ACCT 1013 (Conceptual Framework and Accounting Standards)

1st Semester Academic Year 2021-2022

Week 13 and 14: ACCOUNTING FOR CORPORATIONS

Topics: a) Shareholders’ Equity
b) Subscriptions and Issuances of share capital

Learning Outcomes: At the end of this module, you are expected to:
1. Define Corporation and explain its attributes
2. Identify and describe the classes of corporation
3. Learn the revised Corporation Code method
4. Outline the steps in the creation of a corporation
5. Summarize the essential contents of the articles of incorporation and
bylaws
6. Enumerate the corporate books and records
7. Basic Corporate Organizational Structure
8. Master the presentation and content of the shareholder’s equity
9. Explain the characteristics of the basic types of shares
10. Journalize the issuance of shares

Hi guys, here’s wishing you all a wonderful, productive and healthy week ahead!

Definition

A corporation is an artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence. (The Corporation Code of the
Philippines, Sec. 2)

From the above definition, we can deduce the following attributes:

1. Artificial being separate and distinct from its shareholders or members

2. Created by operation of law. The Corporation Code of the Philippines governs the creation of
corporations thru the Securities and Exchange Commission.

3. Right of Succession – capacity of continued existence notwithstanding the death, insolvency,

incapacity or withdrawal of the shareholders or owners. Transfer of shares does not dissolve the
corporation.
Classes of Corporations

➢ Stock corporation – are corporations that are authorized to issue shares of stocks to its shareholders

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 ➢ Non-stock corporations – are organized or formed for charitable, religious, educational, professional,
cultural, recreational, literary, scientific, social, civic service or similar purpose. No part of its income
shall be distributed to its members, trustees or officers.

Question: What do you think is the classification of our school? stock or non-stock, and why?

Steps in the Creation of a Corporation

1. Promotion – bringing together the incorporators or the interested persons in the business, procuring
subscriptions and setting into motion the machinery that leads to incorporation.

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2. Incorporation. The steps in the incorporation
process:
Registering a corporation used to be a tedious
process. However, upon the assumption of President
Duterte into office as president, he made some
revisions to make it easier for the registration of new
businesses. He also approved revision of the
Corporation Code of the Philippines under RA 11232
that took effect February 23, 2019.
Here is a summary of the step by step processes to be
undertaken when registering a new corporation:

For purposes of registration, the following are the

types of corporations in the Philippines

3. Formal Organization and Commencement. Involves the adoption of bylaws, and the election of the
board of directors and administrative officers.

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The rights of a shareholder are outlined here:

The last rights of a shareholder as mentioned in the

diagram is called preemptive right.

Understanding the Preemptive Right

The preemptive right clause is commonly used

as an incentive to early investors in return for
the risk taken in financing a new venture.

This right is not routinely granted to all

shareholders. Several states grant preemptive
rights as a matter of law but even these laws
give the company the ability to negate that right
in its articles of incorporation.

A preemptive right is essentially a right of first

refusal. The shareholder may exercise the
option to buy additional shares but is under no
obligation to do so.

Sample Organizational Chart of a Corporation:

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Corporations can have many structures, but the most typical corporation organizational structure consists of
the

(1) board of directors,

(2) officers,

(3) employees, and

(4) shareholders or owners.

Classes of Shares in General

a) Par value shares – with a specific amount on fixed on the face of the certificate of stocks and in the
articles of incorporation. The par value is the minimum issue price of the shares.

b) No-par value shares – with no value appearing on the face of the certificate of stock. It may have a
stated value fixed in the articles of incorporation or fixed by the board of directors or the
shareholders. It may vary from time to time based on the book value per share. This is called the
minimum stated value of no-par value shares.

Minimum Stated Value,

Please read and digest

c) Voting shares – issued with the right to vote. (common shares)

d) Non-voting shares – those without the right to vote (preference shares)

e) Ordinary shares – entitles the holder to equal pro-rata division of profits without preference.

f) preference shares – entitle the holder to certain advantages or benefits over the common
shareholders.

g) Promotion shares – issued to promoters as compensation for launching, promoting and

incorporation services.

h) Treasury shares – are the corporation’s own shares repurchased/reacquired but not retired.

i) Convertible shares – changeable from one class to another.

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Salient features of the Revised Corporation Code of the Philippines:

Incorporators.

a) Any person, partnership, association, or corporation, singly or jointly with others, not exceeding 15, may
now be incorporators.
b) No minimum number is required.
c) Majority of them need not be residents of the Philippines.
d) Any single natural person is now allowed to form a corporation by him/herself, under the One Person
Corporation.

One person
Corporation (OPC)

It is one of the major

components of the revised
corporation code.

A One-Person
Corporation (OPC) is a
corporation with a single
stockholder, who can only be
a natural person (who must be
of legal age), trust or estate.
As an incorporator, the “trust”
does not refer to a trust entity
but rather pertains to the
subject being managed by a
trustee.

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Corporate Term
Perpetual corporate existence is now allowed.
Those whose corporate existence were limited to 50 years in the old code will automatically have perpetual
existence. Notify the SEC if you desire to stick to the limited 50 year life.

Minimum Capital Stock

No minimum capital requirements are provided, subject to any contrary provision in other laws.
Example: banks are not covered under this new policy. They still have to come up with a minimum share capital
set by the law.

Articles of Incorporation
The articles of incorporation can now be filed in the form of electronic document, in accordance with SEC rules
and regulations on electronic filing.

Treasurer’s Affidavit
The old code requires the Treasurer designate to issue a certificate on the compliance with the 25-25 rule. The
revised code abolished this requirement. The articles of incorporation should just indicate the name of the
treasurer who certifies that the authorized capital stock and subscriptions and paid up amounts have been duly
received for and in behalf of the corporation.

Non- use of Corporate Charter

The business is given 5 years from
the date of incorporation to
commence its operations. Failure
to do so will revoke the certificate
of incorporation.

The Shareholders’ Equity

There are two major components

of the shareholders’ equity:

a) Share Capital/
Paid-up capital

And

b) Retained Earnings

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Definition of terms related to the Stockholders’ Equity

What is authorized capital and what is paid-up

capital?

Can you differentiate by just looking at the picture?

I hope you do.

Very Important:

Legal Capital – is the portion of the contributed capital or the minimum amount of paid-in
capital which must remain in the corporation for the protection of corporate creditors.

The amount of legal capital is computed as follows:

Par value shares – legal capital is the aggregate amount of all issued and subscribed shares

No-par value shares – legal capital is the total consideration received by the corporation for the issuance of its
shares to the shareholders including the excess of issue price over the stated value (Corporation Code of the
Phils. Sec. 6 par 3)

Share premium or additional paid-in capital – is the excess amount paid by the shareholders over par value. It
may also result from transactions involving treasury shares, retirement of shares, donated capital, share
dividends and any other “gain on” the corporations own stock transactions.

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The two basic types of shares are explained on the diagram below, please read and digest.

Terms related to Share Capital:

Authorized share capital – the number of authorized shares that a corporation can issue specified in its articles
of incorporation. Increases or decreases in the number of authorized shares requires approval of the SEC.

Computation of Authorized Share Capital = Number of authorized shares x Par Value

Issued Share Capital – shares that have been sold and paid in full. Issued shares include treasury shares.

It is credited for total par value of fully collected subscriptions or in the case of no-par shares, it is credited for
the total value of the consideration received
It is debited upon retirement, redemption or cancellation of certificates of stocks.

Subscribed Share Capital – portion of the shareholders equity that has been subscribed but not yet fully paid..
It is credited for the par value of shares subscribed and debited for the par value of fully paid subscriptions.

Outstanding Share Capital – these are issued shares in the hands of shareholders.

Computation of Outstanding Shares:

Issued shares xx
Less: Treasury shares xx
--------------------------------------------
Outstanding shares xx

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Treasury Stock – previously issued shares acquired by the corporation but not retired, awaiting reissue at a
later date.

Accounting for the Issuance of Shares

Par value shares - Credit: share capital

Credit: share premium (for the excess)

No-par value shares(no stated value) - Credit: share capital

No-par value shares(with stated value) - Credit: share capital

Credit: share premium (for excess over stated value)

Considerations for the Issuance of Shares

1) Cash
2) Tangible or intangible properties actually received by the corporation
3) Labor already performed or services actually rendered to the corporation 4) Previously incurred
indebtedness

End of Lesson

References:

1. Cabrera, E, et al. (2018). Conceptual Framework and Accounting Standards. Manila: GIC
Enterprises
2. Valix, C, et al. (2019). Conceptual framework and accounting standards. Manila: GIC Enterprises &
Co., Inc.
3. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
4. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
5. Financial Reporting Standard Council (2017). Philippine Financial Reporting Standards. PICPA
6. Valencia, E. and Roxas, G. (2017), Basic Accounting. Baguio City: Valencia Educational Supply
7. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I. GIC Enterprises & Co., Inc., Manila
8. Empleo, P. and Robles, N. (2019). The Philippine Financial Reporting Reporting (Conceptual
Framework and Accounting Standards). Mandaluyong City: Millennium Books, Inc.

Electronic Resource:
1. Introduction to accounting, https://courses.lumenlearning.com/sac-finaccounting/chapter/chapter-1/
ACCT 1013 – Conceptual Framework and Accounting Standards | 10
This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced
nor transmitted in any form, in whole or in part, without expressed written permission.
 2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research-topics/finance/basic-
accounting/theaccounting-system-and-accounting-basics
4. Basic accounting and bookkeeping lessons, http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html
7. International Financial Reporting Standards. www.ifrs.org
8. International Accounting Standards. www.iasplus.com/en/standards/ias

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This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced
nor transmitted in any form, in whole or in part, without expressed written permission.