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

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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Unit 2 - Accounting for Partnership Formation Case 1 – Both partners are ordinary people

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 Cash Contribution of A

100000

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

Merchandise Inventory A, Capital Revaluation

Accumulated Depreciation A, Capital Revaluation

3000

8000

1000

3000

8000

1000

*note accounts with contra accounts will decrease or increase by adjusting their respective contra accounts.

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Step 2- Close the Sole Proprietor's books Entries A, Capital Step 3 – Opening Partnership

Step 2- Close the Sole Proprietor's books

Entries A, Capital

Step 3 – Opening Partnership Books

104000

Accounts Payable

7000

Allowance for doubtful Accounts

5000

Accumulated Depreciation

2000

Cash

50000

Accounts Receivable

30000

Merchandise Inventory

28000

Office Equipment

10000

Closing Sole Proprietor's books

Opening Entries Cash

50000

Accounts Receivable

30000

Merchandise Inventory

28000

Office Equipment

10000

A, Capital

104000

Accounts Payable

7000

Allowance for doubtful Accounts

5000

Accumulated Depreciation Opening Entries

2000

Cash

104000

B, Capital Opening Entries

104000

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Unit 3 - Accounting for DIVISION OF PROFITS AND LOSSES Much difference only lies in

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

Profit Distributed

A, Capital P300,000

300,000/1,000,000

3

(1,500,000)*(3/10)

B, Capital P200,000

200,000/1,000,000

2

(1,500,000)*(2/10)

C, Capital P500,000

500,000/1,000,000

5

(1,500,000)*(5/10)

Profit Distributed

A

P450,000

B

P300,000

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.

Net income P1,500,000

Arbitrary ratio

Profit Distributed

 

4

(1,500,000)*(4/10)

5

(1,500,000)*(5/10)

1

(1,500,000)*(1/10)

A

B

C

Total

Profit Distributed

P600,000

P750,000

P150,000

P1,500,000

Case 3 – Profit and loss will be shared on an arbitrary ratio and it will allow salary to industrial partners.

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. Partner C will receive an annual salary of

P300,000

 

A

B

C

Total

Salary Allowance remaining distributed Total Distribution

 

P300,000

P

300,000

P480,000

P600,000

120,000

1,200,000

P480,000

P600,000

P420,000

P 1,500,000

*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

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Case 4 – Profit and loss will be shared on an arbitrary ratio and will

Case 4 – Profit and loss will be shared on an arbitrary ratio and will allow bonus to managing partner and allowances

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. Partner C will receive an annual salary of P300,000. A, being the managing partner, will receive a 10% bonus on Net income.

A

B

C

Total

Bonus Given to A Salary Allowance remaining distributed Total Distribution

P150,000

P

150,000

 

P300,000

300,000

420,000

P525,000

105,000

1,050,000

P570,000

P525,000

P405,000

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.

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. 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 income P1,500,000 A, Capital P300,000 B, Capital P200,000 C, Capital P500,000

 

A

B

C

Total

Interest allowed Bonus Given to A Salary Allowance remaining distributed Total Distribution

P30,000

P20,000

P50,000

P 100,000

150,000

150,000

 

300,000

300,000

380,000

475,000

95,000

950,000

P560,000

P495,000

P445,000

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

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Case 6 – Net Loss or insufficient income to pay for interest, bonus and salary

Case 6 – Net Loss or insufficient income to pay for interest, bonus and salary

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 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)

 

A

B

C

Total

Interest allowed Bonus Given to A Salary Allowance remaining distributed Total Distribution

P30,000

P20,000

P50,000

P100,000

 

300,000

300,000

(360,000)

(450,000)

(90,000)

(900,000)

(P330,000)

(P430,000)

P260,000

(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

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Unit 4 – Partnership Dissolution without Liquidation Dissolution - terminates all authority of any partner

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. Admission of new partner

2. Withdrawal, retirement or death of a partner

3. Insolvency of a partnership or a partner

4. 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

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By purchase of interest of existing partners Partners Capital Balances P&L Ratio A 100,000 20%

By purchase of interest of existing partners

Partners

Capital Balances

P&L Ratio

A

100,000

20%

B

200,000

30%

C

300,000

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%)

200,000

A, Capital

40,000

B, Capital

60,000

C, Capital

100,000

C, Capital D, Capital

400,000

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

20,000

B, Capital

40,000

C, Capital

60,000

D, Capital

120,000

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By investment to the partnership 1. Investment equals capital credits Case 1.1: Partners approved the

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

Capital Balances

P&L Ratio

A

150,000

33.33%

B

150,000

33.33%

C

150,000

33.33%

Cash

50,000

Equipment

100,000

D, Capital

150,000

2. Bonus Method

Partners

Capital Balances

P&L Ratio

A

120,000

20%

B

240,000

40%

C

240,000

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

200,000

A, Capital

8,000

B, Capital

16,000

C, Capital

16,000

D, Capital

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

8,000

B, Capital

16,000

C, Capital

16,000

D, Capital

160,000

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3. Goodwill Method     Partners Capital Balances P&L Ratio A 120,000 20% B

3.

Goodwill Method

 
 

Partners

Capital Balances

P&L Ratio

A

120,000

20%

B

240,000

40%

C

240,000

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

200,000

Goodwill

200,000

A, Capital

40,000

B, Capital

80,000

C, Capital

80,000

D, Capital

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

200,000

Goodwill

200,000

D, Capital

400,000

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Case 3.3: Goodwill to all partners . D is admitted into the partnership by investing

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 Total Contributed Capital = 600,000 + 200,000 = P800,000 Goodwill = 900,000 – 800,000 = P100,000

Cash

200,000

Goodwill

100,000

A, Capital

15,000

B, Capital

30,000

C, Capital

30,000

D, Capital

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 Total Contributed Capital = 600,000 + 200,000 = P800,000 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

Capital Balances

P&L Ratio

A

135,000

15%

B

270,000

30%

C

270,000

30%

D

225,000

25%

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The following are independent cases: Sale to outside party Case 1: All of the remaining

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

250,000

E, Capital

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

Capital Balances

P&L Ratio

A

100,000

20%

B

150,000

30%

C

250,000

50%

Merchandise Inventory

400,000

 

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 Jonah’s 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

Merchandise Inventory

50,000

C, Capital

225,000

Cash

225,000

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

C, Capital

250,000

A, Capital

10,000

B, Capital

15,000

Cash

225,000

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Case 3: Partners agreed that C, who is withdrawing, be paid P100,000 cash and P150,000

Case 3: Partners agreed that C, who is withdrawing, be paid P100,000 cash and P150,000 worth

of inventory.

C, Capital

250,000

Cash

100,000

Inventory

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

250,000

Cash

100,000

Notes Payable

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:

 

Partnership

 

General Partners

 

Debit

Credit

Assets

Liabilities

Cash

50,000

     

Accounts

 

500,000

   

Payable

A (20%)

 

100,000

   

B (30%)

250,000

 

500,000

300,000

C (50%)

300,000

 

500,000

50,000

 

Accounts Payable

50,000

Cash

 

50,000

 

Cash

450,000

B, Capital

 

200,000

 

C, Capital

250,000

Accounts Payable

450,000

Cash

 

450,000

 

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Conversion of Partnership to Corporation Using partnership books 1. Adjust the assets and liabilities directly

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.

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Unit V – Partnership Dissolution with Liquidation Liquidation - the process of converting all assets

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

Cash

Noncash

Acconts

Loans

A,

B,

C,

Assets

Payable

from A

Capital

Capital

Capital

(1/5)

(2/5)

(2/5)

Balances

5,000

235,000

195,000

5,000

6,000

12,000

22,000

before

realization

Assets

195,000

(235,000)

   

(8,000)

(16,000)

(16,000)

realization

Balances

200,000

0

195,000

5,000

(2,000)

(4,000)

6,000

Payments

(195,000)

 

(195,000)

       

of

Liabilities

Balances

5,000

 

0

5,000

(2,000)

(4,000)

6,000

Right of

     

(2,000)

2,000

   

Offset

Balances

5,000

   

3,000

0

(4,000)

6,000

B’s Cash

4,000

       

4,000

 

Investment

Balances

9,000

   

3,000

 

0

6,000

Payment

(3,000)

   

(3,000)

     

of Loans

from A

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  Balances 6,000     0     6,000   Cash to (6,000)    
 

Balances

6,000

   

0

   

6,000

 

Cash to

(6,000)

         

(6,000)

Partner C

Balances

0

         

0

 

Cash Loss on Realization Accounts Receivable Merchandise Inventory Unused Supplies

195,000

 

40,000

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

 

195,000

 

Cash

195,000

 

Loans payable to A A, Capital

 

2,000

2,000

Cash

4,000

 

B, Capital

4,000

 

Loans payabe to A Cash

 

3,000

3,000

 

C, Capital Cash Case 2: B is an insolvent.

6,000

6,000

Activities

Cash

Noncash

Acconts

Loans

A,

B,

C,

 

Assets

Payable

from A

Capital

Capital

Capital

(1/5)

(2/5)

(2/5)

Balances

5,000

235,000

195,000

5,000

6,000

12,000

22,000

before

realization

Assets

195,000

(235,000)

   

(8,000)

(16,000)

(16,000)

realization

Balances

200,000

0

195,000

5,000

(2,000)

(4,000)

6,000

Payments

(195,000)

 

(195,000)

       

of

Liabilities

Balances

5,000

   

0

5,000

(2,000)

(4,000)

6,000

Absorption

       

(1,333)

4,000

(2,667)

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  Activities Cash Noncash Acconts Loans A, B, C,   Assets Payable from A
 

Activities

Cash

Noncash

Acconts

Loans

A,

B,

C,

 

Assets

Payable

from A

Capital

Capital

Capital

(1/5)

(2/5)

(2/5)

deficit of

             

B

Balances

5,000

   

5,000

(3,333)

0

3,333

Right of

     

(3,333)

3,333

   

Offset

Balances

5,000

   

1,667

0

 

3,333

Payment

(1,667)

   

(1,667)

     

of Loans

from A

Balances

3,333

   

0

   

3,333

Cash to

(3,333)

         

(3,333)

Partner C

Balances

0

         

0

 

Cash Loss on Realization Accounts Receivable Merchandise Inventory Unused Supplies

195,000

 

40,000

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

 

195,000

 

Cash

195,000

 

A, Capital C, Capital B, Capital

 

1,333

2,667

 

4,000

Loans payable from A A, Capital

 

3,333

3,333

Loans payabe from A Cash

1,667

1,667

C, Capital

3,333

 

Cash

3,333

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

Installment Liquidation Case 1: Activities Cash Noncash Accounts Loans H, I, J, Assets

Installment Liquidation

Case 1:

Activities

Cash

Noncash

Accounts

Loans

H,

I,

J,

Assets

Payable

from H

Capital

Capital

Capital

(20%)

(40%)

(40%)

Balances

5,000

235,000

140,000

5,000

20,000

35,000

40,000

before

realization

Collection

140,000

(150,000)

   

(2,000)

(4,000)

(4,000)

of

receivables

Balances

145,000

85,000

140,000

5,000

18,000

31,000

36,000

Payments

(140,000)

 

(140,000)

       

of

Liabilities

Balances

5,000

85,000

0

5,000

18,000

31,000

36,000

Cash to A

(2,000)

   

(2,000)

     

Cash

3,000

85,000

 

3,000

18,000

31,000

36,000

Balance

Sale of

74,000

(80,000)

   

(1,200)

(2,400)

(2,400)

Inventory

Balances

77,000

5,000

 

3,000

16,800

28,600

33,600

Payment

74,000

     

(15,200)

(25,400)

(30,400)

to partners

Balances

3,000

5,000

 

3,000

1,600

3,200

3,200

Sale of

3,000

(5,000)

 

(3,000)

(400)

(800)

(800)

supplies

Balances

6,000

0

 

0

1,200

2,400

2,400

Payment

(1,000)

     

(200)

(400)

(400)

of liability

and

expenses

Balances

5,000

     

1,000

2,000

2,000

Final

(5,000)

     

(1,000)

(2,000)

(2,000)

Payment

to partners

Balances

0

     

0

0

0

 

Cash Loss on Realization Accounts Receivable

140,000

10,000

 

150,000

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

H, Capital 2,000 I, Capital 4,000 J, Capital 4,000 Loss on Realization 10,000 Accounts Payable

H, Capital

2,000

I, Capital

4,000

J, Capital

4,000

Loss on Realization

10,000

Accounts Payable

140,000

Cash

140,000

Loans from H Cash

2,000

2,000

Cash

74,000

Loss on Realization

6,000

Merchandise Inventory

80,000

H, Capital

1,200

I, Capital

2,400

J, Capital

2,400

Loss on Realization

6,000

Loans from H

3,000

H, Capital

15,200

I, Capital

25,400

J, Capital

30,400

Cash

74,000

Cash

3,000

Loss on Realization

2,000

Unused Supplies

5,000

H, Capital

400

I, Capital

800

J, Capital

800

Loss on Realization

2,000

H, Capital

200

I, Capital

400

J, Capital

400

Loss on Realization

1,000

H, Capital

1,000

I, Capital

2,000

J, Capital

2,000

Loss on Realization

5,000

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

Unit 6 – Accounting for corporate formation and operation Corporation is an entity created by

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 corporation’s 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

Corporation

Formed by at least 2 persons

Formed by at least 5 persons

Starts with an agreement with partners may be written or oral

Starts from issuance of a certificate of incorporation issued by SEC

Unlimited liability

Limited liability

Limited life

Unlimited life

Transfer of equity needs consent

Transfer of stocks may be without consent

Partner is an agent

Stockholders don’t 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

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

Components of a corporation 1. Incorporators – the people who formed the corporation usually consisting

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 treasurer’s 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, promoter’s 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

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

7. Authorized capital, classes of stocks to be issued and the number of each class

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. Authorized shares – maximum number of shares which may be issued

2. Issued shares – shares issued to the stockholders in the past but may or may not be in the their hands at present

3. Unissued shares – shares available for issuance in the future

4. Outstanding shares – total of issued and subscribed shares, whether fully or partially paid except treasury shares

5. Treasury shares – reacquired shares by issuance or donation

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

6. Subscribed shares – shares that are acquired or contracted 7. Subscription – contract wherein

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

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

Unit 7 – Accounting for share capital transactions Corporation may issue stocks directly to investors

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.

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

Pro-forma entries – par value stock subscribed or sold at par   Transaction Memo entry

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

 

Transaction

Memo entry method

Journal entry method

Authorization

Authorized to issue par value of P

shares with a

Unissued capital stock Authorized capital stock

xxx

xxx

Sale

Cash

Capital stock

xxx

xxx

Cash Unissued capital stock

xxx

xxx

Subscription

Subscriptions receivable Subscribed capital stock

xxx

xxx

Subscriptions receivable Subscribed capital stock

xxx

xxx

Collection

Cash Subscriptions receivable

xxx

xxx

Cash Subscriptions receivable

xxx

xxx

Issuance of

Subscribed capital stock Capital stock

xxx

Subscribed capital stock Unissued capital stock

xxx

certificate

xxx

xxx

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

 
 

Transaction

Memo entry method

Journal entry method

Authorization

Authorized to issue par value of P

shares with a

Unissued capital stock Authorized capital stock

xxx

xxx

Sale

Cash

xxx

Cash

xxx

Capital stock Additional paid in capital

xxx

Unissued capital stock Additional paid in capital

xxx

xxx

xxx

Subscription

Subscriptions receivable Subscribed capital stock Additional paid in capital

xxx

Subscriptions receivable Subscribed capital stock Additional paid in capital

xxx

xxx

xxx

xxx

xxx

Collection

Cash

xxx

Cash

xxx

Subscriptions receivable

xxx

Subscriptions receivable

xxx

Issuance of

Subscribed capital stock Capital stock

xxx

Subscribed capital stock Unissued capital stock

xxx

certificate

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

Preference/Preferred shares

Subscription receivable – ordinary

Subscription receivable – preference

Subscribed ordinary capital

Subscribed preference capital

Share premium/additional paid in capital – ordinary

Share premium/additional paid in capital – preference

Ordinary shares

Preference share

Case 1: a. A corporation is authorized to issue 10,000 shares of preferred shares, $100

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

Journal- entry method

500,000

Ordinary share

1,000,000

Sale of stock

Unissued preference share

500,000

Unissued ordinary share

1,000,000

Authorized preference share

500,000

Authorized ordinary share

1,000,000

Authorization

Cash

1,500,000

Unissued preference share

500,000

Unissued ordinary share

1,000,000

Sale of stock

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

Journal entry method

500,000

Ordinary share

1,000,000

Share premium – preference

25,000

Share premium – ordinary

10,000

Sale of stock

Cash

1,535,000

Unissued preference share

500,000

Unissued ordinary share

1,000,000

Share premium – preference

25,000

Share premium – ordinary Sale of stock

10,000

Case 2: a. 1) 500 shares are sold on subscription for $20.00 each. 50% is

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

5,000

Subscription Receivable - ordinary

6,000

Subscribed share capital - ordinary

 

10,000

Share premium – ordinary Subscription of ordinary shares

1,000

b.

Partial payment of 2,500

Memo entry method and Journal entry method

 

Cash

2,500

Subscription Receivable - ordinary Partial payment

 

2,500

c.

1) Full payment of subscription

Memo entry method

 

Cash

2,500

Subscribed share capital – ordinary

10,000

Subscription Receivable - ordinary

 

2,500

Ordinary share capital

10,000

Journal entry method

 

Cash

2,500

Subscribed share capital – ordinary

10,000

Subscription Receivable - ordinary

 

2,500

Unissued ordinary share

10,000

c. 2) Memo entry method Cash 3,500 Subscribed share capital – ordinary 10,000 Subscription Receivable

c. 2) Memo entry method

Cash

3,500

Subscribed share capital – ordinary

10,000

Subscription Receivable - ordinary

3,500

Ordinary share capital

10,000

Journal entry method

Cash

3,500

Subscribed share capital – ordinary

10,000

Subscription Receivable - ordinary

3,500

Unissued ordinary share

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

No stated value

 

With stated value

Authorization

Authorized to issue no par.

shares,

Authorized to issue value of P

shares, no par with stated

Sale

Cash Capital stock, no par

xxx

Cash

xxx

 

xxx

Capital stock, no par Paid in capital in excess of stated value

xxx

 

xxx

Subscription

Subscription receivable

xxx

Subscription receivable Subscribed capital stock Paid in capital – Pxx stated value

xxx

Subscribed capital stock

xxx

 

xxx

 

xxx

Collection

Cash

xxx

Subscription receivable

xxx

Cash Subscription receivable

xxx

xxx

Issuance of stock

Subscribed capital stock Capital stock, no par

xxx

xxx

Subscribed capital stock Capital stock, no par

xxx

xxx

Case: 1.

Bradley Corporation issues 10,000 shares, no par at $15 per share. Cash

a.

Ordinary share, no par

150,000

150,000

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

b. Bradley Corporation issues 10,000 shares, no par at $15 per share with $10 stated

b. Bradley Corporation issues 10,000 shares, no par at $15 per share with $10 stated value.

Cash

150,000

Ordinary share, no par

100,000

Share premium – $10 stated value

50,000

Bradley Corporation issues 10,000 shares, no par at $15 per share. The subscriber gave an initial down payment of 50%.

2.

a.

Cash

75,000

Subscription receivable

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

75,000

Subscription receivable

75,000

Subscribed share capital

 

100,000

Share premium

50,000

3.

50% down payment of the balance Cash

37,500

 

Subscription receivable

37500

4.

a.

Full payment

Cash

37,500

Subscribed share capital

150,000

Subscription receivable

 

37,500

Ordinary share, no par

150,000

b. Cash

37,500

Subscribed share capital

100,000

Subscription receivable

 

37,500

Ordinary share, no par

100,000

Incorporating a Partnership

Steps in converting partnership to corporation

Books of the partnership

Books of the corporation

1. Finish the accounting cycle

1. Record authorized capital stock

2. Revalue the assets using capital adjustment account

2. Record the subscription of incorporators.

3. Close the balance of the Capital Adjustment account to the partners’ capital accounts in accordance with their profit and loss ratio.

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.

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

    • Accounts receivable is transferred at gross amount together with theallowance for bad
   

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.

4.

Record the issuance of stocks

5. Record the receipt of stocks.

 

6. Record the distribution 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 Capital Adjustment

xxxx

xxxx

b. Decrease in the asset value with no contra asset account

Capital Adjustment Asset

xxxx

xxxx

c. Increase in the asset with contra asset account

Contra asset Capital adjustment

xxxx

xxxx

d. Decrease in the asset with contra asset account

Capital adjustment Contra asset

xxxx

xxxx

e. Close capital adjustment account with debit balance

Partner1, capital Partner2, capital Capital adjustment

xxxx

xxxx

xxxx

f. Close capital adjustment account balance with credit balance

Capital adjustment Partner1, capital Partner2, capital

xxxx

xxxx

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

xxxx

Accumulated depreciation – PPE Assets

xxxx To record the transfer of assets and liabilities to the newly formed corporation

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

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

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 Patrner2, capital Stocks of name of corporation To record receipt of stock certificates

xxxx

xxxx

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

Subscriptions receivable Subscribed capital

xxxx

xxxx

3.Transfer of partnership assets and liabilities

Assets Liabilities Allowance for bad debts Subscriptions receivable 4.Issuance of stocks certificates Subscribed capital Capital stock

xxxx

xxxx

xxxx

xxxx

xxxx

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.

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

Pro-forma entries for delinquent stocks 1. Record the subscription Subscription receivable Subscribed capital stock xxx

Pro-forma entries for delinquent stocks

1. Record the subscription Subscription receivable Subscribed capital stock

xxx

xxx

2. Record partial collection Cash Subscription receivable

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 Cash

xxx

xxx

5. The highest bidder pays and corresponding stock certificates are issued

Cash

xxx

Subscribed capital stock

xxx

Receivable from highest bidder

xxx

Subscriptions receivable

xxx

Capital stock

xxx

6. If there is no bidder at all Treasury stock

xxx

Subscribed capital stock

xxx

Receivable from highest bidder

xxx

Subscriptions receivable

xxx

Capital stock

xxx

Case:

receivable xxx Capital stock xxx Case: NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

Accounting for treasury stocks - stock that is basically from the corporation which is issued

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 Cash Re-acquired own stocks at P

xxx

xxx

per share.

Case: a. Caprock Corporation purchased 1,000 shares of its ordinary shares from the market worth $50 per share.

Treasury stock – ordinary Cash

50,000

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

Treasury Stock Additional Paid in Capital-treasury stock Re-issued treasury stocks at above cost

xxx

xxx

xxx

Case: b. Caprock sold 500 treasury shares for $60 per share. Cash

30,000

Treasury stock

25,000

Share premium – treasury stock

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

NOTE: PROPERTY OF BMS. UNOFFICIAL ACTPACO REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

Pro-forma entry: Cash Case: c. 200 treasury stocks were sold for $48 per share. xxx

Pro-forma entry:

Cash

Case: c. 200 treasury stocks were sold for $48 per share.

xxx

Additional Paid in Capital- treasury stock

xxx

Treasury Stock

xxx

Re-issued treasury stocks below cost.

Cash

9,600

Additional Paid in Capital- treasury stock

400

Treasury Stock

10,000

Or

Cash

Case: d. 200 treasury stocks were sold for $26 per share.

xxx

Additional Paid in Capital- treasury stock

xxx

Retained Earnings

xxx

Treasury Stock

xxx

Re-issued treasury stocks below cost.

Cash

5,200