CORPORATION

- Is an artificial being created by operation of law having the right of succession and powers, attributes and
properties expressly authorized by law or incident to its existence.
- It is a legal entity wherein the owner is the stockholders/shareholders.
- They have unlimited control over the corporation and have a right to elect the Board of Directors.
- The founders of a corporation are called “incorporators” and these are the original shareholders mentioned in
the articles of incorporation.

CHARACTERISTICS OF CORPORATION:

1. Artificial being.
2. Created by operation of law.
WHEN SEPARATE JURIDICAL PERSONALITY BEGINS?
 Partnership – from the time the contract begins.
 Corporation – upon registration with the SEC.
3. Right of succession
 Corporation? YES! – bago mapamana sa relatives, need muna magbayad ng tax to transfer yung
property (If the owner dies/estate). 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.
 Partneship? NO!
4. Powers, attributes and properties are expressly authorized under the law and those that are incidental to its
existence.
3 TYPES OF POWER IN CORPORATION:
1) Implied – can be inferred from or necessary for the exercised of the powers.
2) Incidental – existence of the corporation.
3) Express – expressly authorized by the Corporation Code and other laws, and its Articles of Incorporation.

ORGANIZATION OF CORPORATION

 A corporation is formed by at least 5 but not exceeding 15 natural persons, all legal age, and a majority of whom
are residents of the Philippines.
 The entity’s articles of incorporation must be authorized by the Security and Exchange Commission (SEC).
 The articles of incorporation states, 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 shares in excess of the authorized capital stock, the corporation must amend its articles of incorporation.
 To amen the articles of incorporation, a majority vote of the board plus a vote by shareholders representing at
least 2/3 outstanding share capital is needed. After ratification, the amended articles of incorporation is filed
with the SEC and shall become effective only upon the SEC’s approval.
 At least 25% of the corporation’s authorized capitalization must be subscribed and at least 25% of the total
subscription must be paid upon subscription. The paid-up capital cannot be less than 5,000 pesos.

Artificial being

- A corporation is a separate and distinct personality from the shareholders, and as such, it may acquire or dispose
properties, incur and pay obligations, sue and be sued. In other words, the firm is viewed as a separate and
distinct personality from the people who own it.

Legal personality
 - Legally created by operation of law and as such is a juridical person with rights, powers and duties pertaining
thereto.

Perpetual existence

- A corporation shall exist for an indefinite period unless its term is expressly limited as provided in its articles of
incorporation.

Corporate ownership

- the interest and right over the corporation is divided into shares of stock.
- An investor buys shares of stocks to become a shareholder whose interest and rights in the firm is based on the
number of shares and the kind of shares acquired.

Limited liability

- The shareholders are not liable for corporate acts nor are they liable for corporate debts. Their personal
properties cannot be confiscated and used to pay for the corporate liabilities when the corporation becomes
insolvent unlike those of a sole proprietor or partner.

Transferability of interest

- The shares of stock owned by a shareholder may be sold or transferred without prior consent of the other
stockholders.

KINDS OF STOCKS

1. As to value:
 NO PAR VALUE STOCK
 is one without a designated value stated in the stock certificate but it cannot be sold at less than
5 pesos.
 The stock is called a no par but with an issued value or stated value stock.
2. As to right:
 COMMON STOCK/ORDINARY SHARE
 Issued by a corporation which entitles the owner to a pro rata dividend without any priority or
preference over any other stockholders.
 These shares can be issued at par or no par.
 PREFERRED STOCK/PREFERENCE SHARE
 Is a class of stock with preferential rights or claims over the common stock. The most common
preferential right is its priority claim over dividend distribution.
 It is usually at par and the dividend rate is expressed as a percentage of the par value.
 This, as well as the redeemable share, has laws, sale, lease, mortgage, pledge of properties,
among others.

TYPES THAT COVER IN SHAREHOLDERS’ EQUITY:

 Authorized share capital
 Share capital
 Subscribed share capital
 Subscribed preference share
 Subscribed ordinary share
 Ordinary share capital
 Preference share capital
 Share premium (ordinary/treasury)
  Donated capital
 Accumulated profits
 Appropriation reserve
 Treasury shares (deducted)
THE SHAREHOLDERS’ EQUITY IS DIVIDED INTO TWO PARTS:
1. Contributed/Paid in or Paid up Capital
 Represents total contributions made by the shareholders.
 It is the shares to be subscribed and paid in or secured to be paid in by the shareholders, either in
money, property or services, at the time of organization of the corporation or afterwards, and upon
which it is to conduct its operations.
 The amount of resources received by a corporation as a result of investments by shareholders,
donations or other share capital transactions.
 Legal Capital (trust fund doctrine)
 Capital contributed by shareholders comes from the sale of shares of stocks.
 Shares of Stocks issued by the corporation.
 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.
 PAR VALUE SHARES
 Shares with fixed amount per share printed on the stock certificate.
 The par value establishes the nominal value per share and is the
minimum amount that must be paid by each shareholder.
 Legal capital is the aggregate par value of all issued and subscribed
shares.
 The following ledger balances represent the total legal capital:
a) Share Capital
b) Subscribed Share Capital
 NO PAR VALUE SHARES
 Shares with no amount printed on the stock certificate.
 These shares may be given with stated value or without stated value.
 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.
 The following ledger balances represent the total legal capital:
a) Share Capital
b) Subscribed Share Capital
c) Share Premium – Excess overstated Value
NOTE: Preference Shares is always issued with par.
 Share Premium
 Portion of the paid-in capital representing amounts paid by shareholders in excess of
par.
 May result from transactions involving treasury stocks, retirement of shares, donated
capital, share dividends and any other gain on the corporation’s own stock transactions.

2. Accumulated earnings/Retained Earnings

 Represent accumulated profits earned or losses incurred in the operation of the business.
 The amount of capital accumulated and retained through the profitable operations of the business.

TWO BASIC TYPES OF SHARES:

Share capital is divided into transferable shares of stocks. A share of stock represents the interest or right of a
shareholder in a corporation and is evidenced by a certificate of stock. Share capital includes all types of ownership
shares in a corporation. Shareholders acquire either the following basic types of share capital:
 Ordinary Share
 This share represents the basic ownership class of the corporation. When only one class of share is
issued, it must be ordinary share. Ordinary shares are the entity’s residual equity.
 Preferred Share
 This share gives its owners certain advantages over ordinary shareholders. These special benefits relate
either to the receipt of dividends when declared before the ordinary shareholders (preferred as to
dividends) or to priority claims on assets in the event of corporate liquidation (preferred as to assets).

TYPES OF PREFERENCE SHARES

 Cumulative Preference Share
 The holder is entitled to any dividends not declared in the prior period (dividends in arrears), such that
when dividends are declared in the current period, the dividends in arrears are to be satisfied first.
 Participating Preference Share
 The holder is entitled to additional dividends proportionate to the ordinary shareholders on the basis of
the total par value, in excess of a fixed amount or rate.
  Convertible Preference Share
 The holder is entitled to exchange the share into an ordinary share, at the option of the shareholder.
 Callable Preference Share
 The type of preference share that gives the issuing corporation the right, but not the obligation, to
reacquire and retire the share at a fixed or determinable call price.
 Redeemable Preference Share
 The type of preference share that must be retired or reacquired by the issuing corporation, either at the
option of the shareholder, or in most cases, at a certain or determinable date. This is in substance a
financial liability of the issuing corporation.

TERMS RELATED TO SHARE CAPITAL:

 Authorized Share Capital
 The number of authorized shares indicates the maximum number of shares the corporation can issue as
specified in the article of incorporation. This maximum number of shares when multiplied by the par
value of the share will yield the authorized share capital.
Note that any increase or decrease in the authorized shares capital requires prior approval of the SEC and formal
amendment to the articles of incorporation.
 Issued Share Capital
 These are shares which have been sold and paid for in full. Issued share may include treasury shares.
Share Capital, either Ordinary Shares account or Preference Shares account, is credited for the total par
value of fully collected subscriptions or in the case of no-par value shares, for the total consideration
received in relation to the issue.
 Share capital is debited only when the issued shares are retired, redeemed, or canceled by the
corporation.
 Subscribed Share Capital
 It is the portion of the authorized share capital that has been subscribed but not yet fully paid. This
shareholders’ equity account is credited for the total par value of the shares subscribed and debited for
the total par value of the fully collected subscriptions.

 Outstanding Share Capital

 These are issued shares, which are in the hands of the shareholders. The number of outstanding shares
will equal the difference between the issued shares and the treasury shares.
 Treasury Stock
 These are issued shares acquired by the corporation but not retired and are therefore, awaiting to be
reissued at a later date.
ACCOUNTING FOR THE ISSUANCE OF SHARE CAPITAL
The entry to record the issuance of share capital depends on whether the stock is with or without par value.
 When shares with par value are sold, the proceeds should be credited to the share capital account to the extent
of the par value of the shares, with any excess being reflected as share premium:
DR: Cash / Asset / Expense
CR: Share capital
Share premium
 When shares without par value are sold, the proceeds should be credited to the share capital account. If the no-
par stock has a stated value, the excess proceeds overstated value may alternatively be credited to share
premium:
DR: Cash / Asset / Expense
CR: Share capital
Share premium
Section 64 of the Revised Corporation Code prohibits the original issue of share capital (or capital stock) for a
consideration received less than the par or stated value (i.e., issued at a discount). Corporations set the par value of
their ordinary shares at nominal amounts such as P1 per share.
The par value is no indication to its market value; it merely indicates the amount per share to be entered in the
share capital account.
The transaction costs of an equity transaction are accounted for as a deduction from equity (net of any related
income tax benefit), by a charge to additional paid-in capital (share premium) pertaining to that issue.
If there is no resulting additional paid-in capital pertaining to that issue, share issue costs are recorded as
expenses.
The Philippine Interpretations Committee in its Interpretation Q and A – 2011 4 Costs of Offering of Shares
identifies the following costs that are recognized as deductions from equity and are netted against or charged to the
share premium from the related issuance:
 Documentary stamp tax and other percentage tax imposed in public offerings of shares;
 Underwriting costs;
 Newspaper publication fees relating directly to the share issue; and
 SEC registration fees for new shares.
ACCOUNTING FOR COSTS RELATED TO SHARE CAPITAL
Organization costs Expensed
Indirect costs Expensed
Share issuance costs Deduction from equity
Debited in the following order:
  Share premium from issuance
 Retained earnings
 No share premium
 Share premium is not sufficient

TWO METHODS OF ACCOUNTING FOR SHARE CAPITAL:

 Memorandum Method
 Only a memorandum is made for the authorized capitalization. Subsequent issuances of shares are
credited to the share capital account.
 Journal Entry Method
 The authorized capitalization is recorded by crediting “authorized share capital” and debiting “unissued
share capital”.
Note that the more commonly used method in practice is the memorandum method.