1

“Not intended for publication. For classroom instruction purposes only”.

 2

F
UNIT

7
ACCOUNTING FOR
CORPORATIONS
(Source: Partnership and Corporation Accounting by Win Ballada)

DEFINITION

(Source: Financial Accounting and Reporting by Rafael M. Lopez Jr.)

INTRODUCTION
A corporate may be a “Stock” or “Non-Stock”. This textbook deals only on “Stock
Corporation”. A stock corporation is a private corporation organized for profit. Its legal
capital is divided into units called “shares”, the total of this capital is known as “Share
Capital”. It may issue one or two classes of shares. These are “preference” and
“ordinary” shares. When there is only one class of stock issued, it is understood to be
ordinary shares. Ordinary shares are “With Par value” or “No Par value” shares. No
Par value shares may be “With Stated Value” or “No Stated Value”. Preference Shares
will always have a stated par value as required by law.

SHARE CAPITAL
Share Capital, previously known as “Capital Stock” refers to the maximum amount fixed
by the corporate charter or articles of incorporation to be subscribed and paid-in by the
shareholders, either in money or property, labor or services at the organization of the
corporation.

CLASSES OF SHARE CAPITAL

A corporation may issue two (2) classes of share capital, namely Ordinary and
Preference Shares.

ORDINARY SHARES
When a corporation issued a single class of share, it is understood to be ordinary or
common shares. These are called ordinary (common) shares because shareholders
have the same rights and privileges and enjoy no preference over one another in terms
of distribution of profits (dividends out of earnings) and distribution of assets (liquidating
dividends). Ordinary shareholders are assured of equal pro-rata distribution of dividends.

“Not intended for publication. For classroom instruction purposes only”.

 3

Although it is considered risky shareholding, in the event that corporation succeeded,

greater earnings await for the ordinary shareholders.

PREFERENCE SHARE
To attract more investors, a corporation may issue another class of share which is
preference share. Preference shareholders are given certain privilege or specific right
that the ordinary shareholders do not enjoy such as preference on dividends. Preference
on dividends does not mean an guarantee or an assurance to receive dividends but they
are given preference over ordinary shareholders when there are dividends declared by
the Board of Directors.

PAR VALUE AND NO PAR VALUE SHARES

Share Capital may also be classified into “par value share” and “no par value per share”.
A “par value share” has a nominal value stated on the face of the share certificate and
fixed in the Articles of Incorporation.

Section 65 of the Corporation Code of the Philippines prohibits the issuance of a share
less than its par value. When the share is issued for cash at less than par value or stated
value, the share is issued at a discount. The discount is not considered a loss to the
issuing corporation but the shareholder is held liable. When this happens, the issuance
of the share is not cancelled but the shareholder must pay the discount. This is what we
call a “discount liability” of a shareholder.

A “no par value share” has no par or nominal value printed on the Share Certificate or
stated in the Articles of Incorporation. It may be sold at any of the following amounts:
a.) At the amount prescribed in the Articles of Incorporation
b.) At the amount fixed by the Board of Directors pursuant to authority conferred in the
Articles of Incorporation
c.) At the amount approved by a majority of shareholders entitled to vote at a meeting
called for the purpose.

AUTHORIZED SHARE CAPITAL

Being synonymous to Share Capital, Authorized Share Capital is the maximum number
of shares that ordinary and preference share may issue. These shares are referred to as
“Authorized Shares”. When the authorized share is being multiplied by par value or

“Not intended for publication. For classroom instruction purposes only”.

 4

stated value of the share, it is called “Authorized Share Capital”. As mentioned earlier,
the Authorized Share Capital may be increased by amending the Articles of Incorporation.

MEMORANDUM ENTRY AND JOURNAL ENTRY METHODS

These are two (2) methods in accounting for a Share Capital. These are the-
a.) Memorandum Entry Method
b.) Journal Entry Method

(If the problem is silent of what method will be used, it’s the memorandum entry method).
There are also four (4) basic transactions involved wherein both methods can be clearly
distinguished from each other as far as the recording of these transactions are concerned.
These are:
1.) Authorization as to number of shares with par value
2.) Subscriptions to Share Capital
3.) Collection of Subscription Receivable
4.) Issuance of share (stock) certificate

Comprehensive illustration:
On January 1, 20A, Archers Corporation is authorized to issue 5,000 Shares of 8%
Preference Shares at a par value of P100 per share and 20,000 shares of Ordinary
Shares at a par value P50.00 per share.
The following were the incorporators (original shareholders who executed the Articles
of Incorporation) who have made the 25% subscription and 25% paid-up requirements:
25% Subscription 25% Paid-up Requirement
Preference Ordinary Preference Ordinary
Edgar Detoya ₱ 25,000 ₱ 50,000 ₱ 6,250 ₱12,500
Aristotle Go 25,000 50,000 6,250 12,500
Marilou Espocia 25,000 50,000 6,250 12,500
Robinson Berhay 25,000 50,000 6,250 12,500
Mary Jean Tan 25,000 50,000 6,250 12,500
Total ₱ 125,000 ₱ 250,000 ₱ 31,250 ₱62,500

Note: Authorized share capital for Preference Share is P500,000 (5,000 x P100) and
P1,000,000 for Ordinary Shares (20,000 x P50)

“Not intended for publication. For classroom instruction purposes only”.

 5

AUTHORIZATION OF SHARE CAPITAL

Upon the corporate formation the corporation records the classes and number of shares
that Securities and Exchange Commission (SEC) has approved to issue as stated in the
Articles of Incorporation.

MEMORANDUM ENTRY METHOD JOURNAL ENTRY METHOD

Jan. 1
Notations are made and written across the top
of the Share Capital Ledger as follows: Unissued share Capital P500,000
Unissued share Capital 1,000,000
Preference Share Capital Authorized Share capital-P 500,000
20A Authorized Share capital-O 1,000,000
Jan. 1 to issue 5,000 value of To record authorization of
Authorized P100 P5,000 preference at par
shares at par value of P100 and P20,000
share ordinary at par value of
P50.00 per share

Ordinary Share Capital

20A
Jan. 1
Authorized shares at to issue 20,000 value
par of P50

SUBSCRIPTION OF SHARES
Usually, shares are subscribed in an installment basis and seldom paid in cash for the
whole share. Subscription contract is a binding agreement whereby an investor agrees
to acquire certain number of Unissued Shares which may be paid in full or in an
installment basis. As a common practice, corporation complies only the subscription and
paid-up requirement so it can operate immediately.

Both the memorandum and journal entry methods record the same as follows:

Subscription Receivable-Preference P125,000

Subscription Receivable-Ordinary 250,000
Subscribed Share Capital- Preference P125,000
Subscribed Share Capital-Ordinary 250,000
To record the 25% subscription of the incorporators.
“Not intended for publication. For classroom instruction purposes only”.
 6

COLLECTION OF SUBSCRIPTION RECEIVABLE

Collection of the 25% pre-incorporation requirement will reduce the Subscription

Receivable account that was previously set-up when subscription entry was recorded.
Both memorandum and journal entry methods record the same:

Cash P93,750
Subscription Receivable-Preference P31,250
Subscription Receivable-Ordinary 62,500
To record the 25% paid up requirement of incorporators.

Let us assume that on January 30, 20A, Mr. Edgar Detoya has paid in full his subscription
balance and collected P56,250 broken down as follow:

Preference Share (P25,000- P6,250) - P 18,750

Ordinary Share (P50,000-P12,500) - 37,500
Total Collection P 56,250

Cash P56,250
Subscription Receivable-Preference P18,750
Subscription Receivable-Ordinary 37,500
To record full collection from Mr. Detoya’s
subscription balance.

ISSUANCE OF SHARE CERTIFICATE

Share certificates are issued only upon full payment of subscription. No full payment, no
certificate is issued. Since in our Comprehensive Illustration, only Mr. Detoya has made
a full payment of his subscription, then Archer Corporation will issue a Share Certificate
equivalent to the number of shares he subscribed and a corresponding entry in the book
is made as follows.

As already mentioned, share certificate can only be issued upon full collection of
subscription balance. Mr. Detoya has paid in full his subscription balance on January 30,
20A, hence a share certificate is issued to him.

“Not intended for publication. For classroom instruction purposes only”.

 7

MEMORANDUM ENTRY METHOD JOURNAL ENTRY METHOD

Jan. 1
Subscribed Share Capital-Preference
Jan 30 P25,000 Subscribed Share Capital-P
P25,000
Subscribed Share Capital-O
P50,000
Subscribed Share Capital-Ordinary Unissued Share Capital-P P25,000
20A Unissued Share Capital-O 50,000
Jan 30 P50,000 To record full payment
of E. Detoya's
subscription receivable
and issuance of share
certificate.

Share Capital-Preference
Jan. 30
P25,000

Share Capital-Ordinary
Jan. 30
P50,000

BREAKDOWN OF E. DETOYA’S FULL PAYMENT

25% Paid-up June 30 Payment Total

Preferred Shares P 6,250 P 18,750 P 25,000
Ordinary Shares 12,000 37,500 50,000
P18,750 P 56,250 P 75,000

To summarize, memorandum and journal entry methods differ in the recording of

Authorization of Shares and Issuance of Certificate only. This is presented in a
comparative form below:

“Not intended for publication. For classroom instruction purposes only”.

 8

TRANSACTION MEMORANDUM ENTRY METHOD JOURNAL ENTRY ENTRY METHOD

8% Preference Share Capital

Archers Corporation is
authorized by its Authorized to issue 5,000 8% preference Unissued Preference Share P 500,000
charter to issue 8% of par share value, P100 Unauthorized Ordinary Share 1,000,000
preference shares, Authorized Preference Share P 500,000
5,000 shares at P100 Authorized Ordinary Share 1,000,000
par and 20,000 shares Ordinary Share Capital
at P50 par value per
share. Authorized to issue par 20,000 shares
value with P50

25% of Authorized Subscription receivable-P P125,000

Share Capital for both
Subscription Receivable-O 250,000
Preference and SAME ENTRY
Ordinary are Subscribed Share Capital-P P125,000
subscribed Subscribed Share Capital-O 250,000

25% of Subscribed Cash P93,750

Share Capital was Subscription Receivable-P P31,250 SAME ENTRY
paid-up
Subscription Receivable-O 62,500
Full payment of Mr. E. Cash P56,250
Detoya's subcription Subscription Receivable-P P18,750 SAME ENTRY
balance
Subscription Receivable-O 37,500
Subscription Share Capital-P P25,000 Subscription Share Capital-P P25,000
Issuance of share Subscription Share Capital-P 50,000 Subscription Share Capital-P 50,000
certificate to Mr. E.
Detoya Share Capital-P P25,000 Unissued Share Capital-P P25,000
Share Capital-O 50,000 Unissued Share Capital-O 50,000

Detail’s of E. Detoya’s Subscribed Shares

Detoya’s Share
Preference Share : 5,000 shares x 25% = 1,250 shares ÷ 5 incorporators = 250
Ordinary Share : 20,000 share x 25% = 5,000 shares ÷ 5 incorporators = 1,000

250 x P100 = P25,000

1,000 x 50 = 50,000

The Shareholder’s Equity section of the Statement of the Financial Position differs on the
manner of its presentation:

“Not intended for publication. For classroom instruction purposes only”.

 9

Under Memorandum Entry

SHAREHOLDERS' EQUITY
Contributed Capital:
Share Capital:
8% Preference Shares, P100 par, 5,000 shares authorized,
250 shares issued P 25,000
Subscribe Share Capital P 100,000
Less: Subscription Receivable 75,000 25,000
Issued and Subscribed P 50,000

Ordinary Shares, P50 par, 20,000 shares

authorizied, 1,000 shares issued P 50,000
Subscribed Share Capital P 200,000
Less: Subscription Receivable 150,000 50,000
Issued and Subscribed P 100,000

Total P 150,000

“Not intended for publication. For classroom instruction purposes only”.

 10

Under Journal Entry Method

SHAREHOLDERS' EQUITY
Contributed Capital:
Share Capital:
8% Preference Shares authorized, 5,000 shares at P 100 par value P 500,000
Less: Unissued Share Capital 475,000
Issued Share Capital P 25,000
Subscribed Share Capital P 100,000
Less: Subscription Receivable 75,000 25,000
Issued and Subscribed P 50,000

Ordinary Shares Authorized, 2,000 shares at P50 par value P 1,000,000

Less: Unissued Share Capital 950,000
Issued Share Capital 50,000
Subscribed Share Capital P 200,000
Less: Subscription Receivable 150,000 50,000
Issued and Subscribed P 100,000

Total P 150,000

8% Preference Share Capital Ledger Ordinary Share Capital Ledger

Unissued Share Capital-Preference Unissued Share Capital-Ordinary

Jan. 1 P500,000 Jan. 30 P25,000 Jan. 1 P1,000,000 Jan. 30 P50,000
Bal. P475,000 Bal. P 950,000

Authorized Share Capital-Preference Authorized Share Capital-Ordinary

Jan. P500,000 bal. Jan.1 P1,000,000bal.

Subscription Receivable- Preference Subscription Receivable-Ordinary

Jan. 1 P125,000 Jan. 1 P31,250 Jan. 1 P250,000 Jan. 1 P 62,500
31 18,750 30 37,500
P125,000 P50,000 P 250,000 P 100,000
Bal. P 75,000 Bal. P 150,000

“Not intended for publication. For classroom instruction purposes only”.

 11

Subscribe Share Capital-Preference Subscribe Share Capital-Ordinary

Jan. 1 P 25,000 Jan. 1 P125,000 Jan. 30 P 50,000 Jan. 1 P250,000
P100,000 bal. P200,000 bal.

ACCOUNTING FOR ISSUANCE OF SHARE CAPITAL

Share Capital maybe issued for the following considerations:

1. Issued or Sold for Cash

2. Issued or Sold on Subscription Basis
3. Issued in Exchange for Non-cash Assets
4. Issued in Exchange for Services Rendered or Liability Incurred
5. Issued in Exchange for Equity Securities of other Corporation

To illustrate the accounting for issuance of share capital transactions, let us assume that
on Jan. 1 20A, Metro Marketing Corporation is authorized by its charter to issue 10,000
ordinary shares at par value of P100.00 per share. 25% has been subscribed and 25%
of the total subscription has been paid-up.

Authorization Entry (Memo Entry is used)

Jan. 1 – Metro Marketing Corporation is authorized to issue 10,000 of its Ordinary

Shares at P100 par value per share.

25% Subscription Entry

Jan. 1 Subscription Receivable-Ordinary P 250,000

Subscribed Share Capital-Ordinary P 250,000
To record 25% subscription
(25% x P1,000,000)

25% of Subscription were collected

Jan. 1 Cash P 62,500

Subscription Receivable-Ordinary P 62,500
Collected 25% subscription payment
(25% x P250,000)

“Not intended for publication. For classroom instruction purposes only”.

 12

The following transactions took place:

Jan. 5 – Metro Marketing Corporation sold its 200 ordinary shares for cash.

(1) SHARE CAPITAL ISSUED OR SOLD FOR CASH

When share capital is issued or sold for cash, it is measure at the amount of cash
received. When sold at par value, it is debited to Cash and credited to Share Capital.
When sold above par value, it is debited to Cash for the amount received and Share
Capital is credited and the excess is further credited to Share Premium or Additional
Paid In Capital. Whether it is sold at Par value or above par value, a share certificate will
be issued to shareholder concerned because he has already paid the shares in full.

Case 1 Sold its 200 Ordinary Shares at par value, P100.00

JOURNAL ENTRY:

Cash (200shrs. X P100) P20,000

Ordinary Share (200shrs. X P100) P20,000
To record sale of 200 shares at par.

Case 2 Sold its 200 Ordinary Shares above par value, P130.

JOURNAL ENTRY

Cash (200shrs. X P130) P26,000

Ordinary Share (200shrs. X P100) P20,000
Share Premium (200shrs. X 30) 6,000
To record sale of 100 shares at par.

Jan. 30 – Metro Marketing Corporation issued 100 ordinary shares to Nathalyn Alegre
on subscription basis and collected 30% down payment. The balance is
payable in three (3) equal monthly installments.

(2) SHARE CAPITAL SOLD ON SUBSCRIPTION BASIS

A share capital may also be sold on “Subscription Basis” or by “installment”. As already

mentioned, Subscription Contract is a binding agreement whereby a prospective
“Not intended for publication. For classroom instruction purposes only”.
 13

investor agrees to acquire on credit a specified number of shares at a specified price

payable in future dates. When subscription is paid in full, share certificate will be issued.

When subscribed at par value, it is debited to Subscription Receivable and credited to

Subscribed Share Capital. When subscribed above par value, it is debited to
Subscription Receivable at subscription price and credited to Subscribed Share
Capital at par value and excess is further credited to Share Premium or Additional
Paid-In Capital at the time the subscription is recorded rather than when cash is
collected.

Case 1 – SUBSCRIBED AT PAR VALUE. P100

SUBSCRIPTION ENTRY:

Subscription Receivable-Ordinary P10,000

Subscribed Share Capital P10,000
Issued 100 shares at par value

PARTIAL COLLECTION:

Cash P3,000
Subscription Receivable-Ordinary (P10,000x30%) P3,000
Collected 30% of Subscription Receivable

FULL COLLECTION:

Cash P7,000
Subscription Receivable-Ordinary P7,000
Collected in full the balance of 70%

ISSUANCE OF CERTIFICATE:

Subscribed Share Capital-Ordinary P10,000

Share Capital P10,000
Issuance of certificate

NOTE: When there is collection in full, automatically there should be an

entry to record issuance of certificate

“Not intended for publication. For classroom instruction purposes only”.

 14

CASE 2 – SUBSCRIBED AT P120.00 PER SHARE (Above par value)

SUBSCRIPTION ENTRY:

Subscription Receivable-Ordinary (100shrs. x P120) P12,000

Subscribed Share Capital -Ordinary (100shrs. x P100) P10,000
Share Premium (100 shares x P20) 2.000
Issued 100 share above par value

(Subscription Receivable is debited at per subscription price while Subscribed Share

Capital is credited at par value and the difference is credited to Share Premium)

PARTIAL COLLECTION:

Cash P3,600
Subscription Receivable-Ordinary (P12,000 x 30%) P3,600
Collected 30% of Subscription Receivable

FULL COLLECTION:

Cash P8,400
Subscription Receivable-Ordinary (P12,000 x 70%) P8,400
Collected in full the balance of 70%

ISSUANCE OF CERTIFICATE

Subscribed Share Capital-Ordinary P10,000

Share Capital (Memo Entry) P10,000
Issued Share Certificate

FINANCIAL STATEMENT PRESENTATION OF SUBSCRIPTION RECEIVABLE

Subscription Receivable may be presented in the Statement of Financial Position in two

(2) ways:
a.) As an Asset when there is a due date or a call date
b.) As a deduction from Shareholders’ Equity when no due date or call date is set.

“Not intended for publication. For classroom instruction purposes only”.

 15

DEFAULTED SUBSCRIPTION (Delinquent Shares)

Subscription may be collected in an installment at stated “call dates”. When a subscriber

cannot pay the balance of his subscription after calls have been made or several notices
have been sent to him by the corporation, the subscriber is said to be “default”. His total
subscribed shares became “delinquent shares”. The board of directors may, by resolution
order to sell these delinquent shares in “public auction”. Section 67 of the Corporation
Code of the Philippines provides that:

“If within thirty (30) days from the said date, no payments made, all stock
covered by said subscription shall thereupon became delinquent and shall be
subjected to sale…”

The person or the bidder who is willing to pay the unpaid balance of the subscription
plus accrued interest and other expenses incurred to sell these shares of at the “least”
number of shares is called the “highest bidder”. The highest bidder wins the bidding.
Thus, the delinquent shares are sold to him. Certificate of shares are issued upon
receipt of payment from the highest bidder.

May 10 – Let us assume that Nathalyn Alegre defaulted her subscription of

100 shares at par value after paying 30% down payment. Her 100
shares are considered delinquent.

1. Journal entry to record subscription (100 shares x P100)

Subscription Receivable-Ordinary P10,000

Subscribed Share Capital-Ordinary P10,000

2. Journal entry to record collection (P10,000 x 30%)

Cash P3,000
Subscription Receivable-Ordinary P3,000

3. Journal entry to record delinquency of Nathalyn Alegre.

Receivable from the Highest Bidder P7,000

Subscription Receivable- Ordinary P7,000

“Not intended for publication. For classroom instruction purposes only”.

 16

March 15 - Metro Marketing Corporation advertises the auction sale of these

delinquent shares and incurs expenses of P200.

4. Journal entry to record payment of expenses

Receivable form Highest Bidder P200

Cash P200

Few days later, three bids were received. Gerry Guiang is willing to pay the
subscription balance of P7,000 (P10,000 less P3,000) plus expenses of P200 in
exchange for 96 shares. Rafael Lopez III bids in exchange for 90 shares while Elsie
Olaño bids for 94 shares. The highest bidder is Rafael Lopez III.

5. Journal entry to record payment of Rafael Lopez III, the highest bidder

Cash P7,200
Receivable from Highest Bidder P7,200

The Subscription Receivable account as far as the subscription of Nathalyn Alegre is

concerned is closed as shown below:
Subscription Receivable
Subscription P10,000 P3,000 collection from N. Alegre (JE-2)
7,000 to record her delinquency (JE-3)

Inasmuch as the subscription was considered to have been full paid already, share
certificate good for 100 shares will be issued to both Nathalyn Alegre and Rafael
Lopez III as follows:
Rafael Lopez III 90 shares
Nathalyn Alegre for the balance 10 shares
100 shares

6. Journal entry to record the issuance of certificates

Subscribed Share Capital-Ordinary P10,000

Share Capital -Ordinary P10,000

(Assume memo entry is used)

“Not intended for publication. For classroom instruction purposes only”.

 17

In an event wherein there is only one bidder, the board of directors may or may not
accept the bid offered. The corporation may itself bid for the delinquent shares. The
shares acquired by the corporation under this circumstance are considered as
“Treasury Shares”

The journal entry to record the acquisition of 100 delinquent shares by the corporation is:

Treasury Shares P7,200

Receivable from Highest Bidder P7,200

The journal entry to record issuance of certificate is:

Subscribed Share Capital-Ordinary P10,000

Share Capital-Ordinary P10,000

Treasury Shares will be discussed in Chapter 22

(3) SHARE CAPITAL ISSUED IN EXCHANGE FOR NON-CASH ASSET

When share capital is issued in exchange for non-cash assets which is known as non-
monetary exchanges, Philippine Financial Reporting Standards No. 2 (PFRS) on Share-
Based Payment states that” the non-cash asset received shall be measured at its fair
market value. If the fair market value of the non-cash asset received cannot be estimated
reliably or cannot be determined, the non-cash asset is recorded at the fair market value
of the equity instrument. Share Capital is credited at its par value and any excess of the
recorded value of the asset over the par value of the share capital is credited to Share
Premium.

If issued for non-cash asset, the value of share capital issued is equal to the values
according to the following order of priority.
1. fair value of the property received
2. fair value of the share capital issued
3. par value of the share capital

Whichever of the three (3) cited priorities is more clearly determinable must be used in
recording the transaction.

“Not intended for publication. For classroom instruction purposes only”.

 18

Apr. 1 – Metro Marketing Corporation issued its 1,200 shares to Mr. Henry Sy with
par value of P100 in exchange for a parcel of land. Assuming that equity
per share has a fair market value of P130 and the land has fair market
value of P200,000, the journal entry to record the issuance of share capital
would be –

Journal Entry:

Land P200,000
Share Capital (100 x 1,200 shrs.) P120,000
Share Premium 80,000
Issuance of share capital for land

Note: The fair market value of the land is given, hence the fair market value and
par value of the share shall not be used as the basis for its valuation.

WATERED SHARE AND SECRET RESERVE

It must be noted that under our corporation law, it is prohibited to issue a share that is
less than its par value upon its original issue. If shares are issued below its par value,
the amount of difference is debited to discount on share capital. The subscribing
shareholder and not the corporation shall be held liable for that transaction. It is
considered as investment deficiency of the subscribing shareholder. The contribution
by the shareholders whether at par, premium or at a discount are shown as part of share
capital.

This actually happens when share is issued in exchange for non-cash asset. The asset
received is recorded at par value of its share capital issued, thus overstating the asset.
Needless to say, when the asset is overvalued or overstated in the book of accounts,
capital is also overstated. This result the issued shares to be called “watered share”. In
contrast, when the value of an asset received is undervalued or understated, the issued
share capital is called “secret reserve”.

Both practices are violations of our Corporation Law.

To illustrate:

“Not intended for publication. For classroom instruction purposes only”.

 19

Assuming that 1,200 ordinary shares at par value of P100 issued in exchange for
land with a fair market value of P100,000.

Journal Entry:

Land P100,000
Discount on Ordinary Share Capital 20,000
Ordinary Share Capital P120,000
Issued share capital for land

Assuming further that the shareholder Mr. Henry Sy was assessed of the
difference as his investment deficiency, the journal entry is –

Journal Entry:

Cash P20,000
Discount on Ordinary Share Capital P20,000
Collection of investment deficiency

Section 65 of the Corporation Code of the Philippines prohibits the issuance of share
capital at a discount. This pertains to the original issue of share capital and not to
subsequent re issue which are referred to as Treasury Shares.

(4) SHARE CAPITAL ISSUED IN EXCHANGE FOR SERVICES RENDERED

When share capital is issued for services rendered, specifically during the incorporation
stage, the fair market value of services received is debited to Organization Expense and
credited to Share Capital for its par value and the difference if any is further credited to
Share Premium or Additional Paid-In Capital. Share Capital shall not be issued for
future services.

If the fair market value of services is not clearly determinable, the fair market value of the
share capital shall be used.

Apr. 5 – Metro Marketing Corporation issued 500 shares to Atty. Richard Opinion
at P100 par value per share in payment of legal services rendered which
has a fair market value of P75,000. The fair market value of share is
P120.

“Not intended for publication. For classroom instruction purposes only”.

 20

Journal Entry:

Organization Expense P75,000

Share Capital-Ordinary P50,000
Share Premium-Ordinary 25,000
Issued share capital for services rendered

Note: The fair market value of services is given, hence the fair market value and
par value of the equity shall not be used as the basis for its valuation.

(5) SHARE CAPITAL ISSUED IN EXCHANGE FOR EQUITY SECURITIES

When share capital is issued in exchange for equity securities of other corporations, the
measurement is the fair market value of the equity share which is debited to Investment
in Other Corporation’s Equity and credited to Share Capital at par value and the
excess is further credited to Share Premium or Addition Paid-In Capital.

Apr. 10 – Metro Marketing Corporation issued its 900 shares at par value of P100
in exchange for Orange, Inc. 1,000 equity shares. The fair market value
of the share is P120 while that of Orange, Inc. is P110. The entry to
record the issuance of share capital is -

Journal Entry:

Investment in Share-Orange, Inc. P110,000

Share Capital P90,000
Share Premium 20,000

Issuance of 900 shares in exchange for

1,000 Orange, Inc.’s equity.
Note: The fair market value of Orange, Inc. share of P110 is used.

DIRECT ISSUE COSTS FOR SHARE CAPITAL ISSUANCE

Share issuance costs are direct expense incurred in selling share capital. They normally
included printing costs, legal fees, documentary stamps, cost of promoting the issue,
registration and other regulatory fees. These costs are treated as reduction in Share
Capital through a debit to Share Premium or Additional Paid-In Capital.

“Not intended for publication. For classroom instruction purposes only”.

 21

The excess of direct share issuance expense over the share premium or related
Additional Paid-In Capital (APIC) shall be charged to current expenses.

To illustrate:
Mt. Apo Corporation issued 1,000 ordinary shares with par value of P100 for P130
per share. Direct costs related to the issuance of the share is P20,000.

Journal Entry:

1.) Cash (130 x 1,000) P130,000

Ordinary Share Capital (P100 x 1,000 shrs.) P100,000
Share Premium (P30 x 1,000 shrs.) 30,000
To record Issuance of share capital

2.) Share Premium or APIC P20,000

Cash P20,000
To record direct issue cost

In an event wherein the direct share issuance expense exceeds over the related
Additional Paid-In Capital or Share Premium, the excess will be chargeable against
current expense.

To illustrate:
Using the same illustration, if direct issue cost is P40,000 and the share premium
or additional-paid in capital is P30,000, the P10,000 difference will be charged to
Current Expense.
Journal Entry:

Share Premium P30,000

Legal Expense 10,000
Cash P40,000
To record direct Issuance expense in
excess of share premium.

INCORPORATION OF A PARTNERSHIP BUSINESS

When a partnership business is converted into a corporation, the partnership contract is

dissolved. The assets of the partnership are adjusted to conform with their current or fair

“Not intended for publication. For classroom instruction purposes only”.

 22

market values. All liabilities must be recognized. These assets and liabilities are to be
transferred to the corporation and the corporation will issue number of shares equal to
the amount of net assets of the partnership being transferred. “Net Assets” refer to the
excess of all partnership’s assets over liabilities. For example, if total assets are P100,000
and liabilities is P40,000, P60,000 is called “Net Assets” which actually represents the
capital of the partners. If the partnership has only three (3) partners, they should invite
two or more persons to form a corporation. A corporation is being formed by at least five
(5) persons.

To illustrate:
The following were the amount balances of RAMBO Partnership after adjustments
in preparation for its incorporation.

Debit Credit
Cash P 70,000
Accounts Receivable 60,000
Allow. Doubtful
Accounts P 5,000
Merchandise 115,000
Delivery Equipment 120,000
Acc. Depreciation 40,000
Accounts Payable 20,000
Robert, Capital 80,000
Ana, Capital 40,000
Mandro, Capital 60,000
Bogie, Capital 50,000
Oscar, Capital 70,000
Total P 365,000 P 365,000

Rambo Corporation (corporate name of Rambo Partnership) is authorized to issue

P5,000 ordinary shares with par value of P100 per share.

The journal entries needed in the books of the partnership and corporation are shown
with the given steps as follows:

Step 1 – In the partnership book, revaluation of assets and recognition of liabilities are
recorded (This was already discussed thoroughly).

“Not intended for publication. For classroom instruction purposes only”.

 23

Step 2 – In the partnership book, record the transfer of assets and liabilities as follows:

Allowance for Doubtful Accounts P5,000

Accumulated Depreciation 40,000
Accounts Payable 20,000
Receivable from RAMBO Corporation 300,000
Cash P70,000
Accounts Receivable 60,000
Merchandise 115,000
Delivery Equipment 120,000

Step 3 – In the corporation book, record the authorization of 5,000 shares at P10 par
value per share, the subscription equal to net assets of P300,000, the receipts
of assets and assumption of liabilities and issuance of certificate to the
shareholders.

a.) To record authorization assuming Memorandum Entry Method is used.

Ordinary Share Capital
Authorized to issue 5,000 shares
at P100 par value per share

b.) To record subscription equal to net assets of P300,000

Subscription Receivable-Ordinary P300,000

Subscribe Share Capital-Ordinary P300,000

c.) To record receipts of assets and assumptions of liabilities

Cash P70,000
Accounts Receivable 60,000
Merchandise 115,000
Delivery Equipment 80,000
Allowance for Doubtful Accounts P5,000
Accounts Payable 20,000
Subscription Receivable-Ordinary 300,000

(The equipment is recorded at the net book value. This is the equivalent acquisition cost
to the corporation.)

“Not intended for publication. For classroom instruction purposes only”.

 24

d.) To record the issuance of Share Certificate to the partners who are now
incorporators.

Subscribed Share Capital-Ordinary P300,000

Ordinary Share Capita P300,000

Step 4 – In the partnership book, the final entry is the closing of their respective capital
accounts to Receivable from Rambo Corporation representing distribution of
their respective shares.

Robert, Capital P 80,000

Ana, Capital 40,000
Mandro, Capital 60,000
Bogie, Capital 50,000
Oscar, Capital 70,000
Receivable from Rambo Corp. P300,000

The number of shares issued to the partners who are now shareholders of Rambo
Corporation is computed below:

Partnership Net Assets:

Total Assets P320,000
Less: Total Liabilities - 20,000
Net Assets 300,000
Par Value per share P 100
Total shares issued 3,000 shares

Since the partnership net assets are also equal to the partner’s capital balance, the
determination of the number of shares that each partner may receive can be arrived at
by dividing their respective capital balances by the par value per share. Thus,

Partners Capital Balances Par Value per share No. of Shares

Robert P 80,000 P100 800

Ana 40,000 100 400
Mandro 60,000 100 600
Bogie 50,000 100 500
Oscar 70,000 100 700
P 300,000 P100 3,000 shares

“Not intended for publication. For classroom instruction purposes only”.

 25

Assessment

Directions: Read and analyze each activity. Answer what is asked. Encode your answer in a
separate word file and submit it in the classwork section of our google class on or before the date
stated. Please follow the format in naming the file for submission. Lastname_Unit7_Assessment

ACTIVITY 1

Answer Problem 1 of the Chapter 15 of your book Financial Accounting and Reporting (Millan)
pages 563-564.

ACTIVITY 2

Answer Problem 3 of the Chapter 15 of your book Financial Accounting and Reporting (Millan)
pages 567-569. Answer the questions given on each problem. Provide solutions. No merit shall
be given for answers without solutions.

ACTIVITY 3

Answer Problem 4 of the Chapter 15 of your book Financial Accounting and Reporting (Millan)
pages 569-572. Answer the questions given on each problem. Provide solutions. No merit shall
be given for answers without solutions.

“Not intended for publication. For classroom instruction purposes only”.

 26

UNIT

8 ACCOUNTING FOR
DIVIDENDS

(Source: Financial Accounting and Reporting by Rafael M. Lopez Jr.)

INTRODUCTION

Accumulated Profits (Losses) previously known as Retained Earnings account

represents the accumulated profits (losses) of a corporation. One type of Accumulated
Profits (Losses) which is “Unappropriated” or “Free” is that portion of Accumulated Profits
(Losses) which can be declared as “Dividends”. Dividends, therefore are taken out from
accumulated profits (losses) and become a liability by the corporation to its shareholders
once declared by the Board of Directors. Shareholders will get their respective shares in
corporation’s profit in proportion to the number of shares they held.

Treasury Shares are not entitled to receive dividends. Treasury Shares are the
corporation’s own share which are already issued and fully paid for by shareholders and
were later reacquired by the same corporation not for the purpose of cancellation. As
such, treasury shares are no longer in the possession of the shareholders and losses all
the rights. When these treasury shares, however, are resold or reissued, these become
outstanding share again, then these can already be entitled to receive dividends.

NATURE OF ACCUMULATED PROFITS (LOSSES) ACCOUNT

At the end of the accounting period, closing entries are prepared to determine the results
of business operations. Nominal accounts are closed to Income and Expenses Summary
account. The credit balance in the Income and Expense Summary account represents
Profit while a debit balance on the said account represents Loss.

In Sole Proprietorship, the credit balance of the Income and Expense and Expense
Summary account is closed to Proprietor’s Capital account while in Partnership, the credit
balance of the Income and Expense Summary account is closed to Partner’s Drawing
accounts. In a corporate form of business organization, the credit to Profit and Expense
Summary account is closed to “Accumulated Profits (Losses)” account and not to the
“Share Capital” account. Although the Share Capital is the legal capital of the
corporation, it is not affected by decreased in losses nor increased in profit realized by a
“Not intended for publication. For classroom instruction purposes only”.
 27

corporation. It is because creditors of the corporation must be protected and the

contribution of shareholders represented by the amount of Share Premium must be kept
intact. Basically, Accumulated Profits (Losses) has a normal balance of credit.
Accumulated Profits (Losses) is credited when there is Profit and debited when there is
Loss.

To illustrate:

At the end of 20A, Lucky Strike Corporation made a Profit of P150,000. In this,
the Income and Expense Summary account will show a credit balance
P150,000. Profit is transferred to Accumulated Profits (Losses) by debiting
Income and Expense Summary and crediting Accumulated Profits (Losses)
account as shown below:

Income and Expense Summary P150,000

Accumulated Profits P150,000
To close profit to Accumulated Profit (Losses).

If, however, Lucky Strike Corporation made a loss of P150,000 instead, the Income
and Expense Summary account will show a debit balance of P150,000. Loss is
transferred to Accumulated Profits (Losses) by debiting Accumulated Profits (Losses)
and crediting Income and Expense Summary account as shown below:

Accumulated Profits (Losses) P150,000

Income and Expense Summary P150,000
To close loss to Accumulated Profit (Losses).

The Accumulated Profits (Losses) account is usually debited and credited for the
following:

ACCUMULATED PROFITS (LOSSES)

a) Loss for the period a) Profit for the period
b) Dividends declared b) Reversal of Appropriation
c) Appropriation for plant
expansion, contingencies,
etc.

Accumulated Profits (Losses) is also affected by prior period’s adjustments. This is being
debited for prior period’s adjustments that affects the income and expense resulting to
decrease in profit and credited for prior period’s adjustments that affects the income
and expense resulting to increase in profit. The errors from prior period that require

“Not intended for publication. For classroom instruction purposes only”.

 28

adjustments to the accumulated profits (losses) account is presently known as

“Fundamental Errors”. This will be taken up in higher accounting course.

Shareholders will be able to get their shares of the corporation’s accumulated profit by
means of “Dividends” as declared by the Board of Directors. Therefore, dividends
declared will decreased the balance of Accumulated Profits (Losses) account.

Accumulated Profits (Losses) may either have a debit or a credit balance at the end of
any given period. As mentioned earlier, this account has a normal balance of a credit.
When it registers a debit balance, Accumulated Profits (Losses) is said to be “Deficit,
which means that a accumulation of losses is bigger than the accumulation of profit.

Illustration 1 – Accumulated Profits (Losses) a with a Credit Balance

The operating results of Chinatown Corporation from the start of its operations in 20A to
20D were:

20A Profit P 80,000

20B Profit 90,000
20C Loss ( 40,000 )
20D Profit 60,000
20D Dividends Declared 50,000

The ledger of Accumulated Profits (Losses) will have the following postings:

Accumulated Profits (Losses)

20C Loss P40,000 P 80,000 20A Profit
20D Dividends 90,000 20B Profit
Declared 50,000 60,000 20B Profit
P90,000 P230,000
P140,000 * credit balance

The credit balance in the Accumulated Profits (Losses) account is presented in the
Shareholders’ Equity section of the Statement of Financial Position as follows:

“Not intended for publication. For classroom instruction purposes only”.

 29

Shareholders' Equity

Contributed Capital:

Share Capital:
Ordinary Shares, authorized to issue 5,000 shares
par value, P100. Issued 3,000 shares P300,000
Share Premium on Ordinary Shares 15,000
Total Contributed Capital P315,000

Accumulated Profits (Losses) 140,000*

Total Shareholders' Equity P455,000

Illustration 2 – Accumulated Profits (Losses) with a debit balance

The opening results of Chinatown Company from the start of its operations in 20A to 20D
were:

20A Profit P70,000

20B Profit 40,000
20B Dividends Declared 60,000
20C Loss ( 80,000 )
20D Loss ( 20,000 )

The ledger of Accumulated Profits (Losses) will have the following postings:

Accumulated Profits (Losses)

20B Dividends P 70,000 20A Profit
Declared P 60,000 40,000 20B Profit
20C Loss 80,000
20C Loss 20,000
P 160,000 P 230,000
debit balance P 50,000

The debit balance in the accumulated Profits (Losses) account is presented in the
Shareholders’ Equity section of the Statement of Financial Position as follows:
“Not intended for publication. For classroom instruction purposes only”.
 30

Shareholders' Equity

Contributed Capital:

Share Capital:
Ordinary Shares, authorized to issue 5,000 shares
par value, P100. Issued 3,000 shares P300,000
Share Premium on Ordinary Shares 15,000
Total Contributed Capital P315,000

Accumulated Profits (Losses) (Deficit) (50,000)

Total Shareholders' Equity P265,000

Shareholders’ Equity decreases when there is Accumulated Profits (Losses) deficit.

ACCUMULATED PROFITS (LOSSES) DEFICIT

The Accounting Standards provide:

“A deficit in Accumulated Profits (Losses) account should not be presented as an asset.

When a deficit exceeds the total of the other capital account balances, the caption
“CAPITAL DEFICIENCY” is used instead of “SHAREHOLDERS’ EQUITY” in the main
heading of the liability side of the Statement of Financial Position”.

To illustrate:

Let us assume the following corporate data:

Ordinary Shares, authorize to issue 5,000 shares

par value, P100. Issued 3,000 shares, P300,000.
Share Premium on Ordinary Capital, P15,000 and Accumulated
Profits (Losses) is with P350,000 deficit.

The would-be Shareholders’ Equity section of the Statement of Financial Position is

presented below:

“Not intended for publication. For classroom instruction purposes only”.

 31

Capital Deficiency

Contributed Capital:

Share Capital:
Ordinary Shares, authorized to issue 5,000 shares
par value, P100. Issued 3,000 shares P300,000
Share Premium on Ordinary Shares 15,000
Total Contributed Capital P315,000

Accumulated Profits (Losses) (Deficit) (350,000)

Total Shareholders' Equity P(350,000)

ACCUMULATED PROFITS AND LOSSES: APPROPRIATED AND

UNAPPROPRIATED

ACCUMULATED PROFITS (LOSSES): Appropriated and Unappropriated

A credit balance in the Accumulated Profits (Losses) account which represents

Accumulated Profits (Losses) cannot all be declared as dividends and the same cannot
also be distributed to shareholders as their respective shares of the corporation’s
accumulated profit (losses). Restrictions are imposed as a legal requirement, voluntary
act of the Board of Directors or contractual. This resulted to have two types of
Accumulated Profits (Losses), namely:

1. Appropriated or Restricted Accumulated Profits (Losses) – This is the portion

of Accumulated Profits and Losses account appropriated for purchase of treasury
shares, plant expansion and other contingencies. This is not available for dividend
clarification.

2. Unappropriated or Free Accumulated Profits (Losses) – This is a portion of

Accumulated Profits and Losses account which can be declared as dividends.

The Accounting Standards provide:

“Appropriated Accumulated Profits (Losses) should be clearly distinguished

from Unappropriated Accumulated Profits (Losses”.

As a legal requirement, the law provides that a corporation should have an adequate
amount of Accumulated Profits (Losses) in order to acquire its own shares. The

“Not intended for publication. For classroom instruction purposes only”.

 32

corporation, therefore, should appreciate from its Accumulated Profits (Losses) an

amount equal to the cost of the treasury shares acquired.

To illustrate:

If a corporation which has an accumulated profit of P200,000 purchased

its shares for P80,000, the corporation is not permitted to declare and
pay more than P120,000 dividends. The amount of P80,000 must be
earmarked or appropriated so as not to impair the corporation’s legal
capital. Therefore, of the P200,000, Accumulated Profits and Losses,
P80,000 is being referred to as “Appropriated or Restricted Accumulated
Profits (Losses)” while the balance of P120,000 is what is being referred
to as “Unappropriated or Free Accumulated Profits (Losses)”

The Journal Entry to Record Appropriation is:

Accumulated Profits (Losses) P80,000

Accumulated Profits (Losses) Appropriated
for Treasury Shares P80,000

When the Treasury Shares are issued or resold, the appropriation is being reverted back
to Unappropriated of Free Accumulated Profits (Losses) which can already be available
for dividend declaration.

The Journal Entry to Revert Appropriation is:

Accumulated Profits (Losses)

Appropriated for Treasury Shares P80,000
Accumulated Profit (Losses) P80,000

Accumulated Profits (Losses) can also be appropriated through voluntary act of the Board
of Directors so as not to impair the corporation’s working capital.

To illustrate:

The corporation is planning to construct a building. To avoid the

impairment of working capital because the amount involved is big
enough, The Board of Directors by way of an approved resolution makes
an appropriation from its Accumulated Profits (Losses) for the said
purpose. Assuming that the amount appropriated is P500,000, the entry
to record the appropriation is:

“Not intended for publication. For classroom instruction purposes only”.

 33

Accumulated Profits (Losses) P500,000

Accumulated Profits (Losses)
Appropriated for Building Construction P500,000

As soon as the construction is finished, the appropriated portion is reverted back to the
Unappropriated Accumulated Profits (Losses) by the following journal entry:

Accumulated Profits (Losses)

Appropriated for Building Construction P500,000
Accumulated Profits (Losses) P500,000

In the shareholders’ Equity section of the Statement of Financial Position, the

Accumulated Profits (Losses) Account with both Appropriated and Unappropriated
portions is shown in the following proforma:

Accumulated Profits (Losses):

Appropriated for:
Acquisition of Treasury Shares Pxx
Building Construction xx Pxx
Unappropriated or Free xx
Total Accumulated Profits (Losses) Pxx

PRIOR PERIOD ADJUSTMENT

Prior period errors are omissions arising from mathematical mistakes, misapplication of
accounting policies, misinterpretation of facts, fraud or oversights that occur from the past
in one or more accounting periods that are discovered in the current period. Corrections
should be recorded in the year in which the error is discovered.

If the error resulted in overstatement of profit, the adjusting entry should be recorded by
debiting Accumulated Profit (Loss) or Retained Earnings, Beginning of the period to
decrease its balance. Conversely, if the error resulted in understatement of profit. The
adjusting entry should be recorded by crediting Accumulated Profit (Loss) or Retained
Earnings, Beginning of the period to increase its balance.

Remember, the profit or loss of a corporation is closed to Accumulated Profit (Loss) or

Retained Earning through Income and Expense Summary.

To illustrate:

“Not intended for publication. For classroom instruction purposes only”.

 34

The accountant of Macopa Corporation failed to record the 2014 depreciation

of a new building in the amount of P50,000. The error was discovered in 2015.
The entry in 2015 to correct the error is:

Accumulated Profit (Loss), Jan., 2015 P50,000

Accumulated Depreciation-Building P50,000

(Tax implication is not considered)

DIVIDENDS

DEFINITION AND NATURE OF DIVIDENDS

Dividends refer to a shareholders’ share of a corporation’s accumulated profits from its

operations. These are referred to as “dividends out of earnings”. It is the Board of
Directors who declare dividends through approved resolutions and is announced so that
the shareholders would know. Such declaration becomes mandatory on their part if a
corporation has sufficient amount of Unrestricted Accumulated Profits (Losses) and
sufficient cash to pay in case of cash dividends.

Section 43 of the Corporation Code of the Philippines as quoted in the Accounting

Standards provides that:

“Share Corporation are prohibited from retaining surplus profit in excess of one
hundred (100%) percent of their Paid-in Share Capital, except when justified
by the circumstances”

Dividends can also be declared out of a corporation’s capital after payment of the
corporation’s creditors. This is an event wherein the corporation is facing liquidation.
These dividends are being referred to as “liquidating dividends”. Our discussion will be
centered on “dividends out of earnings”.

IMPORTANT DATES TI REMEMBER ON DIVIDEND DECLARATION

A corporation may declare dividends in form of cash, shares, scrip or liability and property.
In any dividend declaration, there are three (3) important dates to remember, namely;

1. DATES OF DECLARATION – this is the date when the Board of Directors

approved the resolution to distribute dividends. On this date, the liability
Dividends Payable is recorded and Accumulated Profits (Losses) is
decreased.

“Not intended for publication. For classroom instruction purposes only”.

 35

2. DATE OF SHAREHOLDERS OF RECORD – this is the date the share and

transfer book is closed to determine who are the shareholders are of such date
who are entitled to receive dividends. On this date, the list of shareholders is
prepared. No journal entry is required.

3. DATE OF PAYMENT – this is the date when the dividends are actually
distributed. On this date, the liability Dividends Payable is paid and assets
decrease in case of cash or property dividends.

WHAT SHARES ARE ENTITLED TO RECEIVE DIVIDENDS?

All “outstanding shares” are entitled to receive dividends. Outstanding shares refer to
shares that were issued and fully paid and at the time of dividend declaration are still in
the possession of the shareholders.

All “subscribed par value shares”, provided they are not delinquent are also entitle to
receive dividends. This is because subscription agreement once entered becomes
binding. It cannot be revoked or cancelled. Hence, Subscribed Par Value Shares are
considered as legally issued from the time of subscription and as such, acquire all the
rights of shareholders. They are entitled to vote and receive dividends.

DIVIDENDS ON DELINQUENT SUBSCRIPTION

As explained earlier, all Subscribed Par Value Shares are entitled to receive dividends
provided they are not delinquent. In case these Subscribed Par Value Shares are
“delinquent” this is what is going to happen:

“Cash dividends due on delinquent shares shall first be applied to the unpaid balance of
the subscription plus expenses”. For instance, if the would-be share in dividend is P10,000
but has a subscription balance plus expenses of P12,000, the shareholders could not
receive the cash dividend. But it in the given case, the subscription balance plus expenses
amounts to P6,000 only, the shareholders will receive P4,000 cash dividend.

“Share Dividends shall be withheld from a delinquent shareholder until he pays his
subscription balance in full”.

CASH DIVIDENDS

Cash dividend declaration may be expressed as follows:

1. As a certain percentage of par or stated value

2. As a certain peso amount per share
“Not intended for publication. For classroom instruction purposes only”.
 36

Regardless of how it may be expressed, the proforma journal entries upon declaration
and payment would be:

UPON Accumulated Profits (Losses) Pxx

DECLARATION Cash Dividends Payable Pxx

Effect: Accumulated Profits (Losses) balance will be reduced and corporation’s

obligations will be recognized.

UPON Cash Dividends Payable Pxx

PAYMENT Cash Pxx

Effect: Corporation’s obligation is paid and its asset will be reduced.

Cash Dividends Payable when not yet paid as of Statement of Financial Position date
is presented as “Current Liability”

To illustrate:

The Board of Directors of Buhangin Corporation at their meeting on August 1, 20A has
declared a 10% cash dividend to shareholders of record on Sept. 30 payable on Oct.
31,20A. 10,000 shares were issued and outstanding with par value of P50 per share.

Computation of Dividends

Issued and Outstanding Shares 10,000

x Par Value Per Share P 50
Share Capital P 500,000
x % of Dividends Declared 10%
Amount of Dividends Declared P 50,000

The other way of computing cash dividend is:

Par Value Per Share 50

x % of Dividends Declared 10%
Dividends Declared Per Share P 5
x No. of Shares Outstanding 10,000
Amount of Dividends Declared P 50,000

“Not intended for publication. For classroom instruction purposes only”.

 37

Journal Entries

Date of Accumulated Profits (Losses) P50,000

Declaration Cash Dividends Payable P50,000
Aug. 1, 20A

Date of Record No entry. A list of shareholders is prepared on

Sept. 30, 20A record as of Sept. 30

Date of Cash Dividends Payable P50,000

Payment Cash P50,000
Oct. 31, 20A

If for example, Mr. B is one of the Shareholders on record on September 30 with 100
shares, his share of the dividend is P500 (100 share x P5 per share).

Assuming that one of the 10,000 shares issued and outstanding, 1,000 shares were
reacquired by Buhangin Corporation as of September 30, the shares outstanding are
9,000 shares. Dividend is computed as follows:

Issued and Outstanding Before Treasury Shares 10,000

Less: Treasury Shares 1,000
Issued and Outstanding After Treasury Shares 9,000
x Dividend Per Share P 5
Amount of Dividends Declared P45,000

Remember, only outstanding shares are entitled for dividends and treasury shares are
not outstanding.

CASH DIVIDEND WHEN THERE ARE TWO CLASSES OF SHARES

When cash dividends are declared for two classes of shares, Cash Dividends Payable
account should indicate as to “Cash Dividends Payable-Preference Share” or “Cash
Dividends Payable-Ordinary Share”. The dividend requirement on preference share must
be paid before any payment can be made to ordinary shareholders. In other words, the
preference shares are given priority over ordinary shares in dividend payment. The
amount of cash dividend on each class of share will depend on the kind of description of
the preference, so as preference share may be:

1. Cumulative and Non-Participating

“Not intended for publication. For classroom instruction purposes only”.
 38

2. Non-cumulative and Non-Participating

3. Cumulative and Fully Participating
4. Non-cumulative and Fully Participating

The journal entry to record the declaration and payment of cash dividends will be similar
to a case where there is only a single class of share except the word ordinary or
preference is indicated:

Upon Accumulated Profits (Losses) Pxx

Declaration Cash Dividends Payable-Preference Pxx
Cash Dividends Payable-Ordinary xx

Upon Cash Dividends Payable-Preference Pxx

Payment Cash Dividends Payable-Ordinary xx
Cash Pxx

To illustrate:

The following data were taken from the records of Banahaw Corporation:

10% Preference Share, P100 par, 1,000

shares were issued and outstanding P100,000
Ordinary Shares, P50 par, 3,000 shares
were issued and outstanding 150,000
Accumulated Profits (Losses):
Appropriated for Plant Expansion P 80,000
Unappropriated or Free 120,000 200,000

Of the Unappropriated or Free Accumulated Profits (Losses) of P120,000, P90,000 was

declared as cash dividends in 20A. no cash dividends were declared and paid in the past
two years.

“Not intended for publication. For classroom instruction purposes only”.

 39

1. PREFERENCE SHARES ARE CUMULATIVE AND NON-PARTICIPATING

Cash Dividend is distributed as follows:

Preference Ordinary
Total Share Shares
Preference Dividends
Arrears - P100,000 x 10% x 2yrs. P 20,000 P 20,000
Current - P100,000 x 10% x 1yr. 10,000 10,000

Ordinary Dividends:
Balance all to Ordinary (90,000 less P30,000) P 60,000 P 60,000
As Distributed P 90,000 P 30,000 P 60,000

Explanation:

a.) The basis in distributing dividends is share capital. Hence, 1,000 shares x P100
par value x 10% description of the preference share = P10,000.

b.) If preference share are cumulative, passed dividends or dividends in arrears are
included for distribution plus current year’s dividend, computed as follows:

Arrears: P10,000 x 2 years = P20,000

Current: 10,000 x 1 yr. = 10,000
Preference Shares P30,000

c.) Since the preference shares are non-participating, the balance of P60,000 will all
go to ordinary shares, computed as follows:

P 90,000 - Amount of Dividends Declared

30,000 - Distributed to Preference Shareholders
P 60,000 - For Distribution to Ordinary Shareholders

d.) A sample distribution to shareholders is presented below:

Preference Ordinary
Share in Dividends P 30,000 P 60,000
÷ Share Outstanding 1,000 shares 3,000 shares
Dividends Per Share P 30 P 20

This means that for every share of preference shares that a shareholders owns, his share
is P30 and P20 each share for the ordinary share. If for instance, Mr. A, a shareholder
owns 50 shares of preference and 100 ordinary shares, his share on the P30,000

“Not intended for publication. For classroom instruction purposes only”.

 40

preference share dividends is P1,500 and his share on the P60,00 ordinary share
dividends is P2,000 as computed below:

Preference Share Ordinary Shares

Number of share he owns 50 shares 100 shares
x Dividend per share P 30 P 20
His share in dividends P 1,500 P 2,000 = P3,500

2. PREFERENCE SHARE AND NON-CUMULATIVE AND NON-PARTICIPATING

Cash Dividend is distributed as follows:

Preference Ordinary
Total
Share Shares
Preference Share Dividends:
Current Year - P100,000 x 10% x 1yr. 10,000 10,000
Ordinary Share Dividends:
Balance all to Ordinary 80,000 P 10,000 P 80,000
As Distributed P 90,000 P 10,000 P 80,000
Distributed as Dividends P 10,000 P 80,000
÷ Shares Outstanding 1,000 shrs. 3,000 shrs.
Dividends Per Share P 10 P 26.67

Explanation:

a) Preference Share are non-cumulative. Therefore, only current year’s dividend is

paid in the amount of P10,000. Passed dividends or dividends in arrears are not
paid anymore.

b) The balance of P80,000 (90,000- P10,000) is all given to ordinary shareholders.

“Not intended for publication. For classroom instruction purposes only”.

 41

3. PREFERENCE SHARES ARE CUMULATIVE AND FULLY PARTICIPATING

Cash Dividend is distributed as follows:

Preference Ordinary
Total
Share Shares
Preference Dividends:
Arrears - P100,000 x 10% x 2yrs. P 20,000 P 20,000
Current - P100,000 x 10% x 1yr. 10,000 10,000

Ordinary Dividends:
P150,000 x 10% x 1yr. 15,000 15,000

Balance for participation, P45,000

Preference: P100,000/250,000 x P45,000 18,000 18,000
Ordinary: P150,000/250,000 x P45,000 27,000 27,000
As Distributed P 90,000 P 48,000 P 42,000

Distributed Dividends P 48,000 P 42,000

÷ Shares Outstanding 1,000 shrs. 3,000 shrs.
Dividends Per Share P 48 P 14.00

Explanation:

a) The Preference Shares are cumulative. Therefore, dividends in arrears of P20,000

and current year’s dividends of P10,000 are paid.

b) Since Preference Shares are participating, the balance of P60,000 could not all be
given to Ordinary. Instead, ordinary shares are given the same rate for one year
based on share capital. Hence, P150,000 x10% = P15,000.

c) The balance of P45,000 (P90,000 – P45,000) is divided between Preference and

Ordinary on a pro-rata basis.

“Not intended for publication. For classroom instruction purposes only”.

 42

4. PREFERENCE SHARES ARE NON-CUMULATIVE AND FULLY

PARTICIPATING

Cash Dividend is distributed as follows:

Preference Ordinary
Total
Share Shares
Preference Dividends:
Current Year - P100,000 x 10% x 1yr. 10,000 10,000

Ordinary Dividends:
Current Year - P150,000 x 10% x 1yr. 15,000 15,000

Balance for participation, P65,000

Preference: P100,000/250,000 x P65,000 26,000 26,000

Ordinary: P150,000/250,000 x P65,000 39,000 39,000
As Distributed P 90,000 P 36,000 P 54,000

Distributed Dividends P 36,000 P 54,000

÷ Shares Outstanding 1,000 shrs. 3,000 shrs.
Dividends Per Share P 36 P 18.00

Explanation:

a) Preference Shares are non-cumulative so that the only current year’s dividend of
P10,000 is paid.

b) Because preference shares are fully participating, the ordinary share is given the
rate for one year based on share capital. Hence, P150,000 x 10% = P15,000

c) The balance of P65,000 is divided between preference and ordinary shares on a

pro-rata basis.

SHARE DIVIDEND

When share dividends are declared, we have to consider not only the sufficiency of the
Unappropriated Accumulated Profits (Losses) but also the sufficiency of the original and
unissued shares which are to be distributed as dividends. Treasury shares cannot be
distributed as share dividends although there were once issued and outstanding and
reacquired by the issuing corporation. The declaration of the share dividends requires
approval of shareholders representing not less than two thirds (2/3) of the outstanding
share capital at a regular meeting called for the purpose.
“Not intended for publication. For classroom instruction purposes only”.
 43

Share dividends are payable in the corporation’s own shares. Therefore, there is no cash
outlay on the part of the issuing corporation. Only, additional shares are issued to
shareholders of record in proportion to the shares they own. This in effect reduces the
Accumulated Profits (Losses) and increases Share Capital. In other words, there is
only a transfer of the portion of Accumulated Profits (Losses) to Share Capital account.
This in effect does not change the amount of the Total Shareholders’ Equity. The
decrease in one component increases the other by the same amount. The Accumulated
Profits (Losses) account is said to have been “CAPITALIZED”. Remember, the assets
of the corporation are not affected.

Share dividends should be recorded on the rate declared and this calls for the issuance
of “certificate of share” upon distribution. The proforma journal entries are as follows:

Upon Accumulated Profits (Losses) Pxx

Declaration Share Dividends Distributable Pxx

Upon Share Dividends Distributable Pxx

Distribution Cash Pxx

Take note that the account title being used is “Share Dividends Distributable” and not
“Share Dividends Payable”. The use of the account Share Dividends Payable is
confusing, if not misleading. This account is not a liability as the word “Payable” implies.
Share Dividends are not payable out of the current assets of the corporation declaring it
but instead a Share Capital account. Hence, the appropriate account title is “Share
Dividends Distributable”. When share dividends are not yet distributed as of Statement of
Financial Position date, Share Dividends Distributable account is shown in the
Shareholders’ Equity section of the Statement of Financial Position.

Presented below is the Share Capital component of a Shareholders’ Equity in the

Statement of Financial Position showing the Share Dividend Distributable account.

Contributed Capital:
Share Capital:
Ordinary Shares, authorized to issue
shares, par value, P . Issued and
outstanding, shares Pxx
Add: Share Dividends Distributable xx
Total Share Capital Pxx

“Not intended for publication. For classroom instruction purposes only”.

 44

Share Dividends are usually declared as:

1. A certain percent of total number of shares entitled to receive dividends.

To illustrate:

Kalayaan Corporation has P10,000 shares issued and outstanding when it

declares 25% share dividends. The number of shares that will be issued to
shareholders as share dividends will be 2,500 shares, computed as follows:

Outstanding Share 10,000

x % of dividends declared 25%
Share Dividends Declared 2,500 shares

Each share outstanding is entitled to a share dividend of .25 or ¼ of a share

(2,500/10,000). If for example, Mr. X is a holder of 500 shares, the additional shares he
will receive as share dividends is 125 shares computed as follows:

500 Number of shares held

x .25 Share dividends per share
125 Additional share he will receive

Or 500 shares x 25% = 125 shares. The holdings of Mr. X in Kalayaan Corporation has
increased to 625 shares.

2. A certain number of shares per share held.

To illustrate:

Bato Corporation declares a share dividend of “one-for-five”. One-for-five

means, one additional share is issued as share dividend for every five (5)
shares outstanding. This is actually equivalent to a 20% share dividend (1/5
= 20%). If there are 20,000 shares outstanding, the additional shares to be
issued as share dividend will be 4,000 shares (20,000/5 shares = 4,000
shares). If Mr. Y is a holder of 1,000 shares, the additional shares that he
will receive as share dividend will be 200 shares. The holding of Mr. Y in
Bato Corporation has increased to 1,200 shares.

When share dividends are declared, Accumulated Profits (Losses) is said to have been
capitalized because the portion of Accumulated Profits (Losses) is transferred to Share
Capital the amount debited to Accumulated Profits (Losses) may or may not be the same
amount credited to Share Capital pursuant to what has been provided for by the
Accounting Standards which categorizes corporation issuing the share dividends as
follows:

“Not intended for publication. For classroom instruction purposes only”.

 45

SMALL SHARE DIVIDENDS

For corporations who declare a share dividend of less than 20% of the previously
outstanding share, the Accumulated Profits (Losses) account is to be capitalized at fair
market value upon the date of declaration.

To illustrate:

Magara Corporation, a corporation with listed shares, declares a 10%

share dividend (less than 20%). It has 10,000 shares issued and
outstanding with par value of P100. On the date of declaration, the
market value per share is P105.

The amount of Accumulated Profits (Losses) to be transferred to Share

Capital is based on P105 per share which is the market value and not
at P100 its par value. The number of shares to be issued as share
dividends is 1,000 shares (10,000 shares x 10%).

The required Journal Entries are as follows:

UPON Accumulated Profits (Losses) (1,000 x P105) P105,000

DECLARATION Share Dividends Distributable (1,000 x P100) P100,000
Share Premium from Share Dividend (1,000 shrs. x P5) 5,000

UPON Share Dividends Distributable P100,000

DISTRIBUTION Share Capital P100,000

LARGE SHARE DIVIDENDS

In an event wherein this corporation declared a share dividend of more than 20% of the
previously outstanding share, the Accumulated Profits (Losses) account is to be
capitalized at par value upon declaration.

Illustration:

Let us assume that Magara Corporation, instead declares a 25% share dividend, the
number of shares to be issued as dividend is 2,500 shares (10,000 shares x 25%). The
required journal entries are as follows:

UPON Accumulated Profits (Losses)

DECLARATION (2,500 shares x P100) P250,000
Share Dividends Distributable P250,000
“Not intended for publication. For classroom instruction purposes only”.
 46

UPON Share Dividends Distributable P250,000

DISTRIBUTION Share Capital P250,000

LIQUIDATING DIVIDENDS

Liquidating Dividends are those dividends declared and paid out of capital. In other words,
liquidating dividends are return of capital to investing shareholders.

SHARE SPLITS

“Share Split” is a corporate practice wherein it reduces its par value or stated value per
share which corresponds to increase in the number of total shareholding. This in effect
will not change the balance of Shareholders’ Equity account. One of the reasons why
corporation do this, it is because the Board of Directors sometimes believe that at a lower
price of share capital would attract more investors to the corporation.

To illustrate:

Mahogany Corporation has 20,000 ordinary shares issued and

outstanding at a par value of P100 for P2,000,000. The Board of Directors
finally decided to “split” the shares “five for one”

This means that a shareholder will receive 5 shares with a new par value
of P20.00 for each share held computed as follows:

20,000 share
x 5 (5 for 1)
100,000 shares x P20 (1/5 x P100) = P2,000,000

As we see, the ordinary shares issued and outstanding of P2,000,000 before the split
remain unchanged after the split of P2,000,000 also but the number of ordinary shares
issued and outstanding increases from 20,000 to 100,000 and the par value was reduced
from P100 down to P20 par value per share.

SCRIP DIVIDENDS

Scrip Dividends are actually deferred cash dividends. These are being declared when a
corporation has sufficient Unrestricted Accumulated Profits (Losses) to warrant
declaration but does not have enough cash to pay dividends. Scrip dividends are written
promise to pay a certain amount of money at a future date. When interest-bearing, interest
is paid at maturity date.

“Not intended for publication. For classroom instruction purposes only”.

 47

To illustrate:

Banana Corporation declares a 10% dividends on 5,000 ordinary

shares, par value of P100 in one year at 12% interest rate. The entries
to record both declaration and payment are:

UPON Accumulated Profits (Losses) P50,000

DECLARATION Scrip Dividends Payable P50,000

UPON Scrip Dividends Payable P50,000

DISTRIBUTION Interest Expense 6,000
Cash P56,000
Computation:

For Dividends: 5,000 shares x P100 par value x 10% = P50,000

For Interest: P50,000 x 12% x 1 year = P 6,000

Scrip Dividends Payable if not yet paid is presented as a Current Liability in the Statement
of Financial Position.

PROPERTY DIVIDENDS

Property Dividends are dividend declared which are payable in terms of non-cash assets.
Usually, securities like shares and bonds that are required by the issuing corporation from
other corporations are being distributed as property dividends.

The Accounting Standards provide:

“Dividends Payable in non-cash assets (other than stock) should be

charged to Accumulated Profits (Losses) at cost or net book value of non-
cash assets distributed.”

To illustrate:

RFM Corporation owns 3,000 shares in DEF Corporation at a cost of P10

per share. When RFM declared dividends, these DEF shares were
distributed to shareholders instead of its own assets. These entries to record
declaration payment are as follow:

UPON Accumulated Profits (Losses) P30,000

DECLARATION Dividends Payable in Shares P30,000
of DEF Corporation

“Not intended for publication. For classroom instruction purposes only”.

 48

UPON Dividends Payable in Share

DISTRIBUTION of DEF Corporation P30,000
Investment in Share of DEF Corporation P30,000

The account credited upon payment in “Investment in Share of DEF Corporation” because
the entry to record the acquisition of these 3,000 shares of DEF Corporation is regarded
as its investment. The entry made in the book of RFM Corporation in acquiring these
3,000 shares was:

Investment in Share of DEF Corporation P30,000

Cash P30,000
Hence, when disposed of, the account credited was the investment account.

The Accounting Standards provides that “Treasury shares may be reissued dividends, in
which case the cost of the shares should be charged to “Accumulated Profits (Losses)”.

Moreover, Corporation Code of the Philippines, Section V, paragraph 3 states that,

“Treasury shares may be declared as property dividends to be issued out of the

Accumulated Profits (Losses) previously used to support their acquisition, provided that
the amount of said Accumulated Profits (Losses) has not been impaired by losses. Any
declaration and issuance of treasury shares as property dividends shall be disclosed and
properly designated as property dividends in the books of the corporation and in its
financial statements”.

UPON Accumulated Profits (Losses) Pxx

DECLARATION Property Dividends Payable Pxx

UPON Property Dividends Payable Pxx

DISTRIBUTION Treasury Shares Pxx

TREASURY SHARES

DEFINITION AND NATURE

Treasury Shares are corporation’s own shares which are already issued and fully paid for
by shareholders, were later reacquired but not cancelled.

“Not intended for publication. For classroom instruction purposes only”.

 49

To illustrate:

Lambada Corporation has 5,000 issued and outstanding shares. Mr. Cruz is one of the
shareholders for 100 shares. Lambada Corporation reacquired these 100 shares. The
reacquired shares are called “Treasury Shares”

There are four (4) basic requirements in order for a share to become Treasury Shares.
They are as follows:

1. It should be the corporation’s own share

2. It has been issued and fully paid already
3. It is reacquired by the issuing corporation
4. It is reacquired not for the purpose of cancellation.

Treasury Share, though they are reacquired are not considered as Assets of the issuing
corporation because a corporation cannot own a part of itself. When these treasury
shares are in the possession of the issuing corporation, these have no more voting rights,
nor does it have a preemptive right to participate in additional issuance of shares and not
entitled to dividends because a corporation cannot recognize income through dealing with
itself.

If a corporation has more than one class of share, the Treasury Share account should
indicate the class as Treasury Share- Ordinary” or “Treasury Share -Preference”.

ACQUISITION OF TREASURY SHARES

Treasury Shares may be acquired by purchase, redemption, donation or through some

legal means. However, “No corporation shall redeem, repurchase or reacquire its own
shares of whatever class, unless it has an adequate amount of Unappropriated or
Unrestricted Accumulated Profits (Losses) to support the cost of the said shares.”

The reason why an appropriation from the Unrestricted Accumulated Profits (Losses) is
reacquired by law when Treasury Shares are acquired is in order to protect creditors so
as not to impair the corporation’s legal capital. This is in conformity with the “Trust Fund
Doctrine” where legal capital of the corporation is held intact for the protection of the
creditors. A portion of the Accumulated Profits (Losses) is then restricted or appropriated,
the amount of which is equal to the cost of treasury shares acquired and the appropriated
portion of the Accumulated Profits (Losses) cannot be available for dividend distribution
anymore until such time that treasury shares are reissued or resold.

To illustrate:

Let us assume that the Shareholders’ Equity of Mango Corporation is as

follows:

“Not intended for publication. For classroom instruction purposes only”.

 50

Ordinary Share P500,000

Accumulated Profits (Losses) 100,000
Total Shareholders’ Equity P600,000

In this example, the corporation can purchase its own shares up to the extent of the
Accumulated Profits (Losses) balance of P100,000. If the Treasury Shares were acquired
at a cost of P100,000, Shareholders’ Equity of Mango Corporation will appear as follows:

Ordinary Share P500,000

Accumulated Profits (Losses) 100,000
Total P600,000
Less: Treasury Shares 100,000
Shareholders’ Equity P500,000

After the acquisition of treasury shares, the Accumulated Profits (Losses) of P100,000
can no longer be available for dividend declaration, otherwise the legal capital of
P500,000, will be reduced to P400,000 which is violation to the “Trust Fund Concept”.
COST METHOD OF ACCOUNTING FOR TREASURY SHARES

The most common method of accounting for the purchase of treasury shares is the “Cost
Method”. This method conforms to the Accounting Standards which provides:

“Treasury Shares should be recorded at cost irrespective of these are

acquired below or above par value. The cost of treasury shares for non-cash
consideration is usually measured by the recorded amount of the non-cash
assets surrendered.”

The cost of treasury shares should be shown in the Statement of Financial Position as a
reduction from the Shareholders’ Equity.

To illustrate:

Let us assume that Silvertown Corporation has the following capital account
balances:

Contributed Capital:
Share Capital
Ordinary Shares, authorized to issue
1,000 shares, par value, P100 issued 900 shares P90,000
Share Premium 10,000
Accumulated Profits (Losses) 50,000

“Not intended for publication. For classroom instruction purposes only”.

 51

On September 1, Silvertown Corporation acquire its own shares of P200 at P105.

A) The journal entry to record the acquisition is:

Treasury Share P21,000

Cash P21,000
To record acquisition of 200
shares of Treasury Share at P105

The treasury shares were acquired above par value. While the par value is P100, the
acquisition cost is P105. The cost of the Treasury Shares therefore, is P21,000 (200
shares at P105). Had the treasury shares been acquired at P95, below its par value, the
cost could have been P19,000.

B) An entry is then prepared to appropriate a portion of the Accumulated Profits

and Losses for the acquisition of the treasury shares is presented below:

Accumulated Profits (Losses) P21,000

Accumulated Profits (Losses)
Appropriated for Treasury Shares P21,000
To record appropriation of Accumulated
Profits (Losses) for acquisition of treasury shares.

The Accumulated Profits (Losses) of P50,000 is now broken down into:

Accumulated Profits (Losses) Appropriated

for Treasury Shares P21,000
Accumulated Profits (Losses) Free or Unrestricted 29,000
Total Accumulated Profits (Losses) P50,000

The amount of P21,000, representing the Appropriated or Restricted portion of

Accumulated Profits (Losses) cannot be available for dividend distribution. If there are no
other restrictions in the Accumulated Profits and Losses, P29,000 representing Free or
Unrestricted Accumulated Profits (Losses) portion is available for dividend distribution.

The acquisition of the treasury shares did not impair the P90,000 legal capital of the
corporation.

C) The Shareholders’ Equity of the Silvertown Corporation is presented as

follows:

“Not intended for publication. For classroom instruction purposes only”.

 52

Shareholders' Equity

Contributed Capital:
Share Capital
Ordinary Share, authorized to issue, 1,000 shares
par value, P100. Issued 900 sharees, of which
200 shares in the treasury P 90,000
Share Premium 10,000
Total Contributed Capital P100,000
Accumulated Profits (Losses):
Appropriated for Treasury Share P21,000
Unappropriated or Free 29,000 50,000
Total Contributed Capital and Accumulated Profts
(Losses)
P150,000
Less: Treasury Shares at cost 21,000
Total Shareholders' Equity P129,000

After the acquisition of 200 shares of Treasury Shares, the number of shares outstanding
had decreased to 700 shares (900-200). The 200 shares which are already called
Treasury Shares have no more voting rights and not included in computing dividends.

The Shareholders’ Equity is composed of Total Contributed Capital and Accumulated

Profit (Losses). Therefore, the Shareholders’ Equity before deducting cost of Treasury
Shares is P150,000.

D) If the Treasury Shares are sold, the appropriation of Accumulated Profits and
Losses will be reverted back to Unappropriated Accumulated Profits (Losses)
in an amount equal to the “cost” of the treasury shares regardless of what
price these are sold.

To illustrate:

Assuming that of the 200 shares of the treasury shares, 150 shares
were sold, to revert the appropriated back to unappropriated, the
journal entry is:

Accumulated Profits (Losses)

Appropriated for Treasury Shares P15,750
Accumulated Profits (Losses) P15,750
To revert appropriation of Accumulated Profits
(Losses) to Free. (150 shares x P105).

“Not intended for publication. For classroom instruction purposes only”.

 53

If the balance of 50 shares in the treasury will be sold, another entry to revert the
appropriation is done in the amount of P5,250 (50 shares x P105). By this time, the whole
amount of P21,000 (P15,750 plus P5,250) is reverted to Unappropriated or Free
Accumulated Profits (Losses). Hence, can already be declared as dividends.

SALE OR ISSUANCE OF TREASURY SHARES

The corporation may sell its treasury shares at any price or even below par provided it is
reasonable price approved by the Board of Directors. The distinction between Unissued
Shares and Treasury Shares is of great importance when shares are sold because
Treasury Share can be sold at a discount while the Unissued Share cannot.

The Accounting Standards provides:

“Upon resale (Reissuance) of the treasury shares, the Treasury Share

account is credited for cost. Gains on such sales shall be credited to or Share
Premium on Treasury Shares transactions for that class of share. Losses
shall be charged against Share Premium but only to the extent of previous
net gains from sales or charged to Accumulated Profits (Losses). Gains and
Losses of treasury share should not be credited or charged to Income”.

To have an easy understanding and a clearer picture of the sale of treasury shares
transaction, let us continue with the use of the same illustrative problem, Silvertown
Corporation.

To illustrate:

Silvertown Corporation has acquired 200 shares of treasury shares at

P105 when the par value was P100 per share. The cost of the treasury
shares is P21,000 (200 shares x P105). The 200 shares were sold as
follows:

30 shares for P105 (at cost)

70 shares for P120 (above cost)
100 shares for P100 (below cost)

A- Sold at cost – 30 shares were sold for P105

Journal Entry:

Cash P3,150
Treasury Shares P3,150
To record 30 shares of Treasury Shares sold
For P105 per share.

“Not intended for publication. For classroom instruction purposes only”.

 54

B- Sold above cost – 70 shares were sold for P120

Journal Entry:

Cash P8,400
Treasury Shares P7,350
Share Premium – Treasury Share Transaction 1,050
To record 60 shares of Treasury Shares sold
P120 per share computed as follows:

Proceeds from Sale (70 shares x P120) P8,400

Less: Cost of Treasury Shares (70 shares x P105) 7,350
Gain (Credited to Share Premium – Treasury Share Transaction) P1,050

C- Sold below cost – 100 shares were sold for P100

Journal Entry:

Cash P10,000
Share Premium – Treasury Shares Transaction 500
Treasury Shares P10,500
To record cost of P100 Treasury Shares sold
For P100 per share computed below:

Proceeds from Sale (100 shares x P100) P10,000

Less: Cost of Treasury Shares (100 shares x P105) 10,500
Gain (Debited to Share Premium – Treasury Share Transaction) (P 500)

The loss was debited to Share Premium – Treasury Share Transaction because the gain
was credited to the said account. The amount of Share Premium that will be shown in the
Shareholders’ Equity will be P550 as shown in the next page in T-account:

Share Premium - Treasury Share

Loss P500 P1,050 Gain

P 550

In an event wherein the amount of loss will be bigger than the amount or gain, the amount
of difference is charge to Accumulated Profits (Losses).

“Not intended for publication. For classroom instruction purposes only”.

 55

Computation:

Proceeds from sale (100 shares x P80) P8,000

Less: Cost of Treasury Shares (100 shares x P105) 10,500
Loss P2,500

Journal Entry:

Cash P8,000
Share Premium – Treasury Share Transactions 1,050
Accumulated Profits (Losses) 1,450
Treasury Shares P10,500
To record sale of 100 shares of treasury
shares for P80 per share.

Again, Accounting Standards partly provide:

“losses shall be charged against Share Premium but only to the extent of
previous net “gains”; otherwise “losses” should be charged to
Accumulated Profits (Losses).

Since the amount of loss is P2,500 and net gain is P1,050, only P1,050 of the P2,500
loss can be charged against Share Premium – Treasury Share Transaction account. The
difference of P1,450 is charged to Accumulated Profits (Losses). The Share Premium
account will be closed while Accumulated Profits and Losses account balance will be
decreased as it is being debited as shown below in T- account:

Share Premium - Treasury Share

Transactions

Loss P1,050 P1,050 Gain

Accumulated Profits (Losses)

For the Balance P1,450

Take Note:

If there are two classes of shares, Ordinary and Preference, The Share Premium account
will be shown separately as “Share Premium – Treasure Share Ordinary” or Share
“Not intended for publication. For classroom instruction purposes only”.
 56

Premium – Treasury Share Preference”. This is so because the Treasury Share Account
of each class should also be separately shown in the Shareholders’ Equity.

RETIREMENT OF TREASURY SHARES

The Accounting Standards provide that,

“If a corporation’s Share Capital is retired, the Share Capital account is

reduced by its par value. The number of shares issued is reduced by the
share retired”. The treasury shares account is credited at cost. If retirement
results a gain (that is, the par value exceeds the cost), such gain shall be
credited to Share Premium relating to the same issue. If retirement results to
a loss (cost exceeds par value), such loss should be debited to the following
accounts in the order given.

a) Share Premium to the extent of the credit when the share was issued;
b) Share Premium from previous Treasury Share transactions (sales or retirement)
of the same class of share and
c) Accumulated Profits and Losses

To illustrate:

Contributed Capital:
Share Capital
Ordinary Share, authorized to issue
2,000 shares par value, P100. Issued
1,000 shares, of which, 200 shares are
in treasury P100,000
Share Premium 5,000
Contributed Capital P105,000

Assume:

The cost of Treasury Share was P90 per share or amounting to P18,000.

Isolation of Data:

1. The premium on Share Capital is P5.00 per share (P5,000/1,000) shares

2. The par value of the Treasury Share is P100 per share while the cost of treasury
share is P90.

“Not intended for publication. For classroom instruction purposes only”.

 57

JOURNAL ENTRY TO RETIRE TREASURY SHARE:

(Retirement Results in a Gain)

Share Capital – Ordinary (200 shares x P100) P20,000

Share Premium (200 shares x P5) 1,000
Treasury Shares (200 shares x P90) P18,000
Share Premium from Retirement of Share 3,000

Assume: The cost of treasury share is P110.

JOURNAL ENTRY TO RETIRE TREASURY SHARE:

(Retirement Results in a Loss)

Share Capital – Ordinary (200 shares x P100) P20,000

Share Premium (200 shares x P5) 1,000
Accumulated Profits (Losses) (Difference) 1,000
Treasury Share (200 shares x P110) P22,000

“Not intended for publication. For classroom instruction purposes only”.

 58

Assessment

Directions: Read and analyze each activity. Answer what is asked. Encode your answer in a
separate word file and submit it in the classwork section of our google class on or before the date
stated. Please follow the format in naming the file for submission. Lastname_Unit8_Assessment

ACTIVITY 1

Answer Problem 1 of the Chapter 16 of your book Financial Accounting and Reporting (Millan)
page 594.

ACTIVITY 2

Answer Problem 3 of the Chapter 16 of your book Financial Accounting and Reporting (Millan)
pages 597-599. Answer the questions given on each problem. Provide solutions. No merit shall
be given for answers without solutions.

ACTIVITY 3

Read and analyze each problem. Answer and provide solutions. No merit shall be given for
answers without solutions.

Problem 1
The records of Marco Polo Corporation showed the following data:

Ordinary shares, par value P1,000, 8,000 shares authorized,

5,000 shares issued and outstanding P5,000,000
Subscribed Share Capital – Ordinary (500 shares) 500,000
Subscription Receivable 100,000
Treasury Shares – Ordinary (200 shares at cost) 200,000
Accumulated Profits (Losses) 1,500,000

Required:

Give the journal entries to record the declaration and payment of dividends under each of
the following independent assumptions:

a. A 20% cash dividend

b. A cash dividend of P25.00 per share
c. A 10% share dividend to be capitalized at P1,200 market value
d. A 20% share dividend to be capitalized at par value

“Not intended for publication. For classroom instruction purposes only”.

 59

Problem 2
Partial data taken from the Shareholders’ Equity section of the Statement of Financial
Position of Cagayan de Oro Motorama, Incorporated showed among others the following:

10% Preference Share, par P30, authorized

5,000 shares, issued 3,000 shares P90,000
Ordinary Share, par P50, authorized
4,000 shares, issued 2,500 shares 125,000
Treasury Shares – 500 shares (ordinary) 25,000
Accumulated Profits (Losses), Free 100,000

No dividends was declared last year. Dividends declared this year is P70,000.

Required:

Determine how much dividend the preference and ordinary shareholders will receive
assuming the preference shares have the following characteristics:

a. Non-cumulative and Non-participating

b. Cumulative and Non-participating
c. Non-cumulative and Fully Participating
d. Cumulative and Fully Participating

“Not intended for publication. For classroom instruction purposes only”.