Accounting Reviewer

1. Review of Accounting Cycle

Journal, Ledger, Trial Balance

1. Documents → Journal – (Analyzing & Recording)
2. Journal → Ledger – (posting)
3. Trial Balance (Unadjusted)
Adjusting Process
4 Types of Adjustments:
1. Deferral of Expense – Prepaid Expenses, Supplies Expense, Depreciation.
2. Deferral of Revenue – Unearned Revenue
3. Accrued Expense – Salaries Payable, Interest Payable
4. Accrued Revenue – Accounts Receivable, Interest Receivable

Financial Statements
Income Statement → Statement of Owner’s Equity → Balance Sheet → Cashflow Statement

Income Statement – revenues & expense

Statement of Owner’s Equity – capital & drawing
Balance Sheet – assets, liabilities, and owner’s equity
Cashflow Statement – inflows & outflows

2. Fundamental Changes of the Revised Corporation Code

R.A. 11232 - The Revised Corporation Code of the Philippines – the law governing corporations
in the Philippines.
a. Removal of the minimum number of incorporators - The minimum number of
incorporators has been cut down from 5 to 2. The maximum number is still 15. Only a
One Person Corporation (OPC) may have a single stockholder and a sole director.

b. Removal of the 25-25 rule - The Old Code required that at least 25% of the authorized
capital stock must be subscribed, and at least 25% of the total subscription must be paid
by the stockholders, provided that the minimum paid-up capital shall not be lower than
Php5,000.00. The New Code removed the aforementioned 25% subscription, payment,
and minimum paid-up capital requirements.
 c. Removal of the prescribed maximum corporate term - Removal of the fifty (50)-year
corporate term.

d. Extended Period to commence corporate operations - Unless there is a provision in the

Articles of Incorporation with regard to the term of corporate existence, the corporation
will exist perpetually unless sooner dissolved

e. Corporations banned from giving political donations – There is an absolute prohibition for
corporations, both foreign and domestic, from giving donations to any political party,
candidate or for the purpose of any partisan political activity.

3. Terminologies and Concepts

a. Difference between sole proprietorship and Corporation:

Corporation
 Artificial being
 created by law
 Having the right of succession,
 Limited liability
 powers, attributes, and properties expressly authorized by law or incident
to its existence

One-Person Corporation

 Allowance for a single person – whether natural or judicial, to organize and put up a
corporation. However, this is subject to the requirement of a minimum capital stock of
Php1,000,000.00 to be paid up in a lump sum at the time of incorporation.

Sole Proprietorship

 One-man ownership
 No separate business entity
 No separation between ownership and management
 Unlimited liability
 All profits or losses to the proprietor

b. Kinds of Corporation
Major Classifications

 Stock Corporation - are those which have capital stock divided into
shares and are authorized to distribute to the holders of such shares,
dividends, or allotments of the surplus profits on the basis of the shares
held.
 Non-stock Corporation - is one where no part of its income is distributable
as dividends to its members, trustees, or officers. Any profit accruing to
the corporation, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation was
organized.
 Corporations Created by Special Laws or Charters - created by special
laws or charters shall be governed primarily by the provisions of the
special law or charter creating them or applicable to them, supplemented
by the provisions of this Code, insofar as they are applicable.
Other Types of Corporations

 Public Corporations - created for political or public purpose & connected with the
administration of government. (e.g., barangay, cities, provinces)
 Private Corporations - owned by individuals or other corporations for private purpose
and benefit. (e.g., private corporations and government-owned and controlled
corporations)
 Open Corporations - Shares of stocks are available to the public. (e.g., corporations
whose shares are available in the stock exchange or over the counter security
brokers)
 Closed Corporations - Shares of stocks are held by few individuals and ownership is
not available to the public. (e.g., family corporations)
 One Person (Sole) Corporation - a corporation owned by one individual.
 Publicly Listed Corporations - Shares are traded on an organized stock exchange.
(e.g., corporations whose shares are traded in Philippine Stock Exchange)
 Non-listed Corporations - Shares are not actively traded over organized stock
exchange. (e.g., corporations whose shares are traded over the counter by brokers)
 Corporation with Perpetual Term - perpetuity in existence until dissolved and
liquidated. Its life can be shortened by amendment of the Articles of Incorporation.
 Corporation with Specific Term - exists until expiration of its term. Can be shortened or
extended.

c. Components/ Structure of a Corporation

 Corporators - are those who compose a corporation, whether as stockholders or

shareholders in a stock corporation or as members in a nonstock corporation
 Incorporators - are those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and who are
signatories thereto
 Shareholders/Members - shareholders are corporators in stock corporation while
members are corporators of a non-stock corporation.
 Subscribers - are persons who have agreed to take and pay for original, unissued
shares of a corporation formed or to be formed.
 Director(s)/Trustee(s) - one (1) to fifteen (15). A one-person corporation shall have one
(1) director/trustee. Every director must own at least one (1) share of voting stock.

d. Authorized Shares, Issued Shares (PSC & OSC), Subscribed Shares, Outstanding
Shares, Treasury Shares, Delinquent Shares
- REFER TO PROBLEM #1

 Authorized Shares - Authorized shares, (also known as authorized stock or authorized

capital stock), are defined as the maximum number of shares that a company is legally
allowed to issue to investors, as per its own determinations.
 Issued Shares - are those that the owners have decided to sell in exchange for cash,
which may be less than the number of shares actually authorized.
a. Ordinary Share Capital or Common Stock
b. Preference Share Capital or Preferred Stock
 Subscribed Shares - Subscribed shares are shares that investor have promised to buy.
These shares are usually subscribed as part of an initial public offering (IPO).
 Outstanding Shares – Issued Shares – Treasury Shares
 Treasury Shares - s are shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation either by purchase, redemption,
donation or through other lawful means. Such shares may again be disposed of for a
reasonable price fixed by the board of directors. Treasury share is reported as a
deduction from total shareholders’ equity. (contra-equity account)
 Delinquent Share - When the subscriber fails to settle the subscriptions in full on the
date specified in the subscription contract or in the call made by the board of directors,
the subscribed shares are declared delinquent.
e. Par Value Shares, No Par with Stated Value shares, No Par No Stated Value Shares

 Par-Value - one in which a specific amount is fixed in the articles of incorporation and
appearing on the certificate of stock. This amount is the minimum issue price of the
shares. Preference/preferred shares may be issued only as par value shares
 No-par value share - may have a stated value which may be fixed in the articles of
incorporation or by the board of directors or the shareholders. However, the minimum
stated value of a no-par share is five pesos (P5.00) and is deemed to be fully paid when
issued.
 No Par No Stated Value - No-par value stock is issued without a par value. The value of
no-par value stocks is determined by the price investors are willing to pay on the open
market.

f. Issued Share Capital, Subscribed Share Capital, Share Premium/Paid-In Capital

- REFER TO PROBLEM # 16

 Issued Share Capital - Issued share capital is simply the monetary value of the shares
of stock a company actually offers for sale to investors. The number of issued shares
generally corresponds to the amount of subscribed share capital, though neither amount
can exceed the authorized amount.
 Subscribed Share Capital - the portion of the authorized share capital that has been
subscribed but not yet fully paid. REFER TO PROBLEM #16
 Note: Subscription Receivable is a shareholders’ equity account. It is presented in the
statement of financial position as a deduction from the related subscribed ordinary
shares; HOWEVER, when it is collectible within twelve months from the date of
statement of financial position, this is presented as current asset in the current asset
portion of the statement of financial position. Thus, it is ignored in the computation of
Shareholder’s equity. (If the problem is silent Subscription Receivable is assumed to be
collectible beyond 1 year.)
 Share Premium/Paid-In Capital - the portion of the paid-in capital representing amounts
paid by shareholders in excess of par. It may also result from transactions involving
treasury shares, retirement of shares, donated capital, share dividends and any other
“gain” on the corporation’s own share transactions.

g. Legal Capital – REFER TO PROBLEM # 7

 It is that 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.
 In case of par value shares, legal capital is the aggregate par value of all issued and
subscribed shares.
 In case of no-par shares, legal capital is the total consideration received by the
corporation for the issuance of its shares including the excess of issue price over the
stated value.

h. Fundamental Rights of Shareholders (Preference and Ordinary)

 Vote in elections for directors and on actions requiring shareholder approval.

 Share in company’s profits through the receipt of dividends.
 Preemptive right to keep the same percentage of ownership when new shares are
issued.
 Residual claim to share in assets upon liquidation in proportion to their holdings.

i. Corporate records shareholder’s journal. Shareholder’s ledger, subscriber’s ledger

 Shareholder’s ledger - Subsidiary record of share capital issued indicating the number
of shares issued to each shareholder.
 Subscriber’s ledger - Subsidiary record of subscriptions made indicating the individual
subscriptions of the subscribers
4. Formation of a Corporation (Original Share Capital Transactions)

a. Incorporating a Sole Proprietorship (Using Old Books of the Proprietor and Using New
Books for the Corporation)
- REFER TO PROBLEM #5
b. Journal Entry Method and Memorandum Entry Method

 Journal Entry Method - An accounting journal entry is the method used to enter
an accounting transaction into the accounting records of a business.
 Memorandum Entry Method - A memo entry is a transaction that contains no
postings to the general ledger. This entry is used for stock splits, where the
number of shares outstanding changes, but there is no alteration of the
underlying equity accounts. The entry is used to note the change in shares
outstanding.

c. Authorization

 REFER TO PROBLEM #6

d. Issuance of Shares with other securities (at lump-sum amount)

 Proportional Method - The term proportional method refers to an approach

used to allocate a lump-sum sale to one or more classes of securities. If the
fair market value of each type of security is known, the proportional method
calls for the allocation of the proceeds to each class of security based on its
proportion of the total.
- Allocation to Security = Fair Market Value of Security / Total of
Lump-Sum Sale
- REFER TO PROBLEM #4
 Incremental Method - The term incremental method refers to an approach used
to allocate a lump-sum sale to one or more classes of securities. If the fair
market value of a security is unknown, the incremental method requires the
proceeds from the sale to first be allocated to those securities with a known
market value; the remainder is then allocated to the security with an unknown
value.
Example: Company XYZ has agreed to sell its transformer business to Company A.
Company A has offered Company XYZ 20,000 shares of its common stock with a market value
of $40.00 per share, along with 2,000 shares of preferred stock with an unknown market value.
Company A values the transformer business at $1,000,000. Since the value of preferred stock is
unknown, Company A's accounting department will use the incremental method to allocate the
purchase price as shown in the table below.
Allocation to Common Stock (20,000 shares at $40.00 per share) $800,000
Fair Market Value of Lump-Sum Purchase $1,000,000
Allocation to Preferred Stock $200,000

5. Subsequent Share Capital Transactions

a. Delinquent Shares/ default subscriptions and Highest Bidder
- REFER TO PROBLEM #8
b. Treasury Shares using Cost Method and Appropriation of Retained Earnings
- REFER TO PROBLEM #9
c. Reissuance and Retirement of Treasury Shares above and below acquisition cost
 - REFER TO PROBLEM #10

d. Retirement/Cancellation of Share Capital

- REFER TO SAMPLE PROBLEM RETIREMENT OF SHARES
e. Share Split (forward and reverse share split)
- REFER TO PRINTED MATERIAL
f. Conversion of PSC to OSC
- REFER TO PRINTED MATERIAL
g. Reacquisition through donation – REFER TO PROBLEM # 12
- Contributions from shareholders are measured and recorded at Fair Market Value of the
items received with the credit going to a share premium account. If significant, separate share
premium account may be set up designated as Donated Capital.
- If the donation is in the form of shares of the corporation, the receipt of the donated
shares is recorded by means of memorandum entry only. The account share premium or
donated capital is credited at the time the shares are to be reissued.
h. Recapitalization
- Recapitalization is a strategy a company can use to improve its financial stability or
overhaul its financial structure. To accomplish this, the company must change its debt-to-equity
ratio by adding more debt or more equity to its capital.
There are many reasons why a company may consider recapitalization including:

 A fall in share price

 To protect itself against a hostile takeover
 To reduce financial obligations and minimize taxes
 To provide venture capitalists with an exit strategy
 Bankruptcy

6. Retained Earnings (Deficit)

a. Closing Entries

- Retained Earnings generally consists of cumulative net income minus any net loss and
dividends declared. Retained Earnings does not mean that a certain amount of cash or
other assets is available to pay stockholders.

b. Appropriated and Unappropriated Retained Earnings

 Appropriated retained earnings - are set aside by the company for some specific
project or purpose whereas inappropriate retained earnings are not kept for any
specific purpose or project, they are just kept aside for any use in the future by the
company.
 Unappropriated retained earnings are not available for distribution to shareholders
whereas appropriated retained earnings can be available for distribution to
shareholders. There is no such restriction of non-distribution to shareholders in form
of dividends.
 c. Types of Appropriation

Appropriated retained earnings are not just used for buildings. It can be utilized for
many different reasons, including:

 Acquisitions
 Stock buyback
 Marketing campaigns
 Research and development
 Reserve against lawsuits and future losses
 Debt reduction

d. Dividends and Dividends Dates

 Preferred Stock has preference for dividends, meaning that preferred

stockholders are paid their dividends before any dividends are paid to common
stockholders. Dividend preference does not mean that preferred stockholders
get more dividends than common stockholders. A preference for dividends
does not guarantee dividends. If the directors do not declare a dividend,
neither the preferred nor the common stockholders get dividends.

- REFER TO PROBLEM #19

e. Type of Dividends—Cash (peso & percentage), Scrip, Stock/Share/Bonus Issue,

Property, Liquidating Dividend

- REFER TO PROBLEM # 20

 Cash Dividends – It is the dividend which is distributed to the shareholders in cash

out of the earnings of the business

 Scrip Dividends – the shareholders are issued transferrable promissory notes

which may/ may not be interest bearing. The objective of the scrip dividend is to
postpone the immediate payment of cash.

Example: If a shareholder holds 1000 shares and the dividend per share was $20
per share declared by the company and the reference price of the claim is $800
per share, then the shareholder will receive 25 shares under the scrip dividend
scheme.
  Stock/Share/Bonus Issue Dividend – If a company does not have liquid resources,
it is better to declare stock dividend.

A company, ABC Co. had a total of 50,000 shares currently issued with a market
price of $150 per share.

The company announced a bonus shares issue of 1 bonus share for every 5
shares owned. This means the company issued a total of 10,000 additional
shares (50,000 x 1 / 5)

To calculate the share price after bonus issue of ABC Co., the total value of the
shares before the bonus issue must be determined. The value of the shares
before the bonus issue was $7,500,000 (50,000 x $100).

After the bonus issue, the number of shares of the company increased from
50,000 to 60,000.

To calculate the share price after the bonus issue, the total value of shares before
the bonus issue must be divided on the new number of shares. Therefore, the
share price after the bonus issue will be $125 ($7,500,000 / 60,000 shares).

 Property Dividend – This dividend is paid in the form of some assets other than
cash.

 Liquidating Dividend - a dividend issued by a business as part of its liquidation

process. Liquidation is the process by which a company ends its business
activities and exits the market. Liquidation can be voluntary or involuntary
(forced).

f. Types of Preference Shares (convertible, redeemable, cumulative, non -cumulative

participating, non-participating, partially participating etc…)

- REFER TO PRINTED MATERIAL AND PROBLEM #20 & #21

g. Allocation of Dividends Between Preference Shares and Ordinary Shares

- REFER TO PROBLEM #20 & #21

7. Shareholder’s Equity Section of the SFP under PAS 1

a. Subheads – Share Capital Reserves, Retained Earnings
 - REFER TO PROBLEM #11

b. Journal Entry Method Presentation

- REFER TO PICTURE ABOVE

c. Memorandum Method Presentation

- REFER TO PROBLEM #11

8. Presentation of Statement of Changes in Shareholder’s Equity

- Statement of Changes in Equity is the reconciliation between the opening balance and
closing balance of shareholder’s equity. It is a financial statement which summarizes the
transactions related to the shareholder’s equity over an accounting period. Movement in
retained earnings, other reserves, and changes in share capital such as the issue of new
shares and payment of dividends are recorded in this report.

- REFER TO SAMPLE OF STATEMENT IN CHANGES OF EQUITY