Elizabeth B.

Cabrera
BATHEOAX – Conceptual Framework and Accounting Standards
ACT231

Topic 1: Basic Accounting for Corporation – Basic Consideration

I. Corporation
- Defined as an artificial being created by operation of law having the right of succession and the powers,
attributes and properties expressly authorized by law and incidence to its existence
- Revised Corporation Code of the Philippines, Sec 2
- Signed by Law by the President Duterte – February 20, 2019 effective February 23, 2019

II. Characteristics (Attributes) of a Corporation

1. Artificial being
- a corporation is considered a legal entity separate and distinct from its owners

2. Created by operation of law

- Corporations require special authority or grant from the State, either by a special incorporation law that
directly creates the corporation or by means of general incorporation law (i.e., The Revised Corporation Code
of the Philippines)

3. Right of succession
- A corporation shall have a perpetual existence unless its articles of incorporation provides otherwise (Sec 11,
RCCP)
- A corporation shall continue to exist regardless of the withdrawal, death, insolvency or incapacity of any
owners or even upon the transfer of their interest (shares of stocks) to others

4. Powers, attributes, properties authorized by law or incidence to its existence

- A corporation being a creation of law, may exercise only such powers authorized by law or incident to its
existence

5. Management by Board of Directors (BOD) or Board of Trustees *

- A corporation is managed by the board of directors or trustees.
- They are elected by the shareholders or members of the corporation.
- The board of directors or trustees should not be more than 15 persons.

6. Ownership is divided into shares of stocks *

- The ownership interest in a corporation is divided into shares of stocks.
- The person who buys the shares of stocks becomes an owner of the corporation and he is known as the
shareholder (stockholder).

III. Advantages of a Corporation

1. The corporation has the legal capacity to act as a legal entity.
2. Shareholders have limited liability.
3. It has continuity of existence.
4. Shares of stock can be transferred without the consent of other shareholders.
5. Its management is centralized in the board of directors.
 6. Shareholders are not general agents of the business.
7. Greater ability to acquire funds.

IV. Disadvantages of a Corporation

1. A corporation is relatively complicated in formation and management.
2. There is a greater degree of government control and supervision.
3. It requires a relatively high cost of formation and operation.
4. It is subject to higher taxation than other forms of business organization.
5. Minority shareholders are subservient to the wishes of the majority.
6. In large corporation, management and control have been separated from ownership.
7. Transferability of shares permits the uniting of incompatible and conflicting elements in one venture.

V. Classes of Corporation - (Section 3 of RCCP classified private corporations into)

1. Stock Corporation
- Corporations that have share capital divided into shares and are authorized to distribute to the holders of
such shares, dividends or allotments of the surplus profits based on the shares held
2. Non-stock Corporation
- One where no part of its income is distributable as dividends to its members, trustees or officers
- Any profit that a non-stock corporation may obtain as an incident to its operation shall, whenever necessary
or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized
- Non-stock corporations may be formed or organized for charitable, religious, educational, professional,
cultural, recreational, fraternal, literary, scientific, social, civic service, or similar service like trade, industry,
agriculture and like chambers or any combination

VI. Other Classifications of Corporation

1. According to the number of persons
 Corporate aggregate – corporation consisting of more than one corporator
 Corporate sole – special form of a corporation usually associated with the clergy; it is a corporation that
consists of only one member or corporator and his successors such as a bishop

2. According to nationality
 Domestic corporation – a corporation organized under Philippine laws
 Foreign corporation – a corporation, formed, organized or existing under laws other than the Philippine
and whose laws allow Filipino citizens and corporations to do business in its own country or State (Sec
140)

3. According to whether for charitable purpose or not:

 Ecclesiastical corporation – those organized for religious purposes
 Eleemosynary corporation – those established for public charity
 Civil corporation – those established for profit

4. According to whether for public or private purpose:

 Public corporation – a corporation formed or organized for the government or a portion of the state
(e.g., provinces, cities, municipalities and barangays)
 Private corporation – corporation formed for private aim, benefit or purpose
 5. According to their legal right to corporate existence:
 De jure corporation – a corporation existing in fact and in law; it is organized in strict conformity with the
law
 De facto corporation – a corporation existing in fact but not in law

6. According to degree of public participation with regard to share ownership:

 Close corporation – a corporation whose share ownership is limited to selected persons or member of a
family not exceeding 20 persons
 Open corporation – a corporation where share is available for subscription or purchase by any person
 Publicly-held corporation – a corporation with a class of equity securities listed on an exchange or with
assets in excess of P50,000,000 and having 200 or more holders, at least 200 of which are holding at least
100 shares of a class of its equity securities

7. According to their relation to another corporation:

 Parent or holding corporation – a corporation that is related to another corporation that it has the
power to either directly or indirectly elect the majority of the directors of a subsidiary corporation
 Subsidiary corporation – a corporation controlled by another corporation known as parent corporation

8. One Person Corporation (OPC) Section 116

- New type of corporation RCCP added
- a corporation with a single stockholder, who may be a natural person, a trust or estate
- has a personality separate and distinct from the single-stockholder
- sole shareholder’s liability is limited to his investment

2 Classes of Share Capital

1. Ordinary Share (Common Stock)

- The 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 entity
- Ordinary shareholders has the right to vote, to share pro-rata in the income and in the vent of liquidation, to
share pro-rata in the assets of the corporation
2. Preference Share (Preferred Stock)
- 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 priority claims on assets in the event of corporation liquidation
(preferred as to assets)

VII. Rights of Shareholders

Each share represents the interests or rights of shareholders in the corporation. The following are some of the rights
of stockholders:

1. Right to be issued a certificate of stock or other evidence of share ownership, and to transfer such shares
2. Right to vote via remote communication or in absentia (under BP68, in person or in proxy only) at
shareholder’s meeting (Sec 57)
3. Right to elect and remove directors
4. Right to adopt, amend, or repeal the by-laws
 5. Right to purchase a portion of any new shares issued to maintain the same percentage of stock ownership.
This right is known as a pre-emptive right. However this right is not absolute and may be denied.
6. Right to receive dividends when declared
7. Right to inspect corporate books and records, and to receive financial reports of the corporation’s operations
8. Right to participate in the distribution of corporate assets upon dissolution

VIII. Components of Corporation

1. Incorporator – they are corporators originally forming the corporation and whose name appears in the
Articles of Incorporation (AOI) and who are signatories to said articles of incorporation
2. Corporators – they are the person who compose the corporation whether as stockholders or shareholders in
a stock corporation or members in a non-stock corporation
3. Shareholders – they are the owners of share in a stock corporation; a stockholder may be a natural being
(human being) or juridical (artificial being)
4. Members – they are the owners of a non-stock corporation
5. Subscribers – they are the ones who agreed to buy shares of stocks but will pay at a future date; subscribers
will eventually become shareholders upon full payment of their subscription

Additional:

6. Promoter – a person who, acting along or with others, takes initiative in founding and organizing the
corporation and receives consideration therefor
7. Underwriters – are usually investment bankers who have:
 Agreed, alone or with others, to buy at stated terms an entire or a substantial part of an issue of
securities
 Guaranteed the sale of an issue by agreement to buy from the issuing corporation any unsold portion at
a stated price
 Agreed to use his best efforts to market all or part of an issue
 Offered for sale shares he has purchased from a controlling corporation
8. Independent Director – a director who is not an employee of the company and doesn’t hold a personal stake
in any of its business (e.g., stock ownership); instead, these directors serve on boards for many different
reasons, often to provide leadership, improve strategy and governance, help with succession planning, and
serve as liaisons between shareholders and management

Hierarchy of Corporate Structure

Shareholders -> Directors -> Officers

IX. Steps in the Creation of a Corporation

1. Promotion
- It is the process of bringing together all interested persons or incorporators, solicit subscriptions to raise
enough capital to form a corporation

2. Incorporation
- It includes the following:
o Corporation name
o Drafting and execution of the articles of incorporation by the incorporators
o Filing (Electronic Filing) with the Securities and Exchange Commission (SEC) of the articles of
incorporation. The Treasurer’s affidavit showing at least 25% of the entire authorized shares have
 been subscribed and at least 25% of the subscription has been paid in cash and in/or property to the
corporation is no longer required by the new Corporation Code.
o The certificate of bank deposit for paid-up capital is no longer required under the new Corporation
Code.
o Payment of the filing and publication fees
o Issuance by the Securities and Exchange Commission (SEC) of the Certificate of Incorporation.

3. Formal Organization and Commencement of Business Operations

- After filing of the Articles of Incorporation and upon issuance by the SEC of the certificate of incorporation,
the corporation commences to have juridical personality and legal existence.

X. Articles of Incorporation

An article of incorporation is a document prepared by the incorporators and filed with the SEC as evidence of its
existence containing the following information:

1. Name of the corporation

2. Purpose or purposes for which the corporation is formed
3. Place where the principal office is to be established or located, which must be within the Philippines
4. Term of existence if the corporation has not elected perpetual existence
5. Names, nationalities and addressed of the incorporators
6. Number of directors or trustees which shall not be more than fifteen (15)
7. Names, nationalities and residences of the persons who shall act as directors or trustees, until the first
regular directors are duly elected
8. If it is a stock corporation, the amount of authorized capital stock, and the number of shares into which it is
divided, the par value of each share, names, nationalities and residences of the original subscribers, and the
amount subscribed and paid by each on this subscription.
If the share has no par value, the Articles need state only the number of shares but the fact that the share is
without par value shall be stated therein.
9. If it is a non-stock corporation, the amount of its capital, the names, nationalities and residences of the
contributors and the amount contributed by each.

XI. By-Laws

It is the rules, regulation or law adopted by the corporation for its internal administration. It usually contains the
following:

1. Time and place and manner of calling and conducting regular or special meeting of the directors, trustees,
shareholders or members
2. Manner of voting of stockholders or members
3. Number of directors, qualifications, duties, responsibilities and compensation of directors, trustees, officers
and employees
4. Term of directors
5. Use of proxies of stockholders or members and the manner of voting them
6. Term of holding the election of directors or trustees
7. Manner of selecting the corporation officers
8. Procedures for amending the articles of incorporation and by laws
 9. Manner of issuing stock certificates, in case of stock corporation

XII. The Shareholder’s Equity

It is the residual interest of the owners in the net asset of a corporation. It is also known as the Owner’s Equity or Net
Assets.

Shareholder’s equity has two major components – share capital (contributed or paid-in capital) and retained
earnings.

Share capital reflects the amount of resources received by a corporation as a result of investment by shareholders,
donations or other share capital transactions.

Retained Earnings (or accumulated profits or losses) is the amount of profit accumulated and retained through
profitable operation of the business.

XIII. Components of Shareholders' Equity

1. Share Capital (Capital Stock)
- It refers to paid-in capital representing the total amount of par or stated value of the shares issued. It is the
portion of the authorized capital share that has been issued and fully paid by the stockholders.
- The share capital is divided into shares evidenced by a share certificate. A share certificate is a document that
evidences the ownership of a share in a stock corporation. It is only issued upon full settlement of the
subscription.

2. Authorized Share Capital

- It is the maximum number of share allowed by the Securities and Exchange Commission (SEC) that a
corporation may issue.
- It is determined by multiplying the total authorized share by its par or stated value.
- The authorized share may be increased or decreased by amending its articles of incorporation and approval
of SEC.

3. Subscribed Share Capital (Subscribed capital stock)

- It is the portion of the authorized share capital that has been subscribed but not yet fully paid and therefore
unissued.

4. Share Premium (Additional paid-in capital)

- It is the portion of paid-in capital in excess of the par or stated value.
 - It may also result from transactions involving treasury stocks, retirement of shares, donated capital, share
dividends and other “gain” on the corporations own stock transactions.

5. Accumulated Profits (Retained Earnings)

- It represents cumulative balance of periodic profits or losses, dividend distributions, prior errors and other
capital adjustments.

6. Treasury Share (Treasury Stock)

- It represent issued share reacquired but not retired by the corporation.
- It is deducted to compute the total shareholder’s equity.

7. Revaluation Reserve (Revaluation Surplus)

- It is the excess revalued amount of property, plant and equipment over its carrying amount.

XIV. Legal Capital

- It is the portion of the paid-in capital arising from the issuance of share capital which cannot be returned to
the shareholders in any from during the lifetime of the corporation for the protection of the corporate
creditors.
- The amount of legal capital is determined as follows:
o In case of par value shares – The legal capital is the aggregate par value of the shares issued and
subscribed.
o In case of no-par value shares – The legal capital is the total consideration received from
shareholders including the excess over the stated value.

Note: Trust Fund Doctrine mandates that the corporation must maintain its legal capital for the protection of its
creditors.

XV. Classes of Shares

1. Par value shares
- One in which a specific amount is fixed in the articles of incorporation and appearing on the certificate of
stock.
- The par value is the minimum issue price of the shares.
 2. No-par value shares
- One without any value appearing on the face of the certificate of stock.
- A 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.
- Thus, the issue price may vary from time to time as it is usually fixed based on the book value of the
corporation’s share.
- However, the minimum stated value of a no-par value share is five peso (P5.00) per share. In addition, shares
issued without par value are deemed fully paid.

3. Voting shares
- Those issued with the right to vote.

4. Non-voting shares
- Those issued without the right to vote.

5. Ordinary shares
- These shares entitle the holder to an equal pro-rata division of profits without any preference share.

6. Preference shares
- These shares entitle the holder to certain advantages or benefits over the holders or ordinary shares.

7. Founder’s shares
- This may be given certain rights and privileges not enjoyed by owners of other stocks.

8. Redeemable shares
- They are shares which may be purchased by the corporation from the holders of such shares upon the
expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions stated in the articles of incorporation and the
certificate of stock representing the shares.

9. Treasury shares
- A stock that has been issued by the corporation as fully paid and later reacquired but not retired.

10. Promotion shares

- Those issued to promoters as compensation in promoting the incorporation of a corporation, or for services
rendered in launching or promoting the welfare of the corporation.

11. Convertible shares

- A stock which is convertible or changeable from one class to another class.

XVI. Contributed Capital

- It is the portion of the subscribed or outstanding share capital that is paid.
XVII. Corporate Books and Records
- Every private corporation, stock or non-stock, is required to keep books and records at the principal office of
the following:

1. Minutes book
- It contains the minutes of the meetings of the directors and shareholders.

2. Stock and transfer book

- It is a record of the names of shareholders, installment paid and unpaid by shareholders and dates of
payment, any transfer of stock and dates thereof, by whom and to whom made.

3. Books of accounts
- These represent the record of all business transactions. The books of accounts normally include the journal
and the ledger.

4. Subscriptions book
- It is a book of printed blank subscription.

5. Shareholder’s ledger
- It is ledger which details the number of shares issued to each shareholder.

6. Subscribers’ ledger
- It is a subsidiary ledger for subscription receivable account; it reports the individual subscription of the
subscribers.

7. Stock certificate book

- It is a book of printed blank certificates of stock.
Topic 2: Basic Accounting for Corporation – Shareholder’s Equity

I. The Shareholder’s Equity

- It is the residual interest of the owners in the net assets of a corporation.
- It is also known as Owner’s Equity or Net Assets.
- Has two major components:

1. Share capital
- reflects the amount of resources received by a corporation as a result of investment by shareholders,
donations or other share capital transactions

2. Retained Earnings
- Or accumulated profits or losses
- Is the amount of profit accumulated and retained through profitable operation of the business

II. Authorization, Subscription and Issuance of Shares

The two methods of accounting for share capital authorization and issuance are as follows:

1. Journal Entry Method

- The authorization of shares is recorded by debiting unissued share capital and crediting authorized share
capital.
- The issuance of shares is recorded by crediting Unissued Share Capital.

2. Memorandum Method
- Only a memorandum is made for the total authorized share capital.
- The issuance of share is recorded by the share capital account. This method is usually used in practice.
Subscription and Collection

- There are times when a corporation sells its shares directly to investors on a subscription basis. The
subscription is a legal binding contract which provides for the number of shares subscribed, the subscription
price, the terms of payment and other conditions of the transaction.
- A subscriber becomes a shareholder upon subscription but the stock certificates evidencing ownership over
the shares of stocks are not issued until full payment of the subscription.

Issuance of Shares

III. Accounting for Issuance of Shares

- Share capital may be issued by the corporation at par or stated value, above or less than par or stated value.

Issuance of Share capital for Cash

With Par Value:

1. Issuance at Par/Stated Value

 - If the share is issued at par value, the proceeds from sale shall be debited to Cash and credited to Share
Capital.

2. Issuance above Par/Stated Value

- If the share is issued above par value, Cash is debited for the total issue price, Share Capital or Unissued
Share credited at par value, and Share Premium is credited for the excess of issue price over par value.

3. Issuance less than Par/Stated Value

- If the share capital is issued below par value, Cash is debited for the total issue price, Discount on Share
Capital is debited for the excess of par value over issue price and Share Capital or Unissued Capital is credited
at par value.
- Note: Corporation Code prohibits the issuance of shares below its par value or state value.

Without Par Value:

Issuing No-Par Share Capital

- When shares without par value are sold, the proceeds should be credited to Ordinary shares account.
- RCCP Section 6 prohibits the issue of no-par value preference shares.

Illustration:

ACT Corporation issued 5,000 no-par ordinary shares for P85,000. Entry:
Cash 85,000
Ordinary Shares 85,000

Issuing No-Par Share Capital with a stated value

- When shares without par value are sold, the proceeds should be credited to Ordinary Shares account.
- The excess proceeds over stated value, may be alternatively be credited to share premium.
Illustration:
ACT Corporation issues 5,000 no-par ordinary shares but with a stated value of P20 for P125,000. Entry:
Cash 125,000
Ordinary Shares 125,000

Cash 125,000
Ordinary Shares 100,000
Share Premium 25,000

Accounting for Issuance of Shares

Issuance of Share Capital for Non-Cash Consideration

- If share capital is issued for non-cash consideration such as tangible or intangible property or services, the
share capital is recorded at an amount equal to the following order of priority:
1. Fair value of non-cash consideration received
2. Fair value of shares issued
3. Par value of shares issued

Illustration for 1 (FV of non-cash consideration received):

ACT Corporation issued 1,000 ordinary shares with P100 par value in exchange for Machinery with a fair value of
P125,000. Entry:

Equipment 125,000
Ordinary Share (1,000 sh x P100) 100,000
Share Premium 25,000

Illustration for 2 (FV of shares issued):

ACT Corporation issued 1,000 ordinary shares with P100 par value in exchange for Machinery with a book value of
P125,000. The fair value of the shares issued is P110 per share. Entry:

Equipment (1,000 shares x P110) 110,000

Ordinary Share (1,000 sh x P100) 100,000
Share Premium 10,000

Illustration for 2 (FV of shares issued):

ACT Corporation issued 1,000 ordinary shares with P100 par value in exchange for Machinery with a book value of
P125,000. Entry:

Equipment 100,000
Ordinary Share (1,000 sh x P100) 100,000

Share Issuance Costs

- These are transactions incurred by the corporation to issue shares of stocks.

- It include accounting fees, legal fees, commissions, cost of printing stock certificates, underwriters’ fees, and
documentary stamp tax.
 - Share issuance cost is deducted to share premium. If the share premium is insufficient to absorb such
transaction costs, the excess amount shall be accounted as a contra equity account and shall be deducted to
the following order of priority:
1. Share premium from previous share issuance
2. Retained earnings

IV. Acquisition of Treasury Shares

- Treasury stocks 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.
- Section 40 of the Revised Corporation Code provides that a stock corporation has to power to purchase its
own shares for a legitimate purpose provided that it has unrestricted retained earnings.

Accounting for Treasury Shares

- The cost method is used to record the treasury shares.

- It means that treasury shares is debited for the amount of acquisition cost, regardless whether the share are
reacquired below or above par or stated value.
- Note: Treasury share is presented as a deduction in total shareholder’s equity.

V. Retirement of Treasury Stock

- When treasury shares are subsequently cancelled or retired, the share capital is debited at par or stated
value with corresponding credit to treasury stock at the cost.

1. With Gain on Retirement

- If the retirement results in a gain, which means that the par or stated value is greater than the cost of the
treasury share, such gain is credited to share premium from treasury shares.

2. With Loss on Retirement

- If the retirement results in a loss, which means that the par or stated value is less than the cost of treasury
share, such loss is debited in order of priority:
1. Share premium from original issuance
2. Share premium from treasury shares
3. Retained earnings
 VI. Donated Capital
- These are gifts received by the entity from its shareholders and non-shareholders.

Accounting for Donated Capital

a. Donation from shareholders are measured and recorded at Fair Value of the item received with the credit
going to share premium. If significant, such contributions may be designated as donated capital.

- If the donation is in the form of shares of the corporation, the receipt of the donated shares shall be
recorded by means of memorandum entry only.
- The account Donated capital is credited upon reissuance of the donated shares.
- Donated shares are actually treasury shares and may be reissued at any amount.

b. Donation from non-shareholders shall be measured and recorded at fair value as income when:
(1) Received
(2) When the condition attached to it is fulfilled
(3) The criteria for asset recognition are met

c. Donation from government – it shall be recognized as government grants.

VII. Callable Preference Shares

- Callable preference shares gives the issuing corporation the right to purchase (retire) the shares from its
holders at a specified price.
- The amount paid to call and retire a preference share is its call price.
- It is important to state that the redemption date is not definite for it is dependent on the corporation
exercising its “call”.
- Retirement may result to a “gain” or “loss”.
o Gain is credited to share premium related to ordinary shares.
o Loss is debited against share premium related to issuance of preference share and then to retained
earnings.

VIII. Redeemable Preference Shares

- A preference share that provides for mandatory redemption by the issuer for a fixed or determinable amount
at a fixed or determinable future date, or gives the holder the right to require the issuer to redeem the
instrument at, or after a particular date for a fixed or determinable amount, is a financial liability.
- A financial instrument that gives the holder the right to put it back to the issuer for cash or another financial
asset, is a financial liability.

IX. Convertible Preference Share

- Preference share is more attractive to investors if it carries a right to exchange preference shares for a fixed
number of ordinary shares.

Pro-forma entry:
Preference shares xxx
Share premium preference xxx
Ordinary shares xxx
Share premium-ordinary xxx
 - Convertibility must be provided in the articles of incorporation.

X. Recapitalization
- Is manifested when there is a change in the capital structure of the corporation
- The typical capitalizations are as follows:
1. Change from Par to No-par
2. Change from No-par to Par
3. Reduction of Par value
4. Reduction of stated value
Topic 3: Retained Earnings

I. Retained Earnings

Retained earnings represent the cumulative balance of the following among others:

a. Net income or loss for the period

b. Dividend distributions
c. Prior period errors
d. Change in accounting policy
e. Reclassifications of some components of other comprehensive income
f. Retirement of preference shares in the excess of original issue price
g. Loss on sale of treasury shares in excess of share premium from treasury shares
h. Loss on retirement of treasury shares in excess of share premium from treasury shares

II. Classification
1. Unappropriated or unrestricted retained earnings. This represent that portion which is free and can be
declared as dividends to shareholders.
2. Appropriated or restricted retained earnings. This represent that portion which is restricted and therefore
not available for dividend declaration.

Note: When the retained earnings account has a debit balance, it is called a “deficit”.

III. Dividends
- Dividends are distributions of earnings or capital to shareholders in proportion to their shareholdings.
- Dividends out of earnings can be declared only from retained earnings. If the entity has a deficit, it is illegal
to pay dividends.
- The common forms of dividends out of earnings are cash dividend, property dividend and share dividend.
- Dividends out of capital are distributions of capital to shareholders in proportion to their shareholdings. It is
popularly known as liquidating dividends.

The declaration and payment of dividends involve three important dates and they are:

Date of Declaration

- On the date of declaration, the board of directors will adopt a resolution declaring that a dividend is to be
paid. The resolution will specify the amount, type and date of payment of this dividend.
- Cash dividends are declared solely by the board of directors while share dividends will necessitate the
concurrence of at least 2/3 of the outstanding shareholders.
- Note: Dividends declared are obligations of the firm. Dividends to be paid in cash or property become a
liability on this date. Shares distributable is also recognized.

Date of Record

- A list of shareholders entitled to the declared dividends is prepared at the date of record.
- If an investor buys a share of stock after this date, he will not receive the dividend. The shares is said to be
traded ex-dividend.
- No entry is required on this date.
Date of Payment

- The corporation settles its liability on this date.

- An entry is made on this date.

IV. Cash Dividends

- Cash dividends are the most common type of dividend. Dividends may be expressed as a certain amount of
pesos per share or a certain percent of par or stated value of shares.

Entry upon declaration

Retained Earnings xxx

Dividends Payable xxx

Entry upon payment

Dividends Payable xxx

Cash xxx

V. Property Dividends
1. Property dividends or dividends in kind are distribution of earnings to the shareholders in the form of
noncash assets.
2. IFRIC 17, Paragraph 11, provides that an entity shall measure a liability to distribute noncash asset as a
dividend to owners at the fair value of the asset to be distributed.
3. Paragraph 13 provides that the dividend payable is initially recognized at fair value of the noncash asset on
the date of declaration and is increased or decreased as a result of the change in the fair value of the asset
every year-end and date of settlement.
4. The offsetting debit or credit is directly though equity or directly retained earnings.
5. Paragraph 14 provides that when an entity settles the dividends payable, the difference between the carrying
amount of the dividend payable of the noncash asset distributed shall be recognized as gain or loss on
distribution of property dividend.
6. IFRIC 17, Paragraph 12, provides that if an entity gives its owners a choice of either a noncash asst or a cash
alternative, the entity shall estimate the dividend payable by considering both the fair value of each
alternative and the associated probabilities of owners selecting each alternative.

Illustration

On December 31, 2022, an entity declared dividends on ordinary shares payable on March 31, 2023. The entity
decided to give shareholders a choice between a total cash dividend of P2,000,000 or a property dividend in the form
of noncash asset from the inventory with a carrying amount of P2,500,000 and a fair value less cost to distribute of
P3,000,000. The entity estimated that 70% of the shareholders shall take the option of the cash dividend and 30%
shall elect the noncash asset.

VI. Share Dividend

1. Share dividend is distribution of the earnings of the entity in the form of the entity’s own shares.
2. When share dividend is declared, the retained earnings of the entity are in effect capitalized or transferred to
share capital.
 3. The assets of the entity remain the same before and after the issuance of the share dividend.
4. Share dividend payable is not a liability but an addition to the share capital in the shareholder’s entity.

The guidance for share dividends is based on the Philippine GAAP in accounting for share dividends:
5. If the share dividend is 20% or more, the par or stated value is capitalized or debited to retained earnings.
6. If the share dividend is 20% or more, the par or stated value is capitalized because this is conceived to
materially effect a reduction in the share market value.
7. Share dividend of 20% or more is considered a large share dividend.
8. If the share dividend is less than 20%, the fair value of the share on the date of declaration is capitalized.
9. However, if the fair value is lower than the par or stated value, the par or stated value is capitalized.
10. If the fair value is higher than par or stated value, the difference is credited to share premium from share
dividend.
11. Share dividend of less than 20% is considered a small share dividend because the small share dividend does
not result in a reduced market price of the outstanding shares.

Large Share Dividend

- If the share is 20% or more of the previously outstanding shares such that the effect is to reduce materially
the market value per share, then only the par or stated value is credited to ordinary shares with a
corresponding debit to retained earnings.

VII. Share Splits

- Corporation reduce the par or stated value of its share capital and issues additional shares to its shareholders
through the practice referred to as share splits.
- The par or stated value per share will decrease with a corresponding increase in the number of authorized,
issues and outstanding shares.
- In effect, there is no change in the balances of the shareholders’ equity accounts.
- Reverse splits can be accomplished by increasing the par or stated value of its share and reducing the shares
accomplished by increasing the par or stated value of its share and reducing the shares outstanding. There
will be no journal entry required; a memo entry is sufficient.

Summary of the Effects of Dividends and Share Splits

Effect on Declaration of Cash Dividends Payment of Cash Dividends

Retained Earnings Decrease None

Ordinary Shares None None

Share Premium None None

Total Shareholders’ Equity Decrease None

 Total Liabilities Increase Decrease

Total Assets None Decrease

Shares Outstanding None None

Declaration & Distribution of

Effect on Small Share Dividends Large Share Dividends Share Split

Retained Earnings Decrease Decrease

Ordinary Shares Increase Increase

Share Premium Increase

Total Shareholders’ Equity

Total Liabilities

Total Assets

Shares Outstanding Increase Increase Increase

VIII. Dividends on Preference and Ordinary Shares

- When the board of directors declares cash dividends, preference shares are entitled to dividends before
ordinary shareholders received any distribution.
- The dividend is stated as a percentage of the par value of shares.
- The corporation is not obliged to declare dividends annually.
- When the board does not declare dividends, the dividends for cumulative preference share accumulate,
these are called dividends in arrears.

IX. Preference shares may contain one of the following combination of features:
1. Non-cumulative and non-participating
2. Non-cumulative and participating
3. Cumulative and non-participating
4. Cumulative and participating

Non-Cumulative Preference Shares

- These shares entitles the holders only to the payment of current dividends, if and when dividends are
declared to the extent of preference rate, before the ordinary dividends are paid.
- If there is not dividend declaration for a certain year, then the dividends for that year is forfeited.

Cumulative Preference Shares

- These shares entitle the holder to payment not only of current dividends but also of back dividends or
dividends in arrears, if and when dividends are declared, before the ordinary shareholders are paid.

Non-Participating Preference Shares

- These shares entitle the holders only to the extent of the stipulated preference dividend.
Participating Preference Shares

- These shares entitle the holders to participate with the holders of ordinary shares pro-rate in the remainder
after the ordinary shares have received their initial share based on the preference rate.

X. Prior Period Errors

- Prior period errors are omissions from and other misstatement of the entity’s financial statements for one or
more prior period that are discovered in the current period.
- Material prior periods must be restated to report financial position and results of operations as they would
have been presented had the error never taken place.
- The amount of the correction of a prior period error that related to prior periods should be reported by
adjusting the opening balances of retained earnings and affected assets and liabilities.
- The correction of a prior period error is excluded from profit or loss for the period in which the error is
discovered.
- If an error resulted in an understatement of profit in previous periods, a correcting entry would be needed to
increase retained earnings.
- If an error overstated profit in prior periods, then retained earnings would have to be decreased.

XI. Restrictions on Retained Earnings

- A corporation may be required by law or contractual arrangements to set aside portion of the retained
earnings for specified purposes.
- In addition, the board of directors may voluntarily designate a portion of retained earnings for future
expenses, contingencies or other purposes.
- This portion of the retained earnings is referred to as restricted or appropriated retained earnings.

Pro-forma Journal Entry:

Retained Earnings xxx

Appropriated Retained Earnings xxx

XII. Statement of Retained Earnings

A retained earnings statement is normally divided into two major sections:

1. Appropriated. This section presents the beginning balance of the retained earnings appropriated account,
any additions or deductions during the period and the ending balance.
2. Unappropriated. This section shows the beginning balance of the retained earnings unappropriated account,
correction of prior period errors, profit or loss for the period, dividends, transfers to and from the
appropriated and unappropriated accounts, and the ending balance.

The restriction or appropriation of retained earnings has no effect on assets, total retained earnings or total
shareholders’ equity. It simply communicates that the restricted portion is not available for dividend declarations.

Once the purpose of the restriction has been served, the appropriated retained earnings should be reversed to
unappropriated retained earnings:

Pro-forma Journal Entry:

Appropriated Retained Earnings xxx

Retained Earnings xxx
XIII. Statement of Changes in Shareholders’ Equity
- The statement of changes in shareholders’ equity may be prepared in columnar format, where each column
represents a major shareholders equity classification.

XIV. Book Value Per Share

- Book value per share is the amount that would be paid on each share if the corporation is liquidated.
- The amount available to shareholders is exactly the amount reported as shareholder’s equity.
- When only one single class of share is outstanding, the book value per share is computed by dividing the
total shareholders’ equity by the number of shares outstanding.

Illustration: Assume that ACT Company has a total shareholder’s equity of P180,000 and 5,000 ordinary shares
outstanding. What is the book value per share?

- The preference shareholders have the right to receive assets equal to the part value or a larger stated
liquidation value per share.
- Liquidation value is the cash price of other consideration that can be received in a forced sale of assets such
as that occurring when a firm is in the process of going out of business.
- Typically, the liquidation value is less than what could be received from selling assets in the ordinary course
of the business.
- The book value per share of the preference share is the sum of its liquidation value, if applicable, plus any
current and dividends in arrears divided by the preference shares outstanding.
- Ordinary shareholders equity is obtained by deducting from total shareholders’ equity the preference
shareholders’ equity.
- The book value per share of the ordinary shares is computed by dividing the ordinary shareholders’ equity by
the shares outstanding.