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Corporation
Initially formed by at least five persons.
3. Unlimited liability
Limited liability
4. Limited life
Unlimited life
Classes of Corporation
A. According to Purpose
1. Public a corporation formed to render government service
2. Private a corporation formed for a private purpose, aim or benefit.
3. Quasi-public a private corporation which is given a franchise to perform
functions of a public character.
B. According to Law of Creation
1. Domestic a corporation that is organized under Philippine laws.
2. Foreign a corporation that is organized under the laws of other countries.
C. According to Membership Holdings
1. Stock a corporation in which the capital is divided into shares of stock and is
authorized to distribute dividends to the holders of such shares. A stock
certificate is a physical evidence of the shares of stock. Stock corporations are
generally profit-oriented.
2. Non-stock - a corporation in which capital comes from fees or contributions
given by individuals. No part of its income is distributed as dividends and any
profit shall be used to further the purpose(s) of the corporation. Non-stock
corporations are generally non-profit in nature.
D. According to the Extent of Membership
1. Open a corporation whose ownership is widely held by many investors.
2. Closely held or family a corporation in which 50% or more of its stock is
owned by five persons or less.
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Components of a Corporation
1. Incorporators persons who originally formed the corporation and whose names
appear in the Articles of Incorporation. They must be 5 but not more than 15
natural persons. They should not artificial persons.
2. Stockholders or shareholders owners of a stock corporation.
3. Members persons who gave fees or contributions to a non-stock corporation.
4. Corporators persons who compose the corporation whether as stockholders or
members.
5. Promoters persons who undertake the necessary steps and procedures to
organize the corporation.
6. Subscribers persons who agreed to buy shares of stock but will pay at a later
date.
7. Underwriters persons who undertake to sell the shares of stocks to the general
public.
Advantages of a Corporate Form of Business
1. Unlimited life. The corporations power of succession enables it to enjoy a
continuous existence.
2. The continuity of corporate existence enables it to obtain a strong credit line.
3. Bigger source of capital may be raised because many individuals invest funds in
the corporation.
4. Stockholders enjoy limited liability. Liability of stockholders is limited to the
extent of their investment in the corporation.
5. Ease of ownership transferability - shares of stocks may be transferred without the
consent of the other stockholders.
6. The corporation has the capacity to act as a legal entity.
7. Centralized management under the Board of Directors.
Disadvantages of a Corporate Form of Business
1. Difficulty in formation. It is not easy to form because of complicated legal
requirements and high costs in its organization.
2.
The limited liability of the stockholders weakens or limits its credit capacity.
3.
4.
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5.
6.
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7. The authorized capital stock, the classes of stocks to be issued and the number of
each class of stock indicating the par value if there is any;
8. The amount of subscription to the capital stock, the names of the subscribers and
the number of shares subscribed by each;
9. The total amount paid on the subscriptions and the amount paid by each
subscriber on his subscription.
By-Laws
The by-laws of a corporation contain provisions for the internal administration of the
corporation. The by-laws should be filed within one month from the date of issuance of
the certificate of incorporation. The by-laws normally include the following:
1. The date, place and manner of calling the annual stockholders meeting;
2. The manner of conducting meetings;
3. The circumstances which may permit the calling of special meetings of the
stockholders;
4. The manner of voting and the use of proxies;
5. The manner of electing the directors;
6. The term of office of the directors;
7. The authority and duties of the directors;
8. The manner of selecting the corporate officers;
9. The procedures for amending the articles of incorporation and by-laws.
Corporate Books and Records
The corporation generally maintains the following books of accounts and records:
1. Journals and Ledgers;
2. Minute books for meetings of stockholders;
3. Minute books for meetings of Board of Directors;
4. Stock and Transfer book - contains record of all stock, the names of stockholders
or members alphabetically arranged; the installment paid and unpaid on all stocks,
for which subscription has been made, any sale or transfer of stock.
Classes of Stock
1. Par value a share of stock that is given a definite or fixed value in the articles of
incorporation.
2. No par value a share of stock that has no fixed value; it may not be issued for
less than P5.00.
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3. Common stock the basic issue or ordinary type of shares. The common stock
entitles the holder to the following basic rights:
a. Right to vote in stockholders meeting;
b. Right to share in corporate profits (dividends);
c. Right to share in corporate profits upon liquidation;
d. Right to purchase additional shares of stocks in the event that the
corporation increases its capital stock (pre-emptive right).
4. Preferred stock - entitles the holder to some specific preferences over the common
stock such as:
a. Preference as to payment of dividends;
b. Preference as to distribution of assets upon liquidation.
Terms Commonly Used in Corporation Accounting
1. Authorized shares - refer to the maximum number of shares which may be
issued by a corporation as set forth in the articles of incorporation.
2. Issued shares represent shares which were issued to stockholders in the past
which at present may or may not be in the hands of stockholders.
3. Unissued shares shares which have never been issued and are available for
issuance in the future.
4. Outstanding shares the total shares of stocks issued to subscribers or
stockholders, whether or not fully or partially paid (as long as there is a binding
subscription agreement) except treasury shares.
5. Treasury shares - shares which have been issued and fully paid for but
subsequently reacquired by the issuing corporation by purchase or by donation..
6. Subscribed shares shares which investors have contracted to acquire.
7. Subscription -is a contract between a subscriber (buyer of stock) and a corporation
(issuer of stock) whereby the former purchases shares of stocks of the latter with
the payment to be made at the later date.
8. Certificate of stock - a written acknowledgment by the corporation of the
stockholders interest in the corporation and its
net assets.
9. Paid in capital in excess of par value/stated value - this account is credited for
contribution in excess of par or stated value.
10. Pre-emptive right - the right of a stockholder to maintain his ownership interest in
the corporation trough purchase of additional shares when new capital is issued.
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Unit 7
ACCOUNTING FOR CORPORATION FORMATION
Accounting for Share Capital/Transactions
Forming a Corporation
The formation of a corporation involves (a) filing an application with the
Securities and Exchange Commission (SEC), (b) paying an incorporation fee, (c)
receiving a charter (articles of incorporation), and (d) developing by-laws.
a. Costs incurred in forming a corporation are called organization costs.
b. These costs include fees to underwriters, legal fees, state incorporation fees,
and promotional expenditures.
c. Organization costs are expensed as incurred.
Ownership Rights of Stockholders
When chartered, the corporation may begin selling ownership rights in the form
of shares of stock. Each share of common stock gives the stockholder the following
ownership rights:
a. To vote for the board of directors and in corporate actions that require
stockholder approval.
b. To share in corporate earnings through the receipt of dividends.
c. To maintain the same percentage ownership when additional shares of common
stock are issued (preemptive right).
d. To share in assets upon liquidation (residual claim).
Stock Issue Considerations
Authorized stock is the amount of stock a corporation is allowed to sell as indicated by
its charter.
a. The authorization of capital stock does not result in a formal accounting entry.
b. The difference between the shares of stock authorized and the shares issued is
the number of unissued shares that can be issued without amending the charter.
A corporation has the choice of issuing common stock directly to investors or
indirectly through an investment-banking firm (brokerage house). Direct issue is typical
in closely held companies, whereas indirect issue is customary for a publicly held
corporation.
Par value stock is capital stock that has been assigned a value per share in the
corporate charter. It represents the legal capital per share that must be retained in the
business for the protection of corporate creditors.
No-par stock is capital stock that has not been assigned a value in the corporate
charter. In many states the board of directors can assign a stated value to the shares,
which becomes the legal capital per share. When there is no assigned stated value, the
entire proceeds are considered to be legal capital.
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The primary objectives in accounting for the issuance of common stock are to (a)
identify the specific sources of paid-in capital and (b) maintain the distinction between
paid-in capital and retained earnings.
When par value common stock is issued for cash, the par value of the shares is
credited to Common Stock and the portion of the proceeds that is above or below par
value is recorded in a separate paid-in capital account.
When no-par common stock has a stated value, the stated value is credited to
Common Stock. When the selling price exceeds the stated value, the excess is credited to
Paid-in Capital in Excess of Stated Value. When no-par stock does not have a stated
value, the entire proceeds are credited to Common Stock.
Basic Capital Stock Transactions
There are 5 basic capital stock transactions:
1. Authorization records the maximum number of shares a corporation is
authorized to issue.
2. Sale of stocks a stockholder buys stocks and pays immediately in full. Stock
certificate is issued to the stockholder.
3. Subscription a subscriber enters into a contract to buy shares of stock.
4. Collection a subscriber pays his subscription either partially or in full.
5. Issuance of certificate if a subscription is fully paid, a stock certificate is issued
to the subscriber.
Capital Stock
Capital stock may be paid by the stockholder or subscriber in the form of:
1. money/cash
2. property record the value of the property using the following amounts:
a. fair value of the property received
b. fair value of the shares of stock, whichever is clearly determinable;
c. par value of the shares of stock
3. labor or services record the cost of the labor or services using the fair value of
the services rendered.
Important:
When shares of stock are issued for services or non-cash assets, cost
is either the fair market value of the consideration given up or the
consideration received, whichever is more clearly determinable (Weygant, et
al, 2006).
Capital stock may be issued
1. at par
2. at a premium at an amount more than the par value. The amount in excess of par
value is treated as additional paid in capital.
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Capital stock cannot be issued at a discount or an amount less than par under the
Philippine setting.
When the value assigned to the asset received is greater than the par value times the
number of shares issued, such issuance is called watered stock. The overstatement is
done to comply with the requirement of the law that the stock should not be issued at less
than its par value. When the value of the asset received is understated, the stock is said to
contain secret reserves.
Accounting Methods to Record Capital Stock Transactions
1. Memo entry method
2. Journal entry method
Pro-forma Entries Par Value Stock Subscribed or Sold at Par
Transaction
Authorization
Sale
Cash
Capital stock
Cash
Unissued capital stock
xxx
xxx
xxx
xxx
Subscription
Collection
Cash
xxx
Subscriptions receivable
xxx
Cash
xxx
Subscriptions receivable
xxx
Issuance of
certificate
xxx
xxx
Sale
Cash
xxx
Capital stock
xxx
Additional paid in capital
xxx
Subscription
Subscriptions receivable
xxx
Subscriptions receivable
xxx
Subscribed capital stock
xxx
Subscribed capital stock
xxx
Additional paid in capital
xxx
Additional paid in capital
xxx
Collection
Cash
xxx
Subscriptions receivable
xxx
Cash
xxx
Subscriptions receivable
xxx
Issuance of
certificate
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xxx
xxx
Cash
xxx
Unissued capital stock
xxx
Additional paid in capital
xxx
Special Notes:
1. The Subscription Receivable account title is always recorded at subscription prices
computed as follows:
Subscriptions receivable = subscribed shares x subscription price
2. Subscribed Capital Stock and Capital Stock accounts are always recorded/credited
at par value.
3. Paid in Capital in Excess of Par is recorded/credited at amount in excess of par
computed as follows:
Paid in capital in excess of par = (Subscription price par value) (subscribed shares)
Accounting for Two Classes of Stock
The two classes of stock are common stock and preferred stock. Common stock entitles
the holder to the four basic rights of a stockholder. Preferred stock is generally issued
with par value and with a dividend rate. Voting right is frequently given exclusively to
common stockholders. The pro-forma entries to record capital stock transactions for two
classes of stock are the same. However, the account titles must be labeled as to whether
they are common or preferred. The following account titles may be used.
Common
Subscriptions receivable common
Subscribed common stock
Additional paid-in capital common
Common stock
Preferred
Subscriptions receivable preferred
Subscribed preferred stock
Additional paid-in capital preferred
Preferred Stock
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No Stated Value
With Stated Value
Authorized to issue _____ shares, no Authorized to issue _____ shares, no
par.
par with a stated value of P___.
Sale
Cash
xxx
Capital stock, no par
xxx
Cash
xxx
Capital stock, no par
xxx
Paid in capital in excess
of stated value
xxx
Subscription
xxx
xxx
Collection
Cash
xxx
Subscriptions receivable
xxx
Cash
xxx
Subscriptions receivable
xxx
Issuance of
certificate
xxx
xxx
Incorporating a Partnership
A partnership may incorporate after considering the many advantages of a corporate form of
business. It is advisable that new set of books is used by the newly formed corporation.
Steps or procedures in converting a partnership into corporate form of business
Books of the Partnership
1. Finish the accounting cycle.
2. Revalue the assets and liabilities using
the Capital Adjustment account.
3. Close the balance of the Capital
Adjustment account to the partners
capital accounts in accordance with
their profit and loss ratio.
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DEBIT
CREDIT
X X X X
X X X X
X X X X
X X X X
X X X X
X X X X
X X X X
X X X X
X X X X
X X X X
X X X X
Close Capital adjustment account with credit balance
Capital Adjustment
X X X X
Rose, Capital
X X X X
Guada, Capital
X X X X
Note: These adjusting entries are similar to year-end adjustments. The only difference is that the
Capital Adjustment account replaces all the nominal accounts which is eventually
closed to the individual capital accounts of the partners.
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b. Close all the ledger accounts with balances except the partners'
capital account and debit "Receivable from Name of Corporation
Date
P AR T IC ULAR S
P/R
DEBIT
X
X
X
X
X
X
X
X
X
X
X
X
CREDIT
X
X
X
X
X X X X
P AR T IC ULAR S
Stocks of Name of Corporation
Receivable from Name of Corporation
To record receipt of stock certificates
P/R
DEBIT
X X X X
CREDIT
X X X X
P AR T IC ULAR S
Rose, Capital
Guada, Capital
Stocks of Name of Corporation
To record receipt of stock certificates
P/R
DEBIT
X X X
X X X X
CREDIT
X X X X
Note: The debits to the partners capital accounts represent their final capital balances
Subscription
Subscriptions receivable
Subscribed capital stock
xxx
Transfer of partnership
assets and liabilities
Assets
Liabilities
Allowance for bad debts
Subscriptions receivable
xxx
Issuance of stock
certificates
xxx
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xxx
xxx
xxx
xxx
xxx
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Pro-forma Entries using the Short Method of accounting for delinquent stocks
a. Record the subscription
Date
P A R TIC U L A R S
P/R
DEBIT
Subscription receivable
Suscribed capital stock
CREDIT
X X X X
X X X X
b. Record partial collection
Cash
Subscription receivable
X X X X
X X X X
c. Corporation sends several notices but no payment was made by the subscriber
No entry
d. The corporation incurred costs related to the selling of the delinquent shares
Receivable from highest bidder
X X X X
Cash
X X X X
e. The highest bidder pays and corresponding stock certificates are issued
Cash
X X X X
Subscribed capital stock
X X X X
Receivable from highest bidder
X X X X
Subscriptions receivable
X X X X
Capital stock
X X X X
OR
f. If there is no bidder at all
Treasury stock
X X X X
Subscribed capital stock
X X X X
Receivable from highest bidder
Subscriptions receivable
Capital stock
X X X X
X X X X
X X X X
Illustrative problem:
Assume that Joseph subscribed 250 shares of Common Stock at P25.00 (P20.00 is
the par value). After paying 50% on his subscriptions, he defaulted. Due process was
taken and the shares were declared delinquent. Advertising and other cost including
those advances made by the corporation amounted to P500.00
At the public auction, bids from Mary, Clare and Luisa were received. Mary bid
230 shares; Clare for 240; and Luisa for 245 shares. The highest bidder paid the
amount due and stock certificate was issued by the corporation.
REQUIRED: Record the above transactions.
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