The transactions involving shares of stocks are

1. Authorization is the recording the maximum number of

shares a corporation is authorized to issue. These are what u
term as Authorized Share Capital or Authorized Capital
Stock.
2. Sale when a shareholder buys and pays immediately in full.
These are called Share Capital
3. Subscription - this is when a subscriber enters into a contract
to buy shares. A down payment is required. The unpaid
balance is called Subscription Receivable and the Shares
are called Subscribed Share Capital
4. Collection of Subscription- the subscription receivable is
paid. However, no Certificate is issued unless fully paid.
5. Re-acquisition of shares -the issuing corporation may
reacquire the issued shares either thru reselling or retiring the
shares. These are called Treasury Shares.
6. Shares of Stocks can be sold thru any of the following:
1. Cash
2. Property- the amount of the property should be based on
the fair market value of the property
3. Service
Account Titles used for Stock Transactions
1. Share Capital is credited upon sale in full of shares. The
value of share capital is at par value.
2. Subscription Receivables - an account we debit upon
subscription of shares representing unpaid balance.
3. Subscribed Share Capital. account credited for the par value
of the subscribed shares. If the subscription is fully paid, this
will be closed to Share Capital.
4. Share Premium or Paid In capital in excess of Par are
amounts in excess of par value. When shares are sold at a
premium, the amount in excess of par is share capital.
5. Treasury Shares- this account is debited for shares
purchased by the corporation from the shares it has originally
issued out. also known as treasury shares or reacquired
stock, refers to previously outstanding stock that has been
bought back from stockholders by the issuing company. The
result is that the total number of outstanding shares on the
open market decreases. Treasury stock remains issued but is
not included in the distribution of dividends or the calculation
of earnings per share (EPS).
 Incorporating a Partnership
Business owners may find they wish to modify the legal formation
of a business entity at some point. A partnership, for example
may be dissolved to be transformed into a corporation. In this
case, the assets and liabilities should be adjusted and revalued
before are transferred to the corporation.

Example: Ada, Bess and Carol are partners dividing profit and
loss in the ratio of 3:2:1 respectively. They decide to incorporate
the business on July 1 and call it the ABC Corporation. with three
more friends they have invited to join them, additional cash of P
1,000,000 will be invested in exchange for some shares of stock
the partnership's financial position appear as follows:

The ABC Corporation filed its incorporation papers and among

the provisions was the authority to issue 100,000 ordinary shares
at a par value of P 50 per share. The partners will receive
common shares equal to their net assets after adjusting the
following 5% provisions for doubtful accounts. 10% write down on
inventories, furniture and equipment to be valued based on its fair
value of P 350,000.

After adjusting the partners account balances the total capital is

now 1,550,000, divide it with the part value of P 50, it will produce
a total number of 31,000 shares.
In the previous topic, we mentioned about the differences
between preferred share and ordinary share. We learned that a
preferred stock is less risky than the ordinary share and has a
fixed rate of return.
Preference over distribution of dividends- they are given
priority claim in the distribution of dividends as against ordinary
shares and the dividends carry privileges such as being
cumulative or participating
Preference over distribution of assets- there are given priority
claim in the distribution of corporate assets over the ordinary
share once the corporation is liquidated.
Ordinary shares, as mentioned has voting privilege and has the
rights over residue dividends and assets after satisfying the
preference.

Illustration
Assume that on January 2, 2015, Makati Corporation was
authorized to issue 18% cumulative 5,000 preference shares of a
par value of P 200 and ordinary 10,000 ordinary shares of no par
but with a stated value of P 100. The incorporators subscribed to
25% of the preferred shares at par and 30% of the ordinary
shares at the stated value. A 25% down payment was required on
each class of stock with the balance due in two equal installments
on February 28 and March 30. the following are the transactions
and the corresponding entries:
Reminders:
You use Subscriptions Receivable for unpaid subscriptions
Subscribed Share Capital for all shares subscribed multiplied by
the par (this is just a temporary account)
Share Capital will be credited if the subscription is fully paid.
Close the Subscribed Share Capital
A statement of financial position prepared at this point:

Legal Capital
As previously discussed, one of the features of a corporation is
the limited liability of the shareholders. This means their personal
assets cannot answer for the liabilities of the corporation. Legal
capital is that amount of a company's equity that cannot legally be
allowed to leave the business; it cannot be distributed through a
dividend or any other means. It is the par value of common stock
and the stated value of the preferred stock that a business has
sold or otherwise issued to investors.
What constitutes Legal Capital?
The Corporation Code states that the legal capital is measured
by:
1. the aggregate par value of all par value shares;
2. the aggregate of the cash and the value of any contributions
paid for all issued no par value shares. Using the

This amount represents the minimum assets which cannot be

distributed to shareholders as this will serve as a cushion of
protection for the corporate creditors following the Trust Fund
Doctrine. Under the said doctrine, capital stock, property and
other assets of a corporation constitute a fund from which
creditors have a right to look for satisfaction of their claims. The
doctrine finds its basis upon the need to preserve the assets and
capital of the corporation for the protection of creditors, who are
preferred over stockholders in the distribution of corporate assets.
Delinquent Shares
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the corporation.
Still, holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder. The
stockholder loses the rights as a stockholder, except the right to
receive dividends, only when the stock becomes delinquent.
When subscription is not paid, the stock is said to be delinquent
and may be sold in a public auction to the highest bidder. The
highest bidder is the one who is willing to pay the least number of
shares. Payment includes unpaid subscription plus accrued
interest and all other expenses.
Assume that A subscribed 100 shares at the value of par P 100
on June 1, 2018. A 25% down payment was given and the
balance in two equal payments June 30 and July 31. A was able
to pay the first installment but failed to pay the balance. The
unpaid subscription was offered in public auction. Advertising cost
of P500 and accrued interest P 425 were incurred. D made a bid
for 90 shares, E for 75 shares and F for 80 shares.

Highest bidder is E who is willing to pay the balance plus interest

and the advertising cost.
Total Payment: Balance P 3,750 + Interest P 425 +
Advertising Cost P 500= P 4,675.
Notice that only 75 shares will be given to E. the other 25 shares
will be given to A.
Treasury Shares
Shares previous paid for and issued to shareholders and then
reacquired by the corporation. There are three features of the
treasury shares.
1. these are shares of the corporation
2. which have been paid for and issued to the shareholders
3. and then reacquired by the corporation
These are reacquired by the corporation by right of redemption
purchase in the secondary market or by way of donation.
Why do corporation repurchase their stock?
1. The corporation could resell this at a reasonable price as fixed
by the Board of Directors. It could be sold even at less than
 par which is not a violation anymore of the par value rule since
it has been originally issued out. Or it could be sold higher
than the part value the excess to be recorded as additional
paid in capital.
2. The corporation could use this as compensation to be paid to
employees
3. The corporation can improve the rate of return of the
shareholders since there are lesser outstanding shares and
lesser unproductive or idle assets.
4. The treasury shares could be retired thereby reducing
permanently the share capital of the company and in so doing
reduce also dividend distribution.
5. It sends a signal of the worth of the corporation 's stock and
that the buyback means that the corporation has more than
adequate resources to fund its own operations sans
shareholder investment.
Treasury shares may come from a share repurchase or buyback.
Many companies buy back their own shares with retained
earnings for a variety of reasons. For example, if the company
believes that its shares are trading for less than their intrinsic
value, it may choose to use more of its earnings to acquire its own
stock at a discount, as opposed to simply paying dividends.
Or, a company's treasury stock may have never been issued to
the public at all, and was simply created when the company's
shares were first issued. Companies may do this to create some
financial flexibility since treasury shares can always be sold to
raise cash if needed. Or, enough stock in the company's treasury
can ensure nobody else will amass a controlling stake.
It's important to point out that treasury shares still have value, and
are listed on the company's balance sheet. This is one of the key
differences between treasury and retired shares.
Retired shares
Sometimes when a company buys back shares of its own stock, it
doesn't have the desire to hang on to them. In this case, the
company can choose to cancel, or retire the shares according to
SEC regulations. Once shares are retired, they cannot be
reissued, and no longer have any financial value nor do they
represent any ownership in the company.
Similarities
Treasury shares and retired shares have a few things in common.
Most notably, neither type is included when calculating the
company's number of outstanding shares. Also, treasury and
retired shares don't receive dividend payments, and no longer
have any voting rights or ownership.

Retained Earnings mean accumulated profit.

There are two (2) kinds of Retained earnings:
1. Unappropriated retained earnings- are earnings which are free
and can be declared as dividends to shareholders.
2. Appropriated Earnings are earnings which has been restricted
and therefore is not available for any dividend declaration.
Retained Earnings by nature has a credit balance. a debit balance
is called deficit. A deficit is not an asset but a deduction from
shareholders equity.
Dividends are distribution of earnings or capital to the
shareholders in proportion to their shareholdings. Legally,
dividends can be declared only from retained earnings. If the
corporation is deficit, it is illegal to pay dividends or if the entity
declares dividends in excess of the retained earnings balance, the
excess is a return of capital and therefore violates the trust fund
law.
When dividends are formally declared by the board of directors,
three (3) dates are essential:
1. Date of declaration is the date on which the directors authorize
the payment of dividends to shareholders.
2. Date of record is the date on which the stock and transfer
book of the corporation will be closed for registration. Only
those shareholders registered as of such date are entitled to
receive dividends.
3. Date of payment is the date on which the dividend liability is to
be paid.
Illustration:
The Board of Directors at their meeting on December 31, 2017
declared a dividend of P5 per share, payable March 31, 2018, to
shareholders of record on January 31, 2018.
Dividends are usually in the form of the following:
1. Cash dividends - are the most common type and can be
expressed as follows:
o A certain amount of peso per share. Example the dividend
is P 5 per share
o A certain percentage of the par or stated value
The Board of Directors at their meeting on November 30,2019
declared a dividend of P 20 per share, payable April 30,2020, to
shareholders of record on December 31, 2017. The entity had
20,000 shares issued and outstanding with par value of P 100.

2. Property Dividends or dividends in kind are distribution of

earnings of the entity to the shareholders the form of non-cash.
Example: Assume that on July 1, Mimi Power Corporation
acquired 50,000 of Meralco shares at a cost of P 750,000 or P 15
each. The BOD of the company declared on November 15 a
dividend of one share of Meralco stock for every 10 shares of
Mimi Power stocks owned. On this date, the Meralco shares are
selling at P 20 per share. Mimi Power has 100,000 common
shares issued and outstanding, P 100 par value. The Meralco
share were distributed on December 15.
3. Liability Dividends deferred cash dividend payable in some
future time because at the time of the dividend declaration cash is
unavailable. A scrip or written promise to pau in a future is given
to the shareholder. Sometimes, interest is also given to the
shareholder.
Assume that Zoro Corporation declared a scrip dividend of P 10
on January 30,2015 to shareholders of record as of February
15,2015 payable at 10% interest on March 15, 2015. The stock
and transfer book show 10,000 shares issued and outstanding on
date of record.
Stock Dividends or bonus issue involve the issuance of
additional shares of stock to existing shareholders on a
proportional basis. Stock dividends are very similar to stock splits.
For example, a shareholder who owns 100 shares of stock will
own 125 shares after a 25% stock dividend (essentially the same
result as a 5 for 4 stock split). Importantly, all shareholders would
have 25% more shares, so the percentage of the total outstanding
stock owned by a specific shareholder is not increased.
Although shareholders will perceive very little difference between
a stock dividend and stock split, the accounting for stock
dividends is unique. Stock dividends require journal entries. Stock
dividends are recorded by moving amounts from retained
earnings to paid-in capital. The amount to move depends on the
size of the distribution. A small stock dividend (generally less than
25% of the existing shares outstanding) is accounted for at
market price on the date of declaration. A large stock dividend
(generally over the 25% range) is accounted for at par value.
To illustrate, assume that on December 31, 2020 Coco
Corporation had 1,000,000 shares of P 15 par value stock
outstanding. The market price per share is P20 on the date that a
stock dividend is declared and issued:
If declaration is 10%

What Are Appropriated Retained Earnings?

Appropriated retained earnings are retained earnings that are
specified by the board of directors for a particular use. Earmarked
earnings can be used for many purposes, including acquisitions,
debt reduction, stock buybacks, and research and development.
The account is used to help third parties stay informed about the
company's agenda.
Examples of Appropriations:
1. Appropriation for Treasury Stocks- reserves for the acquisition
of the company's own stock.
2. Appropriation for contingencies- if the company has a pending
lawsuit which is probable of losing, this resource must be
available to meet such contingency in case the company will
be liable to pay in the future
3. Appropriation for plant expansions- if there is a plan to acquire
land or plant facilities
4. Appropriation for Bonds and Stock redemption- if there is a
provision in the bond issue or stock issue, then an equal
amount of retained earnings be appropriated.
Appropriations are still part of the stockholder’s equity / retained
earnings