CHAPTER 6 – PARCOR ultimately closed to the capital

account of the owner or partner

Accounting Equation
Corporation
- tells us that the assets of the
corporation are contributed by the - such temporary accounts will be
creditors and owners closed to a separate equity account
called Retained Earnings
Creditor’s Equity - Capital and Drawings account of the
- termed as “liabilities” owner will no longer be used since
- stated ahead of the shareholders’ the shareholders’ contribution to the
equity in the accounting equation business will be identified as the
 the law requires the Share Capital of the corporation as
settlement of the creditors’ it arises mainly from the issuance of
claim before any residue or equity securities or shares of stocks
leftovers will be distributed issued by the corporation
to the owners upon
dissolution or corporate
liquidation  The typical transactions of a service
or merchandising businesses are
Credit Retained Earnings recorded similarly regardless of what
- if the source of an asset was the net form of business organization is
income earned by the corporation adopted by the reporting entity
(shareholders’ equity)  The recording of transactions
involving the use of shareholders’
Debit Treasury Shares equity is different from sole
proprietorship and partnership
- if a corporation reduces its assets by
purchasing its stock from its SHARE CAPITAL
stockholders (contra-equity account)
Share Capital
The Shareholders’ Equity Section of the
Statement of Financial Position - Refers to the shares subscribed and
paid for by the shareholders or
- highlights the reporting differences stockholders of the corporation
between a sole proprietorship,  Could be in the form of
partnership, and corporation money, property, or services
received during the
Sole Proprietorship and Partnership
preparatory stage of corporate
- all temporary accounts such as formation, as well as during
Revenues, Expenses, Income or after the start of its
Summary, and Drawings account are operations
 - Such share capital is divided further  the ownership shares of a
into legal capital and share premium corporation

Legal Capital Two basic types of share capital

- Portion of the paid-in capital or - ordinary share capital

contributed capital - preference share capital
- Must remain in the corporation to
protect the claims of corporate Ordinary Share
creditors - equivalent term for Common Stocks
- Shares with par value or Common Shares
 Its legal capital is the - the basic ownership class of the
aggregate or total par value of corporation
all the issued and subscribed - if the corporation have one class of
shares stock outstanding
- No-par shares - Ordinary shareholders: owners of
 Legal capital is the total the ordinary shares issued by the
consideration received by the corporation
corporation for the shares - represents the residual ownership
issued to its stockholders interest or the corporation’s residual
including the share premium equity
or the excess of the issuance - voting right is frequently given
price over its stated value exclusively to ordinary shares
Share Premium Preference Share Capital
- The portion of the paid-in capital - represents the ownership interest of
which was paid by the shareholders the preference shareholders (or
in excess of par preference stockholders) as they own
- May arise from: shares of stock that carries with it
 treasury stock transactions certain preferential treatment
 retirement of shares - should not be issued at a price below
 donations received by the par value (must be more than or less
corporation than)
 share dividends (also known - Preferred as to dividends
as stock dividends)  The preferred stockholders
- There are two common uses of stock. will be given the first priority
One meaning of stock refers to the for payment or distribution of
goods on hand which is to be sold to dividends before the ordinary
customers shareholders (or common
- Stock stockholders) will receive
 means inventory their share of dividend
 - Preferred as to asset contribution  Incentive/reward for key officers of
 The remaining assets after the corporation
settling the creditors’ claim
will be given to them ahead Submit an amended articles of
of the ordinary shareholders incorporation to SEC for approval
in the event of corporate - If the corporation wishes to increase
liquidation or decrease its authorized share
capital
 More than one class of stock
outstanding  Outstanding shares ≤ Issued Shares ≤
o The shareholders’ equity will Authorized Shares
show both ordinary share and  Outstanding Shares = Issued Shares
the preference share capital – Treasury Shares
as well as their share
premium Issued Share Capital
 Preference Share is generally used
- The total par or total stated value of
with par value and with a dividend
the issued shares which include the
rate
treasury shares
Authorized Share Capital - Always less than or equal to the
authorized shares
- The total par or the total stated value
of the maximum allowable number Subscribed Share Capital
of shares to be issued by a
- The portion of the authorized share
corporation
capital that has been subscribed but
- Issued Shares
not yet fully paid
 When a corporation sells
some of its authorized shares Outstanding Shares
 Number of issued shares is
often less than the number of - The shares issued and are in the
authorized shares hands of the stockholders
- The difference between the issued
 Corporation issue or sell shares of shares and treasury shares
stock to obtain cash from investors - Always less than or equal to the
 To acquire another company (the issued shares
new shares are given out to the Unissued Shares
owners of the other company in
exchange for their ownership - Those shares which have never been
interest) issued and are still available for
 To acquire certain assets or services issuance
  Share Capital is debited only upon - Issuance of stocks at a discount is not
the retirement, redemption or allowed
cancelation of the issued shares
 Par Value is not an indicator of its
ISSUANNCE OF SHARE CAPITAL market price but rather indicates the
Shares amount to be credited to the Share
Capital account
- May be issued by the corporation in
order to finance its operation and/or Share Capital may be issued in exchange
investing activities for:

Stock issued with Par Value - Cash paid for by the subscriber to the
corporation
- Cash received by the corporation - Non-cash asset (either tangible or
will be debited at the total intangible asset) received by the
subscription price of the shares corporation
issued - Services received by the corporation
- Share Capital account (either - Payment of a previous liability
Ordinary Share Capital or Preference incurred by the corporation
Share Capital) will be credited at the
total par value of such shares issued  Recording the issuance of
- Excess will be credited to the related preference shares is the same as
Share Premium account of the class recording the issuance of ordinary
of stock issued. shares
 Issuance of no-par value
Shares issued that have no Par Value
preference shares is prohibited in
- Proceeds may be credited outright to the Philippines
the Share Capital account  Shares issued for services rendered
- alternatively you may credit the total for the corporation in connection
stated value of the issued shares to with incorporation shall be charged
the Share Capital account or debited to the account called
- Excess over the stated value of the Organization Expense at an amount
issued shares be credited to Share equal to the fair value of such
Premium Account services received
 No shares shall be issued for future
Revised Corporation Code of the services
Philippines
- If ordinary shares are issued in
- Prohibits the original issue of share
payment for an outstanding liability,
capital for a consideration less than
then the outstanding balance of the
the par or stated value
 liability account shall be debited or Notices ignored by the subscriber
closed
- His subscription is declared
TWO ALTERNATIVE METHODS OF delinquent. Hence, he is in default
ACCOUNTING FOR SHARE CAPITAL - The delinquent subscription is
offered for sale in a public auction
 A subscriber enters into a contract to - The highest bidder is the person
buy shares of stock. On the date of who is willing to pay for:
the signing of the subscription  the unpaid balance of the
contract, the subscriber is legally subscription plus accrued
bound to fulfill the terms and interest on the subscription
conditions stipulated on it. due
 The legally binding contract of  cost of advertisement
subscription provides for:  other expenses related to the
o number of shares subscribed auction sale in exchange for
o subscription price or issuance the smallest number of shares
price
o benefits to which the  Once the subscription is fully paid,
subscriber is entitled to all subscribed shares are issued
receive as well as the terms  Shares are first given to the highest
of payment bidder
 For as long as the subscriber is duly  The excess shares are given to the
recorded in the books as the owner of defaulting subscriber
the shares, he is considered a
stockholder of record and entitled to Treasury Shares
all the rights of a stockholder
- the portion of shares that a company
Two alternative methods of accounting keeps in its own treasury
for the authorization and issuance of
Subscription Receivable
share capital
- reported as a shareholders’ equity
- Memorandum Method
account if the said amount is
- Journal Entry Method
collectible beyond one year from the
reporting date of the statement of
 Stock Certificate will be issued only
financial position
upon full payment of the
- if the balance of the account is
subscription price
collectible within one year, it will be
Subscriber failed to pay his subscription shown as current asset item
on the call date
Reasons for Acquiring Treasury Shares
- Corporation will send several notices
to remind him of his obligation
 1. To obtain stocks be used in acquiring equal to, above or below the
plant assets par or stated value of such
2. To improve earnings per share (EPS) shares.
by reducing the number of shares  The acquisition or purchase of
outstanding treasury shares will not decrease the
3. To invest excess cash temporarily number of issued shares. Only the
4. To support the market price of the outstanding shares will decrease
stock by decreasing the supply of resulting from the repurchase of the
shares corporation’s own stock and holding
5. To increase the ratio of liabilities to those shares instead of retiring them.
shareholders’ equity  The total assets and the total
6. To obtain shares for conversion of shareholders’ equity will decrease as
other securities such as preference the purchase of treasury shares shall
shares be recorded as:
7. To block potential takeovers or avoid
possible takeover by an outside party Treasury Shares (Stocks) Pxx
8. To have shares available for the Cash Pxx
future exercise of stock options Acquired Treasury Shares

The following stock transactions are the  Treasury stocks is not an asset
sources of treasury stocks  Corporation does not:
o Pay dividends on treasury
1. Repurchase of own stock but not stocks
cancelled or retired o Vote treasury stock
2. Delinquent subscription without a o Recognize gains or losses if
highest bidder the treasury stock is reissued
3. Donated shares of corporation’s own  A corporation does not purchase its
stocks own stock as an investment and it is
not recorded as an asset
 In accounting for treasury stocks,
only the cost method is Treasury Stock
recommended for use by the
- The only stock account that is not
Philippine Accounting Standard
recorded at par
(PAS)
- The cost of treasury stock, not the
o Treasury shares are recorded
par value, is debited to the account
at cost, which is the amount
- Considered as contra-equity account
paid for by the issuing
since it will be shown as a deduction
corporation in reacquiring the
from the Total Contributed Capital
previously issued shares
and Retain Earnings in the Statement
regardless of whether they
of Financial Position
are acquired at an amount
 - The corporation may reissue these - Once the shares are retired or
treasury shares at some future date cancelled, they can no longer be
 Reissuance price may be reissued
equal, above, or below - The reissuance and the retirement of
acquisition cost treasury shares may result to either
- Not viewed as an asset that’s why no an indicated gain or an indicated loss
gain or loss is recorded upon its depending on which one exceeds the
reissuance or retirement other
- To protect the creditors, the law  If retirement of treasury
requires that a portion of Retained shares results to an indicated
Earnings shall be restricted equal to gain (treasury shares retired
the cost of the treasury shares less than par value of the
- The accounting for treasury shares retired treasury shares), a
involves these transactions: credit to Share Premium shall
 Acquisition be made
 Reissuance
 Retirement The indicated loss resulting from the
retirement of treasury shares should be
Indicated Loss charged or debited to the following accounts
in the following order:
- The excess of the cost of treasury
stocks sold over its reissuance price 1. Share Premium to the extent of the
- Cost > reissuance price credit when the share was issued
- If there is no existing balance in 2. Share Premium from Treasury Stock
Share Premium – Treasury Stocks transactions of the same class of
account, then the indicated loss on share
the part of the corporation shall be 3. Retained Earnings
debited to Retain Earnings account
which is the dumping ground of any INCORPORATION OF THE
possible losses PARTNERSHIP

Retirement of Treasury Shares  By incorporating your business, your

personal assets will not be at risk in
- The treasury account is closed by the event there is a company lawsuit
crediting it at cost and the Share or bankruptcy since a corporate
Capital account (either Ordinary or personality is a shield against
Preference) is closed by debiting it at personal liability of its shareholders
the total par value of the retired
shares Partnership to Corporation
- Such retired treasury shares will - More capital
reduce the number of shares issued. - Application for the conversion is
filed with SEC
 - Partnership books will have to be - The excess of the agreed value of the
adjusted to reflect the agreed net assets of the partnership over the
valuation of their assets or to correct total par value of the shares issued by
the misstatements in certain account the corporation is credited to Share
balances Premium Account
- Undervaluation of the Partnership
asset:
 If the agreed valuation of the
partnership assets is greater
than the recorded amount of
partnership assets
 There’s a need to increase
their asset which also
requires an allocation of such
increase to the partner’s
Capital account using their
profit and loss sharing ratios
 After posting this adjustment
to the ledger, the Adjusted
Capital balances of the
partners will be determined
 The partnership books will
have to be closed by debiting
the capital accounts of each
partner including the liability
and contra-asset accounts and
credit the asset accounts

Memo Entry

- Shall be made to record the

authorized share capital of the newly
formed corporation
- An entry recording the transfer of the
net assets of the partnership to the
corporation will follow since the
corporation takes over the assets,
assumes the liabilities of the
partnership and issues shares of stock
in exchange