Professional Documents
Culture Documents
Characteristics of a Corporation
The characteristics that distinguish a corporation from proprietorships and partnerships
are:
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Distinction between Partnerships and Corporations
Partnership Corporation
1. Formed by at least two persons. Initially formed by at least five persons.
2. Starts with agreement among partners; may Starts with the issuance of a certificate of
be formed orally. incorporation issued by SEC
5. Transfer of equity of a partner needs the Stocks can be transferred from one
consent of all the partners. stockholder to another without getting the
consent of the other stockholders.
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2. Closely held or family – a corporation in which 50% or more of its stock is
owned by five persons or less.
Components of a Corporation
1. Incorporators – persons who
originally formed the corporation and whose names appear in the Articles of
Incorporation. They must be 5 but not more than 15 natural persons. They
should not artificial persons.
2. Stockholders or shareholders –
owners of a stock corporation.
3. Members – persons who gave fees or
contributions to a non-stock corporation.
4. Corporators – persons who compose
the corporation whether as stockholders or members.
5. Promoters – persons who undertake
the necessary steps and procedures to organize the corporation.
6. Subscribers – persons who agreed to
buy shares of stock but will pay at a later date.
7. Underwriters – persons who
undertake to sell the shares of stocks to the general public.
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3. It is subject to more governmental control.
4. There is possibility of abuse of power by the Board of Directors because
centralized management restricts active participation by stockholders in the
conduct of corporate affairs.
5. Corporation’s activities are limited by the articles of incorporation.
6. It is subject to more taxes.
Articles of Incorporation
The Articles of Incorporation enumerates the powers and limitations conferred upon the
corporation by the government. It includes the following information:
1. The name of the corporation;
2. The purpose or purposes for which the corporation is formed;
3. The place of the principal office of the corporation;
4. The term of existence of the corporation, not exceeding 50 years;
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5. The names, nationalities and addresses of the incorporators;
6. The names of the directors who will serve until their successors are duly elected
and qualified in accordance with the by-laws;
7. The authorized capital stock, the classes of stocks to be issued and the number of
each class of stock indicating the par value if there is any;
8. The amount of subscription to the capital stock, the names of the subscribers and
the number of shares subscribed by each;
9. The total amount paid on the subscriptions and the amount paid by each
subscriber on his subscription.
By-Laws
The by-laws of a corporation contain provisions for the internal administration of the
corporation. The by-laws should be filed within one month from the date of issuance of
the certificate of incorporation. The by-laws normally include the following:
1. The date, place and manner of calling the annual stockholders’ meeting;
2. The manner of conducting meetings;
3. The circumstances which may permit the calling of special meetings of the
stockholders;
4. The manner of voting and the use of proxies;
5. The manner of electing the directors;
6. The term of office of the directors;
7. The authority and duties of the directors;
8. The manner of selecting the corporate officers;
9. The procedures for amending the articles of incorporation and by-laws.
Classes of Stock
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1. Par value –a share of stock that is given a definite or fixed value in the articles of
incorporation.
2. No par value – a share of stock that has no fixed value; it may not be issued for
less than P5.00.
3. Common stock –the basic issue or ordinary type of shares. The common stock
entitles the holder to the following basic rights:
a. Right to vote in stockholders’ meeting;
b. Right to share in corporate profits (dividends);
c. Right to share in corporate profits upon liquidation;
d. Right to purchase additional shares of stocks in the event that the
corporation increases its capital stock (pre-emptive right).
4. Preferred stock - entitles the holder to some specific preferences over the common
stock such as:
a. Preference as to payment of dividends;
b. Preference as to distribution of assets upon liquidation.
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10. Pre-emptive right - the right of a stockholder to maintain his ownership interest in
the corporation trough purchase of additional shares when new capital is issued.
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Unit 7
ACCOUNTING FOR CORPORATION FORMATION
Accounting for Share Capital/Transactions
Forming a Corporation
The formation of a corporation involves (a) filing an application with the
Securities and Exchange Commission (SEC), (b) paying an incorporation fee, (c)
receiving a charter (articles of incorporation), and (d) developing by-laws.
a. Costs incurred in forming a corporation are called organization costs.
b. These costs include fees to underwriters, legal fees, state incorporation fees,
and promotional expenditures.
c. Organization costs are expensed as incurred.
Par value stock is capital stock that has been assigned a value per share in the
corporate charter. It represents the legal capital per share that must be retained in the
business for the protection of corporate creditors.
No-par stock is capital stock that has not been assigned a value in the corporate
charter. In many states the board of directors can assign a stated value to the shares,
which becomes the legal capital per share. When there is no assigned stated value, the
entire proceeds are considered to be legal capital.
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The primary objectives in accounting for the issuance of common stock are to (a)
identify the specific sources of paid-in capital and (b) maintain the distinction between
paid-in capital and retained earnings.
When par value common stock is issued for cash, the par value of the shares is
credited to Common Stock and the portion of the proceeds that is above or below par
value is recorded in a separate paid-in capital account.
When no-par common stock has a stated value, the stated value is credited to
Common Stock. When the selling price exceeds the stated value, the excess is credited to
Paid-in Capital in Excess of Stated Value. When no-par stock does not have a stated
value, the entire proceeds are credited to Common Stock.
Capital Stock
Capital stock may be paid by the stockholder or subscriber in the form of:
1. money/cash
2. property – record the value of the property using the following amounts:
a. fair value of the property received
b. fair value of the shares of stock, whichever is clearly determinable;
c. par value of the shares of stock
3. labor or services – record the cost of the labor or services using the fair value of
the services rendered.
Important:
When shares of stock are issued for services or non-cash assets, cost
is either the fair market value of the consideration given up or the
consideration received, whichever is more clearly determinable (Weygant, et
al, 2006).
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Capital stock cannot be issued at a discount or an amount less than par under the
Philippine setting.
When the value assigned to the asset received is greater than the par value times the
number of shares issued, such issuance is called watered stock. The overstatement is
done to comply with the requirement of the law that the stock should not be issued at less
than its par value. When the value of the asset received is understated, the stock is said to
contain secret reserves.
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Special Notes:
Common Preferred
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Pro-forma Entries: No Par Value Stock (Memo Entry Method)
Incorporating a Partnership
A partnership may incorporate after considering the many advantages of a corporate form of
business. It is advisable that new set of books is used by the newly formed corporation.
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6. Record the distribution of stocks.
Pro-forma Entries: Books of the Partnership
a. Adjust the existing partnership books
Date P AR T IC UL AR S P/R DEBIT CREDIT
Increase in the asset value with no contra-asset account
Asset X X X X
Capital Adjustment X X X X
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b. Close all the ledger accounts with balances except the partners'
capital account and debit "Receivable from Name of Corporation
Date PAR TIC ULAR S P/R DEBIT CREDIT
Note: The debits to the partners’ capital accounts represent their final capital balances
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Accounting for Delinquent Subscription
There are instances when a subscriber cannot pay in full the amount he subscribed
to. Payment of the balance on subscription may either be specified in the contract of
subscription or in lieu thereof may be subject to call by the Board of Directors.
When a subscriber fails to pay his subscription on the call date, the corporation sends
several notices to remind him of his obligation. If no payment was made by the
subscriber, his subscription is declared as delinquent subscriptions and the subscriber is
called a defaulting subscriber. And these delinquent stocks are offered for sale in a
public auction.
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Pro-forma Entries using the Short Method of accounting for delinquent stocks
Subscription receivable X X X X
Suscribed capital stock X X X X
c. Corporation sends several notices but no payment was made by the subscriber
No entry
d. The corporation incurred costs related to the selling of the delinquent shares
Receivable from highest bidder X X X X
Cash X X X X
e. The highest bidder pays and corresponding stock certificates are issued
Cash X X X X
Subscribed capital stock X X X X
Receivable from highest bidder X X X X
Subscriptions receivable X X X X
Capital stock X X X X
OR
f. If there is no bidder at all
Treasury stock X X X X
Subscribed capital stock X X X X
Receivable from highest bidder X X X X
Subscriptions receivable X X X X
Capital stock X X X X
Illustrative problem:
Assume that Joseph subscribed 250 shares of Common Stock at P25.00 (P20.00 is
the par value). After paying 50% on his subscriptions, he defaulted. Due process was
taken and the shares were declared delinquent. Advertising and other cost including
those advances made by the corporation amounted to P500.00
At the public auction, bids from Mary, Clare and Luisa were received. Mary bid
230 shares; Clare for 240; and Luisa for 245 shares. The highest bidder paid the
amount due and stock certificate was issued by the corporation.
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