CORPORATION ACCOUNTING

Updated March 6, 2013

DEFINITION
Corporation: An artificial being created by operation of law having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

BASIC CHARACTERISTICS
1.
2. 3.

4.

5.

6.

Artificial being Created by operation of law Right of succession Powers, attributes and properties expressly authorized by law or incident to its existence Ownership interest comprised of share capital Managed by a board of directors

Artificial Being: - Not a real person - Assumed by law as a person - Separate and distinct from shareholders, officers and employees

Created by operation of law: Cannot exist by mere agreement Require a grant by the state Can exist only for lawful purposes

Right of succession: - Share of stock is transferable - Can continue to exist despite the circumstances of the stockholders - 50 years life, renewable, becomes indefinite

Powers, attributes and properties: - Can only exercise powers expressly authorized by the Corporation Code, its By-laws and other special laws - Can exercise incidental powers inherently necessary for its existence and objectives

Ownership interest: - Represented by share capital divided into several shares of stock - Any person buying a share capital becomes a part owner called stockholder - Stockholder is liable only to the extent of his subscription

Managed by a board of directors: BOD is the group of stockholders managing the corporation At least 5 natural persons, not exceeding 15 Only the BOD and other authorized officers can bind the corporation into contracts

ADVANTAGES OF A CORPORATION
1.
2. 3. 4.

Limited liability of stockholders Transferability of shares Continued life existence Greater source of funds

DISADVANTAGES OF A CORPORATION
1.
2.

3. 4.

Complicated in formation and operation Greater degree of government control and supervision Centralized management Heavier income tax

KINDS OF CORPORATION
1.
2.

Stock corporations Non-stock corporations

OTHER CLASSES OF CORPORATION

1.

As to nationality a. domestic corporation b. foreign corporation c. multinational corporation

OTHER CLASSES OF CORPORATION

2. As to purpose a. government corporation (public, GOCC) b. privately owned corporation (civil, wasting asset, eleemosynary, ecclesiastical) c. quasi-public corporation

OTHER CLASSES OF CORPORATION

3. As to legal right a. de jure corporation b. de facto corporation 4. As to number of persons a. sole corporation b. aggregate corporation

OTHER CLASSES OF CORPORATION

5. As to extent of membership a. open corporation b. close corporation 6. As to relations to other corporations a. parent or holding corporation b. subsidiary corporation

COMPONENTS OF A CORPORATION
1.
2. 3. 4.

Incorporators Corporators Shareholders or members Subscribers

RIGHTS OF SHAREHOLDERS
1.
2. 3. 4. 5.

Right to vote Right to profit Right to inspect Right to financial statements Right to corporate assets

STAGES IN ORGANIZING A CORPORATION

1.
2. 3.

Promotion Incorporation Formal organization and commencement of business

PROMOTION INVOLVES:
1.
2.

3.

Issuing of prospectus Procuring subscriptions from prospective investors Securing a corporate charter

PROCESSES OF INCORPORATION
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2.

3.
4.

5.

Registration of corporate name with SEC Drafting/execution of Articles of Incorporation Execution of sworn affidavits and bank deposit certificate Payment of filing and publication fees Issuance of Certificate of Incorporation

FORMAL ORGANIZATION
Requires adoption of By-laws and election of BOD/BOT and of officers Includes taking steps necessary to transact business and accomplish purpose

FORMAL ORGANIZATION
Shareholders/stockholders are the owners of the business from which BOD are elected BOD members are policy makers and exercise corporate powers

CORPORATE OFFICERS
1.
2. 3. 4.

President Vice-President Secretary Treasurer

COMMENCEMENT OF BUSINESS
Should be within 2 years from incorporation, failure to do so means dissolution and stopping of corporate powers If commenced and then inoperative for at least 5 years, the same is a ground for suspension/revocation of certificate of incorporation

ARTICLES OF INCORPORATION
Basic instrument by which a corporation is formed under the corporation law, executed by several persons as incorporators and filed in a designated public office such as the SEC as evidence of corporate existence. Contents are provided in Sec. 14 of the Corporation Code

PRE-INCORPORATION SUBSCRIPTION REQUIREMENT

1.

2.

Sworn statement of the Treasurer of the 25% subscription of authorized capital stock At least 25% of subscription has been fully paid, which should not be less than P5,000

ORGANIZATION EXPENSES
Accounted as expenses under PAS 38 Includes filing and publication fees, promoters fee, registration and permits.

DIRECT ISSUE COSTS OF SHARE CAPITAL ISSUANCE

Charged against related share premium or APIC arising from stock issuance The excess is charged to current expense

RECURRING COSTS FOR SHARE CAPITAL ISSUANCE

Is charged against corporate income Or recorded as ordinary expense Includes maintaining capital stock records, administrative salaries for share capital issuance and agent fees

CORPORATE BY-LAWS
Are regulations, ordinances, rules or laws adopted by the corporation for its government. Contents are found in Sec. 47 of the Corporation Code

BOOKS AND RECORDS

1. 2. 3. 4. 5. 6. 7.

Sec. 74 of the Corporation Code provides that stock or non-stock corporation should keep in its principal office the following: Minutes book Stock and transfer book Books of accounts Subscription book Shareholders ledger Subscribers ledger Share certificate book

ACCOUNTING FOR CAPITAL STOCK TRANSACTIONS

Ownership distinction:
Corporation Partnership
Owners Ownership account
At least 5
Sole Proprietorship

2 or more

Only 1 Owners capital Owners capital Owners capital

Share capital Partners

capital Equity section Shareholder Partners of B/S s equity capital I/S closed to Accumulated Partners P/L (R/E) capital

SHAREHOLDERS EQUITY
Net assets Net worth Book value Stockholders equity Equity Corporate total capital section of the B/S

SHAREHOLDERS EQUITY
Residual interest of the shareholders in the assets of the corporation after deducting liabilities Formula: Total assets XXX Less: Total liabilities XXX Shareholders equity XXX

ELEMENTS OF SHAREHOLDERS EQUITY

1. 2. 3.

3 Subsections: Total share capital Other reserves Accumulated profits/losses (Retained earnings)

A. TOTAL SHARE CAPITAL (Total Capital Stock)

1.
2. 3.

4.

Share capital (Capital stock) Subscribed share capital Subscriptions receivable (deduction from Subscribed share capital or part of current assets if due within 1 year) Treasury shares (deduction from total Shareholders equity)

B. OTHER RESERVES
1.
2.

3. 4. 5.

Appropriation reserve (R/E appropriated) Additional paid-in capital (APIC) a. Share premium (APIC in excess of par/stated value; APIC on treasury shares) b. donated capital c. equity share options issued Revaluation surplus (revaluation increment) Unrealized gains/losses on available for sale securities Foreign currency translation differences

C. ACCUMULATED PROFITS

Retained earnings unappropriated

SHARE CAPITAL (Capital Stock)

Elements: 1. Share capital paid-in capital representing amount of total par or stated value of shares issued - represents portion of authorized share capital that has been fully paid - may be par value share or no par value share but with stated value

SHARE CAPITAL (Capital Stock)

Par value - Refers to a nominal peso amount assigned to each equity share by the companys charter. - Face value of the shares appearing on the certificate. - The fixed amount assigned to each equity share. - In the Philippines, it is prohibited to issue shares of stock at an amount below par value.

SHARE CAPITAL (Capital Stock)

Stated value - BOD can arbitrarily select an amount for its stock in the absence of par value in the charter - Serves same purpose as par value, although not printed in the share certificate. - Issued price may vary from time to time, fixed based on shares book value, but cannot be issued below P5 per share - Primary advantage: can be issued at any price without a discount liability.

SHARE CAPITAL (Capital Stock)

2. Subscribed share capital - Portion of share capital than an investor agreed to purchase. - Not yet issued because may only be partially paid - added to share capital

SHARE CAPITAL (Capital Stock)

3. Subscriptions receivable - refers to unpaid portion of SSC - usually treated as deduction from SSC except when collectible within 1 year which may be classified as part of current asset

SHARE CAPITAL (Capital Stock)

4. Treasury share - Issued shares reacquired by the issuing corporation - Treated as a reduction from total shareholders equity

NATURE OF SHARE CAPITAL

The capital or principal fund of a corporation from the contribution of subscribers or sale of corporate-owned shares. Shareholders ownership interest Owning at least 1 share makes one a shareholder or part owner Corporation can issue upon SEC registration Can be ordinary shares (common stock) and preference shares (preferred stock)

MAJOR CLASSIFICATIONS OF SHARE CAPITAL

1.

Ordinary share (common stock) - basic interest of ownership - if there is only 1 class of stock issued - holders receive same privilege and rights, assume greater risks but with greater control and may be greater reward in dividends and capital appreciation, have voting rights and can be voted as part of BOD

MAJOR CLASSIFICATIONS OF SHARE CAPITAL

2. Preference share (preferred stock) - separate class according to the corporate by-laws with preference to dividends and/or assets over ordinary shares - have fixed dividend percentage based on par value - according to law, may be issued only with a stated par value - holders have no voting rights and cannot be voted upon as part of BOD - cannot be issued alone without ordinary share although ordinary share can be issued without preference share

ENTRIES ON AUTHORIZATION

See Excel file for examples:

CLASSIFICATION OF SHARE CAPITAL

1.

Cumulative preference shares - the right of preferred shareholders to receive dividend in arrears (undeclared dividends in previous years) is given priority before paying common shareholders

CLASSIFICATION OF SHARE CAPITAL

2. Non-cumulative preference shares - the right of preferred shareholders to receive dividend in arrears is lost and he is entitled to receive only the current years declared dividend

CLASSIFICATION OF SHARE CAPITAL

3. Participating preference shares - the right of preferred shareholders to receive additional dividend after the dividend for both ordinary and preferred shares are paid

CLASSIFICATION OF SHARE CAPITAL

4. Non-participating preference shares - the preferred shareholders are not entitled to receive additional dividend, only the dividends declared during the current year, while excess dividends are all distributed to ordinary shareholders

CLASSIFICATION OF SHARE CAPITAL

5. Convertible preference shares - the preferred shareholders are given the option to convert their shares into ordinary shares or some other securities of the investee corporation

CLASSIFICATION OF SHARE CAPITAL

6. Redeemable or Callable preference shares - the issued preference shares can be bought back by the issuing corporation with a specific call or redemption price

OTHER SHARE CAPITAL CLASSIFICATIONS

Ordinary or preference shares can be classified according to the purpose for which they are issued or acquired: 1. Founders stock equity share given to incorporators with certain privileges on dividends and voting rights not enjoyed by ordinary incorporators (subject to SEC approval and 5-year limitation of exercise)

OTHER SHARE CAPITAL CLASSIFICATIONS

2. Bonus stock (Stock warrant) equity share given as a premium to encourage sale of another class of securities (like bonds) 3. Treasury stock equity share that has been issued to shareholders as fully paid and subsequently reacquired by the corporation

OTHER SHARE CAPITAL CLASSIFICATIONS

4. Promotion stock equity share usually issued as incentive or payment to those who take the preliminary steps in organizing the corporation 5. Donated stock securities given to a corporation by its own shareholders commonly for resale

OTHER SHARE CAPITAL CLASSIFICATIONS

6. Convertible stock a preference share which may be exchanged for ordinary share or another security, usually of the same company, in accordance with the terms of the issue 7. Watered stock an equity share that is issued by a corporation as fully-paid up share capital, when in fact the whole amount of the par value thereof has not been paid, as a result of overstatement of the value of consideration received

Seatwork

March 4, 2013

In a sheet of paper, discuss what you have learned from previous discussions on corporation accounting.

ACCOUNTING FOR SHARE CAPITAL TRANSACTIONS

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2.

3.
4.

5.

Authorization involves recording of capital share upon approval by the SEC Subscription involves accounting for share capital assigned to potential shareholders who agreed to pay a consideration in the future Issuance involves accounting for share capital upon full payment of subscribed capital shares Reacquisition involves accounting for acquisition and retention of corporations own equity shares previously issued Retirement involves accounting for acquisition and retirement of the corporations own share capital

MEMORANDUM METHOD JOURNAL ENTRIES

1. Authorization (memo entry in the general ledger only) 2. Subscriptions Subscription receivable XXX Subscribed share capital XXX

MEMORANDUM METHOD JOURNAL ENTRIES

3. Issuance of share certificate Subscribed share capital XXX Share capital XXX 4. Reacquisition Treasury share XXX Cash XXX 5. Retirement of treasury share Share capital XXX Treasury share XXX

AUTHORIZATION OF SHARE CAPITAL

The maximum authorized number of shares multiplied by the par value per share is called authorized share capital. A decrease or increase in ASC requires amendment of AOI and SEC approval.

AUTHORIZATION OF SHARE CAPITAL

Example: Assume that Big Dreams Corporation was authorized to issue 10,000 equity shares at par value of P100 per share. The entry is recorded not in the general journal but in the GL (see excel file).

SHARE SUBSCRIPTIONS
Share subscription a written contract by which one engages to take and pay for the share capital of a corporation at some future date. - Once perfected, subscriber becomes bound to buy the shares.

SHARE SUBSCRIPTIONS
Example: Assume that the incorporators of Big Dreams Corporation subscribed to the 25% of authorized share capital of P1,000,000 at par value of P100 per share and paid the 25% of the subscribed share capital. To record the subscription: Subscriptions receivable 250,000 Subscribed share capital 250,000 To record the cash collection: Cash 62,500 Subscriptions receivable 62,500

ISSUANCE OF SHARE CAPITAL FOR CASH RECEIVED

Example: Based on the preceding example, assume that 80% of the P250,000 total subscribed share capital is fully paid.
Cash Subscriptions receivable Subscribed share capital Share capital 150,000 150,000 200,000 200,000

ISSUANCE OF SHARE CAPITAL FOR CASH RECEIVED

Assume that additional 500 equity shares are issued for cash of P120 per share:
Cash Share capital Share premium 60,000 50,000 10,000

See excel file for the shareholders equity presentation based on the previous examples and data given.