12.5 COMPONENTS OF A CORPORATION Sec.

72 of the Corporation Code of the Philippines

- Holders of subscribed shares not fully paid which are
not delinquent shall have all the rights of a shareholder.
According to Sec 5. of the Corporate Code, a corporation
may be comprised of the following: Sec. 71 of the Corporation Code of the Philippines
- makes an exception for the provision above, meaning
the delinquent subscriber is still entitled to a dividend
1. Corporators however, the following restrictions must be observed:

They represent the several classifications of owners of a • Cash dividend are not to be actually paid to
corporation after its formation. the delinquent subscriber, but applied as
payment for his delinquent shares
Specifically, corporators are incorporators, shareholders
• Stock dividends are to be withheld until the
and/members
delinquent subscriber shall have fully paid
his subscription

2. Incorporators 13.1 Components of a Shareholder’s Equity

They are also called the "founders of a corporation".

Shareholders' Equity
They are the original organizers of the corporation, stock
or non-stock, whose names appear in the Articles of This represents the residual interest of the shareholders
Incorporation. The primary function of an incorporator is in the assets of the corporation after deducting the total
to organize the corporation amount of corporate liabilities.

Artificial persons like partnerships or corporations The shareholder's equity also known as:
cannot be incorporators.
• net assets
• net worth
3. Shareholders or Members • book value
• stockholder's equity
Owners of a corporations are commonly called • equity
"stockholders" or "shareholders".
Elements of Shareholders' Equity
Their ownership is evidenced by acquiring shares in a
stock corporation either by subscription, or by direct The presentation of the elements in the current practice
purchase or by transfer of a stock from another includes three (3) subsections of the equity section of
stockholder. the statement of financial position:

A "member" refers to a corporators of a non-stock 1. Total Share Capital

corporation.
• Share Capital (Capital Stock)
A shareholder may be a natural person or an artificial
• Subscribed Share Capital
person.
• Subscription receivable - generally treated
Rights of Shareholders as a deduction from subscribed share
capital or part of current assets if due
1. Right to Vote - Vote by himself or by proxy at all within a year.
meetings of the corporation • Treasury Shares - deduction from total
shareholders' equity
2. Right to profit - receive his proportionate share from
the corporate profits

3. Right to inspect - inspect corporate books and

2. Other Reserves
records

4. Right to financial statements - request financial • Appropriation reserve (retained earnings

statements and reports appropriated)
• Additional paid-in capital (APIC)
5. Right to corporate assets - participate in the o Share premium (APIC on excess
distribution of corporate assets in case of dissolution over par or stated value ; APIC
on treasury shares)
o Donated Capital
4. Subscribers o Equity share option issued
• Revaluation surplus
Those who have made an agreement with the corporation
to buy the corporate capital stock at future payments.

A subscriber who does not pay his subscriptions at the *Share Capital & Other Reserves represent total
date agreed upon may be declared delinquent by the
contributions made by the shareholders.
BOD, and loses his rights as provided above.

Note:
3. Accumulated Profits (Retained Earnings) This represents issued shares reacquired by the issuing
corporation which is treated as a reduction from the
Represents accumulated profit earned or losses incurred
total shareholders' equity.
in the operation of the business.
Issued Shares - fully paid shares wherein a stock
certificate is issued to the shareholder.
13.2 Share Capital
Outstanding Shares - total issued shares less those in
The share capital subsection of shareholders' equity the treasury. The shares still in the hands of
consists of the following elements shareholders
1. Share Capital

This refers to the paid-in capital representing the

The first section of the shareholders' equity will appear
amount of the total par or stated value of the shares
as follows for par value shares
issued. It represents the portion of authorized share
capital that has been fully paid

The Share Capital may be Par Value or No Par Value

share but with Stated Value

1.1 Par Value

The fixed amount assigned to each equity share.

This also refers to a nominal peso amount assigned to

each equity share by the company's charter. It is the Major Classifications of Share Capital
face value of the shares appearing on the certificate
A corporation may be authorized to issue two classes of
share capital which must be accounted separately for
each class:
*In the Philippines, issuing the shares of stock at an
amount below par value is prohibited 1. Ordinary Share (Common Stock)

Represents basic interest of ownership in a corporation.

When a corporation issues only one class of stock,
1.1 No Par Value , Stated Value therefor, the stock must be an ordinary share.

A Stated Value is when a company's charter contains no Shareholders holding ordinary shares are called "ordinary
par value stock, its BOD can arbitrarily select an amount shareholders" because they receive the same privilege's
for its stock when issued. and rights.

A stated value serves the same purpose as par value but They assume greater risk but exercise greater control in
is not printed in the share certificate the corporation, and may receive greater reward in the
form of dividends and capital appreciation.
The issued price of no par shares may vary (usually the
book value), but they may not be issued for a values less An ordinary shareholder has the right to vote and be
than P5.00 per share voted upon as a board of director.

*The primary advantage of a no par stock is that it may

be issued at any price without having a discount
liability attached 2. Preference Share (Preferred Stock)

A separate class of corporate shares accorded by the

corporate by-laws. A preference share has a preference
2. Subscribed share capital (subscribed capital stock) with respect to dividends and/or assets over ordinary
shares.
The portion of the share capital that an investor agreed
to purchase. This portion of share capital is not yet The preference dividends have a fixed dividend
issued because it may only be partially paid. percentage based on its par value (for example, 10%
preference share). Accordingly, the law provides that
preference shares may only be issued only with a stated
3. Subscription Receivable par value.

The unpaid portion of the subscribed share capital. Preference as to Dividends

This claim is usually treated as a deduction from the A preference share is given first priority over ordinary
subscribed scare capital, except when collectible within shares with respect to dividend distribution
one (1) year, which may be classified as part of the
Preference as to Assets
current assets
In case of corporate liquidation, preference shareholders
are given preference over the residual assets of the
4.Treasury Share corporation.
NOTES: 2. Bonus stock (Stock warrant)

*Despite this preferential treatment, preference Equity share given as a premium in connection with, or
shareholders generally have no voting rights in the to encourage, the sale of another class of securities.
corporation, hence they cannot be voted into office as
Ex. equity shares issued to the purchasers of bonds as
members of the BOD.
an inducement to them to purchase bonds or loan money
**A corporation is not authorized to issue preference
3. Promotion Stock
share alone, but it can issue ordinary share even without
a preference share. Equity share usually issued as incentive or payment to
those who take the preliminary steps to the organization
*** When there are two classes of corporation's
authorized share capital, each class should be accounted of a corporation
separately by a memorandum entry upon authorization 4. Donated Stock

Securities given to a corporation by its own shareholders

commonly for resale.
Classification of Preference Share Capital

5. Watered Stock
A Corporation may issue several classes of preference
shares as follows: An equity share that is issued by a corporation as fully-
1. Cumulative Preference Shares paid share capital, when in fact the whole amount of the
par value has not been paid, as a result of overstated of
The right of preferred shareholders to receive dividends the value of consideration received.
in arrears (undeclared dividend in previous years) is
13.3 Accounting for Share Capital Transactions
protected and given priority before any payment of
dividend is made to common shareholders.
Accounting for Shares of Stocks
2. Noncumulative Preference Shares

The right of preferred shareholders to receive dividends

The transactions involving the shares of stock are as
in arrears is lost. Only entitled to receive the current follows:
year's declared dividend. 1. Authorization

3. Participating Preference Shares This involves the recording of the maximum number of
shares a corporation is authorized to issue as stated in
The preferred shareholders are entitled to
the articles of incorporation upon approval by
receive additional dividend after the dividend for both
the Securities and Exchange Commission(SEC).
ordinary and preferred shares are paid
Accordingly, the maximum number of share multiplied by
4. Nonparticipating Preference Shares
the par value per share is called Authorized Share
The preferred shareholders are NOT entitled to Capital or Authorized Capital Stock.
receive additional dividends, only to receive dividends
Whenever a corporation increase or decrease its
that are declared during the current year. Any excess
authorized share capital, it would need to amend its
dividends are all distributed to ordinary shareholders
corporate articles which will subsequently need the
5. Convertible Preference Shares approval from the SEC

The preferred shareholders are given the option to 2. Share Subscription

convert the preference share into ordinary shares or
A Share Subscription is a written contract by which one
some other securities of the investee corporation.
engages to take and pay for the share capital of a
6. Redeemable or Callable Preference Shares corporation at some future date.

The issued preference shares can be bought back (call or A Subscriber enters into a contract to buy a number of
redeem) by the issuing corporation with a specific call or shares.
redemption price
A down payment is usually required with the balance
payable on fixed dates or upon call by the BOD,
however, A corporation cannot issue its share capital if
Other Classifications of Share Capital
its is not yet fully paid.
The ordinary shares and/or preference shares can be The shares are called Subscribed Share Capital
further be classified according to the purpose for which
they are issued or acquired. They may be classified as: 3. Sale

1. Founders' stock When a shareholder buys and pays immediately in full,

the shares are considered sold and a stock certificate is
Equity share given to the incorporators with certain issued.
privileges on dividends and voting rights not enjoyed by
ordinary corporators such as voting rights and rights to The shares are called Share Capital.
be elected as an officer. The founders' stocks are subject
4. Collection of Subscription
to SEC approval and its exercise is limited only to five
(5) years.
The subscription may be paid by the shareholders in • Unpaid liabilities of the issuing
cash, or non-cash consideration* corporation

5. Issuance of Certificate
If it is an exchange of liability, the basis value of share
Once the subscription is collected in full, a certificate is capital is the amount of liability set off
issued

*Share Certificate - also known as stock certificate, is 14.0 Subsequent Share Capital Transactions
an evidence of the shareholder's ownership interest in
profit corporation.
This refers to the equity shares owned by the issuing
**It is the investee corporation's acknowledgement of corporation that has been issued and then
the shareholders' right to participate (through voting reacquired but not cancelled
rights) in the company's general management and to
"Also included in the equity section of the statement of
share proportionately in corporate profits or assets in
financial position are treasury share representing issued
case of dissolution.
shares reacquired by the issuer. These are generally
6. Reacquisition of Shares stated at their cost of acquisition and as a reduction of
shareholders' equity."
The issuing corporation may reacquire (purchase or
redeem) the shares of stock which were originally issued When a company reacquired its own shares and these
with the intention of either reselling or retiring these shares are not cancelled, the accumulated profits must
shares in the near future. be appropriated equivalent to the cost of the said shares
(treasury shares/stock)
These are called Treasury Shares.
The law provides that treasury shares shall have no
7. Retirement voting rights as long as such equity shares remain in
the Treasury. For this reason, treasury shares are not
This involves accounting for the acquisition and
entitled to receive dividend.
retirement of the corporation's owned share capital
Treasury shares do not affect the number of issued
shares, but they reduce the number of outstanding
Issuance of Share Capital for Noncash Consideration shares. They are deducted from the total amount of
share capital contribution.
A non-cash consideration may refer to the value received
other than cash. For Example
Sources of Treasury Shares
• Tangible or Intangible property
The following share capital transactions are the sources
If issued for tangible or intangible property, the value of of treasury shares:
share capital is equal to values according to the
1. Repurchase of own shares but not cancelled
following order of priority:
2. Delinquent subscription without a highest bidder
1. Fair Market Value of the property Received
assumed by the corporation
2. Fair Market Value of the share capital issued
3. Corporate own shares donated by the shareholder to
3. Par Value of the share capital issued the company itself.

• Service received
Accounting for Treasury Shares
If issued for services received, the value of share capital
is equal to values according to the following order of Treasury share is accounted for at cost, irrespective of
priority: the par value, stated value or market value of the share
capital acquired.
1. Fair Market Value of the Services Received
This means that treasury shares are recorded based on
2. Fair Market Value of the share capital issued the actual consideration given by the acquiring
corporation, regardless of whether the share is acquired
3. Par Value of the share capital issued
below or above the par or stated value

• Equity share issued by other corporation The accounting for treasury shares involves the
following transactions:
If issued in consideration for equity shares owned by
other corporation, the value of share capital is equal to 1. Acquisition
values according to the following order of priority:
2. Reissuance
1. Fair Market Value of the equity shares Received
3. Retirement
2. Fair Market Value of the share capital issued

3. Par Value of the share capital issued

Acquisition
When a company buys back its own shares, it decreases loss shall be absorbed by the following accounts in the
the number of shares outstanding, while simultaneously following order of priority:
increasing the amount of treasury stock it owns
a. Share premium (APIC) in excess of par to the extent
The par value and the market value of the shares of the credit when the share capital was originally
acquired are not considered in recording the value of the issued
treasury shares.
b. Share premium, APIC from treasury shares
The accumulated profits are immediately appropriated
to the extent of the cost of treasury shares acquired.
c. Accumulated Profits

Example:
2. When treasury shares are retired resulting in
a "gain" (par value of treasury exceeds its cost), the
ALPHA COMPANY acquired 1,000 shares of its excess is credited to the share premium, APIC from
previously issued share capital for a total cost of treasury shares.
P65,000. The market value of the shares of stock at the
time of purchased is P70 per share.
3. The accounting methods for treasury shares with
stated value (NO PAR) are the same as those for
The journal entry to record the acquisition of treasury treasury share with par value.
shares is:

A) Treasury
Shares P 65,000
Cash
P 65,000
Acquisition of company's own equity shares previously
issued

B) Accumulated
Profits P 65,000

Appropriate reserve for treasury

shares P 65,000
Appropriate for treasury shares

Reissuance

When a company reissued the reacquired shares

(treasury shares) to outside investors. There are three
(3) ways to reissue treasury shares;

1. Reissuance of Treasury Shares at Cost

2. Reissuance of Treasury Shares above Cost

3. Reissuance of Treasury Shares below Cost

Notes:

1. When treasury share is issued below cost, the

deficiency ("loss" on sale of treasury shares) shall be
absorbed by the following accounts in the following
order of priority:

a. Share premium (APIC) from treasury share of the

same class of share capital if any (to the extent of the
APIC balance)

b. Accumulated Profits

2. The share premium (APIC) from excess over par is

not used to absorb the "loss" on sale of treasury
shares, even if the APIC from treasury shares were
exhausted. Instead, the accumulated profits are
charged to absorbed the remaining "loss" of P9,000

Retirement of Treasury Shares

Notes:

1. When treasury share are retired resulting in a "loss"

( the cost of the treasury exceeds its par value, the