I

CONCEPT OF A CORPORATION ~

I
A corpo1. t • . · . . . . ted bl\l 0 neration of
law· ?- .ion is an artificial being crea J : attributes
an , having the right of succession and the pow!rs,. nt to its
_a, properties expressly authorized 6y law or ~ncide
existence.
A corporation is a legal or juridical person with a personality
separate and apart from the individual members or
shar~holders. , , . · ·
th
The corpo1·ation is not in fact and in reality a pe~son bu~ e
la~ ~r~ats it as though it were a person by-process of fiction.
' . . . '

Orga~izatiQn
.. , '
';-- .
of a corporation
' -·
A corporatioti· is created by operation of laµJ.
This means that a corporation ·cannot come into existen_ce by
mere agreement of parties as in the case of' ~ business
partnership. A corporation requires the a~thority and grant
from the state. . .
.
In the Philippin~s, the general law which' governs the
creation of private co1;porations is Republic Act 11232
otherwise known as· Revised Corporation Code.
Section 10 of the Revised Corporation Code provides that
any person, partnership1 association or corporation, simply
or jointly with othe~s but not 1niore than fifteen in number
may organize a corporation for any lawful purpose or
purposes. ~ ·

Provided, that natural persons V\1ho are licensed to practice

a profession and partnerships 01· associations organized for
the purpose of practicing a profession sha,l l not be a.llowed
to organize as a corporation unless other\viae p'r ovided under
special laws; ·
A coi·poration with .a single shareholder is considered a One ,
Person Corporation. -
Section 3 provides that corporations formed or organized
may be stock or nonstock corporations.

, Stock co1porations ~~ those w~ch have capi~ stock divided·

into shares.
· All. othei:
· 001-porations are nonstock co1,>orawons.
,-:.
679
 Contents of Articles of Incorporation
. .th h S curities and Exchange
All corporations shall ~e wi f tl e ~poration containing
Commission the Arti cles O nco
substantially the following matters:
a. The name of the corporation.
b. The purpose or purposes for which the corporation is
formed. ·
The place where the principal office of the corpor~ti~n
c. is to be established or located which place muSt be within
the Philippines.
d. The term of existence if the corpor-a tion has not elected
perpetual exi~tence. ·
e. The names, nationalities and residence addresses of the
incorporators.
f. The number of directors ·which shall not be mor e tha n
fifteen or the nu~ber of trustees which may be more than
fifteen.
g. The names, nationalities and residence addresses of
p·e rsons who shall act as directors until the first r egular
directors a1·e duly elected. ·
h~ If.it be 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 residence addresses of original subscribers, amount
subscribed and ~aid ~y each on ·the 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.
i. If it be a nonstoclc corporation, the amount of-its capital,
the names, nationalities and residence addresses of the J, I

contributors an~ amount contributed by each. IL

.
J. Such other matters consistent with law ·and wlµch the
incorporators may deem necessary and convenient.

680.
Certificate of incorporation
The corporation commences to have juridical person:~~ :::
legal existence only from the moment the Securitie
Exchange Co~mission issues to the incorporators a
'!_ertificate of incorporatiq_n~ ·
Such certificate is a final determination of the corporat ion's
iight to do business.
th
The issuance of the certificate of incorporation calls ~
corporation to being but it is not yet ready to do business untr.l
it is organized. ·
.Fornial organization requires the adoption of bylaws which
shall be filed with the Securities and Exchange'Commission.
Bylaws
Bylaws may b~ defined as the rules of action adopted by the
_corporation for its internal government and for the
government of its officers, shareholders or members.
Among others, a private corporation may provide the
following in its bylaws:
a. The time, place and manner of calling and conducting
regular ·or special n1eeting ·of directo1·e, trustees,
shareholders or members .
b. The number, qualific.ations, duties, responsibilities,
length of office and compensation of directors or trustees
c. The appointment, duties, responsibilities, length of office
and compensation of corporate office,·s, other than
directors or trustees
d. The manner of issuing stock certific.ates
. .
:Minimum capital stock
Section 12 of the Revised Corporation Code provid tha 8...........1.
corporation shall not be required to have a m • . es t ~l
-J.
..1. .... t th . .....-:.c:can inimum capita
s~, excep as o erwise sp~.w Y provided by ~pecial law.

681
 Components of corporation_
ho compose the corporation
a. Corporators areldthose wmembers or both. .
whether shareho ers or
. . h se corporators mentioned i~ the
b. Incbrporatf.o~s are tr; tion--as originally forming and
articles o incorpo .
composing the corporation.
c. ;harelwlders or stocklwlders are owners of shares in a st.ock
corporation. ·
· the Revised Corporation Code, · sh~re~olders and
Un der
. incorporators may be natural or .artifiCl·a1 pe~sons. .

ci. Me,nbers are corporators of a nonstock corpor~tion.

. . .
Books and-record~ of a corporation
,

a. Minutes bo~k-contains the minutes of the meetings of the

directors and shareholders. /

~t
b. Stock .and transfer book is a -record of th e ~ames of 1
shareholders, . installments. paid a·rid unpaid by .
of
shareholders and dates payment, any t ransfer of share
and dates thereof, by whom and to ·wnoin made.
. , ,_ :;\

c. Books of accounts represent the record of all business

transactions. The books of accounts;include_normally the
journal and the ]edger. ,.. ·
. /
- ~ _,

d. Subscription book is a book·of printed blank subscription.

1
. .

e. ?hareholders .!edger is~ subsidiary for the share capital

issued reporting the number of shares issued to each
. shareholder. ·

f. Sub~cribers' ledger is a s~bs~dia17 for the subscriptions

receivable ac~ount reportmg the individual subscription
of the subscnbe~s. ·

g. Share certificate book is a bo~k of printed blank share

certificates.

682
r Organization cost '/
t
'As tt~e ~~~e ~~~~ests, th~ term organization cost ~epresents
coS incurred in forming or organizing a corporation.
Specifically,·the following ~hould be included in organization
cost:
l
1 a. l_..egal. fees in co~nection_ with •the ~cmyoration, such
drafting of articles of 1ncorporat1on and by-laws a
!d
,,, corporation registration
\ Q./ ln<:_o!p9ration fe~s__
c. .Share i§u1uance costs, such as printing of share
certificates, ·cost of stock and transfer book, seal of
corporation, underwriting and ·promotional fees,
accounting and legal fees related to share issuance.
PAS 38, paragraph 69, provides that start up costs which
include legal and secretarial costs in establishing a legal
entity shall be recognized as expense when incurred.
1
Accordingly, it is now clearcut that organization cost shall
be expensed immediately with the exception of share issuance
costs which will be discussed later.
.Shareholders' equity ,
Shareholders' equity or stockholders' equity is the residual
interest of owners in the net assets of a corporation measured
. ---
by the excess of assets over liabilities.
Generally, the · elements constituting shareholders' equity
with their equivalent IFRS term are:
Philippine term IASterm
•
Capital stock Share capital ·
Subscribed capital stock Sub~cribed share capital
Common stock Ordinary share capital ·
Preferred stock Preference share capital
Additional paid in capital Share premium
Retained earnings (deficit) Accumulated profits (losses)
Retained earnings appropriated Appropriation reserve
Revaluation surplus Revaluation reserve
Treasury stock Treasury share
683
 Definition of terms
. l . th portion of the paid in capital
Share cap1.ta 1s e . or stated value of the shares
representing the total paI
issued. ·
. the poi·tion of the authorized
. l 18
Subscrib~d share capita ubscribed but not yet fully paid
share capital that has been 8
and therefore still unissued. ,.

The subscribed share capital is reported minus subscrip tion

receivable not collectible current~

Share preniiuni is the portion of the paid in capital

rej}resenfing excess over the par or stated value.

Broadly, the (.;01nmon sources of share premium are:

a. Excess .over par value or stated v~lue

b. Resale of treasury shares at more than cost
c. Donated capital
d. Issuance of share warrants
e. Distribution of share dividends
f. Quasi-reorganization and recapitalization
r .'
Retained earnings ·1·epreseot •the cumulative balance of
periodic earnings, dividend distributions, prior period errors
and other capital adjustments.

Revaluation surplus is the excess of revalued amount over

the carrying amount of the revalued asset. ·

·Treasury shares are the corporation's own shares that have

been issued and then ..__
reacquired but not canceled.

p ~ _SJJt...bscriptHfils.. to ·a proposed increase in share

capital may be reported as part of shareholders' e·quity as a
separate line item in the shareholders' equity.

684
 CAPITAL STOCK .
Th · d · the articles of
. e term capital stock is the amount~~ .m cured to be
in~orporation to be subscribed and paid m or _se either in
paid in by the shareholders of the corporat~ont' of the
money or property or services at the organiza ion ti
~orporation, or afterwards and' upon which the corpora on
1s to conduct it3 operations.
I • •

Actually, the amount-fixed in the articles of_incorpo_ration 18

called the authorized shareca.p_[tal.~
The share capital is divided into shares evidenced by a share
certificate. .
A share represents the interest or right of a shareholder in
the corporation. The four rights of a shareholder are:
a. To shai·e in the earnings of the corporation. .
b. To vote i n t h e election of directors and 1n the
determination of certain corporate policies. .
c. To subscribe fo1· a dditional share issues - This is the right.
of preeniption or share right. ,· -
d. To share in the net ~ sets of the corporation upon liquidation.
A share ·c ertifica:te is the instr ument or document th at
-evidences the ownership of ~ share.
As a general rule, a ~hare certificate is issued only when the
$Ubscription is fully paid. -
The share capital may be par value sha1~e or no-par ualue share.
-
A par value share is one witp specific value fixed in the
. articles of incorporation and appearing on the share
certificate . The purpose of the par value is to fix the
minimum issue price of the share. ·
A no-par share is on~ without any value appearing on the
face of the share certificate.
A share is simply called no par because it has no par valu
appearing on the face of the share certificate. e
But a no-par share_ has a~ways an i~sued va.lue or stated ual
based on the <co~1<!erattQ.._n for wh~ch it is issued. ue
The minirnuni consideration or issue price for h ··
as provided for in the Revised Corporation Cno-dpar. pare 8
. . o e 1s 5.
In other words, a no-par share cannot b . d~ ~
than P5. e issue '!>r 1~ss
~-
685
 Ordinary share capital
. . ital, it necessarily is
If there is only one class of share cap ·
ordinary share. .
be · se the ordinary shareholders
Ordinary share 18 so calle ~~u
• d
.

have the same rights and privileges.

.
The ordinary sh are h oIde rs enJ· oy no preference over each
other. -
Generally the ordinary· share gives the owner t~e ~gh~ to
vote, to share in the in,come, an~ in the ~ven~ o{ liqwdation,
to share in all assets after satisfying creditors and preference
shareholders' claims.
The ordinary shareholders have no fixed or spe.cific return
on investment. .
Their financial re~ard' is dependent· on t he operations of
the entity.
If the entity is exceptionally profitable, the holdings of
ordinary shareholders will become mo~e valuable.
Conversely, if an ·e n'tity suffe,r s los-ses,, the value of the
ordinary shareholders' equity will be reduced as fewer assets
are available to satisfy residual claims. _
Preference share capital
- . -
Preference share is so called because of the· prefe.r ences
granted to · the shareholders. -

Th~ prefere~~s usually pertain to the preference shareholders'

cl~s on dividends and TJ,et assets in the event of liquidation.

The pref~~ence shareholders have only a limited or fixed

return on investment. ·

For example, a holder of PlOO.p ar value, 12% preference share

is·entitled to an annual dividend, if declared, of 12% of PlOO
or P12.

886
 Cegal capital
Le l · . ·
. ga capital is that portion of the paid m capi
·ta1 arising &om
d to the
1.Ssuance of share capital which cannot be ret,srne . tion.
shareholders in any form during the lifetime of the corpora
a. In the case of par value· share, legal capitabl is.:::
aggregate par value 'of the shares issued and SU scri. .
b. In t~ case_ of no-par ~l~ share, legal capi~ is ~e ~~
cons1~erat1on recejved from shareholders including
excess over the stated yalue.
· Trust fund doctrine
The trust fund doctrine holds that t he share capital of a
corporation is considered as trust fund for the protection of
creditors~ · ·
Consequently, it is illegal to return such_legal capital to
shareholders during the lifetime of the .corporation._
. - -
However, the corporation can pay dividep.ds to shareholders
but limited only to _the ,:~ained_!!.grnings ~Pl.a..!L~~-
to
Accordingly, it is illegal pay dividends if the entity has a deficit.
. '
Acc~unti~g for··share capital
a. Memorandu,n niethod
No entry is made to record the authorized share capital.
Only a __memorandum,.,,is· made for the total authorized
share capital. , · - ,
• :.<

W}i~µ share capita_l is issued, it issredited to tlle share

capital .account.
--- - -
b. Journal entry niethod
- · . ~ - T - - -

The_ ~uthor~zation to issue ·share capital is.

deb1t1ng un1ssued share capital and crediti recorhde~ by
share capital. ng aut onzed

When shB.!e capital is issued, it is credited .

share capital account. · . to the umssued

687
 lllust1~ation - Memorandum method
. . sue share capital of
1. An entity was a uthorized to 1h8 with par value of
P4, 000, 000 divided into 40,000 . 8 ares
Pl00.
· . uthorized to issue share
Menio entry - The ent~t~ wda~ ~ 40 000 shares with p·ar
capital ofP4,000,000, diVIde 1n ° ,
value of Pl00.
2. Received subscription to 10,000 shares at par .
.Subsciiptio~receivable • 1,000,000
1,000,000
Subscribed share capital

3. Coll_ec~ed 25% on tl?,e above sttbscripti~n.

Cash 250,000
Subsci·iption receivable 250,000

4. Received full payment for 6,000 shares originally ~ubscribed.

Cash
Subscription receivable
450,000
-
450,000
Subscription price (6,000 x 100) 600,000
Partial payment (25% x 600,000) (150,000) J
Ba.lance 450,000
l
5. Issued the share certificates for 6,0Q0 ~hares which are
fully paid. t
Subscribed share capital 6Q(),000
Share capital 600,000

The Revised Corporation Code· provides tha.t sha,~es are

issued only ·when· subscriptions are fully paid. . ,,; f
6. Received a cash subscription for 5,000 shares at par.
Cash
~~~~
/
.
500,000
~~
-
A cash subscription is directly credited to the share
capital account. It is not necessary to set up a subscription
receivable account.

688
 taternent presentation ·
I ·tal
fa statement of financial position is prepared, the share capl
would be shown under shareholders' equity·
Share capital, Pl00 par, 40,000 shares authorized, 1,100,000
11,000 shares issued 400,000
Subs~be~ share capital, 4,000 shares · (- 300,000)
Subscription receivable
Shai·eholders' equity 1,~00,000

Illustration - Journal entry method

Assume the same infor1nation in the previous illustration.
. 1. Unissued share capital · 4,000,'000
Authorized share capital 4,000,000
2. Subscription receivable 1,900,000
Subscribed share capital 1,000,000
- 3. Cash-· 250,000
Subscription receivable 250,000
4. Cash 450,000
Subscription receivable 450,000

5. Subscribed share capital 600,00,0

U nissued share capital 600,000
'

Here lies the difference between the journal entry

.
methoq. .and memorandum method..
.

'
,
.

The issuance of share capital is ·credited to the unissued

share capital account under the journal entry method.
6. _ Cash 500,000
Unissued snare capital 500,000

Statement presentation
. Authorized share capital, Pl00 par, 40,000 shares . 4,000,000
Unissued share capital, 29,000 shares . (2,900,000)
I

Issued share capital _1,100,000

Subscribed share capital, 4,000 shares 400,000
.Shareholders' equity
Subscription receivable . · ( 300,000)
1,200,000

689
 Issuance of share capital
. . .d that a share shall
The Revised Corporati?~ Co~e provi es the p. ar or stated
not be issued for a consideration less than .
l)alue.
.
The law further provides t hat s h ares wi·thout par value
cannot be issued for less than P5.

Thus, in the Philippines, the no-par shpre must have a st ated

valu~ of at least P5. ·

When ska.res with par value are sold, the proceeds shall be '
credited to the share capital account·to the extent of t~e par
value, with any excess being reflected as share premium.

For example, if 10,000 ordinary shares of P l00 par value a re

sold at P150 per share, the journal' entry is:

Cash , 1,500,000
O1·dinary share capital (10,000 x Pl00) 1,000,000
Share premium , · 500,000

Obse_rve that the excess over .the par value is credited to

s,hare pren1,iu,n1.. · · · · ·

When shares without par .vq.lu,e are so.Id, the proceeds shall
be credited to the. share capital account to the extent of the
_ stated value and any excess is credited to shar~ premium.
, .
. For example, if 20,0OQ ordinary shares of P50 stated value
are issued at P80 p~r share, the journal entry is:

Cash 1,600,000.
Ordinary shai·e ~apitai (20,000 x P50) 1,000,000
Shru.·e premium ·
600,000

690
f Shares 1•ssued at discount
.
..

Share~ @old or i&aued at a price below par or stated value

are said to be issued at a discount.
The Revised Corporation Code prohibits the issue of share
at a discount.
Thus, when a share is sold at a discount,·the discount is not
• considered a los s to the issuing corporation but t h8
.sl,,areholder is held liable there/gr.
. -
Under Philippine jltrisprudence,· the issue itself is not uoid
bu:t the ·agreenient that the share shall be paid for less than
par.value
.
or stated value is. illegal and cannot be eti{o_rced.

The issue of the share therefore is not canceled but the

shareholder must pay for the discount. Tb.is is called the
discoU, iability of the shareholder. ·

Since a discount is an investment deficiency, it should be

accounted for separately.

For exa1nple, if 10;000 shares of Pl00 par value are sold for
PS00,000 cash, the journal entry is:

Cash 800,000
Discount on share capital 200,000
Share capital 1,000,000

The account disco-µ,nt on share capital is a deduction from

total sh~reh_oJqers' eq1:_1i~- ,
~ ---- '

.It should be pointed out that the prohibition to issue share

at a discount refers to the original issue of a share but not to
a subsequent-transfe~ of such shar~ by the corporation.

Hence, treasury shares may be ~old or· reissued for less than
the par value or stated value without violating the provision
of the law..

Treasury shares will be discussed in a later chapter.

691
 I ssuance of s h are cap1·tal .1•£9or noncash consideration
. . oration Code provides that where the
The Revised CoI P . f hare capital is othe,· than,
consideration for the issuance O 8 h t t
actual cash or consists of property ~~c. as_ pa en_ or
• ht th luation thereof shall be m1t1ally determined
co~yhrig h' le vladers or the board of directors subject to the
by t e s are io C · ·
approva I of the Se curities and Exchange oninussion.

I n ·o h e1. words , reference

t.
.
is made to the fair value of the
d . d b h
property received, whic~ must be .eterm1ne y t e
shareholders or board of directors, subJect to the approval
of the Securities and Exchange Commission. .
- .

The Revised Corporation Code further provides that shares

shall not be issued in exchange for promissory notes or future
service.

PFRS 2, paragraph 10, provides that for equity-se.ttied

~hare-based paym_ent ~1~ar1~~ctions, the entity shall meas~re
the goods and services received and the corresponding
increase in equity directly· at the fair value of the goods and
3
~eruices . rec_eiy_ed. - -
However, if the entity cannot estimate reliably the fair value
of the goods and services received, the entity shall measure
their value and the . corresponding increase in equity
indirectly by reference to the fair value of the equity
instrunients issued. ::,1)
Accordingly, if share capital i.s issued for noncash
consideration such as tangible property, intangible property
and services, the share capital is recorded at an amount equal
to the following in the order of priority:

a. Fair value· of the noncash consideration received

b. Fair value of the shares issued .
c. Par value of the. shares issued '
·

692
 lllust1·ation .
An hntity issued 10,000 ordiiiary shares of Pl00 par-value in
exc an ge for land with a fair value of Pl,500,000.
The fair value of the shares issued is P180 per share or a
t otal of Pl,800,000. _ .
If the fair value of the land is u~ed, the journal entry is:
Land · 1,500,000 . .
Ordinary share capital 1,000,000
Share p1·emium 500,000
I

If the fair value of the shares is used, the journal entry is:
Land 1,soo,000 "',
Share- capital 1,000,000
Share premium 800,000

If the par value

'
of the shares is ·used, the journal entry is:
.

Land 1,000,000·
Sha~·e capital 1,000,000

Issuance of share capital for services

Shares niay b~ issued for .services as long as the services are
a.lread~n~
---:::- .
In .conformity with the legal provision and . accounting
standard, if shares are issued for services, the shares shall
') be recorded.at the· fair value of such services· or fair value of
the shares issued, whichever. is reliably determinable.
' - -- - -- .....

Ilustration
An entity issued 1,000 ordin~ry shares of Pl00 par value to
·1awyers for their legal services in gettii:ig the ·corporation
organized.
. The fair value of such services is reliably determined to be
P120,000. , . -
Legal expenses 120,000
Ordinary sha1·e capital 100,000
Share premium · . 20,000

693
 Share issuance costs
•
Sh are issuance d capital
cos ts a.re direct costs to £sell share · •
. h 11
w h 1c norma Y inc u· 1 de legal fees ' CPA
• ees, un
d erwntmg
.c • •• cost of printing certificates, ocumentary
J.ees, comfmil~ss1o;s,s with SEC and cost ·of advertising and
stamps, 1ng ee bli t· £
promotion. or newspaper pu ca ion · ee.

PAS 32, paragraph 37, pro~de~ that transaction costs that

are directly attributabJe to the issuance of new ~hares shall
be de.ducted fr.o m equity, net of any related income tax
benefit.
.,.

In other words, share issuance costs shall be debited to share

·prenii11:m arising froni the share issuance.

If the share prernium is insufficient to absorb such expenses, .

the Philippine Interpretations Committee or PIC
concluded that the excess shall be debited to share issuance
costs to be reported as a contra equity account as a
deduction from the following in the order of priority:

a. Share premium from previous share issuance

b. Retained earnings

Costs of public offering of shares

The Philippine Interpretations Committee concluded that

costs that rel~te to stock ,narke~ listing, or otherwise are not
incremental costs directly. attributable to the issuance of new
shares, shall be recorded as expense in the income statement.

The. costs of listing shares are not considered. as costs of an

equity transaction since n9 equity instrument has been
issued. Therefore, sueh costs are recognized immediately as
an expense when incurred.

Costs of listing shares include the following:

a. Road show presentation
b.. Public relations consultant's fees

694
 Joint costs
th
PAS 32, paragraph 38 requires that transaction coSt8 at
relate jointly to the c~ncurrent listing and issuance of. ne~
shares, and listing of old existing shares shall be allocat;
~etween the newly issued and listed shares, and the new Y
list ed ~ld existing shares.

However, PAS 32 provides no further guidance as to wh at

basis of allocation should be follo\ved. ·

The Philippine Interpretations Committee concluded tha~

the joint costs shall be allocated prora t a on the basis of
outstanding newly issi1ed ~nd listed shares and outstanding
newly listed old existing shares. - ·

Examples of joint costs include the following:

a . .Audit and other ·profession~! advice relating to

prospectus ·
b. Opinion of counsel ·
c. Tax opinion
d. .,Fairness. opinion and valuati<1n report
e. Prospectus design and printing ·
r .

. Illustration
. .
An entity undertakes an initial public offering or IPO for
the listing and issuance of 700,000 new shares and listing of
300,000 old existing shares. _ .

The entity incurred the following costs: ---

Listing fee 300,000

oocwnentary stamp tax 25,000
Newspaper publication 200,000
Fairness opinion and valuation report 125,000
Tax opinion 100,000
Oth~r joint costs 275,000

895
 Cost of public offering
Listing fee 300,000

Share issuance costs

Documentary stamp tax 25,000
Newspaper publication 200,000
Total · 225,000

Joint· costs . .
Fairness opinion and valuation report 125,000 ·
l • • •
Tax oplillon 100,000
Other joint costs 275,000
Total join~ costs '500,000

The cost of public offering is expensed immediately.

Share listing fee 300,000

Cash 300,000

The share issuance costs shall be recorded as adjustment of

the share premium from .the isBuance, ·if any.
a. If the new shares axe issued a t more than par: ·
Shai·e premium 225,000
Cash "225,000
b. If the new shares are issued at par:
Share issuance costs 225,000 j
Cash
225,000
f
Allocation of joint costs 1
· Outstanding Fraction Allocated
n d listed shares
Ne'wly issued a_ 700,000 7/10 . _
Newly listed old existing sha1·es 300,000 350,000
3/10 1502000
1,000,000 500,000
Share pre11:1ium 350,000
Stock listing fee 150,000
Cash ' 500,000
696
Watered share
~ater!1<! share is share capital issued for inadequate or
insufficient consideration.
The cons1·derat1on
· · · h or stated value,
received is less t an par
but the share capital is issued as fully paid.
nd
If the share capital is watered, asset is overstat~d a
capit~.i.ELcorrespondingly overstated. -
For example, land with fair val ue of PSOa°,000 is received for
10,000 shares of Pl00 par value.
To create a water in the share capital, the issuance of 10,000
shares is recorded as fully paid.
Land 1.000,000
Share capital 1,000,000

·Needless to say, the land is overvalued and the share capital ·

is also overstated.
As mentioned earlie1·, it is illegal to issue a share for less
than the par or stated value.· Thus iq. the example, the
shareholde1· has a discount liabi)ity of P200,000. To correct ·
. the accounts, the.journal entry is:
.Discount on share capital 200,000
Land 200,000

Secret reserve
The term secret reserve is the reverse of watered share Secret
reserve arises when asset· is unde1·stated or liability is
overstated with a conse9-uent understatement of capital.
Secret reserve usually arises from the following:
a. Excessive provisio~. for depreciation d 1 t·
amortization ana doubtful accounts ' ep e ion,
b. Excessive w1·itedown of accounts· r~ce 1· bl •
and investment. ra
e, mventory
c. Capital expenditures are recorded .
d. Fictitious liabilities are recorded. as outright expense.

697
 Delinquent subscription
The Revised Corporation Code provides that th~ board ?f
directors may at any time declare due and paya 1e unpaid
subscriptions.
This official declaration is called a call usually expressed in
the form of a board resolution. stating the date fixed for
payment of the unpaid subscriptions.
If the shareholder does not pay on the da_te fixed, the
· shareholder is declared delinquent and the delinquent share
will be sold at public auction.
At the public auction, so many delinquent shares as may be
·necessary to cover the unpaid subscription, interest accrued
on the subscription, expenses of advertisement and other
costs of sale will be sold to the highest bidder.

_W ho is the hlghest bidder?

The highest bidder is the person who is willing to pay the
offer'price of the delinquent shares for the sniallest nuniber
of shares. The offer price normally includes the following:
· a. Balance due on the subscription
b. Interest accrued on the subscription due
c. Expenses of adve1·tising and other costs of sale
•Illustr_ation
X ~ul_)~cribed for 10,?00 shares at par Pl00, paying P600,000
as 1n1t1al :payment. 'l he balance of the subscription was called
and X fatle~ to pay. Consequently, the subscription was
decla1·ed delinquent.
The offer price is P450,000 including the balance due on the
subscription, inte1'est and costs of sale. There are three
bidders who are willing to pay the offer price, namely:
A 4,500shares
B 5,000 shares.
C 6,000'shares
Evidently, Ai$ the highe~t bidder. Thus, all the 10,000 shares
shall be deem_e~ fully paid: Acc9rdingly, A gets 4,500 shaJ:·es,
and X, the or1g1nal subscriber, gets· 5,500 shares.
698
 No bidders
In case where there are no bidders, the corporati?n m~
purchase for itself the delinquent shares. The delinqueh
subscriber is then released from liability with regard to t e
I
l subs~rip~on which is deemed fully paid.
i 1. X subsciibes for 10,000 shares at par Pl00.
S:tbscription receivable 1,000,000
Subscribed share capital 1,000,000
2.- X pays P600,000.
f
·Cash 600,000
Subscription receivable 600,000

.3. The ',Ubscription balance is ca!led and X defaults.

No entry.
4. The.- corporation' pays P30 000 for expenses incurred in
1

connection with the auction of the delinquent shares.

Advances on delinquency sale 30,000
Cash · : 30,000
5. rbe offer price comprises:
Subscription receivable . 400,000
Interest 20,000
on
Expenses delinquency sale • 30,000
Total 450,000
6. There are no bid<;lers. As stated earlier, the corporation
may bid in the absence of a bidder or a highest bidder.

Journal entries
a. Treasury shares 450,000
Subscription receivable
Interest income 400,000
Advances on delinquency sa Je 20,000
30,000
b. Subscribed share capital
1,000,000
Share capital
1,000,000
699
 Callable preference share .
, --- . which ca.n be called in for
redeniptwn at a specifz.ed P
~.7~he
A,...callab!e preferenc~ ~har~i~! option of the. corporation.
edeemable preference _share, a
As distinguished from ah r no definite redemption date
callable preference shareth:~'call" of the issuer.
as this is depend~nt on
are is an "equity instrument" .rather
1 £
A callable pre!e lincb.~~Y because the option of the issuer
than a _financiah ~ cash does not satisfy the "textbook"
to redeem the s aie or . 'Ii
definition of a financial hab1 ty. .
Illustration
An· ntit issued 10,000 callable preference_ shares with par
e ofYPIOO· at ·P120 per share.
va I ue . d The
d issuance of the
preference shares is normally recor e .
Cash (10,000 x 120) . 1,200,000
P1·eference share capital (10,000 x 100) 1,000,000
Share premium - PS . 200,000

Subsequently, the preference sha1·es are called in at P150

per share.
Preference share capital 1,000,000
Share premium - PS 200,000
Retained earnings 300,000
Cash (10,000 ~ 150) 1,500,~00
.
When preference shares are called ·in at niore than the
origi,nal issue price of the preference shares, the excess is
debited to retained earnings. ·
Accordingly, the excess of the ca11 ·price over t~ par value of
the preference .shares is charged to the following:
•
a. Share premium fro1n original issuance of .the preference
shares · • ·
b. Retained earnings
•

On the oth~r. ban~, when: preference shares.are called in at•

less than on~al issue pnce, the .difference is aimply credited
to share premium related to ordinor, shares.
Redeemable
-- .... preference share
p AS 32, par~gi"aph ·1s defines redeemable preference share
as: '
a. A preference share that provides for nian~atory
redemption by the issuer for a fixed or determinabl.e
am':)unt at a future date.
· b. A pr~ference share that gives the holder the right to_ requir~
the 1.ssu.er to redeem the instrument for a fixed- OI .
determinable amount at a future date.

A redeemable preference share shall be classified as current

or noncur1·ent financial liability depending on the redemption
date.

Illustration
An entity issued 10,000 preference shares at the par value
of PlOO per share. The preference shares have a mandatory
redeniption by the issuer for Pl,200,000.
The jow"nal e~try to record the issuance of the redeemable
preference shares is:
Cash (10,000 x 100) 1,000,000
Redeemable preference share~ 1,000,000

If a dividend of Pl00,000 is paid to the redeemable preference

shareholders, the journal entry is:
Interest expense 100,000
Cash 100,000

Subsequently, if the prefe~ence shares are redeemed by- the

issuer for Pl,200,000, the Journal entry is:

Redeemable pref.erence shares 1,000,000

Loss on redemption ·200,000
Cash 1,200,000
PAS 32, paragraph 36, provides that the d:.~
· d t· · d h ULerence ·between
the re e~~ 10n pnce an t e financial li bility • t d
for as gain o_~_l~ss on redemption. a 18 accoun e
------- - --- . ---~

701
 Another illustration
On January 1, 2021, art entity issued preference shSf'es, for
cash equal to the par value of P6,000~000. .

The preference shares are redeemable at the ~pti,on, of the

preference shareholders.-

No dividends are to be paid on these shares but the

preference shareholders have the right to require the issuer
to redeem the shares on January 1, 2023 for P6,61&,000.

The interest rate implicit in this agreement is 5% w-h ich is

compounded annually.

Journal entries
2021

Jan. 1 Cash - 6,000,000

Redeemable preference shares · 6' 000,000
Dec. 31 In~rest expense 300,000
Accrued interest payable
(5% X 6,000,000)
300,000
2'°22 ,

Dec. 31 Interest expense 315,000

Accrued interest payable
(5% X 6,300,000)
315,000
2023

Jan. 1 Redeemable preference shai-es 6,000,000

AcC~hd interest payable 615,000 I
6,615,000 .I

702
 Convertible.preference share
.
A convertible · h dives the holder
preference share is one wh1,C ,,., ·ties of the
~he ~ight to exchange the holdings for other securi
issuing corporation.
A ference share
. prefer~nce shareholder may convert t h e pre ssful and
into ordinary share because operations are succe
earnings on the ordinary share are unlimite~.

· A preference shareholder may convert the preferen~ shar~

into bonds which is actually a change c;,f equity from that?
.,
I
an owner to ~hat of a creditor. Normally, preference share 18
I
convertible into ordinary share.

Illustration
Preference share capital, 10,000 shares, P 100 par 1,000,000
Ordinary share capital. 200,000 shares authorized,
100,000 shares issued, P30 par 3,000,000
Share premium - PS 200,000
Share premium - ordinary 1,000,000
Retained earnings 2,000,000

Case 1
The prefere nee share is converted into ordinary share in
the ratio of one preference share for ·t hree ordinary shares.

Preference share capital 1,000,000

Share premium - PS 200000~
'.
Ordinary share capital (30,000 x 30) 900,000
Share premium - ordinaey 300,000

Case 2
· The pr~ference share is converted into ordinary share in
the ratio of one preference share for five or_d inary shares.
Prefe~ence s~e capital 1,000,000 ,
Share prem1~ - PS 200
Jtetained earnings . aoo'000
Ordinary share capital (50,000 x 30) ,OOO
1,500,000
703