Week 17-18: Unit Learning Outcomes (ULO): At the end of the unit, you are expected

to

a. Identify and analyze the basic consideration, the component and

characteristics of corporation business;

Big Picture in Focus: ULOa. Identify and analyze the basic consideration
and the component and characteristics of corporation business;

Metalanguage
For you to demonstrate ULOa, you will need operational understanding of the terms
enumerated below.

Corporation in the largest and the most complex type of business organization

Shareholders are the owner of corporation

Share Capital is the ownership held by the shareholders evidenced by a share

certificate.

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes), you need to fully
understand the following essential knowledge laid down in the succeeding pages. Please
note that you are not limited to exclusively refer to these resources. Thus, you are
expected to utilize other books, research articles and other resources that are available
in the university’s library e.g. ebrary, search.proquest.com etc., and even online tutorial
websites.

1. CORPORATION

Corporation is an artificial being created by operation of law, having the right of

succession and the powers, attributes, and properties expressly authorized by law or
incidental to its existence.

Any person, partnership, association or corporation, singly or jointly with others but not
more than fifteen (15) in number, may organize a corporation for any lawful purpose or
purposes.
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

No corporate name shall be allowed by the Commission if it is not distinguishable from

that already reserved or registered for the use if another corporation, or if such name is
already protected by law, rules and regulations.
A name is not distinguishable even if it contains one or more of the following:
a. The word "corporation", "company", incorporated", "limited", "limited liability",
or an abbreviation of one if such words; and
b. Punctuations, articles, conjunctions, contractions, prepositions, abbreviations,
different tenses, spacing, or number of the same word or phrase.

The Commission may summarily order the corporation to immediately cease and desist
from using such name and require the corporation to register a new one, upon
determination that the corporate name is:
(1) not distinguishable from a name already reserved or registered for the use of
another corporation;
(2) already protected by law; or
(3) contrary to law, rules and regulations,

The Commission shall also cause the removal of all visible signages, marks,
advertisements, labels prints and other effects bearing such corporate name. Upon the
approval of the new corporate name, the Commission shall issue a certificate of
incorporation under the amended name.

The corporation can be operative at the date the certificate of incorporation is granted to
them but if a corporation does not formally organize and commence its business within
five (5) year from the date of its incorporation, its certificate of incorporation shall be
deemed revoked as of the day following the end of the five (5)-year period.

However, if a corporation has commence its business but subsequently becomes

inoperative for a period of at least five (5) consecutive years, the Commission may, after
due notice and hearing, place the corporation under delinquent status.

A delinquent corporation shall have a period of two (2) years to resume operations and
comply with all requirements that the Commission shall prescribed. Upon the compliance
by the corporation, the Commission shall issue an order lifting the delinquent status.
Failure to comply with the requirements and resume operations within the period given
by the Commission shall cause the revocation of the corporation's certificate of
incorporation.

The Commission shall give reasonable notice to, and coordinate with the appropriate
regulatory agency prior to the suspension or revocation of the certificate of incorporation
of companies under their special regulatory jurisdiction.

Attributes of a Corporation
Artificial being. The personality is separate and apart from its individual shareholders or
members.

Created by Operation of Law. This requires special authority or grant from the state.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Right of Succession. The capacity of the corporation to continued existence subject to

the period in the articles of incorporation.

It has power, attributes and properties expressly authorized by law or incident to

its existence.

Advantages
The corporate has legal capacity to act as a legal entity
Shareholders have limited liability and it has continuity of existence
Transferability of share certificate
Centralized management and the shareholders are not general agents of the business
Greater ability to acquire funds.

Disadvantages
Complications in formation and greater government control and operation
High cost of formation and operation
Heavier taxation and the minority are subservient to the wishes of majority
Transferability of shares uniting of incompatible and conflicting elements to one venture.

Information Provided in the Articles of Incorporation

a. The name of corporation;
b. The specific purpose or purposes for which the corporation is being formed.
Where a corporation has more than one stated purpose, the articles of
incorporation shall indicate the primary purpose and the secondary purpose or
purposes: Provided, That a nonstock corporation may not include a purpose
which would change or contradict its nature as such;
c. The place where the principal office of the corporation is to be located, which
must be within the Philippines;
d. The term for which the corporation is to exist, if the corporation has not elected
perpetual existence;
e. The names, nationalities, and residence addresses of the incorporators;
f. The number of directors, which shall not be more than fifteen (15) or the
number of trustees which may be more than fifteen (15);
g. The names, nationalities, and residence addresses of persons who shall act
as directors or trustees until the first regular directors or trustees are duly
elected and qualified in accordance with this Code;
h. If it be a stock corporation, the amount of its authorized capital stock, number
of shares into which it is divided, the par value of each, names, nationalities,
and subscribers, amount subscribed and paid by each on the subscription, and
a statement that some or all of the shares are without par value, if applicable;
i. If it be a nonstock corporation, the amount of its capital, the names,
nationalities, and residence addresses of the contributors, and amount
contributed by each; and
j. Such other matters consistent with law and which the incorporators may deem
necessary and convenient.

Information Provided in the By-Laws

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

a. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
b. The time and manner of calling and conducting regular or special meetings
and mode of notifying the stockholders or members thereof;
c. The required quorum in meetings of stockholders or members and the manner
of voting therein;
d. The modes by which a stockholder, member, director or trustees may attend
meetings and cast their votes;
e. The form for proxies of stockholders and members and the manner of voting
them;
f. The directors' or trustees' qualifications, duties and responsibilities, the
guidelines for setting the compensation of directors or trustees and officers,
and the maximum number of other board representations that an independent
director or trustee may have which shall, in no case, be more than the number
prescribed by the Commission;
g. The time for holding the annual election of directors or trustees and the mode
or manner of giving notice thereof;
h. The manner of election or appointment and the term of officers other than
directors or trustees;
i. The penalties for violation of the bylaws;
j. In the case of stock corporations, the manner of issuing stock certificates; and
k. Such other matters as may be necessary for the proper or convenient
transaction of its corporate affairs for the promotion of good governance and
anti-graft and corruption measures.

Power of a Corporation
a. To sue and be sued in its corporate name;
b. To have perpetual existence unless the certificate of incorporation provides
otherwise;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation in accordance with the provisions of this
Code;
e. To adopt bylaws, not contrary to law, morals or public policy, and to amend or
repeal the same in accordance with this Code;
f. In case of stock corporations, to issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a nonstock corporation;
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the constitution;
h. To enter into a partnership, joint venture, merger, consolidation, or any other
commercial agreement with natural and juridical persons;
i. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no foreign corporation shall give donations in aid of
any political party or candidate or for purpose s of partisan political activity;

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

j. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers, and employees; and
k. To exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in the articles of incorporation.

Classes of Corporation
Corporation has 2 major classes the stock and non-stock. Stock corporations are those
which have capital stock 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. All other corporations are non-stock corporations, one where no part of its income
is distributable as dividends to its members, trustees, or officers.

Non-stock corporations are for charitable, religious, educational, professional, cultural,

fraternal, literary, scientific, social, civic service, or similar purposes, like trade industry,
agricultural and like chambers, or any combination thereof.

One Person Corporation is a corporation with a single stockholder: Provided, That only a
natural person, trust, or an estate may form a One Person Corporation. This is not be
required to have a minimum authorized capital stock

Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies,
and non-chartered government-owned and -controlled corporations may not incorporate
as One Person. Provided, that a natural person who is licensed to exercise a profession
may not organize as a One Person Corporation for the purpose of exercising such
profession except as otherwise provided under special laws.

De facto Corporations is a due incorporation of any corporation claiming in good faith to

be a corporation under this Code, and its right to exercise corporate powers, shall not be
required into collaterally in any private suit to which such corporation may be a party.
Such inquiry may be made by the Solicitor General in a quo warranto proceeding

Corporation by Estoppel is when all persons who assume to act as a corporation knowing
it to be without the authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof

A close corporation, within the meaning of this Code, is one whose articles of
incorporation provides that: (a) all the corporation's issued stock of all classes, exclusive
of treasury shares, shall be held of record by not more than a specified number of
persons, not exceeding twenty (20); (b) all the issued stock of all classes shall be subject
to one (1) or more specified restrictions on transfer permitted by this Title; and (c) the
corporation shall not list in any stock exchange or make any public offering of its stocks
of any class. Nothwithstanding the foregoing, a corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or
controlled by another corporation which is not a close corporation within the meaning of
this Code.
Any corporation may be incorporated as a close corporation, except mining or oil
companies, stock exchanges, banks, insurance companies, public utilities, educational
institutions and corporations declared to be vested with public interest in accordance with
the provisions of this Code.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

The provisions of this Title shall primarily govern close corporations: Provided, That other
Titles shall primarily govern close corporations: Provided, That other Titles in this Code
shall apply suppletorily, except as otherwise provided under this Title.
Education corporations shall be governed by special laws and by the general provisions
of this Code. Trustees of educational institutions organized as nonstock corporations shall
not be less than five (5) nor more than fifteen (15): Provided, That the number of trustees
shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation or bylaws, the board of trustees
of incorporated schools, colleges, or other institutions of learning shall, as soon as
organized, so classify themselves that the term of office of one-fifth (1/5) of their number
shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the
expiration of a particular term shall hold office only for the unexpired period. Trustees
elected thereafter to fill vacancies caused by expiration of term shall hold office for five
(5) years. A majority of the trustees shall constitute a quorum for the transaction of
business. The powers and authority of trustees shall be defined in the bylaws.
Religious corporations may be incorporated by one (1) or more persons. Such
corporations may be classified into corporation sole and religious societies.
Religious corporations shall be governed by this Chapter and by the general provisions
on nonstock corporations insofar as applicable.
Corporation sole is for the purpose of administering and managing, as trustee, the affairs,
property and temporalities of any religious denomination, sect or church, a corporation
sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or other
presiding elder of such religious denomination, sect or church.
Religious Societies can be in a form of corporation unless forbidden by the competent
authority, the Constitution, pertinent, rules, regulations, or discipline of the religious
denomination, sect or church of which it is part, any religious society, religious order,
diocese, or synod, or district organization of any religious denomination, sect or church,
may, upon written consent and/or by an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership, incorporate for the administration
of its temporalities or for the management of its affairs, properties, and estate by filing the
management of its affairs, properties, and estate by filing with the Commission, articles
of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other
member of such religious society or religious denomination, sect or church

Components of a Corporation
Corporators are those who compose a corporation, whether as stockholders or
shareholders in a stock corporation is not be required to have minimum capital stock or
as a members in a non-stock corporations.

Incorporators are those stockholders or members mentioned in the articles of

incorporation as originally forming and composing the corporation and who are
signatories thereof.

Shareholders owner of a share in an stock corporation

Member is the owner of a nonstock corporation

Subscribers are those person who agreed to pay the share in the future time.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Promoters are people who bring about the formation and organization of the corporation

Underwriters are usually investment bankers that are partners in selling stocks to buyers.

Independent director is a director of the corporation that will protect the owner from any
unnecessary act of the other directors.

Rights of shareholders
Rights of the shareholders to
1. Receive certificate of stock
2. Attend, vote in person or by proxy at shareholders meeting
3. Elect and remove directors
4. Adopt. Amend or repeal by-laws
5. Pre-emptive right
6. Receive dividends when declared
7. Inspect corporate books
8. Right to participate upon dissolution

Holders of nonvoting shares shall nevertheless be entitled to vote on the following

matters;
a. Amendment of the articles of incorporation;
b. Adoption and amendment of bylaws;
c. Sale, lease, echange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property;
d. Incurring, creating, or increasing bonded indebtedness;
e. Increase or decrease of authorized capital stock;
f. Merger or consolidation of the corporation with another corporation or other
corporations;
g. Investment of corporate funds in another corporation or business in
accordance with this Code; and
h. Dissolution of the corporation.

Types of Shares
Par Value share. Share that has minimum issue price
No-par Value Share. Share without minimum issue price
Minimum Stated Value Share. A no-par share that has no stated price and the minimum
issue price of this share is P 5.00.
Voting and Nonvoting Share. Shares that has the right to vote and no write to vote,
respectively
Ordinary and Preference Share. Share that has voting right and share that has
privileges over other shares, respectively but preference share had no voting right.
Promotion Share. A share given as fee for promoters.
Treasury Share. A buy back share of the corporation.
Convertible Share. Share that has capacity to be converted.
Redeemable Share. Share which may be purchased by the corporation from the holders
of such shares upon the expiration of a fixed period.

The Business Structure

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

The shareholder/members votes to elect board of directors/trustees. The board of

directors/trustees will elect officers. Officers will hire employees

The president of the corporation must be a director and hire a secretary and treasurer as
he cannot act as treasurer or secretary.

The Corporate Books and Records

1. Minutes Book for minutes of directors and shareholders meeting.
2. Stocks and transfer book for transfer of stocks that are fully paid or unpaid
by shareholders.
3. Books of accounts for recording all business or corporate transactions
4. Subscription book for printed blank subscriptions
5. Shareholder’s ledger for number of issued shares
6. Subscriber’s Ledger for subscription
7. Stock Certificate book for blank printed certificates

2. SHARE CAPITAL

Share that are subscribed, pain in or secured by the shareholders. This are divided into
the following:

Legal Capital is the contributed capital by shareholders. In the case of par value shares,
the aggregate par value of all issued and subscribed share but in the case of no par share
all the consideration received.

Share Premium is the excess of the total consideration receive from the par value.

Authorized Share Capital the maximum number of share a corporation can issue as
specified in the articles of incorporation.

Issued Share Capital are those capital that are sold and paid may be in the hands of the
shareholders or in the corporation itself.

Subscribed Share Capital share that are authorized but are still not fully paid.

Outstanding Share Capital are those capital that sold and paid

Treasury Share are those capital that are sold and paid but it is in the hands of the
corporation.

Consideration for the issuance of stock may be:

a. Actual cash paid to the corporation;
b. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock issued;
c. Labor performed for or services actually rendered to the corporation;
d. Previously incurred indebtedness of the corporation;
e. Amounts transferred from unrestricted retained earnings to stated capital;

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

f. Outstanding shares exchanged for stocks in the event of reclassification or

conversion;
g. Shares of stock in another corporation; and/or
h. Other generally accepted form of consideration.

Issuance of Share Capital

Cash at Par
Suppose that the share had par value of 100 per share and sold 20,000 shares.
Cash 2,000,000
Ordinary Shares 2,000,000

Cash above Par

Suppose that the share had par value of 100 per share and sold 20,000 shares for 150
per share.
Cash 3,000,000
Ordinary Shares 2,000,000
Share Premium-OS 1,000,000

Cash No-Par
Suppose sold 20,000 shares for 800,000.
Cash 800,000
Ordinary Shares 800,000

Cash No-Par with stated value

Suppose sold 20,000 shares for 800,000. The stated value is P 20/share.
Generally,
Cash 800,000
Ordinary Shares 800,000
Alternatively,
Cash 800,000
Ordinary Shares 400,000
Share Premium-OS 400,000

Subscription is any contract for the acquisition of unissued stock in an existing corporation
or a corporation still to be formed shall be deemed a subscription within the meaning of
this Title, notwithstanding the fact that the parties refer to it as a purchase or some other
contract.

Suppose that Ana subscribed 1,000 shares at P 120.00 per shares with par value of 80.00
per share.
Subscription Receivables 120,000
Subscribed Share Capital 80,000
Share Premium-OS 40,000

Paid 40% of the subscription

Cash 48,000
Subscription Receivables 48,000

Paid the remaining balance

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Cash 72,000
Subscription Receivables 72,000

Subscribed Share Capital 80,000

Ordinary Shares 80,000

A subscription of shares in a corporation till to be formed shall be irrevocable for a period

of at least six (6) months from the date of subscription, unless all of the other subscribers
consent to the revocation, or the corporation fails to incorporate within the same period
or within a longer period stipulated in the contract of subscription. No pre-incorporation is
submitted to the Commission. A holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder.

The board of directors may, by resolution, order the sale of delinquent stock and shall
specifically state the amount due on each subscription plus all accrued interest, and the
date, time and place of the sale which shall not be less than thirty (30) days nor more
than sixty (60) days from the date the stock become delinquent.

Suppose that Ana after paying the 40% could not pay the remaining subscription
anymore. The subscription now are call by the board of directors at due date. Thus, the
share become delinquent. The 1,000 share of Ana will now be in auction and waiting for
the person who will pay the full amount plus interest and cost of advertisement for a
smallest number of shares. Known as the “Highest Bidder”. The subscription is 72,000,
the interest is 15,000 and the expenses is 11,000.

Suppose that Jose will pay the full amount of 98,000 at a 650 shares
Juan will the also the full amount at 630 shares
Maria will also pay the full amount at 680 shares

In this situation the highest bidder is Juan

Receivable from Highest Bidder 15,000

Interest Revenue 15,000

Receivable from Highest Bidder 11,000

Cash 11,000

Cash 98,000
Receivable form Highest Bidder 26,000
Subscription Receivable 72,000

Subscribed Share Capital 80,000

Ordinary Share 80,000

If the corporation will not see any bidder then the corporation will buy back the shares
Treasury Stock 72,000
Receivable from Highest Bidder 26,000
Subscription Receivables 46,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Notice of the salem, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally, by registered mail, or through other means provided in the
bylaws. The same shall be published once a week for two (2) consecutive weeks in
newspaper of general circulation in the province or city where the principal office of the
corporation is located.

Unless the delinquent stockholder pays to the corporation, o or before the date specified
for the sale of the delinquent stock, the balance due on the former's subscription, plus
accrued interest, costs of advertisement and expenses of sale, or unless the board of
directors otherwise orders, said delinquent stock shall be sold at a public auction to such
bidder who shall offer to pay the full amount of the balance on the subscription together
with accrued interest, costs of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share. The stock so purchased shall be transferred to
such purchaser in the books of the corporation and a certificate for such stock shall be
issued in the purchaser's favor. The remaining shares, if any, shall be credited in favor of
the delinquent stockholder who shall likewise be entitled to the issuance of a certificate
of stock covering such shares.

Should there be no bidder at the public auction who offers to pay the full amount of the
balance on the subscription together with accrued interest, costs of advertisement, and
expenses of sale, for the smallest number of shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid for the same, and the total amount due
shall be credited as fully paid in the books of the corporation. Title to all the shares of
stock covered by the subscription shall be vested in the corporation as treasury shares
and may be disposed of by said corporation in accordance with the provisions of this
Code.

No delinquent stock shall be voted for, be entitled to vote, or be represented at any

stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance with the provisions of this Code,
until and unless payment is made by the holder of such delinquent stock for the amount
due on the distribution with accrued interest, and the costs and expenses of
advertisement, if any.

Treasury Stocks
Suppose that the company repurchase its 10,000 share from shareholders at 150 per
share and the par value of the share is 80.00 and originally issued at 120.00.

Repurchase Entry:
Treasury Stock 1,500,000
Cash 1,500,000

Reissuance at cost of 2,000 shares at 150/share

Cash 300,000
Treasury Stock 300,000

Reissuance above cost of 3,000 shares at 200/share

Cash 600,000
Treasury Stock 450,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Share Premium-Treasury Stock 150,000

Reissuance below cost of 4,000 shares at 100/share

Cash 400,000
Share Premium- Treasury Stock 150,000
Retained Earnings 50,000
Treasury Stock 600,000

Remember: the difference will be first attributed to the Share Premium-Treasury Stock
previously recognize up to its balance and if this is not enough then the remaining loss
after deducting the Share Premium-TS will be directly recognized in the Retained
Earnings. Thus, the loss in this problem is 200,000 but there is 150,000 balance of Share
Premium-Treasury Stock (SP-TS) that’s why only 50,000 is recognized in the Retained
Earnings (RE).

If the balance of the SP-TS is Zero (0), then the loss shall be recognized directly to the
RE, then the entry would be:
Cash 400,000
Retained Earnings 200,000
Treasury Stock 600,000

Retirement of Treasury Stock

Suppose that all of the 10,000 share from shareholders with par value of the share is
80.00 and originally issued at 120.00 was retired.

Retired with gain purchased at 60.00

Ordinary Share 80,000
Share Premium 20,000
Treasury Stock 60,000

Retired with Loss purchased at 150.00/share

Ordinary share 80,000
Share Premium-OS 40,000
Share Premium-TS 0
Retained Earnings 30,000
Treasury Stock 150,000

Reminder: the loss on retirement shall be absorbed by the following accounts

1. Share premium original issuance
2. Share premium from treasury share issuance
3. Retained Earnings.

3. RETAINED EARNINGS AND DIVIDENDS

The board of directors of a stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, property, or in stock to all stockholders
on the basis of outstanding stock held by them: Provided, That any cash dividends due
on delinquent stock shall be first be applied to the unpaid balance on the subscription

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

plus costs and expenses, while stock holders until their unpaid subscription is fully
paid: Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing at least two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose.

Stock corporations are prohibited from restraining surplus profits in excess of one
hundred percent (100%} of their paid-in capital stock, except: (a) when justified by the
definite corporate expansion projects or programs approved by the board of directors; or
(b) when the corporation is prohibited under any loan agreement with financial institutions
or creditors, whether local or foreign, from declaring dividends without their consent, and
such consent has not yet been secured; or (c) when it can be clearly shown that such
retention is necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies.

Cash Dividends is a dividend in cash. This is a majority of dividends declared by the

corporation but in declaring the dividends the company must insure that they have
sufficient and appropriate amount of retained earnings and cash.

The Three (3) important dates relative to dividends declaration and payments are the
following:

Date of Declaration is the date that the company recognizes obligation from the dividends
The entry would be:
Retained Earnings XXXXXX
Cash Dividend Payable XXXXXX

Date of Record the date that considers the cut off for shareholders to receive dividends
no entry required.

Date of Payment is the date of settling al the liabilities related to dividends of the company.
The entry would be:
Cash Dividend Payables XXXXXX
Cash XXXXXX

The issued share, fully paid and all subscribed par value shares are all entitled to
dividends of the company declared. No-par value share are considered as legally issued
only when fully paid. Thus, No-par subscribed share, unissued share and treasury shares
are not entitled to dividends.

Illustration:
The PPJ Corporation declares P 2.00/share cash dividends for the 300,000 outstanding
shares and 20,000 subscribed shares. The par value of the shares are P 50.00/share on
March 1, 2020. Recorded of March 20, 2020 and paid on April 10, 2020. The company
had sufficient cash and retained earnings for this dividends.

Journal Entry on March 1, 2020: This is the date of declaration.

Retained Earnings 640,000
Cash Dividends Payable 640,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

March 20, 2020: This is date of record.

=NO ENTRY=
Journal Entry of April 10, 2020: This is the date of payment.
Cash Dividends Payable 640,000
Cash 640,000

Share Dividends is the dividends that are distributed to the shareholders that are in a
form of shares. In this, the share that are to be distributed are the shares of the corporation
itself. This does not involve a transfer of assets. This increases the total share capital and
decreases the retained earnings.

Small Share Dividends are share dividends that are less than 20% additional shares will
be distributed to shareholders. The amount recorded shall be based on the fair market
value of the shares being declared. Thus, the difference between the fair value and the
par value shall be recognized as part of the share premium.

Illustration:
PPJ Corporation declares 15% share dividends of the total 300,000 outstanding shares.
The par value of the shares are P 50.00/share on March 1, 2020. The fair value of the
share is 55.00/share. Recorded of March 20, 2020 and paid on April 10, 2020.

Journal Entry on March 1, 2020: This is the date of declaration.

Retained Earnings 2,475,000
Share Distributable 2,250,000
Share Premium 225,000

March 20, 2020: This is date of record.

=NO ENTRY=

Journal Entry of April 10, 2020: This is the date of distribution.

Share Distributable 640,000
Ordinary Shares 640,000

Large Share Dividends are share dividends that are more than 20% additional shares are
distributed to the shareholders. The amount recorded shall be based on the par value of
the share.

Illustration:
PPJ Corporation declares 25% share dividends of the total 300,000 outstanding shares.
The par value of the shares are P 50.00/share on March 1, 2020. The fair value of the
share is 55.00/share. Recorded of March 20, 2020 and paid on April 10, 2020.

Journal Entry on March 1, 2020: This is the date of declaration.

Retained Earnings 3,750,000
Share Distributable (300,000*.25*50) 3,750,000

March 20, 2020: This is date of record.

=NO ENTRY=

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Journal Entry of April 10, 2020: This is the date of distribution.

Share Distributable 3,750,000
Ordinary Shares 3,750,000

Self-Help: You can also refer to the sources below to help you
further understand the lesson.

You can also refer to the sources below to help you further understand the
lesson:
Ballada, W. and Ballada, S. (2018). Basic finacial accounting and repoting (21st
ed.). Manila: DomDane Publishers.
Ballada, W .and Ballada, S. (2015). Basic accounting: made easy (2015 ed.).
Manila: DomDane Publishers.
Lopez, R. M. (2016). Basic accounting for non-accountants: simplified
approach.(2016 ed., Vol. 1). Ma-a, Davao City: MS Lopez Printing & Pub.

Note:

The content of this manual is based on the textbook for ACC 111 titled “Basic Financial
Accounting and Reporting” by Ballada, Win, CPA, CBE, MBA and Ballada, Susan, CPA

Let’s Check!
I. Questions:
1. What is corporation?
________________________________________________________
________________________________________________________
________________________________________________________

2. What share capital?

________________________________________________________
________________________________________________________
________________________________________________________

3. What is shareholder’s equity and what are the elements?

________________________________________________________
________________________________________________________
________________________________________________________

4. What is retained Earnings?

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

________________________________________________________
________________________________________________________
________________________________________________________
5. What is dividends and the types of dividends?
________________________________________________________
________________________________________________________
________________________________________________________

6. What are the types of dividends?

________________________________________________________
________________________________________________________
________________________________________________________

II. True or False

1. Incorporators can be artificial being.
2. A de jure corporation is a corporation is a corporation existing in fact and in
law.
3. A corporation or a partnership can be an incorporator but not a corporator.
4. The president of a corporation must be a director of the corporation.
5. Shares of stocks cannot be transferred without the consent of the other
shareholders.
6. Shareholders may be natural or juridical persons.
7. Any individual shareholder in a corporation may personally be held liable for
all debts incurred by the corporation.
8. A corporation can be held liable for personal indebtedness of a shareholders.
9. A corporation is an artificial being with personality separate and apart from its
individual shareholders or members.
10. A corporation can come into existence by mere agreement of the parties as in
the case of partnership.

III. Multiple choice

1. When organizing a corporation, the incorporators submit articles of
incorporation to,
a. a judge
b. the Securities and Exchange Commission
c. The National Bureau of Investigation
d. The Board of Investments.
2. The ordinary shares carry all the following rights except the right to
a. share in profits
b. receive information about the corporation
c. receive part of the profit before other classes of shares
d. attend the annual shareholders’ meeting
3. The top governing body of a corporation is known as the
a. Incorporators c. Shareholders
b. management d. Board of Directors
4. Corporate officers are
a. elected by shareholders c. appointed by the board of directors
b. elected by incorporators d. appointed by management
5. The arbitrary value assigned to a share of stock is called,

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

a. market value c. par value

b. liquidation value d. book value

Let’s Analyze!
Problem 1.
Torreon Corporation are authorize to issue 200,000 ordinary shares with par value of
25.00/share. The corporation sold the following during 2020.
January 2020 sold 20,000 shares for 550,000
March 2020 sold 15,000 shares for 375,000
June 2020 sold 12,000 shares at P 27.00/share.

Prepare Journal Entries of the following transaction of share capital.

Problem 2.
Sarong Corporation are authorized to issue 80,000 no-par share. The corporation sold
25,000 share for 700,000. Prepare journal entry for the transaction.

Suppose that in the above problem, the share had stated value of 15.00/share and sold
8,000 shares for 220,000. Prepare journal entry for this transaction.
Problem 3.
Pajo Corporation had the following balances in the shareholder’s equity
Ordinary Share 50,000 shares, 75.00 par value per share 3,750,000
Share Premium – Ordinary share 1,500,000
Retained Earnings 6,700,000

The company purchase its own 10,000 share from the shareholders at 100/per share on
January 2020. The company sold 2,000 shares at P 78.00/share on March 2020. On June
2020 sold additional 4,000 share at 125/share and retire the rest of the shares on July
2020.
1. Prepare journal entries of the transactions.
2. Calculate the outstanding shares on January 2020, March 2020, June 2020
and July 2020. Assuming no other capital transactions happens.

Problem 4.
Maraat Corporation had the following balance on its shareholder’s equity accounts.

Ordinary share 75,000 shares outstanding, 10 par value 750,000

Share Premium – Ordinary 400,000
Retained Earnings 5,000,000

Additional information:

The corporation declares a 15% share dividend on December 20, 2019 form the 75,000
outstanding shares on December 30, 2019 and distributed on January 14, 2020. The par
value of the share is 10.00/share and the market value is 15.00/share.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Additionally, the corporation declares cash dividend of P 5.00 per share on January 15,
2020 from its total outstanding share on January 30, 2020. The dividend were paid on
February 10, 2020.

On June 25, 2020 the company declares additional 25% share dividends to the
stockholders. The fair value of the share is 20.00 per share and distributed on July 30,
2020.

Required:
1. Prepare journal entry of the dividend transaction in the date of declaration,
date of record and the date of payment.

2. Compute for the amount of retained earnings balance and the capital
balances on August 1, 2020, assuming that no other transaction occur
affecting the shareholders equity accounts.

In a Nutshell
Activity 1. Indeed, the corporation is a complex business and a business with various
advantages over others but still there are disadvantages in creating corporation type of
business organization. Based on the discussion and the learning from the exercises that
you have done, please feel free to write your arguments or lessons learned below. I have
indicated my arguments or lessons learned.

1. ________________________________________________________________
________________________________________________________________
__________________________________________________________

2. ________________________________________________________________
________________________________________________________________
__________________________________________________________

3. ________________________________________________________________
________________________________________________________________
__________________________________________________________

4. _______________________________________________________________
________________________________________________________________
__________________________________________________________

5. ________________________________________________________________
________________________________________________________________
__________________________________________________________

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

6. ________________________________________________________________
________________________________________________________________
__________________________________________________________

7. ________________________________________________________________
________________________________________________________________
__________________________________________________________

8. ________________________________________________________________
________________________________________________________________
__________________________________________________________

9. ________________________________________________________________
________________________________________________________________
__________________________________________________________

10. ________________________________________________________________
________________________________________________________________
__________________________________________________________

Q&A List
Do you have any question for clarification?
Questions/Issues Answers
1.
2.
3.
4.
5.

Keywords index
Corporation Ordinary share
Dividends Retained Earnings
Par value Treasury Stock

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