UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
A.Y. 2021-2022

ONLINE LEARNING MODULE

ACCT 1013 – Conceptual Framework and Accounting Standards

Week 13: ACCOUNTING FOR CORPORATIONS

Topics: a) Accounting for share issuances involving cash and noncash
considerations
b) Memo entry vs. Journal Entry Method
c) Accounting for Treasury Shares
d) Accounting for Retirement of Shares
e) Donated Capital

Learning Outcomes: At the end of this module, you are expected to:
1. Record properly share issuance involving cash and noncash
transactions;
2. Record share capital transactions using the memorandum entry method
and journal entry method
3. Define Treasury Shares
4. Record the purchase, reissuance and retirement of treasury shares
5. Define donated capital and record the receipt of donations

Hi guys, here’s wishing you all a wonderful, productive and healthy week ahead!
Considerations for the Issuance of Shares

1) Cash
2) Tangible or intangible properties actually received by the corporation
3) Labor already performed or services actually rendered to the corporation
4) Previously incurred indebtedness

Issuance of shares on Cash Basis – is self-explanatory and will be explained during the live discussions.

Share Capital issued for considerations other than cash:

In the order of priority, the transaction shall be measured as follows:

a) Fair Market Value (FMV) of the property or the services rendered;

b) Fair Market Value of the share capital issued
c) Par of stated value of the share capital issued

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* Thus, the acquisition of Land with equivalent cash price of P12,000,000 by issuing 100,000 shares of
ordinary shares of P100 par value will be recorded as:

Land 12,000,000
Ordinary Share Capital(100,000 x P100) 10,000,000
Share Premium 2,000,000

**If there was no cash price for the land and the land had no ready market but the shares are actively traded at
P130 per share, the land would be recorded at P13,000,000.

Land 13,000,000
Ordinary Share Capital(100,000 x P100) 10,000,000
Share Premium 3,000,000

***Note that the first order of priority is the market value of the non-cash consideration received.
However, if only the market value of the shares is determinable, then it will the basis for recording
acquisition of the land.

COMMON ACCOUNT TITLES INVOLVED IN SAHRE ISSUANCES

IF ONE TYPE OF SHARES ONLY: IF WITH COMMON AND PREFERRED SHARES:

Cash Cash
Subscription Receivable Subscription Receivable
Subscribed Share Capital On Ordinary Shares:
Share Capital Subscribed Share Capital - Ordinary
Share Premium Share Capital - Ordinary
Share Premium-Ordinary
On Preference Shares:
Subscribed Share Capital - Preference
Share Capital - Preference
Share Premium-Preference

ACCOUNTING FOR SHARE CAPITAL

1. Memorandum Entry Method

2. Journal Entry Method

ILLUSTRATIVE EXAMPLE 01
XYZ Corporation was organized with an authorized to issue capital stock of 80,000 ordinary
6-Feb shares, par value
of P100. Issued and outstanding were 20,000 shares for P2,000,000 cash paid by the
Incorporators. Share
certificates were Issued.

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 Cash of P20,000 was received and 200 shares of stock were
9-Mar issued to an investor
Cash of P10,000 was received from a subscriber as 25% of his subscription price for
8-Apr 400 shares.
Cash of P30,000 was received from the investor on April 08 . Share
25-May certificates were issued
Aug 20 Cash of P46,000 was received and 400 shares of stocks were issued

Journal Entries under the Two Methods:

MEMORANDUM ENTRY METHOD JOURNAL ENTRY METHOD

DATE ACCOUNT TITLES DR CR ACCOUNT TITLES DR CR
6-Feb Memo Entry: Unissued Share Capital 8,000,000
Authorized to issue 80,000 shares at P100 Authorized Share Capital 8,000,000
par value.
Cash 2,000,000 Cash 2,000,000
Share Capital 2,000,000 Unissued Share Capital 2,000,000

9-Mar Cash 20,000 Cash 20,000

Share Capital 20,000 Unissued Share Capital 20,000

8-Apr Cash 10,000 Cash 10,000

Subscription Receivable 30,000 Subscription Receivable 30,000
Subscribed share capital 40,000 Subscribed share capital 40,000

25-May Cash 30,000 Cash 30,000

Subscription Receivable 30,000 Subscription Receivable 30,000

Subscribed Share Capital 40,000 Subscribed Share Capital 40,000

Share Capital 40,000 Unissued Share Capital 40,000

20-Aug Cash 45,000 Cash 45,000

Share Capital 40,000 Unissued Share Capital 40,000
Share Premium 5,000 Share Premium 5,000

Notes:
a) The opening entry that gives information on the authorized capitalization are
different from each under the two methods.

b) On the issuance of certificates upon full payment:

Memorandum entry method: (Credit) SHARE CAPITAL
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 Journal entry method : (Credit) UNISSUED SHARE CAPITAL

c) On all the others, the journal entries are the same

TREASURY SHARES or TREASURY STOCKS

Here is a sneak peek in diagram format about T/S:

Definition.

Treasury shares are a corporation’s

own shares which have been issued
and fully paid, but subsequently
reacquired but not retired.

What to remember about Treasury

Stocks:

• Not entitled to dividend

• Cannot vote in any meeting of
shareholders
• Restriction of Retained Earnings
• Reduces the amount that can be
paid as dividend.

Treasury Shares maybe acquired

through:

➢Redemption
➢Donation or
➢Any other lawful means
➢Purchase from a shareholder

There are two methods of accounting for Treasury Shares:

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 1. Par Value Method debits Treasury Stock for the amount of par value or stated value of the shares
purchased.

2. Cost Method is the preferred method of accounting for treasury shares, hence only this method will be
discussed here.

Purchase of Treasury Shares under the Cost Method

Notes:
If treasury stock is purchased for cash, the cost is equal to the cash payment.

If treasury stock is acquired for noncash consideration, cost is measured by the recorded amount of
the non-cash assets given in exchange.

What may the corporation do with Treasury Stocks?

1. Just keep the treasury shares – no transactions on it.

2. Reissue the Treasury Shares:
• At cost
• At above cost or
• Below cost

3. Retire the Treasury Shares

Limitation on Treasury Shares

➢ A corporation can reacquire or repurchase its Treasury Shares to the extent of its Unappropriated
Retained Earnings balance.

➢ When a corporation has treasury shares recorded at cost, an amout of Retained Earnings equal to cost
is appropriated for that purpose.

➢ The appropriation to Retained Earnings is necessary so as not to impair Legal Capital.

ILLUSTRATIVE EXAMPLE 02

1. Purchase of Treasury Shares on cash basis

The Corporation paid cash of P400,000 to purchase 3,000 treasury shares with par value of P100.

Entry to record purchase Corollary Entry to Restrict Retained Earnings:

Treasury Stocks 400,000 Retained Earnings - unrestricted 400,000

Cash 400,000 Retained Earnings - appropriated 400,000

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Notes:

Treasury Stocks is debited for the cost of the shares purchased or credited for the cost of the shares reissued.
There is no reference to the par or stated values.

The corollary entry is optional. In lieu of this, you may maintain a ledger to make sure that all Treasury Share
transactions are backed by sufficient balance of Retained Earnings to avoid overdrafts.

2. Reissuance of Treasury Stocks

a) At cost – will not be illustrated because it is self-explanatory

All you have to do is reverse your entries in No. 01 including the corollary entry.

b) At above cost

Assume that the treasury shares in No 01 were reissued at P150/share.

Retained Earnings -
Cash (P150x3,000) 450,000 appropriated 400,000
Treasury Stocks 400,000 Retained Earnings - unrestricted 400,000
Share Premium - Treasury 50,000

c) At Below Cost

Assume that the 3,000 Treasury Shares in No 01 were reissued on cash basis at P325,000.

Entry to record reissuance at below cost Corollary Entry to Reverse/free Retained Earnings:

Cash 325,000 Retained Earnings - appropriated 400,000

Share Premium - Treasury 50,000 Retained Earnings - unrestricted 400,000
Retained Earnings 25,000
Treasury Stocks 400,000

**** Assuming that Share Premium has sufficient credit balance.

Things to remember about reissuances at below cost:

1) If there is a sufficient credit balance in the Share Premium – Treasury account arising
from the same class of share capital, the difference between cost and reissue price should be debited to
Share Premium-Treasury.

2) If there is no credit balance in the Share Premium – Treasury, then debit the difference to the Retained
Earnings Account.
ACCT 1013 – Conceptual Framework and Accounting Standards | 6
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 3) If there is a balance in the Share Premium - Treasury but insufficient to cover the difference, then charge
the remaining amount to Retained Earnings.

RULE:

The “loss” on the reissue of treasury shares will be debited to the following accounts in the following
order:
A. Share Capital – Treasury

B. Retained Earnings

Now assuming that in the above problem where Treasury Shares previously at P400,000 was reissued at a cash
price of P325,000. Assume further that Share Premium – Treasury has a credit balance of P25,000 and Share
Premium has a balance of P30,000. Take note of the following computations below:

Reissue Price 325,000 Distribution of the Loss based on the assumptions:

Purchase Price at cost 400,000 Share Premium - Treasury 25,000
Difference (loss) (75,000) Share Premium 30,000
Retained Earnings 20,000
“Loss” 75,000

Journal Entry to record issuance at below cost

Cash 325,000
Share Premium - Treasury 25,000
Retained Earnings 50,000
Treasury Stocks 400,000

*** The corollary entries to restrict and reverse Retained Earnings were purposefully omitted for easier
journal entries preparation.

RETIREMENT OF TREASURY SHARES

Gain or Loss on Retirement

What happens?

a) The Outstanding shares are reduced (debit) Share Capital

b) The treasury shares cease to exist (credit) Treasury Shares

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 c) The balancing entry is:
Below Cost (GAIN) (credit) Share Premium - Retirement

Above Cost (LOSS) (debit) In the following order:

a) Share Premium -
Treasury
of the same class of
shares
b) Retained Earnings

It would also be helpful to take note of the following pro forma journal entries when recording retirement of
treasury shares:

Retirement Below Original Issuance Price(GAIN) Debit Credit

Share Capital (at par or stated value) xx
Share Premium (original issuance) xx
Treasury Shares (at cost) xx
Share Premium - Retirement xx

Retirement Above Original Issuance Price (LOSS)

Share Capital (at par or stated value) xx
Share Premium (original issuance) xx
(1)Share Premium - Treasury Shares xx
(2) Retained Earnings xx
Treasury Shares (at cost) xx

Notes:
1) When shares are reacquired and immediately retired, there is no need to set up treasury share
account. The par value and related share premium are immediately debited with corresponding
credit to Cash.
2) In the accounting for treasury shares, Retained Earnings may be decreased but never increased.

Please proceed to Drill No. 01

Financial Statement presentation of Treasury Stocks

It is reported as a deduction from the total SHE

It does not decrease the number of shares issued; only the outstanding number of shares
Treasury shares may decrease cash flows but they have no effect on the profits of the
corporation.

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DONATED CAPITAL

Donated Capital may come from the following sources and

their accounting treatment:

1. Donations from Shareholders – Credited to Share Premium

2. Donations from the Government – recognized as government grants.
3. Donations from Other Sources – recognized as Income when:
a) the conditions attached to the donation are fulfilled or
expected to be fulfilled (doable)
b) the donation becomes receivable
c) the criteria for asset recognition are met

Forms of Donations from shareholders:

1. Cash – recorded as Share Premium – Donated Capital at the amount of cash received.

2. Noncash assets – are recorded at the Fair Value of the Non Cash asset received.

3. Entity’s own shares are initially recorded as a memo entry. An entry to Share Premium-donated capital
is recognized only when it is subsequently issued.

ACCT 1013 – Conceptual Framework and Accounting Standards | 9

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End of Lesson

References:

1. Cabrera, E, et al. (2018). Conceptual Framework and Accounting Standards. Manila: GIC
Enterprises
2. Valix, C, et al. (2019). Conceptual framework and accounting standards. Manila: GIC Enterprises &
Co., Inc.
3. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
4. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
5. Financial Reporting Standard Council (2017). Philippine Financial Reporting Standards. PICPA
6. Valencia, E. and Roxas, G. (2017), Basic Accounting. Baguio City: Valencia Educational Supply
7. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I. GIC Enterprises & Co., Inc., Manila
8. Empleo, P. and Robles, N. (2019). The Philippine Financial Reporting Reporting (Conceptual
Framework and Accounting Standards). Mandaluyong City: Millennium Books, Inc.

Electronic Resource:
1. Introduction to accounting, https://courses.lumenlearning.com/sac-finaccounting/chapter/chapter-1/
2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research-topics/finance/basic-accounting/the-
accounting-system-and-accounting-basics
4. Basic accounting and bookkeeping lessons, http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html
7. International Financial Reporting Standards. www.ifrs.org
8. International Accounting Standards. www.iasplus.com/en/standards/ias

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