CORPORATION

Ma. Margaret R. Garachico, CPA MMT CrFA

REVISED CORPORATION CODE
Republic Act 11232 - AN ACT PROVIDING FOR THE REVISED
CORPORATION CODE OF THE PHILIPPINES

Definition - A 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.
Classes of Corporation (Sec. 3)
§ Stock - 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
§ Non-stock - All other corporations are nonstock corporations
Stockholders, Corporators and
Incorporators
§ Corporators – those who compose a corporation
§ Stockholders – Stock corporation
§ Members – Non-stock corporation
§ Incorporators – stockholders or members who form the
corporation and are mentioned in the articles of incorporation
Organization of a Corporation
§ One-Person Corporation (OPC) – Single Stockholder
§ Regular Corporation – 2 to 15 Incorporators
§ Register with the Securities and Exchange Commission
§ Articles of Incorporation must be authorized by SEC in
accordance with the by laws.
§ The Corporation should be registered with the BIR 30 days
from the date of incorporation
§ At least 25% of the authorized capital is subscribed and at least
25% of the subscribed shares are paid (cannot be less than
PHP 5,000)
Articles of Incorporation
§ Name of the Corporation (Inc., Incorporated, Corp., Corporation,
OPC)
§ Purpose
§ Principal Office Address
§ Life of Corporation (Perpetual or number of years)
§ Names, Nationality and Address of Incorporators
§ Number of Directors and Names, Nationality and Address
§ Authorized Capital, Number of Shares and Par Value
§ Subscribed Capital Stock
§ Elected Corporate Treasurer
Board of Directors/Trustees
§ Directors – Used for stock corporation
§ Trustees – Used for not-for-profit organizations
§ Corporate Officers – elected from the board of directors
§ President – must be a director
§ Treasurer – must be resident (being a shareholder is not a requirement)
§ Secretary – must be a citizen and a resident (being a shareholder is not
a requirement)
One-Person Corporation
§ Single Stockholder
§ No minimum authorized capital stock except as otherwise provided by
special law.
§ Articles of Incorporation is required
§ Name of the single stockholder including residence, nationality
§ Nominee including nationality and residence
§ Alternate Nominee including nationality and residence (in the event of the single
stockholder’s death or incapacity, take the place of the single stockholder as director
and shall manage the corporation’s affairs.)
§ The Corporate name should include “OPC”
§ The OPC should appoint Corporate Secretary and Treasurer within 15
days from the issuance of Certificate of Incorporation.
§ Single Stockholder cannot be the Secretary
§ Single Stockholder can also be the self appointed treasurer
Shareholders’ Equity
§ Share Capital
§ Preference shares
§ Ordinary Share Capital
§ Subscribed Capital
§ Subscription Receivable (deduction)
§ Share dividends distributable
§ Capital liquidated (deduction)
§ Share Premium (Additional Paid-in Capital)
§ Treasury Shares
§ Retained Earnings
§ Other Components
Accounting for Share Capital
§ Memorandum method - Only a memorandum is made for the
authorized capitalization. Subsequent issuances of shares are
credited to the share capital account.
§ Journal entry method - The authorized capitalization is
recorded by crediting "authorized share capital" and debiting
"unissued share capital." Subsequent issuances of shares are
credited to "unissued share capital." The difference between
the two accounts represents the issued share capital.
Memorandum Entry vs Journal Entry
Authorized Capital - represents the maximum
number of shares fixed in the entity's authorized
articles of incorporation that can be subscribed and
issued to shareholders.
Unissued Capital - represents the portion of the
authorized share capital not yet issued and is still
available for subscription and issuance.

MEMORANDUM ENTRY JOURNAL ENTRY

The Authorized Capitalization is PHP 1,000,000 Unissued Share Capital 1,000,000

divided into 10,000 shares with Par Value of PHP Authorized Capital 1,000,000
100.
 Subscription of Share Capital
Of the total authorized share capital, 25% Subscription - a contract between the purchaser of
was subscribed at par value and 25% of shares (i.e., investor) and the issuer (i.e., corporation)
the total subscription was paid at in which the purchaser promises to buy shares of the
subscription date. issuing company’s stocks.
Subscription
JOURNAL ENTRY
Subscription Receivable - represents the unpaid
Cash 62.5K portion of the subscription price. Subscription
Subscription Receivable 187.5K receivable is presented as a deduction from the
related subscribed share capital, i.e., contra
Subscribed Capital Stock 250K equity account.

Subscribed Share Capital - represents the portion

of the authorized share capital that is subscribed but
not yet issue
Collection of Subscription Receivables
§ On February 1, 20x1, ABC Co. received full payment for 2,000
subscribed shares and issued the related share certificates

Share Capital - represents the portion of the authorized share

capital that is already issued
Share Certificate - is a document that evidences the ownership
of a share (issued only after the full payment of subscription price)
Classes of Shares – Ordinary Shares
§ represents the residual corporate interest that bears the
ultimate risk of loss and receives the benefits of success.
Ordinary shareholders are guaranteed neither dividends nor
assets upon dissolution but they generally control the
management of the corporation and tend to profit the most it
the corporation is successful. If an entity has only one class of
share capital, it necessarily is an ordinary share capital. The
Corporation Code prohibits the issuance of only preference
shares without ordinary shares.
Four Basic Rights
§ Right to attend and vote in shareholders' meetings
§ Right to purchase additional shares (also known as preemptive
right or stock right)
§ Right to share in the corporate profits (also known as right to
dividends)
§ Right to share in the net assets of the corporation upon
liquidation
Classes of Shares – Preference Shares
§ shares that give the holders thereof certain preferences over
other shareholders. Such preferences may include priority
claims over (a) dividends and/or (b) net assets of the
corporation in the event of liquidation. In exchange for such
preference(s), preference shareholders sacrifice certain
inherent rights of ordinary shareholders (e.g., voting rights over
election of directors and officers). One purpose of issuing
preference share is to broaden investor appeal, thereby
increasing the corporation's opportunity to generate equity
financing.
Share Premium
§ Share premium (additional paid-in capital) arises from various
sources which include the following:
§ Excess of subscription price over par value or stated value.
§ Excess of reissuance price over cost of treasury shares issued.
§ Distribution of "small" stock dividends.
Illustration – Share Premium
§ ABC Co. started operations on January 1, 20x1. Its authorized
capitalization is P1,000,000 divided into 10,000 shares with par
value per share of P100. ABC Co. receives cash subscriptions
for 5,000 shares at P120 per share.
§ On January 31, 20x1, ABC receives subscription for 2,000
shares at P160 per share.
Par Value vs. No-Par Value

PAR NO-PAR

• With fixed Peso value • Without Peso value but

• Cannot be issue below with stated value
Par • Cannot be issued below
• Indicated in Stock Php 5 per share
Certificate • Not indicated in Stock
Certificate
Illustration - No-Par Value
§ An entity issues 5,000 shares with stated value of P100 per
share for P120 per share. The issuance is recorded as follows:
Contributed Capital
§ Paid-in capital which includes ordinary shares, share premium
and preferred shares.
Legal Capital
§ Portion of contributed
capital that cannot be Par Value – Shares
distributed to the owners issued and
unless the corporation is subscribed
dissolve and all liabilities are
settled.
No Par – Subscription
price inclusive of any
amount in excess of
stated value
Illustration – Legal Capital
6% Preference Share Php 200,000
Share Premium - preference 50,000
Ordinary share capital 800,000
Share premium – ordinary shares 300,000
Subscribed Capital - ordinary 100,000
Subscription receivable - ordinary (50,000)
Retained Earnings 400,000

Compute for the legal capital assuming:

a. The ordinary shares are par value shares; and
b. The ordinary shares are no-par value shares.
Share issuance cost
§ Regulatory fees, legal, accounting, and other professional fees,
commissions and underwriter's fees, printing costs of
certificates, and documentary stamp tax and other transaction
taxes.
§ Deducted to share premium or if insufficient, retained earnings.
Treasury Shares
§ Treasury shares (treasury stocks) are an entity's own shares
that were previously issued but are subsequently reacquired
but not retired. Under the Corporation Code, an entity may
reacquire its previously issued shares only if it has sufficient
unrestricted Retained Earnings.
§ Reacquisition and reissuance are recorded at cost.
§ Presented as deduction in Shareholders Equity
Illustration – Treasury Shares

1. On July 1, 20x1, ABC reacquires 1,000 shares at P90.

2. On September 1, 20x1, ABC reissues the 1,000 treasury shares at P90
3. On September 1, 20x1, ABC reissues the 1,000 treasury shares at P140.
4. On September 1, 20x1, ABC reissues the 1,000 treasury shares at P60.
Retirement of shares
§ considered retired if they have
been reacquired and cancelled
in accordance with Securities
and Exchange Commission Par Value Par Value
(SEC) regulation. and share and share
§ Different from Treasury shares premium > premium <
because it will not be reissued retirement retirement
anymore.
§ The total par value and the cost cost
Share Premium - Share Premium – TS
related share premium of the Retirement Retained Earnings
retired shares are removed from
the books of account
Illustration – Retirement of Shares
§ Case #1 - Retirement cost less
than Original issuance price
ABC reacquires 1,000 shares
at P80 per share on July 1,
20x1 and retires them on
September 1, 20x1.
§ Case # 2 - Retirement Cos
share at Original issuance
price ABC reacquires 1,000
shares at P140 on July 1, 20xl
and immediately retires them.
 Donated Capital
Cash – amount of cash received
Donation from Non-cash Assets – fair value of the noncash
Donation from assets
Government –
Shareholder – Entity’s own share - initially recorded through
government memo entry. Donated capital is recognized only
Share Premium when the donated shares are subsequently
grants reissued. This is because no asset is generated
from the donated shares until they are
subsequently
Donation from reissued. If the donated shares are not to be
resold, the entity should effect a formal
other sources – reduction of its authorized capital by retiring the
recognize as shares received.
income
Illustration – Donated Capital
§ Case # 1: Cash and Noncash donations from shareholders ABC
Co. received cash of P100,000 and land with fair value of
P500,000 and historical cost of P300,000 from a shareholder.
No conditions are attached to the donation.
§ Case # 2: ABC Co. received 1,000 shares with par value of
P100 and fair value of P120 per share from a shareholder as
donation. Subsequently, ABC Co. reissues the 1,000 donated
shares at P130 per share.
Seatwork

Problem 2 – Chapter 15
Quiz

Problem 4 – Chapter 15
(Nos. 1 – 10)
Retained Earnings
§ represent the cumulative profits (net of losses, distribution to
owners, and other adjustments) that are retained in the
business and not yet distributed to the shareholders.
§ Unrestricted - the portion of retained earnings that is available for future
distribution to the shareholders.
§ Restricted (Appropriated) - the portion of retained earnings that is not
available for distribution unless the restriction is subsequently reversed.
Retained Earnings

Retained Deficit
Earnings Capital
Shareholders; Deficiency
Equity
Dividends

Cash Property
Dividends Dividends

Share
Dividends
Share Dividends
§ It the share dividends declared are considered "small,”
meaning less than 20% of the outstanding shares, the share
dividends are accounted for at fair value. Retained earnings is
debited for the fair value of the share dividends on declaration
date. The difference between the fair value and par value is
credited to share premium.
§ If the share dividends declared are considered "large,” meaning
20% or more of the outstanding shares, the shares are
accounted for at par value. Retained earnings is debited for the
par value of the share dividends. Accordingly, no share
premium arises.
 Dividends

Share holders’
BOD listed at that
Date of
Date of announces Date of date are Date of
distribution of
Declaration dividends Record entitled to Distribution
dividends
distribution receive
dividends

Only the outstanding shares (shares issued less treasury shares) are entitled to dividends.
Illustration – Cash Dividends
§ On April 1, 20x1, the board of directors of ABC Co. declared a
P50 dividend per share to shareholders of record as of April 15,
20x1, for distribution on May 1, 20x1. The shareholders' equity
of ABC Co. on April 1, 20x1 is as follows:

§ Treasury shares amounts to Php 144,000 at a cost of Php 120

per share