Accounting for Corporation

Atty. JTL, CPA

Learning objectives

1. State the components of shareholders'

equity.
2. Account for the initial issuances of
shares of stocks.
3. Account for treasury shares.
Corporation
• The Philippine Corporation Code defines a corporation as "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."
• A corporation is a separate legal entity distinguished from its owners
(i.e., shareholders or members).
• It is formed through an operation of law and not by mere agreement
between the owners. It has the right of succession, meaning it
continues to exist notwithstanding the withdrawal, death,
insolvency or incapacity of the individual owners, and is dissolved
only again through an operation of law.
• The operations of a corporation are subject to a higher degree of
government regulation compared to other forms of business.
Organization of a corporation
Some of the provisions of the Corporation Code regarding the
organization of a corporation are highlighted below:
• A corporation is formed by ''any person/ partnership,
association or corporation, singly or jointly with others but not
more than 15 in number.“
• The entity's articles of incorporation must be authorized by the
Securities and Exchange Commission (SEC).
• The articles of incorporation state, among other things, the
corporation's authorized capital stock, which is the maximum
number of shares that the corporation can issue.
• Any excess share issued is deemed illegal. In order to issue
additional shares, the corporation must first amend its articles of
incorporation to increase its authorized capitalization.
Organization of a corporation
• To amend the articles of incorporation, a majority vote of
the board plus a vote by shareholders representing at
least two-thirds (2/3) of the outstanding share capital
are needed. The amendment takes effect after approval
by the SEC or from the date of filing with the SEC if not
acted upon within 6 months from the date of filing.
• A corporation has perpetual existence unless a fixed
term stated in the articles of incorporation.
Shareholders' equity
• residual interest in the assets of a corporation after deducting all
its liabilities. This is the equivalent of the "Owner’s equity" in a
sole proprietorship and the aggregate of partners' capital
balances in a partnership.
The components of the shareholders' equity
include the following:
• Share capital ( Capital stock)
• Preference share capital (Preferred stock)
• Ordinary share capital (Common stock)
• Subscribed share capital (Subscribed capital stock)
• Subscription receivable (as a deduction)
• Share dividends distributable (Stock dividends payable)
• Capital liquidated (as a deduction)
• Share premium (Additional paid-in capital)
• Other components of equity
• Treasury shares (Treasury stock)
The following transactions affect the
accounting for a corporation's equity:
a. Authorization, subscription, and issuance of shares
b. Acquisition and reissuance of treasury shares
c. Retirement of shares
d. Donated capital
e. Distributions to owners (Dividends)
Accounting for Share capital
• An entity accounts for its share capital using one of the
following:
1. Memorandum method - Only a memorandum is made
for the authorized capitalization. Subsequent issuances
of shares are credited to the share capital account.
2. Journal entry method - The authorized capitalization
is recorded by crediting "authorized share capital" and
debiting “unissued share capital.'' Subsequent
issuances of shares are credited to "unissued share
capital." The difference between the "authorized share
capital" and "unissued share capital“ represents the
issued share capital.
 Sample Problem:
Memorandum Method vs Journal Entry Method
AUTHORIZED CAPITALIZATION
1. On January 1, 2025, ABC Co. received authorization from SEC to
issue share capital of P1,000,000 divided into 10,000 shares
with par value per share P100
2. The authorized share capital is recorded under each of the two
methods as follows:
The authorized share capital is recorded under each of the
two methods as follows:
Memorandum method Journal entry method
Memo entry- The authorized capitalization is Unissued share capital 1M
P1,000,000 divided into 10,000 shares with Authorized share capital 1M
par value per share of 100.
• Authorized share capital- represents the
maximum number of shares fixed in the entity’s
authorized articles of incorporation that can be
subscribed and issued to shareholders
• Unissued share capital- represents the portion of
the authorized share capital not yet issued and is
still available for subscription and issuance
SUBSCRIPTION
2. Of the total authorized share capital, 2,500 shares were
subscribed at par value and 25% of the total subscription was paid
at subscription date
Memorandum method Journal entry method
Cash (2,500xP100 parX25%) 62,500 Cash (2,500xP100 parX25%) 62,500
Subscription receivable Subscription receivable
(2,500xP100 parX75%) 187,500 (2,500xP100 parX75%) 187,500
Subscribed share capital 250,000 Subscribed share capital 250,000

*same entry for both method

• Subscription - a contract between the purchaser of shares (i.e.,
investor) and the issuer (i.e., corporation) in which the purchaser
promises to buy shares of the issuing company’s stocks at an
agreed price.
• Subscription receivable - represents the unpaid portion of the
subscription price. Subscription receivable is more commonly
presented as a deduction from the related subscribed share
capital i.e contra equity account
• Subscribed share capital- represents the portion of the
authorized share capital that is subscribed but not yet issued.
COLLECTION OF SUBSCRIPTION RECEIVABLE & ISSUANCE OF SHARES
3. On February 2025, ABC Co. received full payment for 2,000 subscribed
shares and issued the related share certificates
Memorandum method Journal entry method
Cash 150,000 Cash 150,000
Subscription receivable 150,000 Subscription receivable 150,000
Subscribed share capital 200,000 Subscribed share capital 200,000
Share capital 200,000 Unissued share capital 200,000

Subscription price of 2,000 shares (2,000 x P100 par) 200,000

Portion already paid (P200,000 x 25%) (50,000)
Balance 150,000

• Share capital- represents the portion of the authorized share capital

that is already issued
• Share certificate – is a document that evidences ownership of a share
• Under the Corporation Code, shares (and share certificates) are
issued to subscribers only upon full payment of the
subscription price.
• The Corporation Code prohibits the issuance of shares in
exchange for promissory notes or future services. The
corporation must receive first the full consideration before shares
are issued.
CASH SUBSCRIPTION
3. On February 28, 2025, ABC Co. received cash subscription for 1,000
shares at par value
Memorandum method Journal entry method
Cash(1,000xP100) 100,000 Cash(1,000x P100) 100,000
Share capital 100,000 Unissued share capital 100,000
*Share capital (Unissued share capital) is directly credited (debited) for cash subscription
*Share capital of ABC Co as of February 28, 2025 is shown below:
Memorandum Method Journal Entry Method
Share capital 300,000 Authorized share capital 1,000,000
Subscribed share capital 50,000 Unissued share capital (700,000)
Subscribed receivable (37,500) Issued share capital 300,000
Subscribed share capital 50,000
Subscription receivable (37,5000)
Total share capital 312,500 Total share capital 312,000
• *Subscription receivable- commonly presented as contra account, rather than asset as per US GAAP
• Most companies used memorandum method
Classes of Share capital
• Share capital is basically classified into two, namely:
a. Ordinary share capital (Common stock); and
b. Preference share capital (Preferred stock).
Ordinary shares
• Ordinary shares (common stock) represent the residual
corporate interest that bears the ultimate risk of loss and
receives the benefits of success.
• Ordinary shareholders are guaranteed neither dividends nor
assets upon dissolution but they generally control the
management of the corporation and tend to profit the most if
the corporation is successful.
• If an entity has only one class of share capital, it necessarily is
an ordinary share capital. The Corporation Code prohibits the
issuance of only preference shares without ordinary shares.
Ordinary shareholders, generally, enjoy the same rights with no
preference over other shareholders.

The following are examples of rights of ordinary shareholders:

1. Right to attend and vote in shareholders' meetings

2. Right to purchase additional shares ( also known as preemptive
right or stock right)
3. Right to share in the corporate profits (also known as right to
dividends)
4. Right to share in the net assets of the corporation upon
liquidation
• For stock corporations, voting rights are normally conferred to
shareholders in proportion to their shareholdings. Thus, a
shareholder who holds more shares normally will have more
voting rights.
• The preemptive right (right of preemption) protects
shareholders from involuntary dilution of their ownership
interests. Without this right, an ownership interest may be
reduced by the issuance of additional shares without the
shareholder's knowledge.
• Some corporations have more than one type of ordinary shares,
such as “Class A" and “Class B" ordinary shares.
• In such cases, one class of ordinary shares (normally 'Class A,'
but not always) will have more voting rights than the other class.
• The class that has more voting rights is sometimes called "super
voting" shares.
• One purpose of issuing "super voting" shares is to give key
company insiders (e.g., founders and executives) greater
control over the company's voting rights. This enables them to
control corporate policies and management decisions.
Preference shares
• Preference shares (preferred stocks) are shares that give the
holders thereof certain preferences over other shareholders.
• Such preferences may include priority claims over (a) dividends
and/or (b) net assets of the corporation in the event of
liquidation.
• In exchange· for such preference(s), preference shareholders
sacrifice certain inherent rights of ordinary shareholders (e.g.,
voting rights over election of directors and officers).
• One purpose of issuing preference share is to broaden investor
appeal, thereby increasing the corporation's opportunity to
generate equity financing.
Share premium
• Share. premium (additional paid-in. capital) arises from various
sources which include the following:
a. Excess of subscription price over par value or stated value.
b. Excess of reissuance price over cost of treasury shares issued.
c. Distribution of "small" stock dividends.
Sample problem
1. ABC Co. started operations on January 1, 2025. Its authorized
capitalization is Pl,000,000 divided into 10,000 shares with par
value per share of Pl00. ABC Co. receives cash subscriptions
for 5,000 shares at Pl20 per share.
Jan 1, Cash (5,000xP120 Subscription price) 600,000
2025 Share capital (5,000 x P100 par value) 500,000
Share premium (5,000 x(P120-P100) 100,000

2. On January 31, 2025, ABC receives subscription for 2,000 shares

at P160 per share.
Jan 31, Subscription receivable(2,000xP160 Subscription price) 320,000
2025 Subscribed share capital (2,000 x P100 par value) 200,000
Share premium (2,000 x(P160-P100) 120,000

Share premium is credited at the subscription date even for subscriptions that are not yet paid;
provided that, it is probable that the total subscription price will be collected.
ABC Co.'s total contributed capital as of January 31,
2025 is computed as follows:
Share capital 500,000
Subscribed share capital 200,000
Subscription receivable (320,000)
Share premium (100k+120k) 220,000
Total contributed capital 600,000
Par value and No-par value shares
• A par value share is one with a peso value fixed in the articles of
incorporation. The purpose of which is to fix the amount of issuance
price. A par value share cannot be issued below its par value. The
par value appears on each share certificate issued.
• A no-par value share is one without a peso value fixed in the articles of
incorporation. However, a no-par value share has a stated value
(issued value) which is also indicated in the articles of incorporation
but not on the share certificate issued.
• Par value and no-par value shares are distinguished by the presence or
absence of a value per share on the share certificate issued. Under the
Corporation Code, no-par value shares should not be issued for a
consideration less than five (P5) pesos per share. The excess of
subscription price over the stated value is credited to share
premium.
 Sample problem
• An entity issues 5,000 shares with stated value of Pl00 per share
for Pl20 per share. The issuance is recorded as follows:
DATE Cash (5,000xP120) 600,000
Share capital (5,000 x P100 par value) 500,000
Share premium (5,000 x(P120-P100) 100,000

• Under the Corporation Code, ordinary shares may be issued as

either par or no-par value shares. However, preference shares
should only be issued as par value share.
Legal capital
• Legal capital is the portion of contributed capital that cannot be
distributed to the owners during the lifetime of the corporation
unless the corporation is dissolved and all of its liabilities are
settled first.
• Legal capital is based on the concept of trust fund doctrine which
states that the share capital of a corporation is a trust fund held
for the protection of its creditors. Legal capital is computed as
follows:
a. For par value shares, legal capital is the aggregate par value of shares
issued and subscribed.
b. For no-par value shares, legal capital is the total consideration received
or receivable from shares issued or subscribed. Total consideration refers
to the subscription price inclusive of any amount in excess of stated value.
Sample problem: Legal Capital (par and no par)
The equity section of ABC Co.'s statement of financial position shows the following information:
6% Preference share capital, Pl00 par value 200,000
Share premium- preference share capital 50,000
Ordinary share capital 800,000
Share premium- ordinary share capital 300,000
Subscribed share capital- ordinary 100,000
Subscription receivable- ordinary share capital (50,000)
Retained earnings 400,000

Par No par
6% Preference share capital, Pl00 par value 200,000 200,000
Ordinary share capital 800,000 800,000
Share premium- ordinary share capital 300,000
Subscribed share capital- ordinary 100,000
Legal capital 1,100,000 1,400,000
In case of no-par value shares, legal capital includes the share premium of ordinary shares.
Preference shares can only be issued as par value shares. Thus, the share premium of the preference shares is
not included.
Share issuance costs
• Issuing shares entails expenditures, such as regulatory fees,
legal, accounting, and other professional fees, commissions and
underwriter's fees, printing costs of certificates, and documentary
stamp tax and other transaction taxes.
• These expenditures, called 'share issuance costs', are deducted
from any resulting share premium from the issuance.
• If share premium is insufficient, the excess is charged to retained
earnings.
Sample problem
On January 1, 2025, ABC Co. issued 1,000 shares with par value of
Pl0O for Pl20 per share. Share issuance costs amounted to P5,000.

Jan 1, 2025 Cash (1,000xP120) 120,000

Share capital (1,000 x P100 par value) 100,000
Share premium (1,000 x(P120-P100) 20,000
Jan 1, 2025 Share premium 5,000
Cash 5,000
Treasury shares
• Treasury shares (treasury stocks) are an entity's own shares that
were previously issued but are subsequently reacquired but
not retired.
• Under the Corporation Code, an entity may reacquire its
previously issued shares only if it has sufficient unrestricted
retained earnings.
Accounting for treasury shares
• Treasury shares are accounted for using the cost method. Under
this method, the reacquisition and subsequent reissuance of
treasury shares are recorded at cost.
• Treasury shares are presented as deduction in the
shareholders' equity (i.e., contra equity account).
 Sample problem
On January 1, 2025, the statement of financial position of ABC Co. shows the following information:
Share capital (P100 par value) 800,000
Share premium 160,000
Retained earnings 540,000
Total shareholder’s equity 1,500,000

On July 1, 2025 ABC reacquires 1,000 at P90

Jul 1, 2025 Treasury shares(1,000xP90) 90,000
Cash 90,000
Jul 1, 2025 Retained earnings- unrestricted 90,000
Retained earnings-appropriated 90,000

Retained earnings represent the cumulative profits (net of losses, distribution to

owners, and other. adjustments) that are retained in the business and not yet
distributed to the shareholders. Total retained earnings may consist of:
a. Unrestricted - the portion of retained earnings that is available for future
distribution to the shareholders.
b. Appropriated (Restricted) - the portion of retained earnings that is not available
for distribution unless the restriction is subsequently reversed.
Case 1: Reissuance at cost
• On September 1, 2025, ABC reissues the 1,000 treasury shares at P90.
Sep 1, 2025 Cash (1,000xP90) 90,000
Treasury shares (1,000xP90) 90,000
Sep 1, 2025 Retained earnings- appropriated 90,000
Retained earnings-unrestricted 90,000

• When treasury shares are reissued, the related appropriated retained

earnings are reverted back to unrestricted retained earnings.
 Case 2: Reissuance at more than cost
• On September 1, 2025, ABC reissues the 1,000 treasury shares at P140.
Sep 1, 2025 CASH (1,000xP140) 140,000
Treasury shares (1,000xP90) 90,000
Share premium – treasury shares 50,000
Sep 1, 2025 Retained earnings- appropriated 90,000
Retained earnings-unrestricted 90,000

• When treasury shares are reissued at more than the reacquisition

cost, the excess of the reissuance price over the cost is credited
to "Share premium - treasury shares. " This forms part of the
entity's total share premium.
 Case 3: Reissuance at below cost
• On September 1, 2025, ABC reissues the 1,000 treasury shares at P60.
Sep 1, 2025 CASH (1,000xP60) 60,000
(a) Share Premium- Treasury share -
(b) Retained earnings 30,000
Treasury shares(1,000 XP90) 90,000
Sep 1, 2025 Retained earnings- appropriated 90,000
Retained earnings-unrestricted 90,000

• When treasury shares are subsequently reissued at below the

reacquisition cost, the excess of the cost over the reissuance price is
debited to the following in the order of priority:
a. Any balance in "share premium - treasury shares" arising from the same
class of share capital.
b. If the balance in "share premium - treasury shares" is insufficient or if it has
no outstanding balance, any excess is debited to retained earnings.
• In the above, since ABC Co. does not have "Share premium - treasury shares," the P30,000 excess (i.e., P90,000
reacquisition cost - P60,000 reissuance price) is debited to "Retained earnings."
Retirement of shares
• Shares are considered retired if they have been reacquired and
cancelled in accordance with Securities and Exchange
Commission (SEC) regulations.
• Unlike for treasury shares which can be subsequently reissued,
retired shares cannot be reissued anymore.
• When shares are retired, the total par value and the related
share premium of the retired shares are removed from the
books of accounts.
• Any difference between the total amount removed and the
retirement cost is accounted for as follows:
1. If the par value and related share premium of the retired
shares exceed the retirement cost, the difference. is credited to
"Share premium - retirement.“
2. If the par value and related share premium of the retired
shares are less than the retirement cost, the difference is debited
to the following in the order of priority :
a. Share premium - treasury shares
b. Retained earnings
 Sample problem: Retirement of shares
On January 1, 2025, the statement of financial
position of ABC Co. shows the following information:
Share capital (P100 par value) 800,000
Share premium 160,000
Share premium – treasury shares 5,000
Retained earnings 535,000
Total shareholder’s equity 1,500,000
Case 1 - Retirement cost less than Original
issuance price
• ABC reacquires 1,000 shares at P80 per share on July 1, 2025 and
retires them on September 1, 2025
July 1 Reacquisition
July 1, 2025 Treasury shares (1000 X P80) 80,000
Cash 80,000
September 1, Retirement
Sep 1, Share capital (1,000 x P100) 100,000
2025 Share premium – original issuance (1,000 XP20*) 20,000
Treasury Shares (1,000 x P80) 80,000
Share premium - retirement 40,000

"The share premium from original issuance is computed as follows:

Total share premium before retirement 160,000
Divide by : Total issued shares before retirement (P800,000 share capital / P100 par value) 8,000
Share premium per share from original issuance 20
Case 2 - Retirement cost greater than Original
issuance price
• ABC reacquires 1,000 shares at P140 on July 1, 2025 and immediately
retires_ them
July 1, 2025 Share capital (1,000 x 100) 100,000
Share premium – original issuance (1000 X P20) 20,000
(a)Share premium – treasury shares 5,000
(b) Retained earnings (balancing figure) 15,000
Cash (1,000 x P140) 140,000

• When shares are reacquired and immediately retired, there is no need to

set up a treasury share account. The par value and related share premium
of the retired shares are immediately debited, with a corresponding credit to
"Cash‘’.
• Notice that in the accounting for treasury shares and retirement of shares,
retained earnings may be decreased but never increased.
 Donated capital
• Donated capital arises from gifts received by the corporation from nonreciprocal transactions.
• Donated capital may arise from the following:
1. Donations from shareholders - these are credited to share premium.
2. Donations from the government - these are recognized as government grants.
3 . Donations from other sources - these are recognized as income when
(a) the conditions attached to the donation are fulfilled or are reasonably expected to be fulfilled,
b) the donation becomes receivable, and
(c) the criteria for asset recognition are met.
Donations from shareholders may be in the
form of:
• a. Cash - recognized at the amount of cash received or receivable.
• b. Noncash assets - recognized at the fair value of the noncash
assets
• c. Entity's own shares - initially recorded through a memo entry.
Donated capital is recognized only when the donated shares
are subsequently reissued.
• This is because no asset is generated from the donated shares until they
are subsequently reissued. If the donated shares are not to be resold, the
entity should effect a formal reduction of its authorized capital by retiring
the shares received.
Sample problem: Cash and Noncash
donations from shareholders
• ABC Co. received cash of Pl00,000 and land with fair value to
P500,000 and historical cost of P300,000 from a shareholder.
• No conditions are attached to the donation.
Date Cash 100,000
Land 500,000
Share premium- donated capital 600,000
 Sample problem: Donated shares received
from shareholders
• ABC Co. received 1,000 shares with par value of Pl00 and fair value of P120
per share from a shareholder as donation.
• The receipt of the shares is recorded through a memo entry as follows:
Received 1,000 shares with par value of P100 from a shareholder as donation

• Subsequently, ABC Co. reissues the 1,000 donated shares at P130

per share.
Date Cash (1,000 x P130) 130,000
Share premium- donated capital 130,000
Learning objectives

1. State the components of shareholders'

equity.
2. Account for the initial issuances of
shares of stocks.
3. Account for treasury shares.
Reference
• Milan, 2024