ACCTBA2 Reviewer

Unit 1 INTRODUCTION TO PARTNERSHIP AS A BUSINESS ORGANIZATION
*Special Features of Partnership

Mutual Agency each partner is an agent of the partnership and a partner's acts can bind the business
Unlimited Liability each partner except for limited partners is liable to outside creditors outside of his capital
contribution
Limited Life since a partnership is easily dissolved, it can be assumed that the legal life of the partnership easily ends.
Business life may continue even if old partnership is terminated and the formation of a new one occurs
*Kinds of Partnerships as to object
Universal partnership of all present properties assets contributed to the partnership becomes jointly owned by the
partners. Profits earned by certain assets invested are also shared among partners
Universal partnership of profits ownership is retained by the investing partner. Only profits are shared among
partnership
*Kinds of Partnerships as to Liability
General Partnership all partners are general partners who are liable beyond their capital contribution
Limited Partnership requires at least 1 general partner and 1 limited partner. Limited partners are liable only up to
their capital contributions
*Kinds of Partners
General Partner liable beyond capital contribution
Limited Partner liable up to his capital contribution. He cannot contribute mere service or industry
Capitalist Partner a partner who contributes money or property to the partnership
Industrial Partner a partner who contributes service or industry.
Managing Partner one who manages the affairs of the partnership
Liquidating Partner one who liquidates the partnership
Secret Partner one who acts like a partner but is not known to be a partner
Silent Partner one who doesn't act but is known to be a partner
Dormant Partner one who is not known to be a partner and doesn't act
Nominal Partner one who is a partner by name only
*Advantages and Disadvantages of a Partnership
Easily organized (compared to Corporations)
+ More people create better choices because of experience and combined knowledge
You can share resources such as money and equipment
You have to consult your partner and negotiate more as you cannot take decisions by yourself.
The duration of the partnership is always uncertain.
Delay may take place in decision-making process.
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THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!
Unit 2 - Accounting for Partnership Formation

Case 1 Both partners are ordinary people (do not intend on investing his business)
Illustration: A and B decides to form a partnership. A will contribute P100,000 while B will contribute a piece of land
which costs P150,000 and has a Fair Market Value of P175,000
Opening Entries
Cash
100000
A, Capital
100000
Cash Contribution of A
Land
175000
B, Capital
175000
Contribution of B
*note that non-current assets are recorder at Fair Market Value and not at cost.
Case 2 At least one partner decides to contribute his business to the partnership
Illustration: A and B decides to form a partnership called A & B partnership. A decides to contribute his business
which has the following ledger accounts after closing entries: Cash P50,000 Accounts Receivable P30,000 Merchandise
Inventory 20,000 Office Equipment P10,000 Allowance for doubtful Accounts P2,000 Accumulated Depreciation P3,000
Accounts Payable P7,000. B will contribute enough cash so that he gets 50% of partnership equity. B tells A that he needs to
revalue his assets. Revaluation of assets are as follows: Accounts Receivable P25,000 Merchandise inventory P28,000
Office Equipment P8,000
Step 1 Revalue the accounts
Entries
A, Capital
Allowance for doubtful accounts
Revaluation
3000
3000
Merchandise Inventory
A, Capital
Revaluation
8000
Accumulated Depreciation
A, Capital
Revaluation
1000
8000
1000
*note accounts with contra accounts will decrease or increase by adjusting their respective contra accounts.

Step 2- Close the Sole Proprietor's books

Entries
A, Capital
Accounts Payable
Allowance for doubtful Accounts
Cash
Accounts Receivable
Office Equipment
Closing Sole Proprietor's books
104000
7000
5000
2000
50000
30000
28000
10000
Step 3 Opening Partnership Books

Opening Entries
Cash
Accounts Receivable
Office Equipment
A, Capital
Accounts Payable
Allowance for doubtful Accounts
Opening Entries
Cash
B, Capital
Opening Entries
50000
30000
28000
10000
104000
7000
5000
2000
104000
104000
NOTE: PROPERTY OF BMS. UNOFFICIAL ACCTBA2 REVIEWER. THIS

SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!
Unit 3 - Accounting for DIVISION OF PROFITS AND LOSSES

Much difference only lies in the distribution of profits and losses. Each partner has his own capital account, drawing
account. Net income is closed up to drawing accounts only. This is to protect the profit sharing ratio between partners.
Case 1 Profit and loss will be shared based on Beginning capital contributions
Net income P1,500,000
Capital ratio
A, Capital P300,000
B, Capital P200,000
C, Capital P500,000
300,000/1,000,000
200,000/1,000,000
500,000/1,000,000
A
P450,000
Profit Distributed
Profit Distributed
3
2
5
B
P300,000
(1,500,000)*(3/10)
(1,500,000)*(2/10)
(1,500,000)*(5/10)
C
P750,000
Total
P1,500,000
Case 2 Profit and loss will be shared based on an arbitrary ratio

Illustration: A,B and C formed a partnership. They decided to share the profits and losses in the ratio 4:5:1 respectively.
business operations were favorable and showed a Net income of P1,500,000.
A
P600,000
Profit Distributed
Arbitrary ratio
Profit Distributed
4
5
1
(1,500,000)*(4/10)
(1,500,000)*(5/10)
(1,500,000)*(1/10)
B
P750,000
C
P150,000
Total
P1,500,000
Case 3 Profit and loss will be shared on an arbitrary ratio and it will allow salary to industrial partners.
business operations were favorable and showed a Net income of P1,500,000. Partner C will receive an annual salary of
P300,000
A
Salary Allowance
remaining distributed
Total Distribution
P480,000
P480,000
B
P600,000
P600,000
C
P300,000
120,000
P420,000
Total
300,000
1,200,000
P 1,500,000
P
*Note Salary Allowance will be applied first before arbitrary distribution. 1,500,000 less 300,000 is 1,200,000. this amount
will be divided amongst partners based on their profit and loss ratio

Case 4 Profit and loss will be shared on an arbitrary ratio and will allow bonus to managing partner and allowances..
P300,000. A, being the managing partner, will receive a 10% bonus on Net income.
Bonus Given to A
Salary Allowance
Total Distribution
A
P150,000
420,000
P570,000
P525,000
P525,000
C
P300,000
105,000
P405,000
Total
P 150,000
300,000
1,050,000
P1,500,000
*Note Salary Allowance and Bonus given will be applied first before arbitrary distribution. 1,500,000 less 450,000 is
1,050,000. this amount will be divided amongst partners based on their profit and loss ratio
Case 5 Profit and loss will be shared on an arbitrary ratio and will allow interest, bonus, and salary to the partners.
P300,000. A, being the managing partner, will receive a 10% bonus on Net income. 5% Interest is allowed to each partner
based on his capital balance
A, Capital P300,000
B, Capital P200,000
C, Capital P500,000
Interest allowed
Bonus Given to A
Salary Allowance
Total Distribution
A
P30,000
150,000
B
P20,000
C
P50,000
380,000
P560,000
475,000
P495,000
300,000
95,000
P445,000
Total
P 100,000
150,000
300,000
950,000
P1,500,000
*Note Salary Allowance, Bonus given and Interest will be applied first before arbitrary distribution or capital ratio
distribution. 1,500,000 less 550,000 is 950,000. this amount will be divided amongst partners based on their profit and loss
ratio

Case 6 Net Loss or insufficient income to pay for interest, bonus and salary
business operations were unfavorable and showed a Net loss of P500,000. Partner C will receive an annual salary of
P300,000. A, being the managing partner, will receive a 10% bonus on Net income. 5% Interest is allowed to each partner
based on his capital balance
Net Loss
(P500,000)
Interest allowed
Bonus Given to A
Salary Allowance
Total Distribution
A
P30,000
(360,000)
(P330,000)
B
P20,000
C
P50,000
(450,000)
(P430,000)
300,000
(90,000)
P260,000
Total
P100,000
300,000
(900,000)
(P500,000)
*Note Salary Allowance and Interest will be applied first before arbitrary distribution or capital ratio distribution. Bonus does
not apply to Net loss situations. (500,000) less 400,000 is (900,000). this amount will be divided amongst partners based on
their profit and loss ratio

Unit 4 Partnership Dissolution without Liquidation

Dissolution
- terminates all authority of any partner to act for the partnership. When the partnership is
dissolved, the partners are dissociated to continue the business as a going concern.
- is the change in the relation of the partners cased by any partner ceasing to be
associated in the carrying on of the business.
- does not necessarily mean an automatic termination of the business activities. It
may continue until the winding up or liquidation of partnership affairs is completed.
Dissolution does not always lead to liquidation while liquidation is always a result
of dissolution.
Causes of Dissolution
1. Agreement among the partners
2. Operation of law
a. Death or insanity of any of the partners
b. Bankruptcy of any of the partners
c. Partnership activities become unlawful
3. Express will in the case of partnership at will
4. Admission of a new partner
5. Withdrawal of an existing partner
Requirements of Accounting for Dissolution
1. Partners capital accounts shall be updated
a. Nominal and temporary accounts must be closed to the partners capital accounts
2. Assets and liabilities should be at fair market value
3. Revaluation of assets and liabilities
Cases of Accounting for Dissolution
1.
2.
3.
4.
Admission of new partner

Withdrawal, retirement or death of a partner
Insolvency of a partnership or a partner
Conversion of the partnership to a corporation
Admission of New Partner

- Should be with the consent of all the partners. (Mutual Agency)
- Brings about a new association of individuals even if the partnership will not liquidate.
- The newly formed partnership may continue to use either the books of the old partnership
or an entirely new set of books.
- Two cases:
O By purchase of interest of existing partners
O By investment to partnership

By purchase of interest of existing partners

Partners
A
B
C
Capital Balances
100,000
200,000
300,000
P&L Ratio
20%
30%
50%
The following are independent cases:

Case 1: C sold his interest in the partnership to D for 300,000.
C, Capital
D, Capital
300,000
300,000
Case 2: C sold 50% of his interest in the partnership for P100,000.

C, Capital
D, Capital
150,000
150,000
Case 3: C sold 100% of his interest in the partnership to D for P350,000.

C, Capital
D, Capital
300,000
300,000
Case 4: C sold 100% of his interest in the partnership to D for P400,000. The partners agreed that
the excess payment represents goodwill to recognize the true worth of the partnership because of
its established name.
Goodwill (100,000/50%)
A, Capital
B, Capital
C, Capital
200,000
C, Capital
D, Capital
400,000
40,000
60,000
100,000
400,000
Case 5: AB and C sold 20% of their respective interest in the partnership to D for P200,000. They
agreed that there would be no goodwill to be recognized.
A, Capital
B, Capital
C, Capital
D, Capital
20,000
40,000
60,000
120,000

By investment to the partnership

1. Investment equals capital credits
Case 1.1: Partners approved the admission of D provided that the latter will contribute to the
partnership equipment with a fair value of P100,000 and cash, P50,000. They further agreed that
they would receive capital interest equal to their actual contributions to the partnership.
Partners
A
B
C
Capital Balances
150,000
150,000
150,000
Cash
Equipment
D, Capital
P&L Ratio
33.33%
33.33%
33.33%
50,000
100,000
150,000
2. Bonus Method
Partners
A
B
C
Capital Balances
120,000
240,000
240,000
P&L Ratio
20%
40%
40%
Case 2.1: Bonus to the new partner. D is admitted by investing cash of P200,000 for 30%
interest in the partnership. The partners agreed that any discrepancy in the partners actual
contributions and their respective capital credits should be treated under the bonus method.
Cash
A, Capital
B, Capital
C, Capital
D, Capital
200,000
8,000
16,000
16,000
240,000
Case 2.2: Bonus to the old partners. D is admitted by investing cash of P200,000 for 20%
interest in the partnership. The partners agreed that any difference between capital contributed
by the new partner and his capital credit should be treated under the bonus method.
Cash
200,000
A, Capital
B, Capital
C, Capital
D, Capital
8,000
16,000
16,000
160,000

3. Goodwill Method
Partners
A
B
C
Capital Balances
120,000
240,000
240,000
P&L Ratio
20%
40%
40%
Case 3.1: Goodwill to the old partners. D is admitted by investing cash of P200,000 for 20%
interest in the partnership. It is also agreed that the investment should be recorded under goodwill
method.
Total Agreed Capital = 200,000/20% = P 1,000,000
Total Contributed Capital = 600,000 + 200,000 = P800,000
Goodwill = 1,000,000 800,000 = P200,000
Cash
Goodwill
200,000
200,000
A, Capital
B, Capital
C, Capital
D, Capital
40,000
80,000
80,000
200,000
Case 3.2: Goodwill to new partner. D is admitted by investing cash of P200,000 for 40%
interest in the partnership. It is also agreed that the investment should be recorded under goodwill
method and it shall be given to D, the new partner.
Cash
Goodwill
D, Capital
200,000
200,000
400,000

Case 3.3: Goodwill to all partners. D is admitted into the partnership by investing P200,000 for
25% interest in the total agreed capitalization of P900,000.
Total Agreed Capital = P 900,000
Goodwill = 900,000 800,000 = P100,000
Cash
Goodwill
A, Capital
B, Capital
C, Capital
D, Capital
200,000
100,000
15,000
30,000
30,000
225,000
Case 3.4: Goodwill and Bonus. D is admitted into the partnership by investing P200,000
for 20% interest in the total agreed capitalization of P900,000.
Total Agreed Capital = P 900,000
Goodwill = 900,000 800,000 = P100,000
Agreed capital credit to D = 900,000 x 20% = P180,000
Bonus to old partners = P200,000 180,000 = P20,000
Cash
Goodwill
A, Capital
B, Capital
C, Capital
D, Capital
200,000
100,000
24,000
48,000
48,000
180,000
Withdrawal, Retirement or Death of a Partner

- Three cases:
O Sale to outside party
O Sale to one or all partners
O Sale to the partnership
Partners
A
B
C
D
Capital Balances
135,000
270,000
270,000
225,000
P&L Ratio
15%
30%
30%
25%

The following are independent cases:

Sale to outside party
Case 1: All of the remaining partners consented that B will sell his entire capital interest to
an outside person named E for P250,000.
B, Capital
E, Capital
250,000
250,000
Sale to one or all partners

Case 1: A agrees to buy the interest of B for P200,000.
B, Capital
A, Capital
200,000
200,000
Sale to partnership
Partners
A
B
C
Capital Balances
100,000
150,000
250,000
400,000
P&L Ratio
20%
30%
50%
Case 1: Less than book value. C is withdrawing from the partnership. He agreed to be paid
P225,000 cash for his total interest in the partnership. The partners agreed to revalue the
inventory before Jonahs withdrawal. The payment is based on the agreed revaluation of
inventory believer to be overstated.
A, Capital
10,000
B, Capital
15,000
C, Capital
25,000
50,000
C, Capital
Cash
225,000
225,000
Case 2: The underpayment is agreed as bonus given by C to the continuing partners.

C, Capital
A, Capital
B, Capital
Cash
250,000
10,000
15,000
225,000

Case 3: Partners agreed that C, who is withdrawing, be paid P100,000 cash and P150,000 worth
of inventory.
C, Capital
Cash
Inventory
250,000
100,000
150,000
Case 4: Partners agreed to pay C P100,000 cash and P150,000 notes payable with 12% interest
per year. In this case, C is considered out of the partnership and he now becomes a creditor to the
partnership.
C, Capital
Cash
Notes Payable
250,000
100,000
150,000
Insolvency of a Partnership or a Partner

Insolvency
- commonly a result of excessive losses from operations, the over-extension of credit to
customers, or excessive investments in inventories or in plant assets.
Case 1:
Cash
Accounts
Payable
A (20%)
B (30%)
C (50%)
Debit
50,000
Partnership
Credit
General Partners
Assets
Liabilities
500,000
100,000
250,000
300,000
500,000
500,000
Accounts Payable
Cash
50,000
Cash
450,000
B, Capital
C, Capital
Accounts Payable
Cash
300,000
50,000
50,000
200,000
250,000
450,000
450,000

Conversion of Partnership to Corporation

Using partnership books
1. Adjust the assets and liabilities directly to the partners capital accounts.
2. Close (debit) the partners capital accounts and credit the appropriate capital stock
accounts corresponding to the amount of the partners capital accounts which have
been closed.
Using new sets of books
In the partnership books:
1. Close all nominal accounts to the capital accounts.
2. Adjust the assets and liabilities directly to the capital accounts.
3. Close the books of a partnership by closing all real accounts.
In the books of the corporation:
1. Transfer all assets (debit) and liabilities (credit) of the partnership in the books of the
corporation and credit the appropriate capital stock accounts to the equity.

Unit V Partnership Dissolution with Liquidation

Liquidation
- the process of converting all assets of the business into cash (realization), followed y the
final payments of creditors claims and the partners capital balances in the partnership
(liquidation).
- Gains or losses, and liquidation expenses, if any, must be allocated to the partners before
actual cash payments are made to the individual partners.
Kinds of Liquidation
1. Lump Sum Liquidation (Total Liquidation)
- all noncash assets of the partnership are converted first into cash before payments
are made first to the creditors, then to the partners. The payment to the partners is
made only once in a lump sum amount after all the outside creditors are paid.
2. Installment Liquidation (Piecemeal Liquidation)
- Involves selling of the noncash assets on a gradual basis because the complete
liquidation process might take several months. Payments to creditors and partners
may not be postponed. Consequently, cash payments to creditors and partners are on
installment basis as the cash becomes available.
Lump Sum Liquidation
Case 1: Solvent General Partners.
Activities
Balances
before
realization
Assets
realization
Balances
Payments
of
Liabilities
Balances
Right of
Offset
Balances
Bs Cash
Investment
Balances
Payment
of Loans
from A
Cash
Noncash
Assets
5,000
235,000
195,000
(235,000)
200,000
(195,000)
Acconts
Payable
Loans
from A
195,000
A,
B,
C,
Capital
Capital
Capital
(1/5)
(2/5)
(2/5)
5,000
6,000
12,000
22,000
(8,000)
(16,000)
(16,000)
195,000
(195,000)
5,000
(2,000)
(4,000)
6,000
5,000
(2,000)
(2,000)
2,000
(4,000)
6,000
5,000
4,000
3,000
(4,000)
4,000
6,000
9,000
(3,000)
3,000
(3,000)
6,000
5,000

Balances
Cash to
Partner C
Balances
6,000
(6,000)
Cash
195,000
Loss on Realization
40,000
Accounts Receivable
Unused Supplies
150,000
80,000
5,000
A, Capital
B, Capital
C, Capital
Loss on Realization
8,000
16,000
16,000
40,000
Accounts Payable
Cash
195,000
Loans payable to A
A, Capital
2,000
Cash
4,000
195,000
2,000
B, Capital
4,000
Loans payabe to A
Cash
3,000
3,000
C, Capital
Cash
Case 2: B is an insolvent.
Activities
Balances
before
realization
Assets
realization
Balances
Payments
of
Liabilities
Balances
Absorption
6,000
(6,000)
Cash
6,000
6,000
Noncash
Assets
5,000
235,000
195,000
(235,000)
200,000
(195,000)
5,000
Acconts
Payable
Loans
from A
195,000
A,
B,
C,
Capital
Capital
Capital
(1/5)
(2/5)
(2/5)
5,000
6,000
12,000
22,000
(8,000)
(16,000)
(16,000)
195,000
(195,000)
5,000
(2,000)
(4,000)
6,000
5,000
(2,000)
(1,333)
(4,000)
4,000
6,000
(2,667)

Activities
deficit of
B
Balances
Right of
Offset
Balances
Payment
of Loans
from A
Balances
Cash to
Partner C
Balances
Cash
Noncash
Assets
Acconts
Payable
Loans
from A
A,
Capital
(1/5)
B,
Capital
(2/5)
5,000
5,000
(3,333)
(3,333)
3,333
5,000
(1,667)
1,667
(1,667)
3,333
(3,333)
C,
Capital
(2/5)
3,333
3,333
3,333
(3,333)
Cash
195,000
Loss on Realization
40,000
Accounts Receivable
Unused Supplies
150,000
80,000
5,000
A, Capital
B, Capital
C, Capital
Loss on Realization
8,000
16,000
16,000
40,000
Accounts Payable
Cash
195,000
A, Capital
C, Capital
B, Capital
1,333
2,667
Loans payable from A

A, Capital
3,333
Loans payabe from A

Cash
1,667
C, Capital
Cash
3,333
195,000
4,000
3,333
1,667
3,333

Installment Liquidation
Case 1:
Activities
Balances
before
realization
Collection
of
receivables
Balances
Payments
of
Liabilities
Balances
Cash to A
Cash
Balance
Sale of
Inventory
Balances
Payment
to partners
Balances
Sale of
supplies
Balances
Payment
of liability
and
expenses
Balances
Final
Payment
to partners
Balances
Cash
Noncash Accounts
Assets
Payable
5,000
235,000
140,000
(150,000)
Loans
from H
H,
Capital
(20%)
5,000
20,000
140,000
I,
J,
Capital
Capital
(40%)
(40%)
35,000
40,000
(2,000)
(4,000)
(4,000)
145,000
(140,000)
85,000
140,000
(140,000)
5,000
18,000
31,000
36,000
5,000
(2,000)
3,000
85,000
5,000
(2,000)
3,000
18,000
31,000
36,000
18,000
31,000
36,000
74,000
(80,000)
(1,200)
(2,400)
(2,400)
77,000
74,000
5,000
3,000
16,800
(15,200)
28,600
(25,400)
33,600
(30,400)
3,000
3,000
5,000
(5,000)
3,000
(3,000)
1,600
(400)
3,200
(800)
3,200
(800)
6,000
(1,000)
1,200
(200)
2,400
(400)
2,400
(400)
5,000
(5,000)
1,000
(1,000)
2,000
(2,000)
2,000
(2,000)
85,000
Cash
140,000
Loss on Realization
10,000
Accounts Receivable
150,000

H, Capital
I, Capital
J, Capital
Loss on Realization
2,000
4,000
4,000
Accounts Payable
Cash
140,000
Loans from H
Cash
2,000
10,000
140,000
2,000
Cash
74,000
Loss on Realization
6,000
80,000
H, Capital
I, Capital
J, Capital
Loss on Realization
1,200
2,400
2,400
6,000
Loans from H
H, Capital
I, Capital
J, Capital
Cash
3,000
15,200
25,400
30,400
Cash
Loss on Realization
Unused Supplies
3,000
2,000
H, Capital
I, Capital
J, Capital
Loss on Realization
400
800
800
H, Capital
I, Capital
J, Capital
Loss on Realization
200
400
400
H, Capital
I, Capital
J, Capital
Loss on Realization
1,000
2,000
2,000
74,000
5,000
2,000
1,000
5,000

Unit 6 Accounting for corporate formation and operation

Corporation is an entity created by law that is separate and distinct from its owners and its continued existence is dependent
upon the corporate statutes of the state in which it is incorporated.
Characteristics of a corporation
1. Separate legal entity a corporations personality is separate from its owners
2. Created by operation of law generated by law; contracts cannot give rise to a corporation
3. Right of succession the withdrawal, death, insolvency or incapacity of the owners or the changes in the ownership
structure do not dissolve the corporation
4. Powers, attributes, properties expressly authorized by law exercise powers provided by law and powers which are
incidental to existence
5. Ownership divided into shares proprietorship is divided into units known as shares of stocks
6. Board of Directors decision making body of the corporation
7. Stockholders have limited liability
8. Easy to obtain capital through issuance of stock
9. Subject to numerous government regulations
10. Double taxation: income tax for earnings and dividend taxes for stockholders
Distinction between partnership and corporation
Partnership
Formed by at least 2 persons
Starts with an agreement with partners may be
written or oral
Unlimited liability
Limited life
Transfer of equity needs consent
Partner is an agent
Corporation
Formed by at least 5 persons
Starts from issuance of a certificate of
incorporation issued by SEC
Limited liability
Unlimited life
Transfer of stocks may be without consent
Stockholders dont act as agent
Types of Corporation
1. According to purpose
a. Public formed to render government service
b. Private formed for private purpose, aim or benefit
c. Quasi-public privately owned corporation
2. According to Law of Creation
a. Domestic organized under Philippine Laws
b. Foreign organized by Laws of other countries
3. According to membership holdings
a. Stock capital is divided into shares of stock and has the authorization to distribute dividends to the
shareholders who own stock certificates; profit-oriented
b. Non-stock capital comes from fees or contributions; profit are used for improvement; non-profit in nature
4. According to the Extent of Membership
a. Open many investors
b. Closely held or family 50% or more of the stock is owned by 5 persons or less

Components of a corporation
1. Incorporators the people who formed the corporation usually consisting of 5 but not more than 15 persons and
whose names appear in the Articles for Incorporation
2. Stockholders or shareholders owners of stock corporation
3. Members gave fees or contributions to non-stock corporation
4. Corporators compose the corporation whether stockholders or members
5. Promoters undertake procedures to organize the corporation
6. Subscribers buy share of stocks but pay on a later date
7. Underwriters sell their shares to the public
Advantages and disadvantages of corporate form of business
Advantages
Disadvantages
Unlimited life
Difficulty in formation legal requirements
Obtain strong credit line
Limited liability of the stockholders limits credit
capacity
Bigger source of capital
Government control
Stockholders enjoy limited liability
Abuse of power by BOD
Ownership transferrable
Activities are limited by Articles of Incorporation
Act as legal entity
More taxes
Centralized management
Forming a corporation
1. Filing an application with Securities and Exchange Commission
2. Paying an incorporation fee
3. Receive the Articles of Incorporation
4. Develop By-laws
Legal requirements
1. Promotion makes preliminary arrangements and solicits subscription to raise sufficient
capital. Requirements
a. At least 25% of the authorized capital stock stated in the Articles of Incorporation must be subscribed
b. At least 25% of total subscription must be paid upon subscription
2. Incorporation submitting necessary documents such as Articles of Incorporation and treasurers affidavit to SEC;
upon approval, SEC issues a certificate of incorporation, the date shall be considered as the date of incorporation.
3. Commencement of the business business operations should start within 2 years
Pre-operating costs/ organization expense/ organization cost costs incurred in the formation of the corporation such
as filing fees, cost of printing stock certificates, promoters commission and legal fees
Articles of Incorporation filed with SEC; all the power and limitations of the corporation shall be based in this article
1. Name of the corporation
2. Purpose/s for which the corporation is formed
3. Place of the principal office
4. Term of existence, not exceeding 50 years
5. Names, addresses and nationalities of incorporators
6. Name of directors who will serve until their successors are elected and qualified in accordance to by-laws

7. Authorized capital, classes of stocks to be issued and the number of each class of stock indicating their par value if
there is
8. Amount of subscription to the capital stock, the names of subscribers and the number of shares subscribed by each
9. Total amount paid on subscriptions and the amount paid by each subscriber on his subscription
By-Laws contain provisions of internal administration; shall be submitted a month after the date of issuance of Articles of
Incorporation
1. Date, place and manner of calling the annual stockholders meeting
2. Manner of conducting meetings
3. Circumstances which may permit the calling of special meetings of the stockholders
4. Manner of voting and using proxies
5. Manner of electing directors
6. Term of office of the directors
7. Authority and duties of the directors
8. Manner of selecting the corporate officers
9. Procedures for amending the Articles of Incorporation and by-laws
Corporate books and records maintained by the corporation
1. Journal and Ledgers
2. Minute books for meetings of stockholders
3. Minute books for meetings of Board of Directors
4. Stock and transfer book - contains record of all stock, the names of stockholders or members alphabetically arranged;
the installment paid and unpaid on all stocks, for which subscription has been made, any sale or transfer of stock
Classes of stocks
1. Par value a share of stock with a fixed value stated in the Articles of Incorporation; legal capital retained for
protection of corporate creditors
2. No Par value share of stock with no fixed value; may not be issued for less than 5 pesos; BOD can assign stated
value which becomes the basis for legal capital per share. When there is no stated value, proceeds are considered
legal capital.
3. Common stock ordinary shares
Rights exercised by ordinary share holders
1. Vote in stockholders meeting
2. Share in dividends
3. Share in corporate profits upon liquidation
4. Purchase additional shares if the corporation increases its capital stock
4. Preferred stock specific preference over common stock
Rights exercised by preference shareholders
1. Payment of dividends
2. Distribution of assets upon liquidation
Terms
1.
2.
3.
4.
5.
Authorized shares maximum number of shares which may be issued

Issued shares shares issued to the stockholders in the past but may or may not be in the their hands at present
Unissued shares shares available for issuance in the future
Outstanding shares total of issued and subscribed shares, whether fully or partially paid except treasury shares
Treasury shares reacquired shares by issuance or donation
6. Subscribed shares shares that are acquired or contracted

7. Subscription contract wherein a subscriber(buyer of stock) purchase stocks with payment in a later date from the
corporation(issuer of stock)
8. Certificate of stock legal document that certifies the ownership of stocks
9. Paid in capital in excess of par value/ stated value excess contribution above par value or stated value
10. Pre-emptive right right to purchase stocks when new capital is issued

Unit 7 Accounting for share capital transactions

Corporation may issue stocks directly to investors (closely held companies) and indirectly through investing-banking firm
(public held corporation).
Primary objectives of issuance of common stock
1. Identify specific sources of paid-in capital
2. Maintain the distinction between paid-in capital and retained earnings
Basic capital stock transactions
1. Authorized Shares amount of stock the corporation is allowed to sell stated in the Articles of Incorporation
a. Authorization of stock does not require formal entry
b. Authorized share of stock issued shares = UNISSUED SHARES
2. Sale of stocks full payment of stocks immediately
3. Subscription subscriber enters in a contract for acquisition of shares
4. Collection subscriber pays partially or full
5. Issuance of certificate if fully paid, stock certificate is issued to subscriber
Capital stock
Payment of capital stock
1. Cash
2. Property record by value using
a. Fair value of the property
b. Fair value of the shares of stock
c. Par value of the shares of stock
3. Labor or services record cost labor services rendered
Note: when shares of capital are issued for services or non-cash assets, cost is either fair market value of the
consideration given up or received.
Capital stock may be issued
1. At par
2. At premium amount more than the par value; paid in capital
Note: Capital stock cannot be issued at a discount or an amount less than par
Watered stock stock issued less than par value
Accounting methods to record capital stock transactions
When a par value common stock is issued for cash, the par value is credited to common stock and the proceeds above or
below par will be recorded in a separate account title called paid-in capital or premium.

Pro-forma entries par value stock subscribed or sold at par

Transaction
Authorization
Sale
Subscription
Collection
Issuance of
certificate
Memo entry method

Authorized to issue_____ shares with a
par value of P___.
Cash
xxx
Capital stock
xxx
Journal entry method

Unissued capital stock
xxx
Authorized capital stock
xxx
Cash
xxx
xxx
Subscriptions receivable
Subscribed capital stock
Cash
Capital stock
Cash
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Pro-forma entries par value stock subscribed or sold at premium

Transaction
Authorization
Sale
Subscription
Collection
Issuance of
certificate
Memo entry method

Authorized to issue_____ shares with a
par value of P___.
Cash
xxx
Capital stock
xxx
Additional paid in capital
xxx
xxx
xxx
xxx
Cash
xxx
xxx
xxx
Capital stock
xxx

xxx
Authorized capital stock
xxx
Cash
xxx
xxx
xxx
xxx
xxx
xxx
Cash
xxx
xxx
xxx
xxx
NOTES: 1. Subscription receivable is recorded at subscription prices (subscription receivable = subscribed shares x
subscription price).
2. Subscribed capital stock and capital stock are credited at par value.
3. Paid in capital in excess of par is recorded at an amount above par (Paid in capital in excess of par =
(subscription price par value)(subscribed shares))
Accounting of two classes of stock
Common/Ordinary shares
Subscription receivable ordinary
Subscribed ordinary capital
Share premium/additional paid in capital
ordinary
Ordinary shares
Preference/Preferred shares
Subscription receivable preference
Subscribed preference capital
Share premium/additional paid in capital
preference
Preference share

Case 1: a. A corporation is authorized to issue 10,000 shares of preferred shares, $100 par, and 10,000 ordinary shares, $20
par. One-half of each class of authorized shares is issued at par for cash.
Memo- entry method
Authorized to issue 10,000 preference shares with par value of $100 and 10,000 ordinary shares with a par value of $20.
Cash
1,500,000
Preference share
Ordinary share
Sale of stock
500,000
1,000,000
Journal- entry method

Unissued preference share
500,000
Unissued ordinary share
1,000,000
Authorized preference share
Authorized ordinary share
Authorization
1,500,000
Sale of stock
500,000
1,000,000
Cash
500,000
1,000,000
b. The other half of each class of authorized shares is issued at $2 above par for ordinary share and $5 above par for
preference share in cash.
Memo entry method
Cash
1,535,000
Preference share
Ordinary share
Share premium preference
Share premium ordinary
Sale of stock
500,000
1,000,000
25,000
10,000

Cash
1,535,000
Share premium preference
Sale of stock
500,000
1,000,000
25,000
10,000

Case 2: a. 1) 500 shares are sold on subscription for $20.00 each. 50% is due as initial payment.
Memo entry method and Journal entry method
Cash
Subscription Receivable - ordinary
Subscribed share capital - ordinary
Subscription of ordinary shares
5,000
5,000
10,000
a. 2) 500 shares are sold on subscription for $20.00 each. 50% is due as initial payment. The subscriber plans to pay $22
per share.
Memo entry and journal entry method
Cash
Subscribed share capital - ordinary
Subscription of ordinary shares
5,000
6,000
10,000
1,000
b. Partial payment of 2,500

Memo entry method and Journal entry method
Cash
2,500

Partial payment
2,500
c. 1) Full payment of subscription

Memo entry method
Cash
Subscribed share capital ordinary
Ordinary share capital
2,500
10,000
2,500
10,000

Cash
2,500
10,000
2,500
10,000

c. 2) Memo entry method

Cash
Ordinary share capital
3,500
10,000
3,500
10,000

Cash
3,500
10,000
3,500
10,000
Accounting for No Par shares do not have fixed values

1. Recorded using memo entry method only
2. The entire consideration received by the corporation for its no par value shares shall be treated capital and shall not be
liable as dividends.
3. Preferred shares can only be recorded with par value
4. Cannot be issued less than P5
5. Selling price may be assigned(stated value) but not less than P5
Pro-forma entries: No par value stock (memo entry method)
Transactions
Authorization
Sale
No stated value
Authorized to issue ______ shares,
no par.
Cash
xxx
Capital stock, no par
xxx
Subscription
Subscription receivable
xxx
xxx
Collection
Cash
xxx
xxx
xxx
xxx
Issuance of stock
With stated value

Authorized to issue ______ shares, no par with stated
value of P____.
Cash
xxx
xxx
Paid in capital in excess of stated value xxx
xxx
xxx
Paid in capital Pxx stated value
xxx
Cash
xxx
xxx
xxx
xxx
Case: 1. a. Bradley Corporation issues 10,000 shares, no par at $15 per share.
Cash
Ordinary share, no par
150,000
150,000

b. Bradley Corporation issues 10,000 shares, no par at $15 per share with $10 stated value.
Cash
150,000
100,000
Share premium $10 stated value
50,000
2. a. Bradley Corporation issues 10,000 shares, no par at $15 per share. The subscriber gave an initial down
payment of 50%.
Cash
75,000
75,000
Subscribed share capital
150,000
b. Bradley Corporation issues 10,000 shares, no par at $15 per share with $10 stated value. The subscriber
gave an initial down payment of 50%.
Cash
Share premium
3. 50% down payment of the balance
Cash
4. a. Full payment
Cash
b. Cash
75,000
75,000
100,000
50,000
37,500
37500
37,500
150,000
37,500
150,000
37,500
100,000
37,500
100,000
Incorporating a Partnership
Steps in converting partnership to corporation
Books of the partnership
1. Finish the accounting cycle
2. Revalue the assets using capital adjustment
account
3. Close the balance of the Capital
Adjustment account to the partners capital
accounts in accordance with their profit
and loss ratio.
Books of the corporation

1. Record authorized capital stock
2. Record the subscription of incorporators.
3. Record the transfer of the assets and
liabilities of the partnership to the
corporation.This serves as the payment
of the subscription of the partners who
became incorporators.

Accounts receivable is transferred at

gross amount together with
theallowance for bad debts.
Depreciable assets are transferred at
net carrying amount.
4. Close the accounts for partnership except
the capital accounts.
5. Record the receipt of stocks.
6. Record the distribution of stocks
4. Record the issuance of stocks
Pro-forma entries: books of the partnership 1.

Adjust the existing partnership books
a. Increase in the asset value with no contra asset account
Asset
xxxx
Capital Adjustment
xxxx
b. Decrease in the asset value with no contra asset account
Capital Adjustment
xxxx
Asset
xxxx
c. Increase in the asset with contra asset account
Contra asset
xxxx
Capital adjustment
xxxx
d. Decrease in the asset with contra asset account
Capital adjustment
xxxx
Contra asset
xxxx
e. Close capital adjustment account with debit balance
Partner1, capital
xxxx
Partner2, capital
xxxx
Capital adjustment
xxxx
f. Close capital adjustment account balance with credit balance
Capital adjustment
xxxx
Partner1, capital
xxxx
Partner2, capital
xxxx
2. Close all the ledger accounts with balances except the partners capital account and debit Receivable from
name of corporation
Receivable from name of corporation xxxx
Liabilities
xxxx
Allowance for bad debts
xxxx
Accumulated depreciation PPE
xxxx
Assets
xxxx
To record the transfer of assets and liabilities to the newly formed corporation

3. Record the receipt of stocks from the newly formed corporation

Stocks of name of corporation
Receivable from name of corporation
To record receipt of stock certificates
xxxx
xxxx
4. Record the distribution of stocks to the partners

Partner1, capital
xxxx
Patrner2, capital
xxxx
Stocks of name of corporation
To record receipt of stock certificates
xxxx
NOTE: Debit balances of partners capital are their final balances.

Pro-forma entries: books of the corporation
1. Authorization
Authorized to issue ____ shares with a par value of P____
2. Subscription
xxxx
Subscribed capital
xxxx
3. Transfer of partnership assets and liabilities
Assets
xxxx
Liabilities
xxxx
Allowance for bad debts
xxxx
xxxx
4. Issuance of stocks certificates
Subscribed capital
xxxx
Capital stock
xxxx
Accounting for delinquent subscription If subscriber cannot pay in full the amount he subscribed to, he will receive
several notices from the corporation. If payment is still not being delivered, his subscription shall be declared as delinquent
subscriptions and the subscriber is called a defaulting subscriber. Delinquent stocks are offered for sale in public a public
auction.
1. Delinquent stocks are advertised to have bidders. All expenses incurred including advertising and the unpaid balance of
subscription will be charge to the account title Receivable from Highest Bidder which will be collected from the highest
bidder.
2. Highest will be chosen during the auction sale.
3. Delinquent subscriptions will be issued to the highest bidder.
4. Highest bidder is willing to pay for all the unpaid balance of subscription plus all sale related expenses but willing to
receive the least shares.
5. When the subscription is fully paid, all subscribed shares are issued first to the highest bidder then the excess will be for
the defaulting subscriber.
6. If there is no bidder, all delinquent shares shall be given to the corporation under the account title treasury stocks.
The defaulting subscriber shall receive none of the shares.

Pro-forma entries for delinquent stocks

1. Record the subscription
xxx
2. Record partial collection
Cash
xxx
xxx
xxx
3. Corporation sends several notices but no payment was paid by the subscriber
No entry
4. The corporation incurred costs related to the selling of delinquent shares
Receivable from highest bidder xxx
Cash
xxx
5. The highest bidder pays and corresponding stock certificates are issued
Cash
xxx
xxx
Receivable from highest bidder
xxx
xxx
Capital stock
xxx
6. If there is no bidder at all
Treasury stock
xxx
Receivable from highest bidder
Capital stock
xxx
xxx
xxx
xxx
Case:

Accounting for treasury stocks - stock that is basically from the corporation which is issued originally and reacquired but not
canceled; it may be issued again.
Reasons for acquiring treasury stocks
1. To obtain stock for the acquisition of plant assets
2. To improve earnings per share by reducing the number of shares outstanding
3. To invest excess cash temporarily
4. To support the market price of the stock
5. To increase the ration of liability from stockholders equity
6. To obtain shares for conversion of other securities such as preferred stock
Two accounting methods to record treasury stock
1. Cost method used for local accounting standards
2. Par value method
Two kinds of treasury stocks
1. Reacquisition by purchase under cost method
a. Treasury stocks are recorded at
cost. Pro-forma entry:
Treasury Stock xxx
Cash
xxx
Re-acquired own stocks at P__ per share.
Case: a. Caprock Corporation purchased 1,000 shares of its ordinary shares from the market
worth $50 per share.
Treasury stock ordinary
50,000
Cash
50,000
b. When treasury stocks are reissued or sold at more than cost, the excess shall be called
Additional Paid in capital - treasury stock or share premium treasury stock.
Pro-forma entry:
Cash
xxx
Treasury Stock
xxx
Additional Paid in Capital-treasury stock xxx
Re-issued treasury stocks at above cost
Case: b. Caprock sold 500 treasury shares for $60 per share.
Cash
Treasury stock
Share premium treasury stock
30,000
25,000
5,000
c. When treasury stocks are reissued or sold below cost, the indicated loss will be debited to
the following account titles:
1) Additional Paid in Capital treasury stock the balance in this account shall be used
until there is no more remaining balance
2) Retained Earnings will only be used if there is no more balance for additional paid in capital
Pro-forma entry:
Cash
xxx
Additional Paid in Capital- treasury stock xxx
Treasury Stock
xxx
Re-issued treasury stocks below cost.
Case: c. 200 treasury stocks were sold for $48 per share.
Cash
9,600
Additional Paid in Capital- treasury stock 400
Treasury Stock
10,000
Or
Cash
xxx
Additional Paid in Capital- treasury stock xxx
Retained Earnings
xxx
Treasury Stock
xxx
Re-issued treasury stocks below cost.
Case: d. 200 treasury stocks were sold for $26 per share.
Cash
5,200
Additional Paid in Capital- treasury stock 4,600
Retained Earnings
200
Treasury Stock
10,000
Or
Cash
Retained Earnings
Treasury Stock
xxx
xxx
Case: e. 100 treasury shares were sold for $30 per share.
Cash
3,000
Retained Earnings
2,000
Treasury Stock
xxx
5,000
2. Reacquisition by donation stocks received from donation; may be reissued without discount liability; does not affect
the entitys assets, liabilities and stockholders equity; increase premiums through sale with the account title
Additional Paid in Capital Donated stocks.
Pro-forma entry: receipt for donation
Memorandum entry: Received ___ shares from _____ as donation.
Case: a. Donation of 25 shares by BMG Corporation.
Memorandum entry: Received 25 shares from BMG Corporation as donation.

Pro-forma entry: sale of donated stocks

Cash
Additional Paid in Capital- donated stocks
Re-issuance of stocks received as donation
Case: b. Sold all treasury stock for $25.
Cash
Additional Paid in Capital- donated stocks
xxx
xxx
625
625
NOTES: 1. Treasury shares are not outstanding shares; therefore, the former is not entitled to dividends.
2. Treasury shares are not entitled of the rights of stockholders.
3. Treasury shares are not assets; instead, they are a decrease in stockholders equity.
4. A portion of retained earnings is restricted equal to the cost of treasury for the sake of creditors.
Case:
The Beta Corporation was organized in 20x1 in the state of Arizona. Its charter authorized the corporation to issue 1,000,000
shares of $1 par value ordinary shares and an additional 25,000 shares, $20 par value cumulative convertible preference
shares. Here are the transactions that related to the companys stock during 20x1.
Feb.
1 Issued 100,000 shares of ordinary shares for $125,000.
15
Issued 3,000 shares of ordinary shares for accounting and legal services. The services were billed to the
company at $3,600.

Mar.
15
Apr.
July
Sept.
1
30
Feb.
Issued 120,000 shares of ordinary shares to Edward Jackson in exchange for a building and land that
had appraised values of $100,000 and $25,000, respectively.
Purchased 20,000 ordinary shares for the treasury at $1.25 per share from an individual who changed
his mind about investing in the company.
Issued 25,000 preference shares for $500,000.
Sold 10,000 of the shares in the treasury for $1.50 per share.
Cash
125,000
Ordinary Shares
Sale of ordinary stocks
15
Mar.
Apr.
July
15
100,000
25,000
Organization Costs
Ordinary Shares
3,600
Building
Land
Ordinary Share
100,000
25,000
Treasury Stock ordinary

Cash
Acquisition of treasury stocks
25,000
Cash
500,000
3,000
600
120,000
5,000
25,000
Preference Share
Sale of Preference share
Sept.
30
Cash
Treasury Stock ordinary
Share Premium treasury stock
Sale of treasury shares
500,000
15,000
12,500
2,500

Unit 8 - Accounting for Accumulated Profit/Loss (Retained Earnings)

Retained Earnings represent the cumulative balance of periodic income or losses, dividend distribution, adjustments of prior
period earnings and other capital adjustments. Retained earnings are increased by periodic net income and decreased by
periodic net losses and distribution of earnings called dividends to stock holders.
Retained earnings is affected by:
periodic income or loss
Pro Forma Entry
Income summary............................................XXX
Retained Earnings...........................................XXX
dividends
Pro Forma Entry
Retained Earnings............................................XXX
Cash Dividends Payable.................................XXX
prior period adjustments
Retained Earnings............................................XXX
Appropriation for Treasury Shares..................XXX
*recapitalizations
*quasi-reorganization
*these will be discussed in higher accounting. For now, take it as part of theory.
Appropriation of retained earnings
retained earnings is said to be appropriated when it is set aside for a specific purpose. It is appropriated in order to retain
assets in the business for some particular purpose or some general contingency. The appropriation of retained earnings may
be made in the following cases:
Discretionary Appropriation the management of the corporation may deem it necessary to retain the assets of the
corporation for some particular purpose or contingency like pending lawsuits, plant expansions, increase in working capital
etc.
Legal requirements the legal capital of the corporation cannot be returned to the stockholders until the corporation is
dissolved, liquidated and the creditors of the corporation have been paid. An appropriation for an amount equal to the cost of
treasury stock should be made.
Contractual Requirements when a corporation issues a bond or redeemable preferred share, the terms bond and
preferred share issue imposes restrictions on the payment of dividends.

Income summary is closed to the Retained earnings accounting

Pro forma entry for net income
Income Summary..................................................XXX
Retained Earnings.................................................XXX
Pro forma entry for Net Loss
Retained Earnings.................................................XXX
Income Summary.................................................XXX
Dividends
A Dividend is a distribution of cash, non-cash assets or the corporation's own stock among the stockholders. It may be
either a distribution of profits earned by the corporation or a return of the capital investments of the stockholders.
3 important dates regarding Dividends
Date of declaration at this date, the corporation becomes liable for the dividends
Pro forma entry during date of declaration
Retained Earnings......................................XXX
Dividends Payable...................................XXX
Date of record a list of the stockholders who are entitled to receive dividends is prepared
No Entry during this date
Date of Payment date when dividends are to be paid. This would cancel the previous liability the corporation has.
Kinds of dividends
Cash Dividends
Illustration: Assume that on December 1,2010, the board of directors declared an annual dividend of P10.00 per
share on 100,000 shares of common stock issued and outstanding, payable on January 15, 2011 to stockholders of record on
December 31, 2010.
Journal entry on December 30
Retained Earnings.................................................. 1,000,000
Cash Dividends Payable.............................................
1,000,000
Journal entry on January 15
Cash Dividends Payable........................................ 1,000,000
Cash............................................................................
1,000,000
Property Dividends
Illustration: assume that merchandise costing P300,000 with a selling price of P360,000 was declared and paid
as dividends
Journal entry for declaration
Retained Earnings.................................................. 300,000
Property Dividends Payable.........................................
300,000
Journal entry on payment date

Property Dividends Payable.................................. 3000,000
Cash.............................................................................
300,000
Share Dividends
Share Dividends are divided into Small Share and Large Share Dividends. Small share Dividends are
dividends declared that are less than 20%. large share dividends are dividends declared that are 20% or higher.
Illustration: ASSUME THAT THE CAPITAL ACCOUNTS OF XYZ CORPORATION ARE CAPITAL
STOCK OF P100 PAR VALUE, 30,000SHARES AUTHORIZED, 20,000 SHARES ISSUED AND OUTSTANDING
AMOUNTING TO P2,000,000, SHARE PREMIUM P600,000 AND RETAINED EARNINGS OF P800,000
Case 1 Small Share Dividends

shares are recorded at their Fair Market Values
assume 10% share dividends are declared and the market value on the date of declaration was P125 per share.
Pro Forma Entries
Retained earnings................................................ 25,000
Share dividends payable........................................
20,000
Share Premiums.....................................................
5,000
Case -2 Large share Dividends
Shares are recorded at their par value
assume that 40% share dividends are declared and the market value on the date of declaration was P125 per
share.

Pro Forma Entries

Retained earnings................................................ 80,000
Share dividends payable........................................
80,000
computation: 2,000shares x 40% x P100 per share
A cumulative dividend means if dividends are declared, preferred stockholders will receive their current-year dividend plus
any dividends not paid in prior years before the common stockholders receive a dividend. Owning a share of preferred stock
that includes a cumulative dividend still does not guarantee the preferred stockholder a dividend because the company is not
liable to pay dividends until they are declared. Having cumulative preferred stock simply reinforces the preference preferred
stockholders receive when a dividend is declared. If a company has issued cumulative preferred stock and does not declare a
dividend, the company has dividends in arrears. Although not a liability, the amount of any dividends in arrears must be
disclosed in the financial statements.
The participating dividend feature provides the opportunity for the preferred stockholders to
receive dividends above the stated rate. It occurs only after the common stockholders have
received the same rate of return on their shares as the preferred stockholders. For example, say
the preferred dividend rate is 5% and the preferred stock has a participating feature. This means
that the preferred stockholders will receive a larger dividend if the authorized dividend exceeds
the total of the 5% dividend for the preferred stockholder and a 5% dividend to the common
stockholders.
Nonparticipating vs. Participating
Generally speaking, preferred stockholders only receive their stated dividends and nothing more.
If a preferred stock is described as 10% preferred stock with a par value of $100, then its dividend
will be $10 per year (whether the corporation's earnings were $10 million or $10 billion).
Preferred stock that earns no more than its stated dividend is the norm; it is known as
nonparticipating preferred stock.
Occasionally a corporation issues participating preferred stock. Participating preferred stock
allows for dividends greater than the stated dividend. Since this feature is unusual, it is prudent to
assume that all preferred stock is nonparticipating unless it is clearly stated otherwise.
Cumulative vs. Noncumulative
If a preferred stock is designated as cumulative, its holders must receive any past dividends that
had been omitted on the preferred stock and its current year dividend, before common
stockholders are paid any dividends. (A corporation might omit its dividends because it is
suffering operating losses and has little cash available.) If a corporation omits a dividend on its
cumulative preferred stock, the past, omitted dividends are said to be "in arrears" and this must be
disclosed in the notes to the financial statements.

If a preferred stock is noncumulative, its dividends will not be in arrears if a corporation omits
dividends. That is, the corporation need not make up any omitted dividends on noncumulative
preferred stock before declaring dividends. However, the noncumulative preferred stock must be
given its current year dividend before the common stock can get a dividend.
Illustration: Assume that in 2010, Mason Company is to distribute $50,000 as cash dividends,
its outstanding common stock has a par value of $400,000, and its 6 percent preferred stock has a
par value of $100,000.
Illustration: Assume that in 2010, Mason Company is to distribute $50,000 as cash dividends, its outstanding common
stock has a par value of $400,000, and its 6 percent preferred stock has a par value of $100,000.
If the preferred stock is cumulative and nonparticipating, and Mason Company did not pay dividends on the preferred
stock in the preceding two years:

If the preferred stock is noncumulative and is fully participating:
Illustration: Assume that in 2010, Mason Company is to distribute $50,000 as cash dividends, its outstanding common
stock has a par value of $400,000, and its 6 percent preferred stock has a par value of $100,000.
If the preferred stock is cumulative and is fully participating, and Mason Company did not pay dividends on the
preferred stock in the preceding two years:

Preparation of Shareholder's equity.

Unit 9 - Special Topics

Book Value per Share
(Reference: Financial Accounting by Peralta and Valix)
BOOK VALUE PER SHARE (BVPS)
It is the amount that would be paid on each share assuming the company is liquidated and
the amount available to shareholders is exactly the amount reported as shareholders equity.
FORMULAS IN COMPUTING BVPS
1. One class of stock
BVPS
Total Shareholders Equity

Number of shares outstanding
BVPS
(Preference Share
Preference Shareholders Equity

Number of preference shares outstanding
BVPS
(Ordinary Share)
Ordinary Shareholders Equity

Number of ordinary shares outstanding
Two classes of stock
Book value per share represents the equity an ordinary stockholder has in the net assets of
the corporation from owning one share of stock. Book value per share is not synonymous with the
value of the stock in liquidation and does not generally equal market value per share.
Apportionment of Total Shareholders Equity into Its
Preference and Ordinary Components
1. An amount equal to the par or stated value is allocated to the preference share and ordinary
share
2. Any balance of the shareholders equity in excess of par is apportioned taking into account
the liquidation value and dividend rights of the preference shareholders.
3. For book value purposes, following are assumed to be available for dividends:
Accumulated Profit
Share Premium
Revaluation Reserve

4. Where there are treasury share and subscribed share capital, the share capital outstanding is
computed as follows:
Share capital issued
Add: Share capital subscribed
Sub-total
Less: Treasury share at par
Amount and shares outstanding
Shares
xx
xx
xx
xx
xx
Amount
P xx
xx
P xx
xx
P xx
5. Treasury share shall be treated as a retired share. Any gain on retirement is added to Share
Premium, and loss on retirement is charged first to Share Premium and then to Accumulated
Profit.
SPECIAL NOTES
1. Liquidation value amount to be received upon the liquidation of the corporation. It can
be more than the par value.
2. In the absence of liquidation values, the preference shareholders shall receive and amount
equal to the par or stated value.
3. If there is a deficit, the preference shareholders would share on a pro-rata basis with
ordinary shareholders.
4. The preference share call price or redemption price is ignored for book value computation.
5. Preference to assets preference shareholders are entitled to payment not only for the
liquidation value but also for dividends in arrears.
6. Preference as to dividends
Non-cumulative
Cumulative
Non-participating
Participating
7. In the absence of any statement to the contrary, the preference share is preference as to
dividends.
8. In the absence of specific designation, preference share is assumed to be non-cumulative
and non-participating.
9. Dividends in arrears include current dividends.
10. If there are two classes of preference share with different dividend rates -

a. if both are participating, the lower rate is the basis for ordinary share allocation
b. if only one is participating, the basis for ordinary share allocation is the rate of the
participating preference share.
11. In computing for share outstanding, the Subscriptions Receivable balance is NOT
deducted from Subscribed Share Capital.
Earnings per Share
Reference: Philippine Accounting Standards (PAS 33)
The earnings per share figure is the amount attributable to every share of ordinary share
outstanding during the period.
The objective of the basic earning earnings per share information is to provide a measure of the
interest of each ordinary share of a parent entity in the performance of the entity over the
reporting period.
It is not necessary to compute EPS for preference shares because there is a definite rate of
return for such share.
Earnings per share (EPS) indicates the net income earned by each share of outstanding ordinary
stock.
a. The formula for computing earnings per share is:
b.
c.
d.
Most companies are required to report earnings per share on the income statement.
When the income statement contains any of the sections for material non-typical
items, earnings per share should be disclosed for each component.
When there has been a change in the number of shares outstanding during the year, the
denominator in the formula becomes the weighted average shares outstanding.
When a corporation has both preference and ordinary stocks outstanding, dividends declared on
preference stock are subtracted from net income in determining earnings per share. If the
preference stock is cumulative, the dividend for the current year is deducted whether or not it is
declared.
Two presentations of earnings per share:
1. Basic earnings per share
2. Diluted earnings per share

Enterprises required disclosing earnings per share:

1.
2.
The presentation of earnings per share is required for enterprises whose ordinary shares
or potential ordinary shares are publicly traded and
By enterprises that are in the process of issuing ordinary shares or potential ordinary
shares in the public securities market.
Note: Nonpublic enterprises are not required to present earnings per share but are
encouraged to do so in their financial statements.
Uses of earning per share:

a. It is a determinant of the market price of ordinary share.
b. It is a measure of performance.
c. It is the basis of dividend policies of the company.
Simple Capital Structure VS Complex Capital Structure
1.
Simple Capital Structure means that the corporation has only ordinary and
nonconvertible preference share.
2.
Complex Capital Structure means that the corporation has one or more
instruments outstanding that could result in issuance of additional ordinary shares.
BASIC EARNINGS PER SHARE

1. Basic EPS considers only ordinary shares issued and outstanding.
2. The Basic Equation:

Net Income
Ordinary Shares Outstanding
or
Net Income Dividend on Preference Share
Weighted Average Ordinary Shares Outstanding

Notes:
The net income is equal to the amount after deducting dividends on preference stock.
If the preference share is cumulative, the preference dividend for the current year only is
deducted from the net income, whether such dividend is declared or not.
If the preference share is non-cumulative, the preference dividend for the current year is
deducted from the net income only if there is a declaration.
Stock dividend is recognized retroactively, meaning, it is treated as a change from the date,
the original shares are issued.
Pro forma computations of Weighted Average Shares:
1.)
Date Shares
Months outstanding Month-shares

Weighted average =
2.)
Date
Shares
Stock Dividend
Total - month shares

12
Months outstanding
Month-shares
NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS

References
Chua, M. C. M., Arenas, T. P., & Villaria, F. M. C. Fundamentals of Accounting Principles (Theory and
Applications) on Partnership Corporation and Other Related Accounting Topics. Philippines: National Bookstore,
Inc.
Weygandt, J. J., Kieso, D. E., & Warfield, T. D. (2005). Principles of financial accounting. New York : Wiley.
PFRS compilation vol. 2
Roque, G. S. (2006). Auditing Problems: CPA Examination Reviewer: Based on Philippine Accounting Standards
(PAS) Philippine Financial Reporting Standards (PERS).
Valix, C. T. (2006). Practical Accounting I.
Valix, C. T. (2009). Theory of accounts.
th
Wareen, Reeve, & Fess. (1999). Accounting (19 Ed). Cincinnati, Ohio: South-Western College Publishing.
th
Needles, Powers, & Mills, et al. (1999). Principles of Accounting (7 Ed). U.S.A: Houghton Mifflin Company.
http://www.scribd.com/doc/8284337/NO-PAR-Delinquent-And-Treasury-Stocks-Lecture-Notes


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Unit 1 INTRODUCTION TO PARTNERSHIP AS A BUSINESS ORGANIZATION

*Special Features of Partnership

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Unit 2 - Accounting for Partnership Formation

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Step 2- Close the Sole Proprietor's books

Step 3 Opening Partnership Books

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Unit 3 - Accounting for DIVISION OF PROFITS AND LOSSES

Case 2 Profit and loss will be shared based on an arbitrary ratio

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Unit 4 Partnership Dissolution without Liquidation

Admission of new partner

Admission of New Partner

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By purchase of interest of existing partners

The following are independent cases:

Case 2: C sold 50% of his interest in the partnership for P100,000.

Case 3: C sold 100% of his interest in the partnership to D for P350,000.

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By investment to the partnership

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Withdrawal, Retirement or Death of a Partner

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The following are independent cases:

Sale to one or all partners

Case 2: The underpayment is agreed as bonus given by C to the continuing partners.

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Insolvency of a Partnership or a Partner

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Conversion of Partnership to Corporation

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Unit V Partnership Dissolution with Liquidation

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Loans payable from A

Loans payabe from A

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Unit 6 Accounting for corporate formation and operation

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Authorized shares maximum number of shares which may be issued

6. Subscribed shares shares that are acquired or contracted

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Unit 7 Accounting for share capital transactions

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Pro-forma entries par value stock subscribed or sold at par

Memo entry method

Journal entry method

Pro-forma entries par value stock subscribed or sold at premium

Memo entry method

Journal entry method

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Journal- entry method

Journal entry method

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b. Partial payment of 2,500

Subscription Receivable - ordinary

c. 1) Full payment of subscription