IM ACCO 20043 Financial Accounting and Reporting Part 21

ACCO 20043 Financial Accounting and Reporting Part 2 1
2 ACCO 20043 Financial Accounting and Reporting Part 2
ACCO 20043
Financial Accounting and Reporting Part 2
An Instructional Material
Compiled by:
Melinda S. Balbarino
Maria Teresa M. Corrales
Marietta M. Doquenia
Julieta G. Fonte
Editha A. Peralta
Andrea Rose E. Rimorin
Catherine D. Sotto
GENERAL INFORMATION ABOUT THE COURSE
Course Code and Title : ACCO 20043 - FINANCIAL ACCOUNTING AND REPORTING 2
Semester and Academic : Second Semester, Academic Year 2020- 2021

Year
Course Credit : 3 Units
Pre-Requisite : ACCO 20033 - FINANCIAL ACCOUNTING AND REPORTING 1
Course Description : This subject includes the accounting for partnership liquidation,
lump sum method and by installment. It also focuses on the
components in organizing a corporation, the stockholders’ equity
section of the Statement of Financial Position and other Corporate
transactions & related topics.
Course Outcomes : Upon completion of the course, the students will be able to:
a. Have detailed knowledge and understanding of

partnership liquidation, lump-sum and installment;
b. Complete the accounting cycle and other requirements for
a Corporation
c. Competence and honesty in the performance of
accountancy service;
d. Demonstrate the qualities of a future accountant; and
e. Skilled in the use of a calculator, computer and other
business equipment.
General Instructions : Faculty members who prepared this instructional material

purposively chose only five (5) topics which are the most relevant
topics when learning about accounting partnership liquidation and
corporation.
FOR STUDENTS WITH INTERNET CONNECTIVITY, you

are tasked to answer the activities or assessment tools in
accordance with the instruction of your instructor.
FOR STUDENTS WHO DO NOT HAVE INTERNET

CONNECTIVITY AND RECEIVED THIS INSTRUCTIONAL
MATERIAL VIA COURIER SERVICES, you are tasked to
accomplish the activities or assessment tools as well as the
midterm and finals examination at your own space. You may have
your answers handwritten OR computerized and printed.
TABLE OF CONTENTS
Content Page Number
Cover Page 1
Title Page 2
General Information About the Course 3
Module 1 – Partnership Liquidation (Lump-Sum) 5
Module 2 – Partnership Liquidation (Installment Liquidation) 19
Module 3 - Organization and Formation of a Corporation 31
Module 4 – Corporate Operations (Dividends, Book Value Per Share, 60

and Earnings Per Share
Module 5 – Share Capital Transactions Subsequent to Original Issuance 75

MODULE 1
PARTNERSHIP LIQUIDATION – LUMP SUM LIQUIDATION
OVERVIEW
As per defined in the previous discussion on partnership dissolution, it does not

necessarily mean termination of the business, instead, it refers to the termination of the
partnership as a going concern. In some cases, dissolution results in the reorganization of the
partnership as a new unit that will not necessitate the liquidation process. However, if the
recognized condition calls for winding up of business affairs, this will require the process of
liquidation. The association of the partners for the purpose of carrying on the business activities
in the usual manner is considered ended. Termination is that point in time when all partnership
affairs are completely ended and finally settled. It signifies the end of the life of an existing
partnership.
Some of the causes where there is partnership dissolution with liquidation include the
accomplishment of the objective for which the partnership was formed, termination of the period
covered as stated in the contract and mutual agreement among the partners to dissolve and
liquidate the partnership.
MODULE OBJECTIVES
At the end of the lesson/module, the student will be able to:
• Distinguish the difference between dissolution and liquidation of a partnership

• Recognize the two types partnership liquidation
• Prepare a Statement of Liquidation using the lump-sum Method
• Prepare the entries to record the partnership liquidation and other related entries
• Partnership liquidation is the process of winding up the business operations/affairs after
dissolution.
This is the process where non-cash assets are reduced to cash and distributing the
proceeds to the proper parties.
The following procedures are to be followed in the process of liquidation:
1. Conversion of non-cash assets into cash

2. Payment of liabilities to creditors other than partners
3. Payment to partners in the following order:
a. Loans to the partnership
b. Capital contribution
c. Share in profits
1. Conversion of non-cash assets into cash
The process of converting non-cash assets into cash is called realization. This involves
the collection of receivables, selling of inventories, and selling of property and equipment.
Realization of non-cash assets may either result in a gain or loss on realization and will be
distributed to the partners based on their profit and loss agreement. Gain on realization is
the excess of the selling price over the cost or book value of the assets being disposed,
otherwise, the result would be a loss on realization. There is not much problem if the result
is a gain since there would be enough cash to settle all the outside creditors and the partners.
However, problem arises when the realization resulted in a loss since this will be distributed
among the partners as a deduction from their capital balance. If the partner’s capital balance
resulted in a negative amount (debit balance) after the distribution of the loss, this is known
as capital deficiency and must be eliminated and the affected partner will be known as the
deficient partner.
Capital deficiency may be eliminated in the following manner:
a) If the deficient partner has a loan to the partnership, he may exercise the right of offset,
which is the legal right to apply part or all of the amount owing to a partner on a loan
balance against deficiency in his capital account resulting from losses in the process of
liquidation. The loan payable to a partner has a higher priority in liquidation than a
partner’s capital balance but a lower priority than liabilities to outside creditors.
b) If the deficient partner is solvent and has no loan to the partnership, he may make an
additional investment equal to the amount of his capital deficiency, and
c) If the deficient partner is insolvent, his capital deficiency will be absorbed by the
remaining partners as additional loss based on their profit and loss sharing.
A partner is considered solvent if his personal assets exceed his personal liabilities while
an insolvent partner is one whose personal liabilities exceed his personal assets.
Liquidation expenses maybe incurred to facilitate the realization of non-cash assets and
will result in reduction to cash and will be distributed to partners as a deduction in their capital
balances according to their profit and agreement.
2. Payment of liabilities to creditors other than partners
In the distribution of proceeds from realization, the partnership creditors other partners
has the top priority. If the cash available is sufficient, liabilities to this group of creditors must
first be settled in full before making any payment to the partners in whatever capacity they
are entitled into.
In case the partnership cannot meet its obligation to outside creditors, the personal assets
of the partners will be applied as payment but only if there is an excess over his personal
liabilities. In other words, priority is given to the partner’s personal creditors and any excess
will be applied as payment to the partnership creditors.
Marshalling of assets involves the order of priorities or creditors’ rights against the
partnership assets and the personal assets of the individual partners. The order in which
claims against the assets of the partnership will be marshaled is as follows:
1) partnership outside creditors;

2) partners’ claims other than capital and profits, such as loan payable; and
3) partners’ claims to capital or profits, to the extent of credit balances in capital accounts
3. Payment to partners
After the settlement of the liabilities to the partnership outside creditors, any capital
deficiency resulting from the distribution of loss on realization, must first be eliminated before
making payments to the partners. Settlement with the partners follows this order of priority:
1) Loans to the partnership

2) Capital contributed
3) Share in the profits
Accounting problems involved in partnership liquidation include the following:
1. Determining the profit or loss from the beginning of the accounting period to the date of
liquidation and the distribution of the such profit or loss;
2. Closing of the partnership books;
3. Correction of the discovered accounting errors of prior periods; and
4. Liquidation of the partnership.
TYPES OF LIQUIDATION
1. Lump-sum liquidation – this is a process whereby the distribution of cash to partners is

done only after all the non-cash assets have been realized, the gain or loss is distributed,
and the obligation with the partnership outside creditors have been settled.
2. Liquidation by installment or piece-meal liquidation – this is the process whereby

assets are realized on a piecemeal basis and cash is distributed to partners on a periodic
basis as it becomes available even before all non-cash assets are realized.
STATEMENT OF LIQUIDATION
The statement of liquidation is a statement prepared to show the summary of the process
of liquidation. It is the basis for the preparation of journal entries to record the liquidation. It
presents the realization of non-cash assets and the distribution of the proceeds to the proper
parties.
ILLUSTRATIVE PROBLEM
Assume that the statement of financial position of King, Jolly and Donald shows the
following account balances before liquidation:
KING, JOLLY and DONALD

Statement of Financial Position
October 1, 2019
ASSETS LAIBILITIES AND CAPITAL

Cash P 16,000 Liabilities P 89,600
Other Assets 272,000 Jolly, Loan 4,000
Donald, Loan 6,400
King, Capital 76,000
Jolly, Capital 48,000
Donald, Capital 64,000
Total Assets P 288,000 Total Liabilities and P 288,000
Capital
Profit and loss ratio: 4:4:2 to King, Jolly and Donald, respectively.
Required:
1. Prepare a Statement of Liquidation for each case below:

Case 1 – The other assets were sold for P 280,000
Case 4– The other assets were sold for P 136,000. Deficient partner is solvent.
Case 5 – The other assets were sold for P 136,000. Deficient partner is insolvent.
Case 6 – The other assets were sold for P 136,000. Additional cash investment of
deficient partner is considered as second cash distribution to partners requiring a schedule
to accompany the statement of liquidation to determine amounts paid to partners.
2. Journal entries to record the liquidation process.

Journal entries:
a) Sale of other assets and distribution of gain
Cash 280,000
Other assets 272,000
King, capital 3,200
b) Payment of liabilities
Liabilities 89,600
Cash 89,600
c) Payment to partners
Jolly, loan 4,000

Donald, loan 6,400
King, Capital 79,200
Cash 206,400
The Schedule to Accompany the Statement of Liquidation shows amounts to be paid to the
partners. Total partners’ interest will be reduced by the restricted interest for possible losses if
the deficient partner fails to pay his capital deficiency. Restricted interest for possible loss will
continue until all deficiencies or debit capital balances are eliminated, after which, balances will
now be called as Free Interest-amounts to be paid to partners, where payments are applied first
t loan, then on capital.
King, Jolly and Donald

Schedule To Accompany Statement of Liquidation
October 1-31, 2019
King Jolly Donald

Capital balances P (P P
21,600 2,400) 36,800
Add: loan balances
6,400
Total partners’ Interest P (P2,400) P
21,600 43,200
Restricted interests – possible loss to P 2,400 to King and
Donald in the ratio of 4:2 if Jolly fails to pay his deficiency 2,400 (800)
(1,600)
Free interest – amount to be paid to partner P P
20,000 42,400
Payment to apply on:

Loan P
6,400
Capital P
20,000 36,000
Cash settlement P P
20,000 42,400
COMPUTATION OF CASH SETTLEMENT TO PARTNERS
There are some problems that ask for the computation of cash settlement to partners but
do not require the preparation of a statement of liquidation. In such cases, the following must
have taken place before computing the cash settlement to partners:
a) Non-cash assets must have been realized

b) Liabilities to outside creditors are already settled
c) Gain or loss on realization have not been distributed to partners’ capital accounts
To determine if there is a gain or loss on realization, comparison must be made between the
debits
(cash available to partners) and the total credits (partners’ loans and capital balances). If total
debit exceeds total credit, the excess is a gain on realization, and if the total debit is less than the
total credit, the difference is a loss on realization. Such gain or loss on realization must first be
distributed before proceeding with the liquidation process.
ILLUSTRATIVE PROBLEM
On June 30, 2019, the capital balances of Joe, Andy and Greg are P 80,000, P 50,000 and P
10,000, respectively. Profits and losses are shared 3:2:1. The partners decided to liquidate, and
the non-cash assets were realized for P 74,000. After paying the liabilities amounting to P 24,000,
cash balance showed P 56,000 for distribution to partners.
The loss on realization would then be computed as follows:
Total capital (credit) 80,000+50,000+10,000 P 140,000

Less cash balance for distribution to partners 56,000
Loss on realization P 84,000
=======
Settlement of cash to partners would be distributed as follows:
Joe Andy Greg

Capital balances P 80,000 P 50,000 P 10,000
Loss on realization (42,000) (28,000) (14,000)
Balances P 38,000 P 22,000 (P 4,000)
Additional loss to Joe and Andy for the deficiency of Greg
in the ratio of 3:2 (2,400) (1,600) 4,000
Free interest – amount to be paid to partner P 35,600 P 20,400 -
REFERENCES
• Baysa & Lupisan Accounting for Partnership & Corp

ASSESSMENT TOOLS
I. EXERCISES
A. Bob, Gary and Bob, who share profits and losses in the ratio of 4:4:2, respectively, decide
to liquidate their partnership on December 31, 2019. The condensed statement of
financial position is presented below just prior to liquidation.
BGC Partnership
December 31, 2019
ASSETS LIABILITIES AND EQUITY
Other Assets 680,000 Gary, Loan 10,000
Crab, Loan 16,000
Bob, Capital 190,000
Gary, Capital 120,000
Crab, Capital 160,000
Total Assets P 720,000 Total Liabilities and Equity P 720,000
Instruction: Prepare a statement of Liquidation and the required journal entries for each of the
following cases and supporting schedule of cash distribution, if necessary assuming cash is
immediately distributed to the proper parties. Assume also that the deficient partner/s will invest
cash which is then distributed as second payment to the proper parties.
Case A P 700,000 Case C P 370,000 Case E P 250,000

Case B 500,000 Case D 340,000 Case F 180,000
B. Jack, Jill, Dick and Jane are partners with capitals of P 22,000, P 20,600, P 27,400 and
P 18,000 respectively. Jack has a loan balance of P 4,000. Profits and losses are shared
40%; 30%; 20%; 10% by Jack, Jill, Dick and Jane respectively. Assuming assets were
sold and liabilities paid and the balance of cash showed P 24,000. Prepare a schedule
showing how the P 24,000 will be distributed to the partners.
C. The partnership accounts of Guess, Jag and Levis are shown below as of December 31,
2019. Profits and losses are shared 50%; 30%; and 20%, respectively.
Guess, Drawing (debit balance) P (32,000)

Levis, Drawing (debit balance) (12,000)
Jag, Loan 40,000
Guess, Capital 164,000
Jag, Capital 134,000
Levis, Capital 144,000
Total assets amounted to P 638,000, including cash of P 70,000, and P 200,000 worth of liabilities.
On January 2019, the partnership was liquidated, and Jag received P 111,000 cash as final
settlement.
Required:
1. The total loss from the liquidation of the partnership

2. Prepare the statement of liquidation.
3. Journal entries to record the liquidation.
D. Red, White, and Blue are partners who share profits and losses 20%; 30%; and 50%
respectively. The partners have decided to liquidate the partnership. Their capital
accounts show the following balances: Red – P 60,000 credit; White – P 90,000 credit;
Blue – P 30,000 debit. What is the amount of cash available for distribution?
E. Orange and Lemon share profits and losses equally. They decided to liquidate their
partnership when their net assets amounted to P 260,000. Capital balances were P
170,000 and P 90,000, respectively. If the non-cash assets were sold for an amount
equal to book value, what amount of cash should Orange and Lemon respectively
received?
MODULE 2
INSTALLMENT LIQUIDATION
OVERVIEW
Under the installment liquidation, the cash settlement is on installment or piece meal basis.
As soon as cash becomes available, and the liabilities are fully paid, partial payments will be
made to the partners based on their capital balances if any, after subtracting their share in the
losses on realization whether actual or theoretical.
If the realization process (conversion of non-cash assets into cash) will take an extended
period of time, the non-cash assets will be sold on a piece-meal basis and the cash is distributed
to proper parties as it becomes available.
MODULE OBJECTIVES
After this module, the students are expected to have learned:
• Grasp the nature of installment liquidation

• Prepare a Statement of Liquidation using the Installment method
• Prepare schedule of safe payments and cash priority program
• Prepare entries to record the partnership
ACCOUNTING PROCEDURES IN INSTALLMENT LIQUIDATION
The order of payment will still be the same as per the provisions of the law whether the
cash settlement us by lump sum or on installment basis. Creditors should be given first priority,
then the partner’s loan, and the balance, will be distributed to the partners based on their capital
balances (return of capital).
To insure that the cash settlement on installment basis will be equitable and will not result
in under or overpayment of the partners’ claims, the non-cash assets still unsold on the date of
partial cash distribution will be assumed to be a total loss (that is, cannot be sold anymore). The
book value of the unsold assets will be considered as “theoretical loss” which will be divided
among the partners using their profit and loss sharing agreement. Also, if there are expected
liquidation expenses yet to be incurred, they will also be divided among the partners prior to the
cash distribution.
It should be emphasized that the cash settlement among the partners will be the same
regardless of whether the lump sum method or installment method of liquidation is employed.
As far as the accounting procedures are involved, they are practically the same except
that under the lump sum liquidation, the cash settlement is made only after all the non-cash are
realized while under the liquidation by installment, cash distribution is made as soon as cash is
available. To determine the correct distribution of cash, a schedule of distribution is prepared
every time a partial settlement will be made, known as the schedule of safe payments.
SCHEDULE OF SAFE PAYMENTS
The schedule for safe payments shows how available cash would be distributed to
partners. The schedule is also based on the assumption that all unsold non-cash assets will be
worthless. The assumed loss is allocated among the partners according to their profit and loss
sharing agreement. The allocation of the assumed loss could produce debit balances (capital
deficiency) in partners’ capital accounts, and these balances are treated as being uncollectible.
The assumed debit capital balances are allocated to those partners with credit balances according
to their profit and loss ratio. Only after the liabilities and liquidation expenses are paid, liquidation
losses distributed, and debit capital balances eliminated, can cash be distributed safely to the
partners in amounts equal to the resulting credit capital balances.
A new schedule of safe payments is prepared each time cash is available for distribution
to partners. These schedules support the installment liquidation statement which summarizes the
changes in real account balances as the liquidation progresses. When the capital balances of
the partners are brought into the profit and loss ratio, all partners will be allocated automatically
according to the profit and loss ratio, thereby eliminating the need for the schedule of safe
payments.
CASH PRIORITY PROGRAM
Instead of preparing a schedule showing how cash will be distributed every time a partial
cash settlement will be made among the partners, a cash priority program can be prepared
which will show in advance how future cash available can be distributed without making any
under or overpayment to the partners.
The steps in the preparation of the cash priority program are as follows:
1. Determine total partners’ interest – this is equal to the capital balances before
liquidation plus loans by partners to the partnership less advances by the partnership
to the partners.
2. Compute partner’s loss absorption capacity – divide the total partners’ interest by their
profit and loss ratio. The loss absorption capacity is the maximum partnership loss a
partner’s capital can absorb out of his share in the loss without having a capital
deficiency. The partner with the highest absorption capacity will have the first priority
in the distribution of cash available (after full payment of creditors). The partner with
the second highest absorption capacity will have the second priority, and so forth and
so on. The order of priority, therefore, depends on the loss absorption capacity of the
partners.
3. Cash distributions will now be based on the profit and loss ratio once the partners’ loss
absorption balances become equal.
Assume that Jose, Marie, and Chan are partners sharing profits in the ratio 5:3:2,
respectively. A statement of financial position prepared just prior to liquidation follows:
JOSE, MARIE, and CHAN

July 1, 2017
ASSETS LAIBILITIES AND CAPITAL

Other Assets 230,000 Jose, Loan 12,500
Marie, Loan 10,000
Jose, Capital 65,000
Marie, Capital 50,000
Chan, Capital 50,000
Total Assets P 240,000 Total Liabilities and P 240,000
Capital
Assets are sold, and the cash from asset realization is distributed at the end of each
month. Asset realization takes place as follows:
Month Carrying Value Selling Price

July P 70,000 P 50,000
August 30,000 20,000
September 25,000 12,500
October 105,000 50,000
Required:
1. Statement of Liquidation using

a. Schedules of Safe Payments to Partners
b. Cash Priority Program
2. Journal entries to record the liquidation process.

1. A) Installment liquidation with the use of schedule of safe payment to partners.
Jose, Marie, and Chan

Statement of Liquidation
Other Loan Capital

Cash Assets Liabilities Jose Marie Jose Marie Chan
Profit and loss ratio 5: 3: 2
Balances before 10,000 230,000 52,500 12,500 10,000 65,000 50,000 50,000
liquidation
July: Realization and 50,000 (70,000) (10,000) (6,000) (4,000)
distribution of loss
Balances 60,000 160,000 52,500 12,500 10,000 55,000 44,000 46,000
Payment of liabilities 52,500 (52,500)
Balances 7,500 160,000 12,500 10,000 55,000 44,000 46,000
Payment to partners (7,500)
(Schedule A) (7,500)
Balances - 160,000 12,500 10,000 55,000 44,000 38,500
August: Realization 20,000 (30,000) (5,000) (3,000) (2,000)
and distribution of loss
Balances 20,000 130,000 12,500 10,000 50,000 41,000 36,500
Payment to partners (20,000) (10,000) (500) (9,500)
(schedule B)
Balances - 130,000 12,500 - 50,000 40,500 27,000
September: 12,500 (25,000) (6,250) (3,750) (2,500)
Realization and
distribution of loss
Balances 12,500 105,000 12,500 43,750 36,750 24,500
Payment to partners (12,500) (5,250) (3,500)
(schedule C) (3,750)
Balances - 105,000 8,750 43,750 31,500 21,000
October: Realization 50,000 (105,000) (27,500) (16,500) (11,000)
and distribution of loss
Balances 50,000 8,750 16,250 15,000 10,000
Final payment to (50,000) (8,750) (16,250) (15,000) (10,000)
partners

Schedule A – Schedule of Safe Payment to Partners
To Accompany Statement of Liquidation
July 31, 2017
Jose Marie Chan
5: 3: 2
Capital balances 55,000 44,000 46,000
Add: loan balances 12,500 10,000
Total partners’ Interest 67,500 54,000 46,000
Restricted interests – possible loss to P 160,000 assuming nothing can be
realized on the remaining non-cash assets (80,000) (48,000) (32,000)
Balances (12,500) 6,000 14,000
Restricted interests – possible loss to P 12,500 to Marie and Chan in the ratio of
3:2 assuming Jose is unable to meet his possible deficiency
12,500 (7,500) (5,000)
Balances (1,500) 9,000
Restricted interests – possible loss to P 1,500 to Chan assuming Marie is unable
to meet her possible deficiency 1,500 (1,500)
Free interest – amount to be paid to partner 7,500
Payment applied on:
On loan -
On capital 7,500
Jose, Marie and Chan

Schedule A –Payment to Partners
July 31, 2017
Payable to
Jose Marie Chan
Cash available P 10,000
Allocation 1 – Payable to Chan
Amount payable to Chan in July 7,500 7,500
Allocation 1 balance P 2,500 P 7,500
Payment applied:
On capital P 7,500
Jose, Marie and Chan

Schedule B –Payment to Partners
August 31, 2017
Payable to
Jose Marie Chan
Allocation 1 – Payable to Chan 2,500 P 2,500
Allocation 2 – Payable to Marie and Chan
Amount payable in August:
Marie: (13,500/22,500) x 17,500 = 10,500 P 10,500
Chan: ( 9,000/22,500) x 17,500 = 7,000 17,500 7,000
Allocation 2 balance* P 5,000 P 3,000 P 2,000
Payment applied:
On loan P 10,000
On capital P 500 P 9,500
*Allocation 2 Balance: Marie: 13,500 – 10,500 = 3,000; Chan: 9,000 – 7,000 = 2,000

Schedule C –Payment to Partners
September 30, 2017
Payable to
Jose Marie Chan
Allocation 2 – Payable to Marie and Chan (5,000) P 3,000 P 2,000
Allocation 3 – Payable to Jose, Marie and Chan
Amount payable in September: P and L ratio
Jose: 7,500 x 5/10 = 3,750 P 3,750
Marie: 7,500 x 3/10 = 2,250 2,250
Chan: 7,500 x 2/10 = 1,500 (7,500) 1,500
Totals P 3,750 P 5,250 P 3,500
Payment applied:
On loan P 3,750
On capital P 5,250 P 3,500
1. Journal entries (same journal entries will be recorded whether Schedule of Safe
Payments to Partners or Cash Priority Program is used)
July:
Debit Credit
1. Cash 50,000
Chan, Capital 4,000
Other Assets 70,000
2. Liabilities 52,500
Cash 52,500
3. Chan, Capital 7,500

Cash 7,500
August
Debit Credit
1. Cash 20,000
Jose, Capital 5,000
Chan, Capital 2,000
Other Assets 30,000
2. Marie, Loan 10,000

Marie, Capital 500
Chan, Capital 9,500
Cash 20,000
September:
Debit Credit
1. Cash 12,500
Jose, Capital 6,250
Chan, Capital 2,500
Other Assets 25,000
2. Jose, Loan 3,750

Chan, Capital 3,500
Cash 12,500
October:
Debit Credit
1. Cash 50,000

Other Assets 105,000
2. Jose, Loan 8,750

Cash 50,000
LIQUIDATION EXPENSES
Liquidation expenses maybe incurred to facilitate the immediate realization of non-cash

assets. Payment of liquidation expenses reduces cash and is recorded as a deduction from
partners’ capital based on the partners’ profit and loss ratios.
REFERENCES
ASSESSMENT TOOL
EXERCISES
A. On July 1, 2019, Jun, Mar and Roy decided to liquidate their partnership. Prior to
liquidation, the partnership had Cash of P 12,000, Other assets amounting to P 146,000,
Liabilities of P 36,000 and a Note Payable to Roy of P 14,000. Profits and losses are
shared 30:30:40, respectively. Capital balances of the partners were as follows:
Jun- P 36,000 Mar – P 54,000 Roy – P 18,000
During July 2019, the partnership realized P 30,000 from the sale of Other Assets with a
book value of P 38,000 and paid P 3,600 for liquidation expenses. During August, the
partnership collected P 44,000 from the sale of Other assets having a book value of P
35,000 and paid liquidation expenses of P 8,400. During September, the unsold Other
Assets were realized for P 36,000. The partners agreed to distribute cash at the end of
each month.
Required:
1. Prepare a statement of Liquidation using:
a. Schedule of Safe Payments
b. Cash Priority Program
2. Prepare the necessary journal entries to record the liquidation process.
B. Ledger balances of the OMG partnership as of May 31, 2019 are as follows:
Cash P 150,000
Other Assets 1,080,000
Accounts Payable P 450,000
Olga, Capital 480,000
Mega, Capital 135,000
Giga, Capital 165,000
Profits and losses are shared 4:5:1 to Olga, Mega and Giga, respectively. If the
partnership is liquidated in installments and assuming that as cash becomes available, it
will be distributed to the partners; Inventory costing P 600,000 is sold for P 420,000, How
much cash should be distributed to each partner at this time?
C. Partners Pisces, Gemini and Leo have capital balances of P 11,200; P 13,000 and P
5,800 respectively and share profits and losses in the ratio 4:2:1.
Required:
a) Prepare a schedule showing how cash will be distributed to partners as it
becomes available.
b) Determine how much must the partnership realize on the sale of its non-cash
assets if Pisces is to receive P 10,000 as final settlement.
c) If Pisces receives a total of P 3,200 in cash, determine how much will Leo have
received at this point.
d) If Pisces is personally insolvent and Gemini receives a total of P 1,800 in final
liquidation of the partnership, determine the firm’s loss on liquidation.
D. Partners Lakers, Bulls, Celtics, and Spurs who have been operating their partnership for
the last ten years, decided to liquidate their business. At the time of liquidation, The
statement of Financial Position consisted of the following
Cash 207,000
Non-Cash Assets 600,000
Liabilities P 120,000
Lakers, Capital 180,000
Bulls, Capital 300,000
Celtics, Capital 240,000
Spurs, Capital 33,000
Profits and losses are shared equally. It is estimated that the Administrative cost of liquidation
will amount to P 9,000. While preparing the liquidation, an unrecorded liability of P 15,000 was
discovered
Required: Prepare a Schedule of Safe Payments for the distribution to each partner.
E. Jose, Andres and Apo share profits in the ratio 50:30:20, respectively. Capital and loan
balances just prior to partnership liquidation are:
CAPITAL LOANS
Jose P 120,000 Jose P 45,000
Andres 90,000 Andres 30,000
apo 40,000 Apo 13,000
Non-cash assets are sold, and cash is distributed to partners in monthly installments
during the course of liquidation as follows:
January-P 15,000; February-P 40,000; March-P 90,000; april-P30,000 (final distribution)
Required:
a) Prepare a program to show how cash should be distributed during the entire
course of liquidation.
b) Using the program developed in (a), prepare schedules summarizing the

payments to be made to partners at the end of each month.
c) Prepare a Statement of Liquidation to summarize the course of liquidation.
MODULE 3
ORGANIZATION AND FORMATION OF A CORPORATION
OVERVIEW
A corporation is an artificial being created by operations of law, having the right of

succession and the powers, attributes and properties expressly authorized by law or incident to
its existence. (Section 2, Corporation Code of the Philippines). Its powers and limitations are
enumerated in its’ Articles of Incorporation. The by-laws of the corporation supplement the articles
of incorporation that contains provisions for the internal administration of the corporation.
MODULE OBJECTIVES
• Define a corporation, identify its attributes and discuss the various classes of corporation.
• Discuss the advantages and disadvantages of a corporate form of organization.
• Enumerates the components of a corporation and the steps in organizing a corporation.
• Identify the different records that are maintained by a corporation.
• Differentiates the two classes of share capital that may be issued by a corporation.
• Identify the basis of measurement in the issuance of share capital in exchange for various
considerations.
• Record the transactions on the issuance of share capital using the memorandum entry
method and the journal entry method.
DEFINITION OF A CORPORATION
A corporation is an artificial being created by operations of law, having the right of

succession and the powers, attributes and properties expressly authorized by law or incident to
its existence. (Section 2, Corporation Code of the Philippines)
ATTRIBUTES OF A CORPORATION
1. Separate legal entity - artificial being. A corporation is an artificial being with a

personality that is separate from that of its individual shareholder. Thus, it may, under its
corporate name, take, hold or convey property to the extent allowed by law, enter into
contracts, and sue or be sued.
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. Rights of succession. A corporation has the right of succession irrespective of the death,
withdrawal, insolvency, or incapacity of the individual member or shareholders, and
regardless of the transfer of their interest or share capital, a corporation can continue its
existence up to the period of time stated in the article of incorporation but not to exceed
fifty (50) years.
4. Power, attributes, properties authorized by law. A corporation has only the power,
attributes and properties expressly authorized by law or incident to its existence. Being a
mere creation of law, a corporation can only exercise power provided by law and those
power that is incidental to its existence.
5. Ownership divided into shares. Proprietorship in a corporation is divided into units

known as share capital. The buyers of this share capital are called shareholders and are
considered owner of the business.
6. Board of directors. Management of the business is vested in a board of directors elected

by the shareholders. The board of directors is the governing body or decision making body
of the corporation. The Corporation Law provides that the number of directors be not less
than five but not more than fifteen.
ADVANTAGES OF A CORPORATION
1. The corporation enjoys continuous existence because of its power of succession.

2. The corporation has the ability to obtain a strong credit line because of continuous
existence.
3. Large scale business undertakings are made possible because many individuals investing
their funds in the enterprise.
4. The liability of its’ investors or shareholders is limited to the extent of their investment in
the corporation.
5. The transfer of shares can be effected without the need for prior consent of other
shareholders.
6. Its smooth operation is guaranteed because of centralized management.
DISADVANTAGES OF A CORPORATION
1. It is not easy to organized because of complicated legal requirements and high costs in
its organization.
2. The limited liability of its shareholders may weaken its credit capacity.
3. It is subject to rigid governmental control.
4. It is subject to more taxes.
5. Its centralized management restricts a more active participation by shareholders in the
conduct of corporate affairs.
CLASSES OF CORPORATION
Corporations are generally classified according to purpose, membership holdings,

compliance of law, law of creation, extent of membership or other basis of clarification. Generally,
profit-oriented corporations are open, private and stock corporations. Nonprofit corporations are
public and private non-stock corporation.
The following is a list of the common classes of corporation.
1. As to Membership Holdings
a. Stock corporation- a private corporation in which the capital is divided into share of
stock and is authorized to distribute corporate earnings to the holders on the basis of
shares held. The owners of a stock corporation are called stockholders or
shareholders.
b. Non-stock corporation- a private corporation in which capital comes from fees paid
by individuals composing it. The owners of a non-stock corporation are called
members.
2. As to Purpose
a. Public corporation- a corporation that is organized to govern a portion of the state
(e.g. municipalities, provinces).
b. Private corporation- a corporation that is organized for a private benefit, aim or end.
c. Quasi-public corporation- a private corporation which is given a franchise to perform

functions of a public character. Classified under this type are the so-called public utility
corporation such as MERALCO and PLDT.
3. As to Compliance of Law
a. De jure corporation- a corporation which exist in both law and fact. It exists in law
because it has complied with all the legal requirements; it exists in fact because it
actually operates as a corporation.
b. De facto corporation- a corporation which exist only in fact but not in law. It does not
exist in law because of non-compliance with certain legal requirements.
4. As to Law of Creation
a. Domestic corporation- a corporation that is organized under Philippine laws.
b. Foreign corporation- a corporation that is organized under the laws of other

countries.
5. As to Extent of Membership
a. Open corporation- a corporation whose ownership is widely held by many investors,
usually a private stock corporation.
b. Closely-held corporation or family corporation- a private corporation in which 50%

of its stock is owned by five (5) person or less.
Other types of corporations include parent or holding corporations, subsidiary

corporations, ecclesiastical corporations and lay corporations which themselves classified into
other groups.
COMPONENTS OF A CORPORATION
1. Incorporators- they are the person who originally formed the corporation and whose
names appear in the Articles of Incorporation. They must be natural person as
distinguished from artificial person.
2. Corporators- they are the person who compose the corporation whether as shareholders
or members.
3. Stockholders or shareholders- they are the corporators of a stock corporation.
4. Members- they are the corporators of a non-stock corporation.

5. Promoters- they are the person who undertake to (a) form a company based on given
project, (b) set it going, and (c) take the necessary steps to accomplish the purpose for
which the corporation is organized.
6. Subscribers- they are the person who have agreed to take original, unissued shares but
will pay at a later date. They may be incorporators or not and they may eventually become
shareholders the moment the full payment of their subscription is made.
7. Underwriters- they are those who undertake to dispose of the share to the general public.
ORGANIZING A CORPORATION
The process of organizing a corporation generally consists of three stages which normally
require the aid of legal, competent advisers. These three stages are discussed below.
1. Promotion- the incorporators make preliminary arrangements to set up a tentative

working organization and to solicit subscription to raise sufficient capital for the business.
2. Incorporation- the process of formalizing the organization of the corporation. This stage
includes:
a. Drafting of the articles of incorporation which must be duly executed and acknowledge
before a notary-public.
b. Filing of the articles of incorporation with the Securities and Exchange Commission
(SEC) together with the statement showing that at least 25% of the total authorized
share capital (also known as authorized capital stock) has been subscribed and that
at least 25% of the total subscription have been paid.
c. After the required fees have been paid and upon approval of the articles of
incorporation, the SEC issues a certificate of incorporation, the date of which being
considered as the date of registration of incorporation.
3. Commencement of the business- the business should start its operation within two
years from the date of incorporation. Failure to do so will automatically dissolve the
corporation without the need of hearing.
Costs incurred during incorporation, such as filling fees, cost of printing stock certificates,
promoters’ commission and legal fees, are known as organization cost or pre-operating costs.
Under PAS 38 Intangible Assets, organization or pre-operating costs are charge to expense in
the period incurred.
ARTICLES OF INCORPORATION
The Articles of Incorporation enumerate 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 fifty years;

5. the names, nationalities, and addresses of the incorporators;
6. the names of the directors who will serve until their successors are duly elected and
qualified in accordance with the by-laws;
7. the authorized share capital (authorized capital stock), the classes of share capital (stocks)
to be issued, and the number of shares and terms of each class indicating the par value
per share, if there is any;
8. the amount of subscriptions to the share capital (capital stock), the names of the
subscribers and the number of shares subscribed by each; and
9. the total amount paid on the subscriptions to the share capital (capital stock) and the
amount paid by each subscriber on his subscription.
BY-LAWS
The by-laws of the corporation supplement the articles of incorporation. It contains

provision for the internal administration of the corporation. The corporate by-laws normally include
the following:
1. the date, place and manner of calling the annual shareholders’ (stockholders’) meeting;
2. the manner of conducting meetings;
3. the circumstances which may permit the calling of special meetings of the shareholders;
4. the manner of voting and the se of proxies;
5. the manner of electing the directors and the number of 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 authority and responsibilities of the officers;
10. the procedure for amending the articles of incorporation; and
11. the procedure for amending the by-laws.
CORPORATE RECORDS
The corporation generally maintains the following records to keep track of its various
transactions:
1. Minute’s books - minutes of all meetings of directors and shareholders.

2. Stocks and transfer book – a chronological and numerical record of stock certificates
issued indicating the names of shareholders; installments payments made; unpaid amount
of shareholders; dates of subsequent payments; any transfer of shares and dates thereof,
by whom and to whom made.
3. Books of accounts - records of all business transactions (journals, ledgers, vouchers,
and other supporting documents).
4. Shareholders’ ledgers – a subsidiary for the share capital issued reporting the number
of shares issued to each stockholder.
5. Subscribers’ ledgers – a subsidiary for the subscription receivable account supporting
the individual subscription of the subscribers.
6. Share certificates book – is a book of printed blank share certificates.
7. optional and supplementary records.
SHARE CAPITAL (CAPITAL STOCK)
Share capital is also known as capital stock. It is the amount fixed in the articles of
incorporation to be subscribed and paid in or secured to be paid-in by the shareholders of a
corporation either in money, property or services. The share capital is divided into shares
evidenced by a share certificate (stock certificate) that represents ownership in a corporation.
LEGAL CAPITAL. The portion of the paid-in capital arising from the issuance of share capital
which cannot be returned to the shareholders in any form during the lifetime of the corporation for
the protection of the corporate creditors. The amount of legal capital is determined as follows:
(Sec.6, par.3)
a. in case of par value shares – the legal capital is the aggregate par value of the shares
issued and subscribed.
b. In case of no-par value shares – the legal capital is the total consideration received from
shareholders including the excess over the stated value.
AUTHORIZED SHARE CAPITAL
The maximum number of shares that a corporation may issue is termed as authorized
shares (both preference and ordinary shares). The authorized share capital (authorized
capital stock) is determined by multiplying the authorized shares by the par or stated value of
the share capital.
A corporation cannot issue shares more than the authorized shares stated in the articles
of incorporation. However, it may increase its authorized shares and authorized share capital by
amending its articles of incorporation.
CLASSES OF SHARES CAPITAL
A corporation may issue two classes of share capital, namely, 1.) ordinary share capital
(common stock) 2.) and preference share capital (preferred stock). When a single class of
share capital is issued, it is an ordinary share capital. Ordinary share capital entitles the holder to
an equal or pro-rata division of profits without any preference or advantage over any class of
shares. Preference share capital, on the other hand, entitles the holder to enjoy priority as to
distribution of dividends and distribution of assets upon corporate liquidation. Dividends are
corporate profits distributed to its shareholders.
Each share represents interest or rights of shareholders in the corporation. The following
are the rights of a shareholder:
1. to share in the profit distribution of the corporation;

2. to share in the distribution of assets upon liquidation;
3. to vote in the election of directors during shareholders’ meeting;
4. to maintain one’s ownership interest in the corporation through purchase of additional
shares when a new share capital is issued, known to be the pre-emptive rights or
stock rights.
If a corporation issues both preferences and ordinary share capital, the articles of
incorporation or the corporate by-laws should state the special features of each class of share
capital.
Preference and Ordinary share capital may be issued at par value, without par value but
with stated value, or no-par value and no stated value.
A par value share capital has a nominal or face value stated on the face of the stock
certificate and in the articles of incorporation.
A no-par but with stated value share capital has a nominal value stated in the articles
of incorporation but not on the face of the stock certificate.
A no-par, no stated value share capital has no nominal value stated either in the articles
of incorporation nor on the face of the stock certificate.
In our Corporation Code, a no-par share capital is to be issued for a consideration of not
less than five pesos (P5.00).
PREFERENCE SHARE CAPITAL (PREFERRED STOCK)
A preference share capital is generally issued with a par value and a dividend rate. The
holders of a preference shares have priority as to distribution of dividends and as to distribution
of assets in the event of corporate liquidation. However, this does not mean that the holders are
assured of regular receipt of dividends; rather, this means that dividend requirements on
preference shares must first be met before any payment san be made to holders of ordinary
shares.
A corporation may issue more than one class of preference shares. Generally, preference
shares may be classified as follows:
1. Cumulative preference shares- entitle the holders to the receipt of previous years’
unpaid dividends (i.e. dividends in arrears) before any payment can be made to
ordinary shareholders upon dividend declaration. This means that of dividends is not
declared in a particular year, the right to such dividend is not lost but carried forward
to a subsequent year.
2. Non-cumulative preference shares- entitle the holders to the receipts of current

dividends but not on the previous years’ unpaid dividends. This means that of dividend
is not declared in a particular year, the right to such dividend is forfeited.
3. Participating preferences shares- entitle the holders to the receipt of additional

dividend after holders of both preference and ordinary shares have been paid up to
the current year’s dividend. This means that the holders of preference shares have the
right to share in extra dividends. Participating preference shares may be fully
participating or participating only up to a certain amount or percentage.
4. Non-participating preference share- entitle the holders to the receipt of dividends

up to the current period only. All extra dividends are given to the holders of ordinary
shares.
5. Convertible preference shares- entitle the holders the option to exchange the shares
for some other securities of the issuing corporation, normally ordinary shares.
6. Redeemable preference shares- entitle the issuing corporation the option to redeem
or call the shares at a certain call price.
ORDINARY SHARE CAPITAL (COMMON STOCK)
An ordinary share capital (common stock) represents residual ownership equity. The
holders of this class of share capital carry the greatest risks; however, they ordinarily share in
earnings to the greatest extent if the corporation is successful. Although the right to vote is a basic
right of all shareholders, it is frequently given exclusively to ordinary shareholders as long as
dividends are paid regularly to preference shareholders.
Authorized share capital may be recorded under the journal entry method or the
memorandum entry method. The entries under the two (2) methods to record authorized share
capital are presented below and on the next page.
MEMORANDUM ENTRY METHOD JOURNAL ENTRY METHOD
Authorized to issue xxx shares of xxx share Unissued XXX Share Capital xxx
capital with a par value of Pxxx. Authorized XXX Share Capital
xxx
The total amount recorded is computed

by multiplying authorized shares by the par
or stated value of the share capital. Thus,
this method cannot be used if the share
capital is a no-par and no-stated value stock.
The entry to record authorized share capital is made in the general journal and is then
posted to the share capital account in the general ledger. If more than one class of share capital
are issued, a separate entry is made for each class of share capital and a separate account for
each class is maintained in the ledger.
The memorandum entry method enjoys popularity in use compared with the journal entry
method. For problem solving purposes, the memorandum entry method will be used if there is no
specification as to which method will be used.
Illustrative Problem A: Froilan Company was organized on March 1, 2019 with

authorized share capital as follows:
10,000 shares 10% preference share capital with a par value of P10 per share
200,000 shares of ordinary share capital with a par value of P1 per share
The entries to record authorized share capital and the subsequent posting to the general ledger
under each method are illustrated below:
Case 1- The memorandum entry method Case 2- The journal entry method is used.
is used. 2019
2019 Mar.1 Unissued Preference Share Capital 100,000
Authorized Preference Share Capital 100,000
10% Preference Share Capital
2019 1 Unissued Ordinary Share Capital 200,000
Authorized Ordinary Share Capital 200,000
Mar.1 Authorized to issue 10,000
shares, par value P10 These entries are then posted to the accounts
in the general ledger as follows:
Mar.1 Authorized to issue 10,000 shares of
10% preference share capital with a par
value of P10 per share.
1 Authorized to issue 200,000 shares
ordinary share capital with a par value Authorized Preference Share Capital
2019
The two entries are then posted to the Mar. 1 100,000
accounts in the general ledger as follows:
Ordinary Share Capital Unissued Preference Share Capital
2019
2019
Mar. 1 100,000
Mar.1 Authorized to issue 200,000
shares, par value P1
Authorized Ordinary Share Capital

2019
Mar. 1 200,000
Unissued Ordinary Share Capital

2019
Mar. 1 200,000
Posting to the accounts in the general ledger is very important so that the corporation will be able
to monitor shares issued and avoid the issuance of shares more than what is authorized.
ISSUANCE OF SHARE CAPITAL
A share capital may be issued in exchange for cash, non-cash assets, services, liability or
other form of securities. It may be sold also on subscription basis. A share capital issued to a
shareholder is called an outstanding share.
The major issue on issuance of share capital is the basis for measurement of the
transaction. The discussion of the measurement standards will be based on the provision of PRFS
2 Share-Based Payment and will be limited to issuance of share capital to non-employees. The
issuance of share capital to employees (such as share option and share appreciation rights) will
be discussed in financial accounting.
A shareholders’ ledger is used to maintain records affecting the shareholding of each

shareholder such as transfer or sale of share capital. Shares issued to shareholder, on the other
hand, are recorded in the stock certificate book.
Share capital issued are recorded in the share capital account maintained for each class
of share capital. The discussions in the succeeding paragraphs are focused on the issuance of
various classes of shares in exchange for various considerations.
A. ISSUANCE at PAR VALUE SHARE
As discussed earlier, a par value share has a nominal value stated on the face of the stock
certificate. The following rules shall apply in the issuance of this class of share capital.
ISSUANCE FOR CASH. A share capital may be issued for cash equal to its par value,
above par value, or below par value. If cash received is equal to its par value, Cash is debited
and Share Capital or Unissued Share Capital is credited.
If the share capital is sold or issued above its par value, Cash is debited for the amount
received, Share Capital or Unissued Share Capital is credited at par value, and Share Premium
or Paid-in Capital in Excess of Par is credited for the excess of cash received over par value.
If the share capital is sold or issued below its par value, Cash is debited for the amount
received, Share Capital or Unissued Share Capital is credited at par value, and Discount on Share
Capital is debited for the excess of par value over the amount of cash received. Under the
Corporation Code of the Philippines, however, the original issuance of share capital at a discount
is not allowed. Therefore, problems involving discounts are used in the book for illustration
purposes only.
Illustrative Problem B: Ellen Corporation was organized on January 1, 2019 and is authorized
to issue 100,000 shares of P10 par value ordinary share. Subsequently, 20,000 shares were sold.
The entries to record the sale of shares under two method of recording share capital using three
independent cases are presented below and on the next page.
MEMORANDUM ENTRY METHOD JOURNAL ENTRY METHOD
Case 1- The issuance price is P10 (at par) Case 1- The issuance price is P10 (at par)
Cash 200,000 Cash 200,000
Ordinary Share Capital 200,000 Unissued Ordinary Share Capital 200,000
20,000sh x P10 = P200,000 20,000sh x P10 = P200,000
Case 2- The issuance price is P15 (above par) Case 2- The issuance price is P15 (above par)
Cash 300,000 Cash 300,000
Ordinary Share Capital Unissued Ordinary Share Capital 200,000
200,000 Ordinary Share Premium 100,000
Ordinary Share Premium 20,000sh x P15= P300,000
100,000 20,000sh x P10= P200,000
20,000sh x P15= P300,000 20,000sh x P 5= P100,000
20,000sh x P10= P200,000
20,000sh x P 5= P105,000 Case 3- The issuance price is P8 (below par)
Case 3- The issuance price is P8 (below par) Cash 160,000

Discount on Ordinary Share Capital 40,000
Cash 160,000 Ordinary Share Capital 200,000
Discount on Ordinary Share Capital 20,000sh x P8 = P160,000
40,000 20,000sh x P10 = P200,000
Ordinary Share Capital 20,000sh x P2 = P40,000
200,000
20,000sh x P8 = P160,000
20,000sh x P10 = P200,000
20,000sh x P2 = P40,000
It should be noted that the basic difference between the memorandum entry method and
the journal entry method is the account to be credited upon issuance of the share capital.
Under the memorandum entry method, the Share Capital account is credited upon
issuance of the stock. The balance of this account represents the amount of capital stock or share
capital issued to shareholders.
Under the journal entry method, the Unissued Share Capital account is credited upon
issuance of the share capital thereby reducing the balance of this account. The balance of this
account represent the amount of authorized share capital not yet issued and is deducted from the
balance of Authorized Share Capital account to determine the amount of share capital already
issued to shareholders.
ISSUANCE IN EXCHANGE FOR NON-CASH ASSETS OR PROPERTY. When a share

capital is issued in exchange for non-cash assets, the asset received is recorded at its fair value
(also known as direct measurement), unless the fair value cannot be estimated reliably. If the fair
value of the asset received cannot be estimated reliably, it will be recorded at the fair value of the
share capital issued (also known as indirect measurement). The fair value of the asset received
shall be determined at the date the entity receives the asset.
Upon issuance of the stock, Share Capital or Unissued Share Capital is credited at par
value. The excess of the value assigned to the assets received over the par value of the stock
issued is credited to Share Premium or Additional Paid-in Capital, or Share Capital in Excess of
Par. (Note: original issuance of share capital at less than its par value is prohibited under our
Corporation Code.
In some instances, the value assigned to the asset received is overstated or understand.
When the value assigned to the asset received in exchange for share capital is overstated then
the share capital issued is called watered share capital. The overstatement is done to comply
with requirement of the law that the share capital should not be issued at less than its par value.
When the value of the asset received is understated, the share capital is said to contain secret
reserves.
Illustrative Problem C: Ellen Corporation issued 9,000 share of its P10 par value ordinary share
capital in exchange for land. The entries to record the issuance of the share capital under the
memorandum entry method using three independent cases are given on below and on the next
page.
Case 1- The land has a fair value of P165,000.
Land 165,000
Ordinary Share Capital 90,000
Ordinary Share Premium 75,000
9,000sh x P10 = P90,000
P165,000 – P90,000= P75,000
Case 2- The land has no known market value. The fair of ordinary share capital on the date of
exchange is P14.
Land (9,000 x 14) 126,000

Ordinary Share Capital (9000 x 10) 90,000
If the journal entry method is used instead of the memorandum entry method, Unissued
Ordinary Share Capital should have been credited instead of Ordinary Share Capital.
ISSUANCE IN EXCHANGE FOR SERVICES RENDERED. When a share capital is

issued in exchange for services rendered, the services received is recorded at its fair value (also
known as direct measurement), unless the fair value cannot be estimated reliably. If the fair value
of the services received cannot be estimated reliably, it will be recorded at the fair value of the
share capital issued, also known as indirect measurement. The fair value of the services received
shall be determined at the date the other party renders the services.
If the shares are issued for services rendered during incorporation, Pre-Operation
Expense is debited, Share Capital or Unissued Share Capital is credited at par value: Share
Capital in Excess of Par, or Additional Paid-in Capital or Share Premium is credited for any excess
of the value assigned to pre-operating expenses and the par value of the share capital.
Illustrative Problem D: Ellen Corporation issued 1,200 shares of P8 par value ordinary share
capital in payment for the services of the lawyer rendered during incorporation.
Case 1- The services of the lawyer is valued at P14,000.
Pre-Operating Expenses 14,000

1,200sh x P8 = P9,600
P14,000 – P9,600= P4,400
Case 2- There is no known fair market value for the services of the lawyer. The fair market
value of the ordinary share capital issued is P12 per share.

1,200sh x P12 = P14,400
1,200sh x P8 = P9,600
1,200sh x P4 = P4,800
SALE OF SHARE CAPITAL ON A SUBSCRIPTION BASIS. Subscription is a contract

between a subscriber (buyer of share capital) and a corporation (seller or issuer of share capital)
whereby the former purchases shares of stock of the latter with the payment to be made at a
future date. The corporation issues the corresponding stock certificate upon full payment of
subscription. This practice is a mean of encouraging subscribers to pay their unpaid subscription
on time.
Sales of share capital on a subscription basis generally involves three major transactions
– (1) receipt of subscription, (2) collection from subscribers, and (3) issuance of stock certificate
upon full payment of subscription. Entries required for these transactions are given below.
1. To record the receipt of subscription
a. Subscription price (SP) is equal to par value (PV)

Share Capital Subscription Receivable xxx
Share Capital Subscribed xxx
No. of Shares subscribed x PV = Pxxx
b. Subscription price is above par value

Share Premium xxx
Receive = shares subscribed x SP
Subscribed = shares subscribed x PV
Premium = shares subscribed x (SP-PV)
It should be noted that the Share Capital Subscribed account is always credited at par
value, regardless of the subscription price.
2. To record collection of subscription from subscribers.
Cash xxx
3. To record issuance of stock certificate upon full payment of subscription.

Share Capital (or Unissued Share Capital) xxx
Illustrative Problem E: On February 8, 2019, Ellen Corporation received subscription for 5,000
shares of its P10 par value ordinary share capital at P14. A down payment of 25% was received
and the balance was paid in full on July 2, 2019. The entries to record these transactions sing
memorandum entry method are presented below.
2019
June 3 Ordinary Share Capital Subscription Receivable 70,000
Ordinary Share Capital Subscribed 50,000
5,000sh x P14 = P70,000
5,000sh x P10 = P50,000
5,000sh x P4 = P20,000
3 Cash 17,500
Ordinary Share Capital Subscription Receivable 17,500
P70,000 x 25% = P17,500
July 4 Cash 52,500

P70,000 x 75% = P52,500
July 4 Ordinary Share Capital Subscribed 50,000

The entries on June 3 may be recorded in a compound entry as follows:

Cash 17,500
B. ISSUANCE OF NO-PAR, BUT WITH STATED VALUE SHARE CAPITAL

A share capital without par value but with a stated value has a nominal value stated in the
articles of incorporation but not on the face of the stock certificate.
The same rules discussed in the issuance of share capital with a par value are applicable.
The account Share Capital in Excess of Stated Value may be used instead of the account Share
Premium or Share Capital in Excess of Par.
ISSUANCE FOR CASH. A share capital may be sold for cash at its stated value, at more
than stated value, or at less than stated value. If cash received is equal to stated value, Cash is
debited and Share Capital or Unissued Share Capital is credited.
If the share capital is sold or issued at more than its stated value, Cash is debited for the
amount receive, Share Capital or Unissued Share Capital is credited at stated value, and Paid-in
Capital in Excess of Stated Value is credited for the excess of cash received over the stated value.
If the share capital is sold or issued at less than its stated value, Cash is debited for the
amount received, Share Capital or Unissued Share Capital is credited at stated value, and
Discount on Share Capital is debited for the excess of stated value over the amount of cash
received. (Note: Under the Corporation Code of the Philippines, however, the original issuance of
share capital at a discount is not allowed). Therefore, problems involving discounts are used in
the book for illustration purposes only.
Illustrative Problem F: Celine Corporation was organized on January 1, 2019 and is authorized
to issue 100,000 shares of P10 stated value ordinary share capital. Subsequently, 20,000 shares
were sold.
The entries to record the sale of share capital under the memorandum entry method of recording
share capital using three independent cases are as follows:
Case 1- The issuance price is P10 (at stated value)

Cash 200,000
20,000sh x P10 = P200,000
Case 2- The issuance price is P14 (above stated value)
Cash 350,000
Ordinary Share Capital in Excess of Stated Value 150,000
25,000sh x P14 = P350,000
25,000sh x P10 = P250,000
25,000sh x P5 = P125,000
Case 3- The issuance price is P8 (below stated value)
Cash 160,000
Discount on Ordinary Share Capital 40,000
20,000sh x P8 = P200,000
20,000sh x P10 = P200,000
20,000sh x P2 = P40,000
Share Capital will be credited instead of Ordinary Share Capital.

capital is issued in exchanged for non-cash assets received is recorded at its fair value (also
of the asset received cannot be estimated reliably, it will be recorded at the fair value of the share
capital issued (also known as indirect measurement). The fair value of the asset received shall
be determined at the date the entity receives the asset.
Upon issuance of the share capital, Share Capital or Unissued Share Capital is credited
at stated value. The excess of the value assigned to the asset receive over the stated value of
the share capital issued is credited to Share Capital in Excess of Stated Value.
Illustrative Problem G: Celine Corporation issued 10,000 shares of its P10 stated value ordinary
share capital in exchange for land. The entries to record the issuance of the share capital under
the memorandum entry method using three independent cases are given below:
Case 1- The land has a market value of P175,000
Land 175,000
10,000sh x P10 = P100,000
P175,000 – P100,000 = P75,000
Case 2- The land has no known market value. The fair market value of ordinary share capital on
the date of exchange is P15.
Land 150,000
10,000sh x P15 = P150,000
10,000sh x P10 = P100,000
10,000sh x P5 = P50,000
Ordinary Share Capital should have been credited instead of Ordinary Share Capital

of the service received cannot be estimated reliably, it will be recorded at the fair value fair value
of the share capital issued, also known as indirect measurement. The fair value of the services
receive shall be determined at the date the other party renders the services.
If the shares are issued for services rendered during incorporation, Pre-Operating
Expense is debited, Share Capital or Unissued Share Capital credited at stated value; Share
capital in Excess of Stated Value or Additional Paid-in Capital is credited for any excess of the
value assigned to pre-operating expenses over the stated value of the share capital
Illustrative Problem H: Celine Corporation issued 1,000 shares of P10 stated value ordinary
share capital in payment for the services of the lawyer rendered during incorporation.
Case 1- The services of the lawyer is valued at P20,000

1,000sh x P10 = P10,000
P20,000 – P10,000 = P10,000
value of the ordinary share capital issued is P14 per share.

1,000sh x P14 = P14,000
1,000sh x P10 = P10,000
1,000sh x P4 = P4,000
+
SALE OF SHARE CAPITAL ON A SUBCRIPTION BASIS. The sale of stock with stated
value on a subscription basis is recorded in the same manner as that of a stock with a par value,
except for the account credited for the excess of the subscription price over the stated value of
stock. The account Share Capital in Excess of Stated Value is credited instead of Share Premium,
or Additional Paid-in Capital, or Share Capital in Excess of Par.
Illustrative Problem I: On June 3, 2019, the Froilan Corporation received subscription for 5,000
shares of its P10 stated value ordinary share capital at P13. A down payment of 25% was received
and the balance was paid in full on July 4, 2019. The entries to record these transactions using
the memorandum entry method are presented below and on the next page.
2019
5,000sh x P13 = P65,000
5,000sh x P10 = P50,000
5,000sh x P3 = P15,000
3 Cash 16,250
P65,000 x 25% = P16,250
July 4 Cash 48,750

P65,000 x 75% = P48,750
July 4 Ordinary Share Capital Subscribed 50,000

The entries on June 3 may be recorded in a compound entry
C. ISSUANCE OF NO-PAR, NO STATED VALUE SHARE CAPITAL
When a share capital has no par value and no stated value, the value assigned to the
consideration received is the same amount credited to the Share Capital account.
ISSUANCE FOR CASH. When a no-par, no stated value stock is issued for cash, Cash
is debited and Share Capital is credited for the total value of the cash consideration received.
Illustrative Problem J: Alfonso Corporation was organized on January 1, 2019 and is authorized
to issue 100,000 shares of no-par, no stated value ordinary share capital. Subsequently, 23,000
shares were sold at P15 per share.
The entry to record the sale follows:
Cash 345,000
23,000 x P15 = P345,000

capital is issued in exchange for non-cash assets, the asset received is recorded at its fair value
(also known as direct measurement), unless the fair value cannot be estimated reliably. If the fair
value of the asset received cannot be estimated reliably, it will be recorded at the fair value of the
share capital issued, also known as indirect measurement. The fair value of the asset received
shall be determined at the date the entity receives the asset.
Upon issuance of the shares, Share Capital is credited for the value assigned to the asset
received.
Illustrative Problem K: The Alfonso Corporation issued 10,000 shares of its ordinary share
capital in exchange for land. The entries to record the issuance of the share capital under the
memorandum entry method using three independent cases are given below.
Case 1- The land has a market value of P165,000
Land 165,000
Case 2- The land has no known market value. The fair market value of ordinary share capital
on the date of exchange is P14.
Land 140,000
If the share capital has no par and no stated value, only the memorandum entry method
can be used.

of the services received cannot be estimated reliably, it will be recorded at the fair value of the
share capital issued, also known as indirect measurement. The fair value of the services received
shall be determined at the date the other party renders the services.
If the shares are issued for services rendered during incorporation, Pre-Operating
Expenses is debited and Share Capital or Unissued Share Capital is credited for the value
assigned to the services rendered.
Illustrative Problem L: Alfonso Corporation issued 800 share of its ordinary share capital in
payment for the services of the lawyers rendered during incorporation.
Case 1- The services of the lawyer is valued at P18,000

value of ordinary share capital issued is P15 per share.

SALE OF SHARE CAPITAL ON A SUBSCRIPTION BASIS. The sale of no stated value

share capital on a subscription basis is recorded in the same manner as that of share capital with
a par value or with stated value stock, except that the entire subscription price is credited to Share
Capital account.
Illustrative Problem M: On June 3, 2019, Alfonso Corporation received subscription for 5,000
shares of its no-par, no stated value ordinary share capital at P12. A down payment of 25% was
received and the balance was paid in full on July 4, 2019. The entries to record these transactions
using the memorandum entry method follow:
2014
5,000sh x P12 = P60,000
3 Cash 15,000
P60,000 x 25% = P15,000
July 4 Cash 56,250

P60000 x 75% = P45,000
4 Ordinary Share Capital Subscribed 45,000

The entries on June 3 may be recorded in a compound entry.
When the share capital issued have no par and have no stated value, only the
memorandum entry can be used in recording the stock transactions.
SUBSCRIPTION DEFAULTS
When a subscriber fails to pay his obligations after the corporation has sent several notices
to him, his subscribed shares are declared delinquent shares. His subscription is declared
delinquent subscription. Such delinquent subscription is then offered for sale in a public auction
and delinquent shares are issued to the highest bidder. The highest bidder is the one who is
willing to pay the unpaid subscription plus any expense incurred in connection with the
delinquency sale and is willing to receive the least number of shares.
The following entries are made in relation to subscription defaults and issuance of stock
certificates.
a. Upon default
Receivable from Highest Bidder xxx
b. Cost incurred in connection with the delinquency sale

Cash ` xxx
c. Upon receipt of payment from Highest Bidder

Cash xxx
d. Upon issuance of certificate of stock

All subscribed shares are issued. Shares are first given to the highest bidder. The excess,
if any, are given to the defaulting subscriber.
If there is no bidder, all of the delinquent shares will be issued in the name of the
corporation. Such shares are considered treasury share and the following entries will be made,
after making the entries (a) and (b) above.
c. Treasury Share Capital xxx

d. Share Capital Subscribed xxx

Illustrative Problem N: On June 15, 2019, Alfonso Corporation received subscription for 2,000
shares of its P10 par value ordinary share capital at P15. A down payment of 60% was received.
The final payment was due on August 15, 2019, although several notices were sent to the
subscriber, no payment has been received. On August 31, the subscription was declared
delinquent and was offered for sale in a public auction. On September 6, expenses of P500 were
incurred in connection with the delinquency sale. On September 21, payment was received from
the highest bidder and shares were issued 1,500 to the highest bidder and 500 to the defaulting
subscriber.
The entries to record the foregoing transactions using the memorandum entry method follow:
2019
2,000sh x P15 = P30,000
2,000sh x P10 = P20,000
2,000sh x P5 = P10,000
June 15 Cash 18,000

P30,000 x 60% = P18,000
Aug. 31 Receivable from Highest Bidder 12,000

P30,000 x 40% = P12,000
Sept. 6 Receivable from Highest Bidder 500

Cash 500
21 Cash 12,500
Receivable from Highest Bidder 12,500
21 Ordinary Share Capital Subscribed 20,000

INCORPORATION A SOLE PROPRIETORSHIP OR A PARTNERSHIP
A sole proprietorship by a corporation or incorporation of a partnership may involve the

recognition of goodwill. The goodwill shall be the result of the acquisition by the new corporation
of the net assets of the partnership. It is the excess of the market value of the capital share issued
to the former partners in the partnership over the fair value of net assets transferred by the
partnership into the corporation. The adjustment for the goodwill increases the capital of the
former partners.
PFRS 3 prohibits the amortization of goodwill acquired in a combination an instead

requires the goodwill to be tested for impairment annually, or more frequently, if events or changes
in circumstances indicate that the asset might be impaired.
BOOKS OF THE OLD PARTNERSHIP ARE RETAINED
If the books of the partnership are retained, the following steps in recording the
incorporation will be followed:
1. Revalue the net assets of the partnership (i.e. assets and liabilities). Adjustments in
assets and liability balances may be reported through a revaluation account called
Capital Adjustment Account or recorded directly to the capital accounts of the partners.
2. Recognize goodwill. The total value of the share capital to be issued is compared with
the adjusted fair value of the net assets received from the partnership. The excess of
the total value of the share capital over the adjusted fair value of net assets is payment
for goodwill.
3. In case a revaluation account is used, close the balance of Capital Adjustment Account
to the capital accounts of the partners in accordance with their profit and lost ratio.
4. Record the authorized share capital of the new corporation.
5. Record the issuance of share capital to the partners.
6. Record any necessary distribution of cash to the partners.
7. Record the issuance of share capital to other incorporators or shareholders

(stockholders).
NEW BOOKS ARE OPENED FOR THE CORPORATION
If a new set of books is opened for the corporation, the following shall be recorded in the
corporation books:
1. authorized share capital.

2. issuance of share capital for the net assets transferred by the partnership.
3. issuance of share capital to their incorporators.
Entries are also prepared on the partnership books to record the following:
1. revaluation of net assets.

2. recognition of goodwill, if any.
3. closing the balance of Capital Adjustment Account to partners’ capital accounts.
4. receipt of share capital from the new corporation.
5. distribution of share capital to partners.
6. distribution of cash to partners, if there is any.
Illustrative Problem O: Larry and Sarry are partner sharing profits and losses in the ratio of 3:2.
They decide to retire from active participation in their business so they form a corporation to take
over the net assets of the partnership. The statement of financial position of the partnership just
prior to incorporation on January 1, 2014 is presented below.
Larry and Sarry Partnership

January 1, 2019
Assets
Cash P 40,000
Accounts Receivable P 70,000
Less: Allowance for Uncollectible Accounts 3,000 67,000
Merchandise Inventory 20,500
Equipment P 85,000
Less: Accumulated Depreciation 30,000 55,000
Total Asset P 182,500
Liabilities and Equity
Accounts Payable P 55,000

Expense Payable 10,000
Roberto, Capital 85,000
Remedios, Capital 32,500
Total Liabilities and Equity P 182,500
The corporation is organized as the BEST CORPORATION and is authorized to issue

100,000 share of ordinary share capital, par value P10. Twenty-five thousand (25,000) shares are
sold for P20. The corporation takes over the partnership assets other than cash and assumes
partnership liabilities in exchange for 12,000 shares.
The following adjustments are to be made before taking over the net assets:
a. The inventories are to be stated in their market value of P38,000.

b. The allowance for uncollectible accounts is to be increased to P5,600.
c. Equipment is to be recorded at its current value of P115,000.
The ordinary shares will be distributed as follows: Larry 9,000 shares; Sarry 3,000 shares.
Cash will be distributed based on the capital balances of the partners after distribution of the
shares. The ordinary share capital are selling at P14 per share on this date.
Assumption 1 – The books of the partnership will be used by the new corporation
Step 1 Revalue the net asset of the partnership
a. Merchandise Inventory 17,500

Capital Adjustment Account 17,500
b. Capital Adjustment Account 2,600

Allowance for Uncollectible Account 2,600
c. Accumulated Depreciation 30,000

Equipment 30,000
Step 2 Recognize goodwill.
Goodwill 15,600
Net assets before adjustment

(P182,500 – P55,000 – P10,000) P117,500
Add Net adjustment
(P17,500 – P2,600 + P60,000) 74,900
Net assets after adjustment P192,400
Less: Cash 40,000
Net assets excluding cash P152,400
Market value of share capital issued
(P12,000sh @ P14) 168,000
Goodwill P 15,600
Step 3 Close the balance of Capital Adjustment Account to partners’ capital accounts.

Larry, Capital 54,300
Sarry, Capital 36,200
P74,900 + P15,600 = P90,500
P90,500 x 3/5 = P54,300
P90,500x 2/5 = P36,200
Step 4 Record authorized share capital of the corporation
Authorized to issue 100,000 shares of P10 par value ordinary share capital.
Step 5 Recorded issuance of share capital to partners

9,000sh x P14 = P126,000
3,000sh x P14 = P42,000
12,000sh x P10 = P120,000
12,000sh x P4 = P48,000
Step 6 Record the distribution of cash to partners

Cash 40,000
P85,000 + P54,300 – P126,000 = P13,300
P32,500 + P36,200 – P42,000 = P26,700
Step 7 Record the issuance of ordinary shares to other incorporators
Cash 500,000
25,000sh x P20 = P500,000
25,000sh x P10 = P250,000
25,000sh x P10 = P250,000
Assumption 2 – New books are opened for the corporation.
Partnership Books
Step 1 Revalue the net assets of the partnership
a. Merchandise Inventory 17,500

Capital Adjustment Accounts 17,500
b. Capital Adjustment Account 2,600

Allowance for Uncollectible Accounts 2,600
c. Accumulated Depreciation 30,000

Equipment 30,000
Step 2 Recognize goodwill
Goodwill 15,600
Step 3 Close the balance of Capital Adjustment Account to partners’ capital accounts.

P74,900 + P15,600 = P90,500
P90,500 x 3/5 = P54,300
P90,500x 2/5 = P36,200
Step 4 Record the receipt of share capital from the new corporation
Best Corp. Ordinary Share Capital 168,000

Accounts Payable 55,000
Expenses Payable 10,000
Accounts Receivable 70,000
Equipment 115,000
Goodwill 15,600
Step 5 Record the distribution of share capital to partner

Best Corp. Ordinary Share Capital 168,000
9,000sh x P14 = P126,000
3,000sh x P14 = P42,000
Step 6 Record the distribution of cash to partners

Cash 40,000
P85,000 + P54,300 – P126,000 = P13,300
P32,500 + P36,200 – P42,000 = P26,700
NEW CORPORATION’S BOOKS
Step 1 Record authorized share capital of the corporation.

Authorized to issue 100,000 shares of P10 par value ordinary share capital.
Step 2 Recognize the issuance of share capital in exchange for the net
assets of the partnership.
Accounts Receivable 70,000

Equipment 115,000
Goodwill 15,600
Accounts Payable 55,000
Expense Payable 10,000
Step 3 Record the issuance of share capital to other incorporators
Cash 500,000
Ordinary Premium Capital 250,000
25,000sh x P20 = P500,000
25,000sh x P10 = P250,000
25,000sh x P10 = P250,000
REFERENCE
ASSESSMENT TOOL
Exercise 3 – 1 (Issuance of Par Value Share Capital for Cash)
The Froilan Corporation was incorporated on February 1, 2019 with authorized capital of
200,000 shares of P100 par value 10% preference share capital and 400,000 share of P20 stated
value ordinary share capital. The shares were issued during 2019 as follows.
Feb. 1 Issued for cash 60,500 preference shares at par and 125,000 ordinary
shares for P25.
June 1 Issued for cash 20,000 preferences shares for P2,400,000.
Dec. 1 Issued for cash 20,000 ordinary shares for P480,000.
Instructions: Prepare the journal entries to record the foregoing transactions, including
authorized share capital, assuming the use of:
a. memorandum entry method
b. journal entry method
Exercise 3 – 2 (Issuance of Par Vale Share Capital for Cash, Services, and Non-cash
Assets)
The Stephen Corporation was organized on March 1, 2019 with authorized share capital
of 500,000 ordinary shares, par value of P20. Thereafter, the following transactions took place:
March 1 The incorporators acquired 200,000 shares at P30 per share.
25 Issued 5,000 shares for the services rendered by the lawyer during the
period of incorporation. The fair value of such services is P135,000.
April 28 Issued 14,500 shares in exchange for equipment valued at P377,000.
Instructions: Prepare the journal entries to record the authorized share capital and the
subsequent transactions assuming the corporation uses the:
a. memorandum entry method
b. journal entry method
Exercise 3 – 3 (Issuance of Various Classes of Share Capital for Cash)
The Bien Corporation was organized on June 1, 2019 and is authorized to issue 500,000
shares of ordinary share capital. Subsequently, 220,000 shares were issued at P20 per share
Instructions: Prepare the journal entries to record authorized capital and the issuance of
the 220,000 shares using the memorandum entry method under each of the following
independent assumptions:
1. Each ordinary share has a par value of P40.

2. Each ordinary share has a stated value of P15.
3. The ordinary shares have no par and no stated value.
Exercise 3 – 4 (Issuance of Share Capital with Stated Value in Exchange for Various
Considerations)
The Estefanny Corporation is authorized to issue 500,000 shares of ordinary share capital
with a stated value of P25. The following transactions have taken place in relation to the share
capital:
a. Issued 122,000 shares for cash at stated value.

b. Issued 2,300 shares to attorneys for services in securing corporate charter and
for preliminary legal costs of organizing the corporation. The value of the
services was P150,000.
c. Issued 2,000 shares to the corporate promoters. Each ordinary share is selling
at P24 on this date.
d. Issued 10,000 shares in exchange for land valued at P250,000.
e. Issued for cash 50,000 shares at P22 per share.
Instructions: Prepare the journal entries to record the preceding transactions, including
authorized capital, using the memorandum entry method.
Exercise 3 – 5 (Issuance of Share Capital on a Subscription Basis)
On June 1, 2019, Carey, Inc. sold 30,000 shares of its P20 par value ordinary share capital
on a subscription basis at P30 per share. Carey received a 60% down payment on the date of
subscription. On September 8, 2019, Carey received the balance on the subscription and the
stock certificates were issued.
Instructions: Prepare journal entries to record the preceding transaction.
The Harry Corp. was organized on July 1, 2019 and is authorized to issue share capital
as follows:
50,000 shares of 10%preference share capital, P100 par
500,000 shares of ordinary share capital, P10 stated value
The following transactions took place during July:
July 1 Issued to incorporators 120,000 ordinary shares at P12 per share and
12,300 preference shares at par value.
8 Issued 1,200 preference shares to corporate promoters. The value of

preference share capital on this date is P120 per share.
12 Received subscription for 70,000 ordinary shares at P15 per share with a
down payment of 60% of the total subscription price.
21 Issued 19,000 ordinary shares in exchange for the following:

Fair value
Merchandise Inventory P12,000
Land 150,000
Building 110,000
Equipment 21,000
30 Receive the balance due on the subscription on July 12 and shares were
issued to subscribers.
Instructions: Prepare journal entries to record the preceding transactions.
The Sales Co. was organized on June 1, 2019 with authorized capital of 400,000 ordinary
share with a par value of P20.
The following are selected transactions of the corporation during September:
Sept. 1 Received subscription for 120,000 shares at P25 per share. A down
payment of 40% was received from the subscribers. The balance is due
in three equal installments.
8 Issued 23,000 shares in exchange for land valued at P750,000.
10 Received the first installment from the subscribers.
20 Received the second installment due from the subscribers.
30 Received the final installment from all subscribers and share of stock were
issued.
Instructions: Prepare journal entries to record the preceding transactions.
Exercise 3 – 8 (Subscription Default)
Patience Co. was authorized to issue 400,000 ordinary shares with a stated value of P20.
The following transactions relative in the share capital took place.
a. Received subscriptions for 123,000 shares at P25 receiving a down payment

of 60%.
b. Received balance due from subscribers of 50,000 shares. Shares of stock

subsequently issued.
c. Received balance due from subscribers of 60,000 shares. Shares of stock

were issued to the subscribers.
d. The subscriber of the remaining 15,000 shares failed to pay his obligation, so
his subscription was declared delinquent.
e. Paid delinquency sale expenses totaling P45,000.
f. Received payment from the highest bidder and shares were issued as follows:
10,000 to the highest bidder and 5,000 to the defaulting subscriber.
Instructions: Prepare the journal entries to record the preceding transactions.
MODULE 4
CORPORATE OPERATIONS
(DIVIDENDS, BOOK VALUE PER SHARE, AND EARNINGS PER SHARE)
OVERVIEW
A dividend is a distribution of corporate profits to the stockholders on a pro-rata basis. The

company’s Board of Directors approve the distribution of dividends. The amount to be declared
is based on its ability to generate free cash flow (FCF) to be used for cash distributions to
shareholders. A company increase its value through its choice of distribution policy: (1) the level
of distributions, (2) the form of distributions (cash dividends and other forms of dividends), and
(3) the stability of distributions.
A company can change its value of operations only if it changes the cost of capital or
investors’ perceptions regarding expected free cash flow. In practice, the distribution decision is
made jointly with capital structure and capital budgeting decisions. The underlying reason for
joining these decisions is asymmetric information, which influences managerial actions in two
ways.
Dividend changes provide signals about managers’ beliefs concerning their firms’
prospects. Thus, dividend reductions generally have a significant negative effect on a firm’s stock
price. Since managers recognize this, they try to set peso dividends low enough that there is only
a remote chance the dividend will have to be reduced in the future.
Dividends maybe provided to shareholders in the form of cash dividends, property

dividends, share dividends, and script dividends.
Book value per share represents the equity of an ordinary shareholder in net assets of the
corporation.
Earnings per share indicates the amount of earnings available for every share held by an
ordinary shareholder.
MODULE OBJECTIVES
a. Understand the different classes of shares of stocks;

b. Allocate the dividends to shareholders;
c. Prepare accounting entries in the general journal/special journal;
d. Compute book value per share upon liquidation of a corporation; and
e. Determine the earnings per share available to ordinary shareholder for every share
held.
Introduction to Dividend
Dividend is an income to be provided to shareholders. It comes from the company’s

internally generated free cash flow (FCF) which is the amount of cash flow available for distribution
to investors after expenses, taxes, and the necessary investments in operating capital. It depends
on a company’s investment opportunities and its effectiveness in turning those opportunities into
realities. A company with many opportunities will have large investments in operating capital and
might have negative FCF even if the company is profitable. But when growth begins to slow, a
profitable company’s FCF will be positive and very large.
There are only five potentially “good” ways to use free cash flow: (1) pay interest expenses,
(2) pay down the principal on debt, (3) pay dividends, (4) repurchase stock, or (5) buy
nonoperating assets such as Treasury bills or other marketable securities.
A company’s capital structure choice determines its payments for interest expenses and
debt principal. A company’s value typically increases over time, even if the company is mature,
which implies its debt will also increase over time if the company maintains a target capital
structure. If a company instead were to pay off its debt, then it would lose valuable tax shields
associated with the deductibility of interest expenses. Therefore, most companies make net
additions to debt over time rather than net repayments, even if FCF is positive. This “negative
use” of FCF provides even more FCF for the other uses.
It is also important to evaluate the company’s working capital policies and determine its
level of marketable securities which recognizes the decision between its benefits and costs of
having a large investment. In terms of benefits, a large investment in marketable securities
reduces the risk of financial distress should there be an economic downturn. If investment
opportunities turn out to be better than expected, marketable securities provide a ready source of
funding that will not incur the flotation or signaling costs due to raising external funds. There is a
potential agency cost if a company has a large investment in marketable securities, then
managers might be tempted to squander the money on perks or high-priced acquisitions.
Distribution policy involves three issues:
(1) What fraction of earnings should be distributed?

(2) Should the distribution be in the form of cash dividends or stock repurchases?
(3) Should the firm maintain a steady, stable dividend growth rate?
The optimal distribution policy strikes a balance between current dividends and future
growth so as to maximize the firm’s stock price. Miller and Modigliani (MM) developed the dividend
irrelevance theory, which holds that a firm’s dividend policy has no effect on either the value of its
stock or its cost of capital. The dividend preference theory, also called the bird-in-the-hand theory,
holds that the firm’s value will be maximized by a high dividend payout ratio, because investors
regard cash dividends as being less risky than potential capital gains. The tax effect theory states
that because long-term capital gains are subject to lower taxes than dividends, investors prefer
to have companies retain earnings rather than pay them out as dividends.
Dividend policy should take account of the information content of dividends (signaling) and
the clientele effect. The information content, or signaling, effect stems from investors regarding
an unexpected dividend change as a signal of management’s forecast of future earnings. The
clientele effect suggests that a firm will attract investors who like the firm’s dividend payout policy.
Both factors should be taken into account by firms that are considering a change in dividend
policy.
In practice, dividend-paying firms follow a policy of paying a steadily increasing dividend.

This policy provides investors with stable, dependable income, and departures from it give
investors signals about management’s expectations for future earnings. Most firms use the
residual distribution model to set the long-run target distribution ratio at a level that will permit the
firm to meet its equity requirements with retained earnings. Legal constraints, investment
opportunities, availability and cost of funds from other sources, and taxes are also considered
when firms establish dividend policies.
In summary, a company’s investment opportunities and operating plans determine its level
of FCF. The company’s dividend policy is determined by its Board of Directors upon the
recommendation the President and Chief Executive Officer.
Companies distribute different forms of dividend to their shareholders following the actual
procedures:
Dividend Payment Procedures
A. Cash dividends
The cash dividend should be set so that there is an extremely low probability that
the dividend, once set, will ever have to be lowered or omitted. The dividend
decision is made during the planning process, so there is uncertainty about future
investment opportunities and operating cash flows. The actual payout ratio in any
year will therefore likely be above or below the firm’s long-range target.
Cash dividend should be maintained, or increased as planned, unless the firm’s

financial condition deteriorates to the point at which the planned policy simply
cannot be maintained. A steady or increasing stream of dividends over the long
run signals that the firm’s financial condition is under control. Investor uncertainty
is decreased by stable dividends, so a steady dividend stream reduces the
negative effect of a new stock issue—should one become absolutely necessary.
In general, firms with superior investment opportunities should set lower payouts,
and hence retain more earnings, than firms with poor investment opportunities.
The degree of uncertainty also influences the decision. If there is a great deal of
uncertainty regarding the forecasts of free cash flows, which are defined here as
the firm’s operating cash flows minus mandatory equity investments, then it is best
to be conservative and to set a lower cash dividend. Firms can afford to set a
higher cash dividend, because of an increasing retained earnings and cash
balance available for dividends. There are three important dates in the payment of
cash dividends:
Declaration date
On the declaration date, the Board of Directors meet and declare the regular
dividend, issuing a statement similar to the following: “On November 11, 2020, the
directors of ABC Corporation met and declared the regular quarterly dividend of
P0.50 per share, payable to shareholders of record as of December 10, 2020,
payment to be made on January 7, 2021.”
For accounting purposes, the declared dividend becomes an actual liability on the
declaration date. If a balance sheet were prepared, an amount equal to P0.50 ×
number of shares issued outstanding, would appear as a current liability, and
retained earnings would be reduced by a like amount. Assuming the corporation
has 2.0 million shares issued and outstanding, the journal entry is:
Record date
At the close of business on the shareholder-of-record date, December 10, the

company closes its stock transfer books and makes up a list of shareholders as of
that date. If ABC Corporation is notified of the sale before 5 p.m. on December 10,
then the new owner receives the dividend. However, if notification is received after
5 p.m. on December 10, the previous owner gets the cash dividend. On the record
date, the list of current shareholders is prepared by the Corporate Secretary as the
basis for the payment of dividends. Only the shareholders whose names are listed
as of the record date will receive the cash dividends on the date of payment. No
journal entry is recorded in the accounting book of the corporation.
Payment date
The company actually pays the dividend on January 7, the payment date, to the
shareholders of record. The journal entry is:
B. Share Dividend
A share dividend is a pro-rata distribution of the corporation’s own share capital to its
shareholders. It will not affect total assets and total shareholders’ equity. It represents a transfer
of an amount from retained earnings to contributed capital.
Share dividends are similar to stock splits in that they “divide the pie into smaller slices”
without affecting the fundamental position of the current stockholders’ equity. On a 5% stock
dividend, the holder of 100 shares would receive an additional 5 shares (without cost); on a 20%
stock dividend, the same holder would receive 20 new shares; and so on.
The total number of shares is increased, so earnings, dividends, and price per share all
decline. If a firm wants to reduce the price of its stock, should it use a stock split or a stock
dividend? Stock splits are generally used after a sharp price run-up to produce a large price
reduction. Stock dividends used on a regular annual basis will keep the stock price more or less
constrained. For example, if a firm’s earnings and dividends were growing at about 10% per year,
its stock price would tend to go up at about that same rate, and it would soon be outside the
desired trading range. A 10% annual stock dividend would maintain the stock price within the
optimal trading range. Note, however, that small stock dividends create bookkeeping problems
and unnecessary expenses, so firms today use stock splits far more often than stock dividends.
If a company splits its stock or declares a stock dividend, will this increase the market value
of its stock? Many empirical studies have sought to answer this question. Here is a summary of
their findings.
On average, the price of a company’s stock rises shortly after it announces a stock split or
a stock dividend. However, these price increases are probably due to signaling rather than a
desire for stock splits or dividends per share. Only managers who think future earnings will be
higher tend to split stocks, so investors often view the announcement of a stock split as a positive
signal. Thus, it is the signal of favorable prospects for earnings and dividends that causes the
price to increase.
If a company announces a stock split or stock dividend, its price will tend to rise because
stock splits may reduce the liquidity of a company’s shares. This particular piece of evidence
suggests that stock splits/dividends might actually be harmful, although a lower price does mean
that more investors can afford to trade in round lots (100 shares), which carry lower commissions
than do odd lots (fewer than 100 shares). What can we conclude from all this? From a purely
economic standpoint, stock dividends and splits are just additional pieces of paper. However, they
provide management with a relatively low-cost way of signaling that the firm’s prospects look
good.
Further, we should note that since few large, publicly owned stocks sell at prices above
several hundred pesos, we simply do not know what the effect would be if highly successful firms
had never split their stocks and consequently sold at prices in the thousand pesos. All in all, it
probably makes sense to employ stock splits (or stock dividends) when a firm’s prospects are
favorable, especially if the price of its stock has gone beyond the normal trading range.
There are two kinds of share dividends declaration, namely: Small share dividend, and Large
share dividend.
I. Small share dividend is when the corporation declared below 20% share dividend.
When the proportion of the additional shares issued is small in relation to the
shares previously issued and outstanding, the current market value of the
additional shares should be transferred from retained earnings to contributed
capital.
Declaration date
On the declaration date, the Board of Directors meet and declare the share
dividend, issuing a statement similar to the following: “On August 8, 2020, the
directors of BCD Corporation met and declared a 10% share dividend to
shareholders of record as of October 5, 2020, payment to be made on December
15, 2020.”
For accounting purposes, the retained earnings are debited for the market value
of the shares to be issued and share distributable is credited equal to the par or
stated value of the shares to be issued, and the excess of the market value over
par value is credited to share premium. Assuming the corporation has 1.5 million
shares issued and outstanding at a par value is P1.0 per share and current market
price is P1.25 per share. The journal entry is:
Record date
At the close of business on the holder-of-record date, October 5, the company

closes its stock transfer books and makes up a list of shareholders as of that date.
If BCD Corporation is notified of the sale before 5 p.m. on October 5, then the new
owner receives the dividend. However, if notification is received after 5 p.m. on
October 5, the previous owner gets the cash dividend. On the record date, the list
of current shareholders is prepared by the Corporate Secretary as the basis for the
payment of dividends. Only the shareholders whose names are listed as of the
record date will receive the share dividends on the date of payment. No journal
entry is recorded in the accounting book of the corporation.
Payment date
The company actually pays the dividend on December 15, the payment date, to
the shareholders of record. The journal entry is:
II. Large share dividend is when the corporation declared at least 20% share
dividend. When the proportion of the additional shares issued is small in relation
to the shares previously issued and outstanding, the current market value of the
additional shares should be transferred from retained earnings to contributed
capital.
Declaration date
On the declaration date, the Board of Directors meet and declare the share
dividend, issuing a statement similar to the following: “On September 4, 2020, the
directors of CDE Corporation met and declared a 25% share dividend to
shareholders of record as of November 17, 2020, payment to be made on
December 28, 2020.”
For accounting purposes, the retained earnings are debited for the market value
of the shares to be issued and share distributable is credited equal to the par or
stated value of the shares to be issued, and no share premium is recognized.
Assuming the corporation has 2.5 million shares issued and outstanding at a par
value is P10.0 per share. The journal entry is:
Record date
No journal entry is recorded in the accounting book of the corporation.
Payment date
The company actually pays the dividend on December 28, the payment date, to
the shareholders of record. The journal entry is:
C. Property Dividend
A property dividend is a non-cash asset such as inventories and securities held by the corporation
as investment to be distributed to the shareholders.
Declaration date
On the declaration date, the Board of Directors meet and declare the property
dividend, issuing a statement similar to the following: “On June 6, 2020, the
directors of XYZ Corporation met and declared a property dividend of one share
FYI Corporation ordinary share for every ten shares XYZ Corporation ordinary
share to shareholders of record as of August 15, 2020, payment to be made on
October 2, 2020.”. FYI Corporation ordinary shares are held by XYZ Corporation
as equity investments at a fair value through profit or loss and have a carrying
value (with equal amount of market value) of P 15 per share. Assuming the XYZ
Corporation has 500,000 shares issued and outstanding. The journal entry is:
Record date
Payment date
The company actually pays the dividend on October 2 to the shareholders of record. On
the payment date, the liability for property dividend shall be remeasured at a fair value of
the non-cash assets to be distributed, followed by an entry for the settlement. The
settlement is recorded by debiting liability at the adjusted value and a credit to an asset at
the carrying value.
The journal entry is:

In case, the current value is not equal to market value of the assets held for
distribution at the end of the accounting period, the difference being credited or
debited to Gain or Loss on Disposal of the Asset.
Scrip Dividend
A scrip dividend is declared when a corporation has sufficient retained earnings but not
sufficient cash balance for payment of dividends to be distributed to the shareholders.
Declaration date
On the declaration date, the Board of Directors meet and declare the scrip
dividend, issuing a statement similar to the following: “On June 1, 2020, the
directors of ACS Corporation met and declared a 20% scrip dividend to
shareholders to be made on December 31, 2020 with an interest rate of 10%”.
Assuming the ACS Corporation has 1,500,000 shares issued and outstanding at
a par value of P1. The journal entry is:
Record date
Payment date
The company actually pays the dividend on December 31 to the shareholders of

record. On the payment date, the liability for scrip dividend plus the interest
computed from date of declaration to the date of payment. The settlement is
recorded by debiting liability and interest due and a credit to cash. The journal entry
is:
A stock split increases the number of shares outstanding. Splits reduce the price per share
in proportion to the increase in shares because splits merely “divide the pie into smaller slices.”
However, firms generally split their stocks only if (1) the price is quite high and (2) management
thinks the future is bright. Therefore, stock splits are often taken as positive signals and thus boost
stock prices.
A share dividend is a dividend paid in additional shares rather than in cash. Both stock
dividends and splits are used to keep stock prices within an “optimal” trading range.
Preference Share
Preference share is a hybrid and it is similar to bonds in some respects and to ordinary
shares in others. Like bonds, preference share has a par value, and a fixed amount of dividends
must be paid before dividends can be paid on the ordinary share. However, if the preference
dividend is not earned, the directors can omit (or “pass”) it without throwing the company into
bankruptcy. Although preference share has a fixed payment like bonds, a failure to make this
payment will not lead to bankruptcy. The dividends on preference shares are fixed, and if they are
scheduled to go on forever, the issue is a perpetuity.
Allocation of Cash Dividends Between Preference Share and Ordinary Share
Preference share has priority over ordinary share in terms of dividends. The corporation
shall see to it that there is enough amount to satisfy the dividend requirement of the preference
share before any amount is allocated to ordinary share.
The allocation of cash dividends between the preference share and the ordinary share
depends on the type of preference share issued by the corporation. Preference share can be
cumulative or non-cumulative and participating or non-participating.
1. Cumulative preference shares entitle the shareholders to the receipt of dividends

not paid in the previous year or years when the corporation incurred loss or losses.
2. Non-cumulative preference shares provide that any dividends no declared any

prior year years when the corporation incurred loss or losses are lost permanently.
Shareholders of this class are entitled only to current year dividends if the
corporation registered a profit and declared a dividend.
3. Fully participating preference shares entitle the shareholders to the receipt of

additional dividends over the stipulated rate or amount. Both the preference and
ordinary shareholders receive additional dividends pro-rata basis in any dividends
after the minimum amounts of dividends have been paid to them.
4. Partially participating preference shares entitle the preference shareholders to the

receipt of additional dividends above the preferential rate on a pro-rata basis, with
ordinary shareholders. The participation of preference shareholders is limited to
an additional rate specified in its stock certificate or stipulated in the agreement.
5. Non-participating preference shares limit the receipt of additional dividends for any
year/s to the specified preference dividends.
Assume the BGC Corporation has the following information at December 31, 2019:
BGC Corporation declared and paid the cash dividends for the years 2017 to 2019, as follows:
The share capital balances remained unchanged for the years 2017 to 2019.
To determine the allocation of dividends between the preference and ordinary shares, the
following independent cases will be applied to BGC Corporation:
1. Preference share is non-cumulative and non-participating.
2. Preference share is cumulative and non-participating.

It is noted that the computation is the same as case no. 1 because the corporation as no
loss.
3. Preference share is non-cumulative and participating.
4. Preference share is cumulative and participating.

It is noted that the computation is the same as case no. 1 because the corporation
as no loss.
Book Value Per Share
Book value per share represents the equity of an ordinary shareholder in net
assets of the corporation. In the event of corporate liquidation, if assets were realized
and liabilities were settled at their carrying amounts, a shareholder would receive an
amount equal to book value per share, in settlement of his equity.
When a corporation has only one class of share capital issued and outstanding, the book
value per share is computed by dividing the total shareholders’ equity by the total number of
ordinary shares issued and outstanding.
When the company has both preference and ordinary shares, the preference share is
given a priority on the assets over the ordinary shares. Below is the illustration on how to compute
for the book value per share:
Assume the following capital structure of BGC Corporation at December 31, 2019:
Assume that preference shares are in arrears for two years (2015 to 2016). The book value per
share is computed as follows:
Earnings Per Share
It indicates the amount of earnings available to ordinary shareholders. This is calculated as the
profit available to ordinary shareholders divided by the average number of outstanding ordinary
shares. The following worksheet is used to compute the EPS:
It means that P26.18 is available for every share of ordinary shareholders.
REFERENCES
ASSESSMENT TOOL
Questions:
1. How do share dividends affect stock prices?
2. In what situations should the Board Directors consider to declare a dividend of any form?
3. Suppose you have 1,000 ordinary shares of Company A. The EPS is P6.00, the DPS is
P3.00, and the stock sells for P90 per share. Company A declares 10% dividends? What
would be the effect in the stockholders’ equity of Company A?
4. The stockholders’ equity accounts of FGC Corporation on December 31, 2019:
Prepare journal entries to record the declaration and payment of dividends for each of the
following independent cases:
a) A share dividend of 15% is declared and issued.
b) A share dividend of 25% is declared and issued
5. The stockholders’ equity accounts of JFT Corporation on December 31, 2019
Additional information:
Cash dividends were declared on this date. Dividends were last declared and paid on
December 31, 2017.
Compute for the total dividends and dividends per share on preference share capital and
ordinary share capital under each of the following independent cases:
a) The preference share is cumulative and participating and the amount of dividend
declared is P250,000.
b) The preference share is non-cumulative and participating and the amount of dividend
c) The preference share is cumulative and non-participating and the amount of dividend
d) The preference share is cumulative and participating and the amount of dividend
e) The preference share is non-cumulative and non-participating and the amount of
dividend declared is P130,000.
MODULE 5
SHARE CAPITAL TRANSACTIONS SUBSEQUENT TO ORIGINAL ISSUANCE
OVERVIEW
MODULE OBJECTIVES
• identify the various share capital transactions after corporate formation

• produce various entries in the accounting for share capital retirement, treasury stocks,
conversion of preference shares into ordinary shares, stock splits and recapitalization.
KINDS OF SHARE CAPITAL TRANSACTIONS SUBSEQUENT TO ORIGINAL ISSUANCE
1. Treasury Shares
a. Mode of Acquisition
❖ Acquisition by purchase
❖ Acquisition by donation
b. Method of Accounting for the Acquisition of Treasury Shares
➢ Cost Method
➢ Par Value Method
2. Share Capital Transactions other than Treasury Shares

• Retirement
• Conversion of preference shares into ordinary shares
• Share (Stock) split
• Recapitalization
TYPES OF SHARE CAPITAL TRANSACTIONS
When a share capital (capital stock) is fully paid, a stock certificate is issued to the shareholder
and the stock becomes outstanding. Subsequent to the original issuance, various capital share
transactions may take place. These transactions may cause a change in total shareholder’s equity
of the company or in the number of shares outstanding. These share capital transactions include
the following:
1. Share capital reacquisition
2. Share capital retirement
3. Conversion of preference shares into ordinary shares
4. Share (stock) split
5. Recapitalization
1. SHARE CAPITAL REACQUISITION (TREASURY SHARES)

A corporation may choose to reacquire some of its outstanding stock from its shareholders
when it has a large amount of idle cash and, in the opinion of its directors, the market price of
its stock is too low. If a corporation reacquires a significant amount of its own stock, the
corporation's earnings per share may increase because there are fewer shares outstanding.
If a corporation reacquires some of its stock and does not retire those shares, the shares
are called treasury stock. Treasury stock reflects the difference between the number of
shares issued and the number of shares outstanding. When a corporation holds treasury
stock, a debit balance exists in the general ledger account, Treasury Stock (a contra
stockholders' equity account). There are two methods of recording treasury stock:
(1) the cost method, and
(2) the par value method.
The issuing corporation reacquires shares issued to shareholders either by purchase or

donation. Such shares are being held in the name of the corporation as treasury shares. The
company may reissue these shares at some future date as deemed necessary.
The practice of reacquiring one’s own capital share is done for the following reasons:
a) To obtain shares to be used in acquiring plant assets.

b) To improve earnings per share by reducing the number of shares outstanding.
c) To invest excess cash temporarily.
d) To support the market price of the share capital.
e) To increase the ration of liabilities to shareholders’ equity.
f) To obtain shares for conversion to other securities such as preference share capital.
a. REAQCQUISITION BY PURCHASE.
Treasury shares may be acquired by purchase and the reacquisition will be accounted for using
the cost method or par value method. The cost method is widely used, and the par value method
is used in practice only rarely
COST METHOD
Under the cost method, the reacquired shares are viewed as capital elements awaiting ultimate
disposition. Treasury shares are recorded at cost. When the shares are reissued at more than
cost, the indicated gain is credited to an additional paid-in capital account, Paid-In Capital from
Sale of Treasury Shares. When the shares are reissued at less than cost, the indicated loss is
debited to the following accounts in the order shown below:
(a) Additional paid-in capital from treasury share transactions of the same class of share
capital, and
(b) Retained earnings.
The balance of the treasury shares account is resorted as a deduction from the sum of total
contributed capital and retained earnings.
The reacquisition of a company’s own shares reduces the number of outstanding shares but does
not affect the number of issued shares. Treasury shares are not entitled to receipt of dividends
because they are not outstanding. Retained Earnings, however, must be appropriated equal to
the cost of the treasury shares acquired.
Illustrative Problem A: The shareholders’ equity of Panalo Corp. included the following items:
Ordinary share capital, P10 par, 100,000 shares P1,000,000

Ordinary share premium (P5 per share) 500,000
Retained earnings 500,000
On June 1,2020, 1,000 shares were reacquired at P25. On June 30, 900 shares were reissued at
P35.
Entries to record the foregoing and the shareholders’ equity section of the statement of financial
position as of September 30 are presented below and on the next page.
2020
June 1 Treasury Shares 25,000
Cash 25,000
(1,000 sh x P25 = P25,000)
1 Retained Earnings 25,000

Retained Earnings Appropriated for Treasury Shares 25,000
June 30 Cash 31,500

Treasury Shares 22,500
Paid-In Capital frm Sale of Treasury Shares 9,000
900 sh x P35 = P31,500
900 sh x P25 = P22,500
900 sh x P 10=P 9,000
30 Retained Earnings Appropriated for Treasury Shares 22,500

Retained Earnings 22,500
Shareholder’s Equity
Contributed Capital:
Ordinary Share Capital , P10 par, 100,000 shares
issued, 99,900 shares outstanding, 100 shares in treasury P1,000,000
Paid-in Capital from Sale of Treasury Shares 9,000 P1,509,000
Retained Earnings:
Retained Earnings Appropriated for Treasury Sahres P 2,500
Unappropriated Retained Earnings 497,500 500,000
Total Contributed Capital and Retained Earnings 2,009,000
Less Treasury Shares, at cost (100 @P25) 2,500
Total Shareholder's Equity P2,006,500
If the corporation were to sell some of its treasury stock, the cash received is debited to
Cash, the cost of the shares sold is credited to the stockholders' equity account Treasury Stock,
and the difference goes to another stockholders' equity account, Paid in capital from sale of
treasury stock. Note that the difference does not go to an income statement account, as there can
be no income statement recognition of gains or losses on treasury stock transactions.
If the corporation sells any of its treasury stock for less than its cost, the cash received is
debited to Cash, the cost of the shares sold is credited to Treasury Stock, and the difference
("loss") is debited to Paid-in Capital from Treasury Stock (so long as the balance in that account
will not become a debit balance). If the "loss" is larger than the credit balance, part of the "loss" is
recorded in Paid-in Capital from Treasury Stock (up to the amount of the credit balance) and the
remainder is debited to Retained Earnings. To illustrate this rule, let's look at a transaction where
treasury stock is sold for less than cost.
We will continue with our example from above. Recall that the cost of the corporation's treasury
stock is P25 per share. The corporation now sells 100 shares of treasury stock for P20 per share
and receives cash of 2,000. As mentioned previously, the P5 "loss" per share (P20 proceeds
minus the P25 cost) cannot appear on the income statement. Instead the "loss" goes directly to
the account Paid-in Capital from Treasury Stock (if the account's credit balance is greater than
the "loss" amount). Since the P2,500 credit balance in Paid-in Capital from Treasury Stock is
greater than the P500 debit, the entire 500 is debited to that account: The entry will then be:
Page
Date Account Title and Explanations PR Debit Credit

2020
1 June 30 Cash 2 0 0 0 1
2 Paid in capital on share of treasury stock 5 0 0 2
3 Treasury stock 2 5 0 0 3
4 to record sale of treasury stock 4
5 below cost 5
Let us illustrate a loss that is greater than the Paid in capital from sale of treasury stock. In the
same Panalo Corporation details except that the 900 shares instead of being sold at P35, was
sold at 25.50 hence there would only be Paid in capital from sale of treasury stock in the amount
of P450 (.5x900), and the remaining stocks of 100 were sold at P20. There will be a P500 loss
computed by deducting from the P25 cost the P20 selling price multiplied by the number of shares
sold. The entry to record this new transaction will be as follows:]
Page

2020
1 June 30 Cash 2 0 0 0 1
2 Paid in capital on share of treasury stock 4 5 0 2
Retained earnings 5 0
4 to record sale of treasury stock 4
5 below cost 5
PAR VALUE METHOD
The transactions relating to purchase and sale of treasury stock are generally accounted for using
one of the two methods. The cost method was illustrated using Problem A, the par value method
will be illustrated here using Problem B.
Purchase of treasury stock – par value method
When a company purchases its own shares and uses par value method for accounting purpose,
the treasury stock account is debited with the total par value of shares acquired and cash account
is credited with the amount of cash paid. If the debit part of the journal entry exceeds the credit
part, the difference is credited to the additional paid-in capital from treasury stock and if, on the
other hand, credit part of the journal entry exceeds the debit part, the difference is debited to the
additional paid-in capital from treasury stock and if additional paid in capital from treasury stock
is not available or is not sufficient, retained earnings account is debited with the rest of the amount.
Reissuance of treasury stock – par value method:
Under par value method, when shares of treasury stock are reissued, the cash account is debited
with the amount of cash received and treasury stock is credited with the par value of shares
reissued. If the amount of cash received is more than the total par value of shares reissued, the
difference is credited to the additional paid-in capital from treasury stock and if, on the other hand,
the amount of cash received is less than the total par value of shares reissued, the difference is
debited to the additional paid-in capital from treasury stock and if additional paid in capital from
treasury stock is not available or is not sufficient, the retained earnings account is debited with
the rest of the amount.
Problem B The following transactions relate to Nanalo Corporation:
1. Jan 10, 2020- Issued 2,000 shares of P5 par value ordinary shares at P20 per share.
2. April 12, 2020 -Bought back 300 shares at P18 per share.
3. August 11, 2020 -Bought back 400 shares at P25 per share.
4. September 26, 2020 -Reissued 200 shares at P30 per share.
Required: Prepare journal entries using above transactions. Assume Nanalo Corporation uses
par value method of treasury stock.
1. To record issuance of ordinary shares
Page

2020
1 Jan 10 Cash 4 0 0 0 0 1
2 Ordinary shares 1 0 0 0 0 2
Premium on Ordinary share capital 3 0 0 0 0
3 to record sale of ordinary share capital 3
4 4
2. To record purchase of 300 shares at P18 /share of treasury stock
Page

2020
1 April 12 Treasury Stock 1 5 0 0 1
2 Premium on ordinary share capital 4 5 0 0 2
Cash 5 4 0 0
3 Paid in capital on treasury stock 6 0 0 3
4 to record purchase of treasury stock 4
Premium on ordinary share capital on 300 shares: 300 × (20 – 5)

Paid in capital on treasury stock has been credited with the balancing amount: (1500 + 4,500 –
5,400)
We have here ordinary shares, 5 / share, premium on ordinary shares 15 / share total 20.
(2000*20=P40,000 cash received), when the company buys 300 treasury stocks using par value
method, we should reduce ordinary share by the par value amount (5 *300=1500). also Premium
on ordinary share is reduced by (15*300=4500). the P 600 is an increase in Paid in capital
because the company bought the shares at lower price than it was originally sold, calculated as
follows (18 – 20 * 300 =P600)
3. To record purchase of 400 shares at 25/share of treasury stock
Available additional paid-in capital from treasury stock (see journal entry No. 2)
Retained earnings account has been debited with the balancing amount (10,000 – 2,000 – 6,000
– 600)
4. Sale or reissuance of 200 shares treasury stock
Page

2020
1 Sept 26 Cash 6 0 0 0 1
Paid in capital on treasury stock 5 0 0 0
to record sale of treasury stock
3 3
b. REACQUISITION BY DONATION
Treasury shares may be acquired through donation by shareholders. This practice is done by
shareholders to enable the company to increase its working capital and at the same time maintain
their proportionate ownership interests.
Upon receipt of capital shares as donation, a memorandum entry is made stating the number of
shares received. Subsequent sale of donated shares is recorded by debiting Cash and crediting
Donated Capital or Paid-In capital from Donated Shares for the entire proceeds.
Alternatively, the receipt and the subsequent sale of the donated shares may be recorded as
follows:
Upon receipt
Treasury shares xxx
Donated Capital xxx
(amount recorded is the fair value of the sahres on the date of donation)
Upon sale of donated shares at more than recorded cost

Cash xxx
Treasury Shares xxx
Paid-in Capital from Sale of Treasury Shares xxx
2. SHARE CAPITAL RETIREMENT

Share capital may be reacquired and formally retired by the issuing corporation. Such retirement
calls for the cancellation of the stock certificate, cancellation of the share original account and the
cancellation of the related additional paid-in-capital from the original issuance of the stock. If the
retirement price is greater than the original issuance price, Retained Earnings is debited for the
difference. On the other hand, if the retirement price is less than the original issuance price, Paid-
in Capital from the Retirement of Share Capital is credited for the difference. The difference
between the retirement price and the original issuance price of the share capital retired should
not be recognized as a gain or loss. The excess of the original issuance price over the retirement
price of the share capital should not be credited to Retained Earnings.
The retirement of share capital will reduce both the number of shares issued and the number of
shares outstanding.
Illustrative Problem C: The shareholders’ equity section of the statement of financial position of
Double Deck Co. contains the following:
Preference share capital, P100 par, 10,000 shares P1,000,000
Preference share premium 250,000
Based on the above data, the original issuance price of each preference share is P125, that is,
the par value of P100 per share and the share premium of P25 per share (P250,000/10,000
shares).
One thousand (1,000) shares of preference share capital were reacquired and retired. Entries to
record the retirement using two independent cases follow:
Case 1- The retirement price is P110
Preference Share Capital 100,000

Preference Share Premium 25,000
Cash 110,000
Paid-In-Capital from Retirement of Preference 15,000
Shares
1,000 sh x P100=P100,000
1,000 sh x P25= P25,000
1,000 sh x P110 = P110,000
1,000 sh x P15 = P15,000
Case 2- The retirement price is P130 per share

Cash 130,000
1,000 sh x P100=P100,000
1,000 sh x P25= P25,000
1,000 sh x P5 = P5,000
1,000 sh x P130=P130,000
The debit to Retained Earnings of P5,000 or P5.00 for every share retired is the excess of the
retirement price of P130 over the original issuance price of P125.
3. CONVERSION OF PREFERENCE SHARES INTO ORDINARY SHARES
Convertible preference shares can be converted into ordinary shares at the option of the holder.
This type of preference share capital can be sold at a higher price but at a lower dividend rate
because of its conversion privilege. When investors own convertible preferred shares, they may
convert the shares into common stock any time after the conversion date stated on the preferred
share purchase agreement. A company can also include an option in the purchase agreement
that gives it the ability to force the conversion of outstanding preferred shares. In a forced
conversion, investors must convert their preferred shares into a specific number of common
shares, whether they want to convert or not.
When investors convert their preferred shares to common shares, the company debits the
preferred stock account and credits the common stock account. If the common stock price at the
time of conversion is more than the par value of the preferred stock then the company debits
retained earnings for the difference between the two prices. If investors paid a premium on the
preferred stock at the time of purchase, the company must also make adjusting entries to the
additional paid in capital accounts. The accounting for conversion of preference shares into
ordinary shares is similar to retirement of share capital. Account balances related to the
preference shares converted are cancelled and the issuance of ordinary shares is recorded. An
indicated gain from conversion is credited to Paid-In Capital from Conversion of Preference
Shares into Ordinary Shares; an indicated loss from conversion is debited to Retained Earnings.
Illustrative Problem D: The Singlebed Corporation’s shareholders’ equity contains the following:
Ordinary share capital, P10 par, 50,000 shares P500,000
Ordinary share premium 100,000
10% Preference share capital, P100, 5,000 shares 500,000
Preference share premium 50,000
On July 15,1,000 preference shares were converted into ordinary shares.

Case 1- Twenty ordinary shares were issued for every preference share
1,000 sh x P100 = P100,000
1,000 sh x P10 = P10,000
1,000 sh x 20 sh x P10 = P200,000
P200,000 – P110,000 = 90,000
Case 2- Eight ordinary shares were issued for every preference share
Paid-in Capital from Conversion of Preference Share into 30,000
Ordinary Shares
1,000 sh x P100 = P100,000
1,000 sh x P10 = P10,000
1,000 sh x 8 sh x P10 = P80,000
P110,000 – P80,000 = 30,000
Preference share premium (additional paid in capital) is the amount of money investors paid for
the preference share at purchase in excess of par value. Mathematically, Preference share
premium is the issue price of the preference share minus its par value multiplied by the number
of preference shares issued. If this excess exists, then the company debits the Preference share
premium account and credits Paid in capital from conversion of preference share into ordinary
shares. Just like in the retirement of share capital and acquisition of treasury shares, no gain or
loss is recognized on the conversion of preference shares into ordinary shares.
4. SHARE (STOCK) SPLITS AND REVERSE SHARE (STOCK) SPLITS
When the market price of the shares is high and the corporation feels that a lower price will result
in a wider distribution of ownership, it may authorize the replacement of outstanding shares by a
larger number of shares. The increase in the number of shares outstanding in this manner is
called share (stock) split or share split-up. A stock split involves increasing the number of shares
outstanding with a corresponding decrease in the par value. However, just like a stock dividend,
this is a non-event as far as the total value of the company is concerned.
Although the number of shares increases by the split factor (the ratio of new shares to the old
shares), the market price per share decreases by exactly the same factor. If a corporation has
1,000 shares of P10 par common stock outstanding and decides to order a two-for-one split,
where there was previously one share, there are now two shares. Because nothing else has
changed, the price per share decreases exactly by one-half after the split. (Just because a pizza
is cut into eight slices as opposed to four slices does not mean that the total amount of pizza
available has increased. It means only that the number of pizza slices has doubled.) For instance,
10,000 ordinary shares with a par value of P10 are replaced by 20,000 ordinary shares with a par
value of P5. This type of transaction is described as a share split of 2 for 1-two new shares are
issued in exchange for one old share. The par value is subsequently reduced to P5. (P10/2)
The reverse procedure, that is, the replacement of shares outstanding by a smaller number of
shares with an increase in par value, is called reverse share split or a share split down. A reverse
share split has the opposite effect on a security than a share split -up does; with a reverse split,
the market price of the security increases and the number of shares decreases. As with stock
splits, the overall market value of the securities does not change. A company may reverse split
its stock if the market price gets low, whereby potential investors may think the company has a
problem.
In the event of a reverse split, investors usually have to send in their old shares to the transfer
agent to receive the new shares. If a company were executing a 1-for-3 reverse split, investors
would receive one new share for every three they sent in.
This is desirable when the market price of the shares is low and it is felt that assigning a higher
price for the shares offers certain advantages. For instance, 10,000 ordinary shares with a par
value of P10 are replaced by 5,000 ordinary shares with a par value of P20. This type of
transaction is described as a share split of 1 for 2-one new share is issued in exchange for two
old shares. The par value is subsequently increased to P20 (P10 x 2).
A share split is recorded by a memorandum entry. The entry should state the new number of
shares and the new par value of the shares. Alternatively, a journal entry may be prepared
canceling the old issue and recording the new issue. Using the example in the first paragraph,
the share split of 2 for 1 may be recorded as follows:
Ordinary Share Capital, P10 par 100,000
It should be noted that a share split will not affect total shareholder’s equity nor total share capital.
It will simply change the number of shares outstanding and the par value per share of stock.
5. RECAPITALIZATION
Corporate recapitalization takes place when an entire issue of share capital is changed by
appropriate action of the corporation. The typical types of recapitalization are as follows:
1. Change from par to no-par share capital and vice-versa
2. Reduction in the par or stated value of share capital
Recapitalization is normally undertaken to establish an additional paid-in capital account that will
be used in capital restructuring. This type of transaction requires the setting up of capital accounts
related to the new issue and the cancellation of account balance related to the old issue. (Capital
restructuring will be discussed in a higher accounting subject)
Illustrative Problem E: The shareholders’ equity of Queenside Corporation. contains the

following:
Ordinary share capital, P20 par, 50,000 shares P1,000,000

Ordinary share premium 250,000
Case 1 – The original issue is replaced by a no-par share capital with a stated value of P20
Ordinary Share Capital, P20 par 1,000,000
Ordinary Share Capital, P20 stated value 1,000,000
Paid-In Capital from Exchange of Par for No-Par Share Capital 250,000
Case 2 – Each capital share is exchanged for a new share with a par value of P15
Ordinary Share Capital, P20 par 1,000,000
Paid-in Capital from Reduction in Par
Value of Ordinary Shares 250,000
REFERENCES
ASSESSMENT TOOLS
A. Prior to the repurchase of Eastern company of its own shares, its stockholders’ equity is as
shown here-
Stockholder's Equity
Paid- in capital
Ordinary shares, 10 par, 10,000 shares authorized, 300,000 shares issued and outstanding P 2,000,000
Ordinary share premium 1,000,000
Total paid in capital P 3,000,000
Retained earnings 1,200,000
Total stockholdes' equity P 4,200,000
During the year, these are the transactions of Eastern company on its own shares of stock.
1. April 12, 2020 - Eastern company repurchases 2,500 shares of its own ordinary
shares from stockholders. The par value per share is P10 and company reacquires it
for P80.
2. August 29, 2020 - Eastern company reissues 1,000 shares out of its treasury stock at 110
per share.
3. November 25, 2020 -Eastern company reissues 500 more shares from its treasury stock
at a price of P50 per share,
Required:
1. Prepare the journal entries to record the 3 transactions using cost method
2. Prepare the stockholders’ equity section of the balance sheet as of Dec. 31, 2020
assuming there were no other transactions than those three mentioned.
B. Three years ago, Company A issued 1,000,000 shares of ordinary shares with a par value of
P10. When first issued, the stock sold for P200.00 per share. One of the company's original
founders passed away and donated 100,000 shares back to Company A, which held the donation
as treasury stock. At the time of donation, the market price of Company A's stock was P23.00
per share. Company A recently reissued the treasury stock to the market at P25.00 per
share. Prepare the necessary journal entry/entries to record the donated shares of stock.
C. The Hinday Motors Company issued 5,000 shares of its 25-par value common stock at 28 per
share. Later, the company bought back 1,000 shares at P22 per share and immediately retired
them.
Required: Prepare journal entries for issuing, buying back and retiring the shares.
D. A company has in issue 1,000,000 preference shares of P10 each which are redeemable at
par value. They are also convertible into 100,000 ordinary shares of P10 each. The company’s
Articles provide that the preference shares are to be redeemed at par value and the proceeds of
redemption are to be applied to subscribing for new ordinary shares. Prepare the journal entry to
record the conversion.
E. Company A has P3,000,000 million issue of cumulative preference share comprising of

100,000 shares each carrying 3 dividend per annum. The company earned a profit of P200,000
in Year 1 and P500,000 in year 2. Company A converts the 100,000 preference shares to P10-
par ordinary shares on 2-for-1 basis, prepare the journal entry to record the transaction.
F. Bob Dabilder owns 1,200 shares of Lumberjack common stock at a current market price of 90
per share. If Lumberjack splits its stock 3-for-1, what would Bob’s position be after the split?
4) Beatriz Omila owns 3,600 shares of Taguro Corp. common stock at a current market price of
P2 per share. If Taguro Corp. reverse splits its stock 1-for-5, what would Betty’s position be after
the split?
G. The stock holders’ equity section of the statement of financial position of Calubcub Company
at December 31, 2019, is given below:
Stock holders' equity:
Commons stock, P10 par value. 200,000 shares authorized,

80,000 shares issued and outstanding P 800,000
Premium on Ordinary share capital 400,000
Total paid in capital P 1,200,000
Retained earnings 2,500,000
Total stockholders' equity P 3,700,000
On 31 January 2020, the board of directors proposed a 5-for-4 stock split. The proposal was
approved and new shares were distributed among stockholders.
Required:
1. Compute the number of shares that were distributed among stockholders as a result of 5-
for-4 stock split.
2. Compute the par value per share after this split.
3. What accounting entry will be made for this split?
4. Show stockholders’ equity section of the company immediately after 5-for-4 stock split.

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ACCO 20043 Financial Accounting and Reporting Part 2 1

2 ACCO 20043 Financial Accounting and Reporting Part 2

Financial Accounting and Reporting Part 2

GENERAL INFORMATION ABOUT THE COURSE

Semester and Academic : Second Semester, Academic Year 2020- 2021

Course Credit : 3 Units

Pre-Requisite : ACCO 20033 - FINANCIAL ACCOUNTING AND REPORTING 1

a. Have detailed knowledge and understanding of

General Instructions : Faculty members who prepared this instructional material

FOR STUDENTS WITH INTERNET CONNECTIVITY, you

FOR STUDENTS WHO DO NOT HAVE INTERNET

Content Page Number

General Information About the Course 3

Module 1 – Partnership Liquidation (Lump-Sum) 5

Module 2 – Partnership Liquidation (Installment Liquidation) 19

Module 3 - Organization and Formation of a Corporation 31

Module 4 – Corporate Operations (Dividends, Book Value Per Share, 60

Module 5 – Share Capital Transactions Subsequent to Original Issuance 75

PARTNERSHIP LIQUIDATION – LUMP SUM LIQUIDATION

As per defined in the previous discussion on partnership dissolution, it does not

At the end of the lesson/module, the student will be able to:

• Distinguish the difference between dissolution and liquidation of a partnership

The following procedures are to be followed in the process of liquidation:

1. Conversion of non-cash assets into cash

1. Conversion of non-cash assets into cash

Capital deficiency may be eliminated in the following manner:

2. Payment of liabilities to creditors other than partners

1) partnership outside creditors;

1) Loans to the partnership

Accounting problems involved in partnership liquidation include the following:

2. Closing of the partnership books;

3. Correction of the discovered accounting errors of prior periods; and

4. Liquidation of the partnership.

1. Lump-sum liquidation – this is a process whereby the distribution of cash to partners is

2. Liquidation by installment or piece-meal liquidation – this is the process whereby

KING, JOLLY and DONALD

ASSETS LAIBILITIES AND CAPITAL

1. Prepare a Statement of Liquidation for each case below:

2. Journal entries to record the liquidation process.

a) Sale of other assets and distribution of gain

Jolly, loan 4,000

King, Jolly and Donald

King Jolly Donald

Payment to apply on:

COMPUTATION OF CASH SETTLEMENT TO PARTNERS

a) Non-cash assets must have been realized

The loss on realization would then be computed as follows:

Total capital (credit) 80,000+50,000+10,000 P 140,000

Settlement of cash to partners would be distributed as follows:

Joe Andy Greg

• Baysa & Lupisan Accounting for Partnership & Corp

Total Assets P 720,000 Total Liabilities and Equity P 720,000

Case A P 700,000 Case C P 370,000 Case E P 250,000

Guess, Drawing (debit balance) P (32,000)

1. The total loss from the liquidation of the partnership

After this module, the students are expected to have learned:

• Grasp the nature of installment liquidation

ACCOUNTING PROCEDURES IN INSTALLMENT LIQUIDATION

SCHEDULE OF SAFE PAYMENTS