MODULE 5

CORPORATION
Week 12-14

INTRODUCTION

A corporation is an entity recognized by law as possessing an existence separate and

distinct from its owners; that is, it is a separate legal entity. Endowed with many of the
rights and obligations possessed by a person, a corporation can enter into contracts in its
own name; buy, sell, or hold property; borrow money; hire and fire employees; and sue
and be sued. Let’s look at a video to learn about the difference in partnerships and
corporations.

Forming a corporation varies according to both the state that one resides and live in and
the state that the business is conducted in. Generally speaking, articles of incorporation
will be filed with the state, followed by the issuance of stock to the corporation's
shareholders. After this point, in an annual meeting, the shareholders will elect a board
of directors whose duties include executing the company’s business plan and overseeing
the day-to-day operations of the business1.

1
Will Kenton, “Corporation”, Investopedia at https://www.investopedia.com/terms/c/corporation.asp, February
24, 2021
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Corporations have a remarkable ability to obtain the huge amounts of capital necessary
for large-scale business operations. Corporations acquire their capital by issuing shares
of stock; these are the units into which corporations divide their ownership. Investors buy
shares of stock in a corporation for two basic reasons. First, investors expect the value of
their shares to increase over time so that the stock may be sold in the future at a profit.
Second, while investors hold stock, they expect the corporation to pay them dividends
(usually in cash) in return for using their money.2

A corporation has the ability to enter into contracts, incur liabilities, and buy, sell, or own
assets in its corporate name. These provisions can be found in the charter or articles of
incorporation. Ownership of a corporation is divided into shares of stock. Stocks can be
issued in different classes. All shares of stock in the same class have identical rights and
privileges. The buying and selling of shares does not effect the business activities of the
corporation. Shareholders' liability is limited to the amount they invested.3

A corporation is created when it is incorporated by a group of shareholders who have

ownership of the corporation, represented by their holding of common stock, to pursue a
common goal. A corporation's goals can be for-profit or not, as with charities. However,
the vast majority of corporations aim to provide a return for its shareholders.
Shareholders, as owners of a percentage of the corporation, are only responsible for the
payment of their shares to the company's treasury upon issuance.4

INTENDED LEARNING OUTCOMES

1. To know the definition of corporation and its related terms

2. To distinguish it from other forms of business organization and
identify essential attributes of a corporation, characteristics and the
basic organizational structure, who the owners are and their basic
rights.
3. To be able to enumerate and describe the different kinds of
corporation under Philippine laws
4. To describe the classes of shares of a corporation including treasury
shares earnings and book value per share, the different books and
records for financial reporting.

2
https://courses.lumenlearning.com/sac-finaccounting/chapter/corporations/
3
John Petroff, “Chapter 3: Corporations” https://www.peoi.org/Courses/Coursesen/acc/fram3.html, 1989
4
Will Kenton, “Corporation”, Investopedia at https://www.investopedia.com/terms/c/corporation.asp, February
24, 2021
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 CORPORATE TRANSACTIONS

DEFINITION OF CORPORATION

An artificial being created by operation of law, having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its
existence
- The Revised Corporation Code of the Philippines RA 11232, Sec. 2

ATTRIBUTES OF A CORPORATION

1. Artificial being with a personality separate and apart from its individual
shareholders or members.
2. Created by operation of law.
3. Enjoys the right of succession.
4. Has the powers, attributes and properties expressly authorized by law or incident
to its existence.

COMPARISON BETWEEN PARTNERSHIP AND CORPORATION

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ADVANTAGES OF A CORPORATION

• Separate legal entity

• Limited liability of stockholders
• Continuous life
• Transferable ownership rights
• Management is centralized in the Board of Directors
• Lack of mutual agency for stockholders
• Ease of capital accumulation

DISADVANTAGES OF A CORPORATION

• Complicated in formation and management

• Governmental regulation
• High cost of formation and operation
• Heavier taxation than other forms of business organizations
• Minority shareholders are subservient to the wishes of the majority
• Management and control have been separated from ownership
• Transferability of shares permits the uniting of incompatible and conflicting
elements in one venture.

CLASSES OF CORPORATIONS

Section 3 of the Revised Corporation Code classified private corporations

into:
1. Stock corporation – Corporations which have share capital divided into
shares and are authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the basis of the shares held.
2. Non-stock corporation – Corporations which do not have share capital

According to number of persons:

1. Corporation aggregate – consisting of more than
one corporator.
2. Corporation sole or a special form of corporation usually associated
with the clergy – consists of only one member or corporator and his
successors such as a bishop.

According to nationality:
1. Domestic corporation – organized under Philippine laws.
2. Foreign corporation – organized under foreign laws.

According to whether for public or private purpose:

1. Public corporation – formed for the government of a portion of the state
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 2. Private corporation – created for private aim, benefit or purpose

According to whether for charitable purpose or not:

1. Ecclesiastical corporation – organized for religious purposes
2. Eleemosynary corporation – established for public charity
3. Civil corporation – established for business or profit

According to their legal right to corporate existence:

1. De jure corporation – existing in fact and in law.
2. De facto corporation – existing in fact but not in law.

According to degree of public participation with regard to their share ownership:

1. Close corporation – share ownership is limited to selected persons or
member of a family not exceeding 20 persons.
2. Open corporation – the share is available for subscription or purchase by
any person.
3. Publicly-held corporation – a class of equity securities listed on an
exchange or with assets in excess of P50,000 and having 200 or more
holders, at least 200 of which are holding at least 100 shares of a class of
its equity securities.

According to their relation to another corporation:

1. Parent or holding corporation – a corporation that is related to another
corporation that it has the power to either directly or indirectly elect the
majority of the directors of a subsidiary corporation.
2. Subsidiary corporation – a corporation controlled by another corporation
known as a parent corporation.

STEPS IN THE CREATION OF A CORPORATION

1. PROMOTION
It is the process of bringing together the incorporators or the persons interested in
the business, of procuring subscriptions or capital for the corporation and of setting
in motion the machinery that leads to the incorporation of the corporation itself.

2. INCORPORATION
• Verification from the records of the Securities and Exchange Commission
(SEC) that the proposed corporate name is not the same or similar to an
existing corporation.
• Drafting and execution of the articles of incorporation by the incorporators. The
person elected as temporary treasurer should execute an affidavit regarding
the share capital subscribed and paid up. The treasurer should submit a sworn
statement of assets and liabilities of the corporation.
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 • Deposit by the treasurer of the cash paid for the shares subscribed in the bank
in the name of the treasurer in trust for and to the credit of the corporation. The
bank is required to issue a certificate of deposit.
• Filing of the articles of incorporation with the SEC together with treasurer’s
affidavit, statement of financial position, certificate of bank deposit, and
certificate as to the name of the corporation;
• Payment of the filing fees: for the AI, equivalent to 1/5 of 1% of the authorized
capital stock of the proposed corporation but not less than P1,000; for the by-
laws, P510; for SEC Form F-100, P2,000; and a legal research fee which is 1%
of the filing fee for the AI;
• Endorsement from other government agencies if the proposed corporation will
engage in an industry regulated by the government, other requirements for
corporations with foreign equity and additional requirements based on the kind
of payment of subscriptions; and
• Issuance by the SEC of the certificate of incorporation.

3. FORMAL ORGANIZATION AND COMMENCEMENT OF BUSINESS

OPERATIONS
• Formal organization requires the adoption of by-laws and the election of the
board of directors and of the administrative officers. It also includes the taking
of such other steps as are necessary to enable the corporation to transact the
legitimate business or accomplish the purpose for which it was created.

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BY-LAWS
• The rules of action adopted by the corporation for its internal government and for
the government of its officers, shareholders or members.
• The by-laws shall be effective only upon the issuance by the Commission of a
certification that the bylaws are in accordance with the Revised Corporation Code.
• Failure to file a code of by-laws shall render the corporation liable for the revocation
of its registration.

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RIGHTS OF A SHAREHOLDER

1. Vote at stockholders’ meetings or by proxy

2. Sell stock
3. Purchase additional shares of stock or any new shares issued to maintain same
percentage of stock ownership (pre-emptive right)
4. Receive dividends, if any
5. Share equally in any assets remaining after creditors are paid in a liquidation
6. Be issued certificate of stock or other evidence of share ownership and to transfer
such shares
7. Right to elect and remove directors.
8. Right to adopt, amend or repeal the by-laws
9. Right to inspect corporate books and records, and to receive financial reports of
the corporation’s operations

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 10. Right to participate in the distribution of corporate assets upon dissolution.

COMPONENTS OF A CORPORATION

1. Corporators, Incorporators, Shareholders, Members

• A corporation or a partnership can be a corporator, but cannot be an
incorporator. A partnership can be a corporator in a corporation but a
corporation cannot be a general partner in a partnership.
• All incorporators are corporators of a corporation, but not all corporators are
incorporators.

2. Subscribers – persons who have agreed to take and pay for original, unissued
shares of a corporation formed or to be formed. All incorporators are subscribers
but a subscriber need not be an incorporator.

3. Promoters – persons who bring about or cause to bring about the formation and
organization of a corporation.

4. Underwriters – usually investment bankers who have:

a. Agreed, alone or with others, to buy at stated terms an entire or a substantial
part of an issue of securities; or
b. Guaranteed the sale of an issue by agreement to buy from the issuing
corporation any unsold portion at a stated price; or
c. Agreed to use his best efforts to market all or part of an issue; or
d. Offered for sale shares he has purchased from a controlling stockholder.

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 5. Independent director– person who apart from his fees and shareholdings is
independent of management and free from any business or other relationship
which could, or could reasonably be perceived to, materially interfere with his
exercise of independent judgment in carrying out the responsibilities of a director.

A publicy-held corporation shall have at least two independent directors or at least

20% of the members of the board, whichever is the lesser (Sec. 38 of the SRC)

CLASSES OF SHARES IN GENERAL

1. Par value shares. One in which a specific amount is fixed in the articles of
incorporation and appearing on the certificate of stock. The par value is the
minimum issue price of the share.

“Section 6 of the Code states that preference (or preferred) shares of stock may
be issued only with a stated par value.”

2. No-par value shares. One without any value appearing on the face of the
certificate of stock. A no-par value share may have a stated value which may be
fixed in the articles of incorporation or by the board of directors or the shareholders.
Thus, the issue price may vary from time to time as it is usually fixed based on the
book value of the corporation’s shares.

However, the minimum stated value of a no-par value share is 5 pesos (P5.00)
per share (Sec. 6). In addition, shares issued without par value are deemed fully
paid.

Banks, trust companies, insurance companies, public utilities, and building and
loan associations are not permitted to issue no-par value shares of stock.

3. Voting shares. Those issued with the right to vote.

4. Non-voting shares. Those issued without the right to vote.

5. Ordinary shares. These shares entitle the holder to an equal pro-rata division of
profits without any preference.

6. Preference shares. These shares entitle the holder to certain advantages or

benefits over the holders of ordinary shares.

7. Promotion shares. Those issued to promoters as compensation in promoting the

incorporation of a corporation, or for services rendered in launching or promoting
the welfare of the corporation.
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 8. Treasury shares. A stock that has been issued by the corporation as fully paid
and later reacquired but not retired.

9. Convertible shares. A stock which is convertible or changeable from one class to

another class.

10. Authorized shares. The maximum number of shares which a corporation may
issue.

11. Issued shares. Shares issued to shareholders which at present may or may not
be in the hands of the shareholder.

12. Unissued shares. Shares which never been issued and are available for
issuance.

13. Outstanding shares. Shares issued to shareholders or subscribers whether fully

or partially paid except for treasury shares.

14. Subscribed shares. Shares which investors have contracted to acquire.

BASIC CORPORATE ORGANIZATIONAL STRUCTURE

• The ultimate control of the corporation rests with the shareholders. They are the
owners of the corporation. The shareholders elect the members of the board of
directors.
• The board of directors is responsible for the formulation of the overall policies for
the corporation and for the exercise of corporate powers. The board also elects a
chairman of the board.
• The president must be a director of the corporation, but he cannot act as president
and secretary or as president and treasurer at the same time. The president is the
only officer required by law to be a director. (Sec. 24)
• The corporate secretary must be a resident and a citizen of the Philippines. He
need not be a director unless required by the corporate by-laws. It is his duty to
make and keep its records and to make proper entries of the votes, resolutions
and proceedings of the shareholders and directors in the management of the
corporation.
• The corporate treasurer is the officer entrusted with the authority to receive and
keep the money of the corporation and to disburse them as he may be authorized.
He may or may not be a director.

NOTE: There is no prohibition in the law against a shareholder being a director or

officer of two or more corporations. The Corporation Code does not prohibit a
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 corporate officer from occupying the same position in another corporation
organized for the same purpose. However, such situation may be prohibited by
special law, the articles of incorporation or the by-laws.

CORPORATE BOOKS AND RECORDS

• Minutes book. It contains the minutes of the meetings of the directors and
shareholders.
• Stock and transfer book. It is the record of the names of shareholders,
installments paid and unpaid by shareholders and dates of payment, any transfer
of stock and dates thereof, by whom and to whom made.
• Books of accounts. These represent the record of all business transactions.
These normally include the journal and the ledger.
• Subscription book. It is a book of printed blank subscription.
• Shareholders’ ledger. It is a ledger which details the number of shares issued to
each shareholder.
• Subscribers’ ledger. It is a subsidiary ledger for the subscriptions receivable
account; it reports the individual subscriptions of the subscribers.
• Stock certificate book. It is a book of printed blank certificates of stock.

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 CORPORATE TRANSACTIONS

IMPORTANT NOTES:
1. Common Stock account title = Share Capital – Ordinary Share
2. Stockholder = Shareholder
3. Stock = Share

The accounting equation (or basic accounting equation) for a corporation is

In our examples below, we show how a given transaction affects the accounting equation
for a corporation. We also show how the same transaction will be recorded in the
company's general ledger accounts.

In addition, we show the effect of each transaction on the balance sheet and income
statement. (Our examples assume that the accrual basis of accounting is being followed.)

CORPORATION TRANSACTION C1

Let's assume that members of the Ott family form a corporation called Accounting
Software, Inc. (ASI). On December 1, 2020, several members of the Ott family invest a
total of $10,000 to start ASI. In exchange, the corporation issues a total of 1,000 shares
of common stock. (The stock has no par value and no stated value.) The effect on the
corporation's accounting equation is:

As you see, ASI's assets increase by $10,000 and stockholders' equity increases by the
same amount. As a result, the accounting equation will be in balance.

The accounting equation tells us that ASI has assets of $10,000 and the source of those
assets was the stockholders. Alternatively, the accounting equation tells us that the
corporation has assets of $10,000 and the only claim to the assets is from the
stockholders (owners).

This transaction is recorded in the asset account Cash and in the stockholders' equity
account Common Stock. The general journal entry to record the transaction is:

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After the journal entry is recorded in the accounts, a balance sheet can be prepared to
show ASI's financial position at the end of December 1, 2020:

The purpose of an income statement is to report revenues and expenses. Since ASI has
not yet earned any revenues nor incurred any expenses, there are no amounts to be
reported on an income statement.

CORPORATION TRANSACTION C2.

On December 2, 2020, ASI purchases $100 of its stock from one of its stockholders. The
stock will be held by the corporation as Treasury Stock. The effect of the accounting
equation is:

The purchase of its own stock for cash causes ASI's assets to decrease by $100 and its
stockholders' equity to decrease by $100.

This transaction is recorded in the asset account Cash and in the stockholders' equity
account Treasury Stock. The accounting entry in general journal form is:

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Since the transactions of December 1 and December 2 were in balance, the sum of both
transactions should also be in balance:

The totals indicate that ASI has assets of $9,900 and the source of those assets is the
stockholders. The accounting equation also shows that the corporation has assets of
$9,900 and the only claim against the assets is the stockholders' claim.

The December 2 balance sheet will communicate the corporation's financial position as
of midnight on December 2:

The purchase of a corporation's own stock will never result in an amount to be reported
on the income statement.

CORPORATION TRANSACTION C3.

On December 3, 2020, ASI spends $5,000 of cash to purchase computer equipment for
use in the business. The effect of this transaction on ASI's accounting equation is:

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The accounting equation shows that one asset increases and one asset decreases. Since
the amount of the increase is the same as the amount of the decrease, the accounting
equation remains in balance.

This transaction is recorded in the asset accounts Equipment and Cash. The Equipment
account increases by $5,000 and the Cash account decreases by $5,000. The journal
entry for this transaction is:

The effect on the accounting equation from the first three transactions is:

The totals tell us that the corporation has assets of $9,900 and the source of those assets
is the stockholders. The totals tell us that the company has assets of $9,900 and that the
only claim against those assets is the stockholders' claim.

The balance sheet dated December 3, 2020, reflects the financial position of the
corporation as of midnight on December 3:

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The purchase of equipment is not an immediate expense. It will become part
of depreciation expense only after the equipment is placed in service. We will assume
that as of December 3 the equipment has not been placed into service. Therefore, there
is no expense to be reported on the income statement for the period of December 1-3.

CORPORATION TRANSACTION C4.

On December 4, 2020, ASI obtains $7,000 by borrowing money from its bank. The effect
of this transaction on the accounting equation is:

As you see, ACI's assets increase and its liabilities increase by $7,000.
This transaction is recorded in the asset account Cash and the liability account Notes
Payable with the following journal entry:

The following shows the effects on the accounting equation from the first four
transactions:
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These totals indicate that the transactions through December 4 result in assets of
$16,900. There are two sources for those assets: the creditors provided $7,000 of assets,
and the stockholders provided $9,900. You can also interpret the accounting equation to
say that the corporation has assets of $16,900 and the creditors have a claim of $7,000.
The residual or remainder of $9,900 is the stockholders' claim.

The balance sheet dated December 4 reports the corporation's financial position as of
that date:

The receipt of money from the bank loan is not revenue since ASI did not earn the money
by providing services, investing, etc. As a result, there is no income statement effect from
this or earlier transactions.

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CORPORATION TRANSACTION C5.

On December 5, 2020, Accounting Software, Inc. pays $600 for ads that were run in
recent days. The effect of the advertising transaction on the corporation's accounting
equation is:

Since ASI is paying $600, its assets decrease. The second effect is a $600 decrease in
stockholders' equity, because the transaction involves an expense. (An expense is a cost
that is used up or its future economic value cannot be measured.)

Although stockholders' equity decreases because of an expense, the transaction is not

recorded directly into the retained earnings account. Instead, the amount is initially
recorded in the expense account Advertising Expense and in the asset account Cash.
The journal entry for this transaction is:

The combined effect of the first five transactions is:

The totals now indicate that Accounting Software, Inc. has assets of $16,300. The
creditors provided $7,000 and the stockholders provided $9,300. Viewed another way,
the corporation has assets of $16,300 with the creditors having a claim of $7,000 and the
stockholders having a residual claim of $9,300.

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The balance sheet as of the end of December 5 is:

**The income statement (which reports the company's revenues, expenses, gains, and
losses for a specified time period) is a link between balance sheets. It provides the results
of operations—an important part of the change in retained earnings and stockholders'
equity.

Since this transaction involves an expense, it will affect ASI's income statement. The
corporation's income statement for the first five days of December is presented here:

Because we assumed that Accounting Services, Inc. is a Subchapter S corporation,

income tax expense is not reported on the corporation's income statement.

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CORPORATION TRANSACTION C6.

On December 6, 2020, ASI performed consulting services for its clients. The clients were
billed for the agreed upon amount of $900. The amounts are to be paid within 30 days.
The effect on ASI's accounting equation is:

Since ASI has performed the services, it has earned revenues and it has the right to
receive $900 from its clients. This right means that assets increased. The earning of
revenues also causes stockholders' equity to increase.

Although revenues cause stockholders' equity to increase, the revenue transaction is not
recorded directly into a stockholders' equity account at this time. Rather, the amount
earned is recorded in the revenue account Service Revenues. This will allow the
corporation to report the amount in the revenue account on its income statement at any
time. (After the year ends, the amount in the revenue accounts will be transferred to the
retained earnings account.) The general journal entry for this transaction is:

The effect on the accounting equation from the first six transactions can be viewed here:

The totals tell us that at the end of December 6, the corporation had assets of $17,200. It
also shows that $7,000 of the assets came from creditors and that $10,200 came from
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stockholders. The totals can also be viewed another way: ASI had assets of $17,200 with
its creditors having a claim of $7,000 and the stockholders having a claim for the
remainder or residual of $10,200.

The balance sheet as of midnight on December 6 is presented here:

**The income statement (which reports the company's revenues, expenses, gains, and
losses for a specified time period) is a link between balance sheets. It provides the results
of operations—an important part of the change in retained earnings and stockholders'
equity.

The income statement for Accounting Software, Inc. for the period of December 1 through
December 6 is shown here:

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CORPORATION TRANSACTION C7.

On December 7, 2020, ASI uses a temporary help service for 6 hours at a cost of $20 per
hour. ASI records the invoice immediately, but it will pay the $120 when it is due in 10
days. This transaction has the following effect on the accounting equation:

The accounting equation shows that ASI's liabilities increase by $120 and the expense
causes stockholders' equity to decrease by $120.

The liability will be recorded in Accounts Payable and the expense will be recorded in
Temp Service Expense. The general journal entry for utilizing the temp service is:

The effect of the first seven transactions on the accounting equation can be viewed here:

The totals show us that the corporation had assets of $17,200 and the sources were the
creditors with $7,120 and the stockholders with $10,080. The accounting equation totals
also reveal that the corporation's creditors had a claim of $7,120 and the stockholders
had a claim for the remaining $10,080.

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The financial position of ASI as of midnight of December 7 is presented in the following
balance sheet:

**The income statement (which reports the corporations' revenues, expenses, gains, and
losses for a specified time period) is a link between balance sheets. It provides the results
of operations—an important part of the change in stockholders' equity.

The income statement for the first seven days of December is shown here:

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CORPORATION TRANSACTION C8.

On December 8, 2020, ASI received $500 from the clients it had billed on December 6.
The effect on the accounting equation is:

The corporation's cash increases and one of its other assets (accounts receivable)
decreases. Liabilities and stockholders' equity are unaffected. (There are no revenues on
this date. The revenues were recorded when they were earned on December 6.)

The general journal entry to record the increase in Cash and the decrease in Accounts
Receivable is:

The effect on the accounting equation from the transactions through December 8 is
shown here:

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The totals after the first eight transactions indicate that the corporation had assets of
$17,200. The creditors had provided $7,120 and the company's stockholders provided
$10,080. The accounting equation also indicates that the company's creditors had a claim
of $7,120 and the stockholders had a residual claim of $10,080.

ASI's balance sheet as of midnight of December 8 is shown here:

**The income statement (which reports the corporation's revenues, expenses, gains, and
losses for a specified time period) is a link between balance sheets. It provides the results
of operations—an important part of the change in stockholders' equity.

The income statement for ASI's first eight days of operations is shown here:

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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
EXPANDED ACCOUNTING EQUATION FOR A SOLE PROPRIETORSHIP

The owner's equity in the basic accounting equation is sometimes expanded to show the
accounts that make up owner's equity: Owner's Capital, Revenues, Expenses, and
Owner's Draws.

Instead of the accounting equation, Assets = Liabilities + Owner's Equity, the expanded
accounting equation is:

The eight transactions that we had listed under the basic accounting equation Transaction
8, are shown in the following expanded accounting equation:

With the expanded accounting equation, you can easily see the company's net income:

Page 27 of 35
MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
EXPANDED ACCOUNTING EQUATION FOR A CORPORATION

The stockholders' equity part of the basic accounting equation can also be expanded to
show the accounts that make up stockholders' equity: Paid-in Capital, Revenues,
Expenses, Dividends, and Treasury Stock.

Instead of the accounting equation, Assets = Liabilities + Stockholders' Equity, the

expanded accounting equation is:

The eight transactions that we had listed under the basic accounting equation Transaction
C8 are shown in the following expanded accounting equation:

With the expanded accounting equation, you can easily see the corporation's net income:

Page 28 of 35
MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
 RETAINED EARNINGS

RETAINED EARNINGS

• Represent the component of shareholders’ equity arising from the retention of

assets generated from the profit directed activities of the corporation
• Normally has a “Credit” balance
• Normally has a “Credit” balance
• Formula:
RE, beginning balance
Add/Less: Prior Period Errors
Add/Less: Net Income (Net Loss)
Less: Dividends
Less: Sale of T.S. .
RE, ending balance .

Retained Earnings
- RE, beg
Prior Period error - overstated NI - - Prior Period error - understated NI
Net Loss 2,000,000.00 Net Income
Dividends 300,000.00
Sale of Treasury Shares 100,000.00
1,600,000.00

DEFICIT

Retained Earnings Year 2

1,600,000.00 RE, beg
Prior Period error - overstated NI - - Prior Period error - understated NI
Net Loss 2,000,000.00 Net Income
Dividends -
Sale of Treasury Shares -
400,000.00

Page 29 of 35
MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
CHANGES IN RETAINED EARNINGS
• Profit / Loss
• Dividends
• Reissuance of Treasury Shares
• Retirement of Treasury Shares
• Prior Period Errors
* Only Unrestricted Retained Earnings can be declared as dividends.

DIVIDENDS
• These are return on investments to the shareholders.
• As a general rule, any form of dividend declaration should be based on the total
subscription and not merely on the shares already paid.
• Can only be distributed if declared by the Board of Directors.
• Important dates to remember include e Date of Declaration, Date of Record
and Date of Payment.
• Normally has a “Credit” balance

DATE OF DECLARATION
• The date on which the board of director will adopt a resolution declaring that a
dividend is to be paid, specifying the amount, type and payment date. Cash
dividends are declared solely by the BOD while Share Dividends will require the
concurrence of at least 2/3of the outstanding shareholders.
• This is the time in which, liability of the corporation to its shareholders is said to
arise.

DATE OF RECORD
• This serves as a cut off date for those shareholders who will be entitled to
dividends.
• A person who becomes a shareholder on or before the date of record is entitled
to dividends.

DATE OF PAYMENT
• The date on which the corporation settles the liability to the shareholders.

TYPES OF DIVIDENDS
• Cash Dividends
• Property dividends
• Share Dividends
• Liquidating Dividends

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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
CASH DIVIDENDS
• Cash is paid to shareholders. The amount my be expressed as a percentage of
the par value or an arbitrary value per share.
• The pro-forma entry upon declaration is:
Retained Earnings xxx
Cash dividends Payable xxx

PROPERTY DIVIDENDS
• Also known as “Dividends in Kind”
• Shareholders are given assets other than cash as their dividends.
• The entity shall measure a liability at Fair Value of the assets to be distributed.
• Pro forma entry upon declaration:
Retained Earnings xxx
Property Dividends Payable xxx

SHARE DIVIDENDS
• Additional shares issued to shareholders.
• Differs from cash and property dividends in such a way that there is no transfer of
assets from the corporation to the shareholder.
• Affects only the shareholder equity section and increases the total share capital
and decreases the retained earnings account. Thus, total shareholders’ equity
section remains unchanged.
• Small Share Dividends- are dividends in which additional shares issued are
less than 20% of the previously outstanding shares. Shares to be issued are
valued at their fair market value.
• Large Share Dividends – if the additional shares to be issued are more than
20% of the previously outstanding shares. Shares to be issued are recorded at
par or stated value.
• Pro forma entry upon declaration:
Retained Earnings xxx
Share Dividends Payable xxx

LIQUIDATING DIVIDENDS
• Are not distributions of earnings but rather returns of capital to the investing
shareholders. Can be paid only in the following circumstances:
– When the corporation is under dissolution and liquidation.
– When the corporation is engaged in the exploration of natural resources.

SHARE SPLITS
• Increase the number of shares and consequently, decrease the par or stated
value of the shares.
• Reverse Split decreases the number of shares and consequently increases the
par or stated value of the shares.
Page 31 of 35
MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
 END CHAPTER TEST

• The drafts of this module were submitted to our classroom as assignments.

• Submit your answers with solutions with the following heading format:
LAST NAME, FIRST NAME, MIDDLE INITIAL
MODULE 5 CORPORATION
• Typewritten or handwritten will do and your document must be submitted on time
in PDF format only.
• Name of your document: LASTNAMEFIRSTNAME_MODULE(NUMBER)
Example: BAGSITMARUBY_MODULE5
• Deadline: Before FINALS

PROBLEM 1

1. For a corporation to pay a cash dividend, it must have:

a. Retained earnings
b. Adequate cash
c. A declaration of dividends
d. All of the Above

2. Company A declared a P50,000 cash dividend on March 10, payable on April 6 to

shareholders of record on March 25. What would be the journal entries on March
10?
a. Retained Earnings 50,000
Dividends Payable 50,000
b. Retained Earnings 50,000
Accounts Payable 50,000
c. Cash 50,000
Retained Earnings 50,000
d. No Entry

3. Company A declared a P50,000 cash dividend on March 10, payable on April 6 to

shareholders of record on March 25. What would be the journal entries on March
25?
a. Retained Earnings 50,000
Dividends Payable 50,000
b. Dividends Payable 50,000
Cash 50,000
c. Retained Earnings 50,000
Cash 50,000
d. No Entry

Page 32 of 35
MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
4. Company A declared a P50,000 cash dividend on March 10, payable on April 6 to
shareholders of record on March 25. What would be the journal entries on April
6?
a. Retained Earnings 50,000
Dividends Payable 50,000
b. Dividends Payable 50,000
Cash 50,000
c. Retained Earnings 50,000
Cash 50,000
d. No Entry

Page 33 of 35
MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
 PROBLEM 2

BSA1 Corporation was organized on January 1, 2020. During its first year, the
corporation issued 2,000 shares of P50 par value preferred stock and 100,000 shares of
P10 par value common stock. At December 31, the company declared the following cash
dividends: 2020, P6,000, 2021, P12,000, and 2022, P28,000.

a. Show the allocation of dividends to each class of stock, assuming the preferred
stock dividend is 8% and not cumulative.
b. Show the allocation of dividends to each class of stock, assuming the preferred
stock dividend is 9% and cumulative.
c. Journalize the declaration of the cash dividend at December 31, 2022, under part
(b).

Page 34 of 35
MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
 PROBLEM 3

HH Inc. has 5,000 shares issued and outstanding. The per share par value is P10, book
value P32 and market value is P40.

a. What will be the entry for 10% stock dividend as declared?

b. What will be the entry for the stock issued?

Page 35 of 35
MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit