. Share Premium

SUBSCRIPTION OF SHARES

A subscription is a written contract by which one engages to take and pay for the capital stock
of a corporation in
some future date.

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Minimum Subscription at Authorization of Shares

According to the law, the approval of incorporation requires that at least 25% of the authorized
capital stock should
have been subscribed and 25% of which should have been paid.

Minimum subscription after Authorization of Share

No legal provision on minimum subscription after authorization.

Pro forma entries:

Upon Subscription:

Subscriptions receivable (shares x subscription price)

XX
Discount on Share Capital (If Subscription Price < Par or Stated Value) XX
Subscribed share capital (shares x par or stated value) XX
Share Premium (If Subscription Price > Par or Stated Value) XX

Upon Collection: Dual effect record the collection and the issuance of the share capital.
Cash XX
Subscriptions receivable XX

Subscribed share capital XX

Share capital XX

NOTE: The issuance of shares will only be done UPON FULL COLLECTION. No full collection, no
issuance of shares.

What if the subscription cannot be collected?

We call the subscriber or subscription as a delinquent subscriber.
If a stock subscriber does not pay in full his unpaid stock subscription on the date fixed by the
board of directors, he
may be declared a delinquent subscriber.

Accounting for Delinquent

Subscription: The delinquent
subscription may:
1. Auctioned Subscription
a. With Highest Bidder
b. Without Highest Bidder
i. Corporation acquires the shares ii.
Corporation is prohibited to acquire the shares 2. Not
Auctioned

AUCTIONED SUBSCRIPTION

Offer Price
Whenever a subscription is declared delinquent and the shares are to be auctioned, the following
items composes the offer price:
1. Unpaid balance due on subscription
2. Cost of money, such as accrued interest on the subscription due
3. Related expenses in public auction, such as advertising and other cost in selling.

To determine the highest bidder, the highest bidder is a person willing to pay the offer price and is
willing to receive the smallest number of shares.

To record expenses incurred related to the auction

Advances from sales of delinquency share xxx

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Cash xxx

AUCTIONED with highest bidder

To record collection from highest bidder

Cash xxx
Subscription receivable xxx
Advances from sales of delinquency share xxx
Interest income xxx

To record issuance of share certificates

Subscribed share capital xxx
Share capital xxx

AUCTIONED without highest bidder

Corporation Acquires
To record the acquisition of entity’s own shares
Treasury shares xxx
Subscription receivable xxx
Advances from sales of delinquency share xxx
Interest income xxx

To record issuance of share certificates

Subscribed share capital xxx
Share capital xxx

Corporation is prohibited to Acquire

The whole payment on the subscription is forfeited.

Subscribed share capital xxx

Premium on share capital xxx
Subscription receivable xxx
Share premium – forfeited downpayment xxx

NOT AUCTIONED

The whole payment on the subscription is forfeited.

Subscribed share capital xxx

Premium on share capital xxx
Subscription receivable xxx
Share premium – forfeited downpayment xxx

TREASURY SHARES

Treasury shares are company’s own stock previously issued, reacquired but not cancelled.

Accounting for treasury shares – Cost Method

I. Re-Acquisition
When entity’s own shares are reacquired, the cost of the reacquisition is recorded as treasury
shares.
To record acquisition of entity’s own shares
Treasury shares (no. of treasury shares x cost per share) xxx
Cash xxx

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II.Reissuance
When entity’s own shares are reissued.

Accounting problem:
Reissuance at cost – no problem
Reissuance above cost – remainder is credited to Share Premium – TS
Reissuance Below cost – remainder is debited to up to the extent of Share Premium TS
is SP – TS is not enough, Retained Earnings

To record reissuance of entity’s own shares

Cash (no. of TS re-issued x issue price per share) xxx
Treasury shares (no. of TS re-issued x cost per share) xxx

Balancing figures:
If Debit:
Share Premium-TS of the same class
Retained earnings
If Credit:
Share Premium-TS

III. Retirement
When entity’s own share reacquired is retired. Under cost method, the journal entry for the retirement
of treasury stock is made by debiting the common stock with par value of shares being retired,
debiting additional paid-in capital (if any) associated with the shares being retired and crediting
treasury stock with the cost of shares being retired.

Accounting problem:
Retirement price is equal the original issuance price
Retirement price is greater than the original issuance price – Debit Retained Earnings
Retirement price is lesser than the original issuance price – Credit Share Premium Retiement

To record retirement of entity’s own shares

Ordinary shares (par value x no. of shares retired) xxx
Share Premium from original issuance
(if not given, total Share Premium/ no. of shares issued
X no. of shares retired) XXX
Treasury shares (no. of TS retired x cost per share)
xxx

Balancing figures:
If Debit:
Retained earnings
If Credit:
Share Premium-Retirement

DONATED CAPITAL

Donations of shareholders in the business. Donated capital is a share premium account.

Entity’s own
Asset shares
Upon receipt Asset XX Memo
(at
of donation
fair
value) XX

XX Cash
Upon sale XX
XX
XX
Donated XX Donated

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capital XX capital
Cash
Loss (if
any)

Asset

Gain
(if
any)

ASSESSMENTS

Additional capital. The assessment is credited to share premium.

EARNED CAPITAL

RETAINED EARNINGS – Retained earnings are the profits that a company has earned to date, less
any dividends or other distributions paid to investors. It represents the cumulative profits which are
not yet distributed as dividends but rather retained to be reinvested in the business or to settle debt.

The Normal Balance of Retained Earnings is Credit, if the balance of Retained Earnings is negative
we describe it as Deficit.

Retained Earnings may be:

 Restricted
(Appropriated)
o This may be a result of:
§ Legal Requirement – e.g. Treasury Shares
§ Contractual Requirement
§ Voluntary
 Unrestricted (Unappropriated)

NOTE: The restriction of retained earnings does not necessarily provide cash for any intended
purpose. The purpose is to show that assets in the amount of the appropriation are not available for
dividends. When a reserve is no longer needed it must be returned directly to unappropriated retained
earnings by reversing the entry that created it.

Distribution to Owners (Dividends)

Ø May be Return on Capital or Return of Capital
Ø Only Outstanding Shares are entitled to dividend.
o Outstanding Shares = Issued + Subscribed – Treasury

Dividends as Return of Capital – charged to capital liquidated (capital liquidated is a reduction on the
capital or share premium)
1. Liquidating Dividend

Dividends as Return on Capital – charged to retained earnings

1. Cash Dividends
2. Liability Dividends
3. Property Dividends
4. Choice between Cash and Property Dividends
5. Share Dividends

LIQUIDATING DIVIDEND
Measurement:
Ø The amount of capital liquidated.

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CASH DIVIDENDS
Measurement:
Ø The amount of cash distributable
o certain amount of pesos per share (# of shares x dividend per share)
o certain percent of the par or stated value (outstanding shares par or stated value
x percentage of cash dividend) Accounting:
Ø At the date of declaration, measure the dividends payable accordingly based on the rules
above.

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LIABILITY DIVIDENDS
Ø May be a scrip dividend or a bond dividend. The dividend declared may or may not include
interest. In case the liability carries interest, any interest is treated as an expense not an
additional dividend.
o Scrip Dividend – short term. o
Bond Dividend – long term.
Measurement:
Ø Amount of liability or face amount of the liability for Scrip Dividends.

PROPERTY DIVIDENDS
Measurement:
Ø Noncurrent assets covered by PFRS No. 5 (Property, plant and equipment, Intangibles and
Investment in Associate)
o Lower between Carrying Amount
or Fair Value Less Cost to Sell
Ø Assets other than those covered by PFRS No. 5 (for example current assets just like inventory,
noncurrent assets covered by PAS 39 or PFRS 9) o Fair Value Accounting:
Ø At the date of declaration, measure the dividends payable accordingly based on the rules
above.
Ø At the end of each reporting, review and adjust the carrying amount of the dividends payable to
equity (retained earnings) as adjustments to the amount of the distribution.
Ø At the date of settlement, get the difference between the carrying amount of dividends payable
and carrying amount (fair value) of the noncash assets, any difference is reported as gain or
loss in the profit or loss.

Cash Dividends Property Dividends Share Dividends

Date of Declaration Dr. Retained Dr. Retained Dr. Retained
Earnings Earnings Earnings
Cr. Cash Dividends Cr. Property Cr. Stock Dividends
Payable Dividends Payable
Payable Cr. Share Premium

Note: You will only

credit share
premium if it is a
small stock
dividend.
Date of Record No Entry No Entry No Entry
Year End No Adjustment Adjustment of the No Adjustment
liability to the Fair
Value or Lower of
CA or
FVLCTS of the
Property
Date of Payment or Dr. Cash Dividends Dr. Property Dr. Stock
Settlement or Payable Dividends Payable Dividends
Distribution Cr. Cash Payable
CHOICE BETWEEN CASH AND PROPERTY DIVIDENDS
Measurement:
Ø Consider the fair value of each alternative and the probability of shareholders selecting each
alternative.
Accounting:
Ø At the date of declaration, measure the dividend payable accordingly based on the rule above.
Ø At the end of each reporting, review and adjust the carrying amount of the property dividends
payable to equity (fair value) as adjustments to the amount of the distribution.
Ø At the date of settlement, review and adjust each alternative based on the actual selection of
the shareholders, further, get the difference between the carrying amount of property dividends

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payable and carrying amount of the noncash assets, any difference is reported as gain or loss
in the profit or loss.

SHARE DIVIDENDS
Measurement:
Ø New Issuance of Shares:
o Small Stock Dividend – the stock
dividend declared is less than 20%,
measure at fair value of the shares o Large
Stock Dividend – the stock dividend
declares is at least 20%, measure at par
value  Old Share (Treasury Share):
o Measure at cost of the treasury
share Accounting:
Ø At the date of declaration, measure the dividend payable accordingly based on the rule above.
Ø At the date of settlement, issue the shares or reissue the treasury share.

Summary:
Cr. Asset Account Cr. Share /
for Capital
the property Treasury Share

Note: The property

should be adjusted
again to Fair Value
or Lower of CA or
FVLCTS, any
changes is treated
as gain or loss.

PREFERENCE SHARE DIVIDENDS

 Preference over
dividends o
Noncumulative o
Cumulative o
Participating
§ When the Preference Shares are participating, the ordinary shares are given a
basic allocation based on the preference rate. If two or more preference shares,
the lowest preference rate is given to the ordinary share.
§ The remainder is shared pro rata based on the aggregate par value of the shares
if the preference share is fully participating. If the preference share is partially
participating, the preference share must only be shared up to the amount of
participation (Participation Rate less Preference Rate( and any remainder is
allocated to the ordinary shareholder.
o Non-Participating

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