ACCT 2A&B: Accounting for Partnership & Corporation

BCSV
ACCTG 2A&B: Accounting for Partnership & Corporation II
Accounting for the Organization and Formation of a Corporation

I. CONCEPTS.
A. Multiple Choices.
Select the letter of the best answer.

1. Their names are mentioned in the articles of incorporation as originally forming the corporation and are
signatories thereof.
A. Corporators
B. Stockholders
C. Incorporators
D. Members

2. A corporation acquires juridical personality

A. Upon the filing of the articles of incorporation
B. Upon the filing of the by-laws
C. Upon the issuance of the certificate of incorporation
D. Within 30 days from the receipt of the notice of the issuance of the certificate of incorporation

3. The articles of incorporation differ from the by-laws in that the articles of incorporation are
A. The rules of action adopted by a corporation for its internal government
B. Adopted before or after incorporation
C. A condition precedent in the acquisition by a corporation of a juridical personality
D. Approved by the stockholders if adopted after incorporation

4. A stock that is issued without consideration or below par value or the issued price is known as
A. Watered stock
B. Delinquent stock
C. Redeemable stock
D. Preferred stock

5. If shares are issued for non cash consideration, the proceeds shall be measured by the
A. Fair value of shares issued
B. Fair value of the non cash consideration received
C. Par value of shares issued
D. Cost of the non cash consideration received

6. Subscriptions receivable and other receivables from sale of shares which are not collectible currently shall be
presented as
A. Deduction from the related subscribed share capital in the shareholders’ equity section
B. Current asset
C. Long term investment
D. Other asset

7. The par value of the ordinary share capital represents

A. The liquidation value of the share capital
B. The book value of the share capital
C. The legal nominal value assigned to the share capital

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D. The amount received by the corporation when the share was originally issued

8. On March 1, authorized ordinary share capital was sold on a subscription basis at a price in excess of par value,
and 20% of the subscription price was collected. On May 1, the remaining 80% of the subscription price was
collected. Additional paid-in capital would increase on

March 1 May 1
A. No Yes
B. No No
C. Yes No
D. Yes yes

9. Which of the following would not be considered a characteristic of a corporation?

A. Separate legal entity
B. Limited liability of shareholders
C. Mutual agency
D. Both a and c

10. The par value of a share capital

A. Is usually different from its market value
B. Is often higher for preference share than for ordinary share
C. Is an arbitrary amount assigned to a share of stock
D. All of these

11. When there is no bidder for delinquent subscription, the subscribed shares
A. Will be issued to the delinquent subscriber
B. Will be issued in the name of the corporation
C. Will be reverted back to unsubscribed shares
D. None of these

12. The SEC 25 – 25 rule means that

A. At least 25% of the total authorized share capital has been subscribed
B. At least 25% of the total subscriptions have been paid
C. A only
D. Both a and b

13. Green Inc., issued 8,000 shares of P 20 par ordinary share capital for P 24 per share. In recording this sale of share
capital, Green will include a credit to
A. Gain on issuance of share capital for P 32,000
B. Ordinary share capital for P 192,000
C. Paid-in capital in excess of par for P 32,000
D. Discount on ordinary share capital for P 16,000

14. XYZ Corporation was organized on January 1, 2012 with authorized capital of P 2,000,000, P 20 par value shares.
Subsequently incorporators subscribed 25% of the authorized shares at P 24 per share. How much must be paid
upon subscription to comply with the requirement of the SEC?
A. P 600,000
B. P 125,000
C. P 500,000
D. 150,000

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15. Magnum Co. was authorized to issue 10,000 preference shares, P 100 par value and 200,000 no-par ordinary
shares. Subscriptions for 4,000 preference shares was received at P 110 with a down payment of 25%. What entry
should be made in the books of Magnum Co. to record the receipt of subscription?
A. Pref. share capital Subscription receivable 330,000
Cash 110,000
Pref. share capital subscribed 400,000
Share premium – preference 40,000

B. Pref. share capital Subscription receivable 440,000

Pref. share capital subscribed 440,000

C. Pref. share capital Subscription receivable 400,000

Pref. share capital subscribed 400,000

D. Pref. share capital subscribed 400,000

Pref. share capital Subscription receivable 400,000

B. True or False.
Write C if the statement is correct otherwise, write W.

16. A corporation commences to exist upon the execution of the articles of incorporation by the incorporators.
17. A subscriber’s may appear in the articles of incorporation but he may not be an incorporator of the corporation.
18. A stockholder can transfer his shares to another person without the consent of the other stockholders.
19. A corporation may exist for a period not exceeding 50 years but its life may be extended several times provided
each extension does not exceed 50 years in any single instance.
20. All subscribed shares are issued shares whether or not fully or partially paid as long as there is a binding
subscription agreement.
21. A share of stock is an intangible personal property.
22. Shares without par value may be issued for a consideration less than P 5.00 per share.
23. A corporation may be formed for more than one purpose.
24. A corporation may be a stockholder of another corporation.
25. A delinquent stock is deprived of all the rights of a stockholder including the right to dividends.
26. Holders of shares not fully paid but which are not delinquent shall have all the rights of a stockholder except the
right to a stock certificate.
27. All incorporators are shareholders, and all shareholders are incorporators.
28. A corporation, like a partnership, may be formed by the mere agreement of 5 or more persons.
29. The authorized shares represent the maximum number of shares that a corporation may issue.
30. The highest bidder is the one who is willing to pay the entire unpaid subscription plus any expenses incurred in
the delinquency sale and getting the highest number of shares.
31. When a partnership is incorporated, a new set of books should always be opened for the new corporation.
32. A corporation issues share capital on a subscription basis that is payable in three installments. Each time the
corporation receives a payment, share capital account is credited.
33. The management of a stock corporation is vested on a body called Board of trustees.
34. Generally, there are only two classes of authorized share capital, the preference share and the ordinary share.
35. The journal entry method may be used in recording authorized share capital and other stock transactions relating
to a no-par and no-stated value share capital.

II. APPLICATIONS.

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Problem1:
The Ianey Corporation is authorized to issue 120,000 shares of P 220 par value ordinary share capital. Ianey has the
following transactions during the month:

 Issued 24,200 shares at par, receiving cash.

 Issued 320 shares to attorneys for services in securing the corporate charter and for preliminary legal costs of
organizing the corporation. The value of the service was P 85,500.
 Issued 15,600 ordinary shares in exchange for a land and a building with fair market values of P 1,320,000 and P
2,780,000, respectively.
 Received cash for 8,200 ordinary shares sold at P 310 per share.

Questions:
1. What is the amount that is to be reported as Ordinary share capital in the statement of financial position?
2. What is the amount that is to be reported as Share premium – ordinary share in the statement of financial position?

Problem2:
The Dirge Corporation was organized on January 1, 2013 with authorized share capital consisting 50,000 preference
shares with a par value of P 50 and 1,000,000 of no-par ordinary shares with a stated value of P 6. At December 31, 2013,
the ledger included the following balances pertaining to shareholders’ equity:

Preference share capital P 1,000,000

Share premium – preference 120,000
Ordinary share capital 3,000,000
Paid in capital in excess of stated value – ordinary 4,760,000

Ten thousand preference shares were issued for equipment having a fair value of P 550,000. The remaining preference
shares were issued for cash. All ordinary shares were issued for cash.

Compute for the:

3. Number of preference shares issued for cash.
4. Price per share of preference share capital issued for cash.
5. Number of ordinary share issued.
6. Average price per share of the ordinary share capital.
7. Total preference share premium arising from issuance in exchange for equipment.

Problem3:
Shown below are account balances found in the ledger of Hannah Corporation at the end of 2013:
Subscription receivable – preference P 360,000
Subscription receivable – ordinary 182,000
9% preference share capital, P 50 par
value, authorized, 80,000 shares
Issued P 1,440,000
Subscribed 720,000 2,160,000
Ordinary share capital, no par, P 10
stated value, authorized, 320,000
shares
Issued P 1,360,000
Subscribed 280,000 1,640,000
Paid in capital in excess of par and/or
stated value

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Preference P 216,000
Ordinary 328,000 544,000

Compute for the:

8. Number of preference shares issued.
9. Number of ordinary shares issued.
10. Number of subscribed preference shares.
11. Number of subscribed ordinary shares.
12. Average price per share received by the corporation on its preference share capital including subscribed shares.
13. Average price per share received by the corporation on its ordinary share capital including subscribed shares.
14. Average amount per share that the subscribers of preference share capital have not yet paid to the corporation.
15. Average amount per share that ordinary share subscribers have already paid on their subscriptions. Assume that the
subscription price per ordinary share is same as the answer in # 13.

Problem4:
On Jan. 1, 2011, X and Y agreed to combine their talents and capital and form XY Partnership. X contributed P 75,000 cash,
merchandise with a book value of P 230,000; a current market value of P 235,500; and an average value of P 232,750 and
equipment (net) with a book value of P 171,000; a discounted value of P 173,500; fair value of P 178,000 and a dissolution
value of P 140,000. Y gave P 120,000 cash and Land with a book value of P 500,000; an assessed value for tax purposes of
P 492,000; a market value of P 520,000; and original value of P 480,000. The partners agreed whoever has a higher capital
balance will give bonus to the other partner in order that their capital to be at par with each other. They will share profits
and losses in the ratio of 9:7, respectively. On Dec. 31, 2011, before the books are closed, the drawing account of X
shows a debit balance of P 5,975; and for Y, debit balance of P 8,625. The income summary account on Dec. 31 has a
credit balance of P 330,000. On Jan. 1, 2012, X and Y agreed to incorporate their business. The asset and liabilities section
of the balance sheet of the XY Partnership on Dec. 31, 2012 appears below:

XY Partnership
Statement of Financial Position
December 31, 2011
Assets
Current Assets:
Cash P 452,000
Accounts receivable P 267,500
Less: Allow. for bad debts (69,550) 197,950
M. Inventory 648,350

Non Current Assets:

Equipment 430,000
Less: Accum. Depreciation (129,000) 301,000
Land 391,700
Liabilities
Accounts payable P 547,100

An appraisal of the assets discloses the following fair market values:

M. Inventory – P 775,650
Equipment – P 290,000
Land – P 420,000

Other adjustment in the books of accounts:

 Allowance for bad debts is to be increased by 5,000.

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X and Y, together with three other friends, are to form a corporation with 70,000 authorized shares of P 60 par value
common stock and 40,000 authorized shares of P 200 par value cumulative preferred stock. The corporation is to absorb
all assets, except the 45% of the cash balance, and liabilities of the XY partnership. X will receive P 112,425 cash and the
remainder to Y. The three other incorporators subscribed 7,000 preference shares at P 250 per share and 12,500 ordinary
shares at P 100 per share. Received 60% down payment on subscribed ordinary shares and 35% on subscribed preference
shares, the balance is payable after one month. X and Y will receive their corresponding number of shares based on their
capital balance after allocation of cash. The fair value of the shares were as follows: Ordinary shares – P 100; Preference
shares – P 250. X preferred to receive preference shares while Y preferred to receive ordinary shares.

Questions:
16. Who is the partner that received the bonus from the other partner and how much?
17. How much is the share of X in the profit?
18. How many preference shares did X received?
19. How many ordinary shares did Y received?
20. What amount should be reported as cash?
21. What amount should be reported as Preference share capital?
22. What amount should be reported as additional paid in capital?
23. What amount should be reported as Subscription receivable – ordinary?
24. What is the legal capital of the newly formed corporation?
25. How much is the total contributed capital?

Problem5:
Last October 7, 2013, Spirit Corporation issued 3,700 shares of its P 22 par value ordinary share capital in exchange for a
piece of land to be held for a future plant site. Spirit Corporation’s ordinary share capital was listed and traded at P 52 per
share on same date. The land has no known market value.

Question:
26. How much is the increase in share premium - ordinary resulting from this exchange?
27. Assuming the market value of the land is P 420,000 and Spirit paid P 96,000, How much is the increase in share
premium – ordinary?

Problem6:
SK Corporation was incorporated on July 1, 2013 with an authorized 650,000 shares of no-par ordinary share capital,
stated value P 30 and 140,000 shares of 11 ½% preference share capital, par value P 175. Transactions affecting
company’s share capital as of July 31, 2013 were as follows:

July 1 – Issued 72,000 ordinary shares for cash at P 65 per share.

July 5 – Issued 82,300 ordinary shares in exchange for assets with total market value of P 3,450,000.
July 18 – Received subscriptions for 203,500 ordinary shares at P 52 and for 26,900 preference shares at P 225 and
received down payment of 30% for the ordinary shares and 15% for the preference shares.
July 30 – Received the amount due from the subscriptions received on July 18 and the corresponding stocks were issued.

Questions:
28. What amount should be reported as paid in capital in excess of stated value?
29. How much is the legal capital of the corporation?

Problem7:
The shareholders’ equity of A4 Corporation revealed the following on Aug. 31, 2013:

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Preference share, P 135 par value P 32,400,000
Share premium – Preference 9,540,000
Ordinary share, P 25 par value 11,250,000
Share premium – Ordinary 5,739,300
Subscribed ordinary share 1,217,500
Retained earnings 2,775,000
Notes payable 260,000
Subscription receivable – ordinary * 433,000
*the following balance will be received as follows: 50% on September 27, 2013 and 50% on November 6, 2013.

Questions:
30. How many ordinary shares were issued?
31. How much is the legal capital of the corporation?
32. What is the average price per preference share?
33. How much is the additional paid-in capital?
34. How much is the total shareholders’ equity?

Problem8:
The Mia Corporation was incorporated on January 1, 2012, with the following authorized capitalization:
 P 2,600,000 worth of common stock, no par value, stated value P 40.
 P 2,300,000 worth of 6% cumulative preferred stock, par value P 115.

During 2012, Mia issued 13,000 ordinary shares for P 55 per share and 8,500 preference shares at P 142 per share. In
addition, on Dec. 11, 2012, subscription for 2,900 preference shares were taken at a purchase price of P 170. A down
payment of 40% was received. The full payment on these subscribed shares was received on Jan. 10, 2013.

Question:
35. What amount should Mia report as total additional paid in capital?
36. What amount should be reported as unissued preference share capital?
37. What should Mia Corporation report as total contributed capital in its Dec. 31, 2012 balance sheet?

Problem9:
Bean Corp. is authorized to issue 300,000 of P 2 par value ordinary shares. The company has the following transactions:

(a) Issued 60,000 shares at P 30 per share; received cash.

(b) Issued 750 shares, selling at P 35 per share, to lawyers for services in connection with the organization of the
corporation. The value of the legal service was P 27,000.
(c) Issued 900 shares, valued objectively at P 30,000, to the employees instead of paying them cash wages.
(d) Issued 37,500 shares in exchange for a building valued at P 885,000 and land valued at P 240,000. The building
was originally acquired by the investor for P 750,000 and has P 300,000 of accumulated depreciation; the land
was originally acquired for P 90,000.
(e) Received cash for 19,500 shares issued P 38 per share.
(f) Issued 12,000 shares at P 45 per share; received cash.

Question:
38. What amount should be reported as paid in capital in excess of par?
39. What amount should be reported as cash?
40. Under the journal entry method, what is the balance of the unissued share capital account after the foregoing
transactions?

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Problem10:
The Joyce Corp. is authorized to issue 600,000 shares of P 10 par value ordinary share capital. Joyce’s accounting year
ends on Dec. 31. The following transactions occurred in 2013, the company’s first year of operations.

(a) Issued 20,000 shares at P 20 per share; received cash.

(b) Issued 2,500 shares to attorneys for services in securing the corporate charter and for preliminary legal costs of
organizing the corporation. The value of the service was P 85,000.
(c) Issued 300 shares, valued objectively at P 15,000, to the employees instead of paying them wages.
(d) Issued 325,000 shares in exchange for a building valued at P 3,000,000 and land valued at P 4,000,000. The
building was originally acquired by the investor for P 2,500,000 and has P 1,000,000 accumulated depreciation;
the land was originally acquired for P 1,500,000.

Questions:
41. What is the ordinary share capital balance on December 31, 2013?
42. What is the amount of share premium to be reported on Joyce’s statement of financial position at December 31,
2013?
43. What is the amount of organization expense to be charged against Joyce’s income for 2013?

Problem11:
Tostitos Corporation issued 20,000 shares of its P 10 par value ordinary share and 40,000 shares of its P 10 par value
convertible preference share for a total amount of P 1,800,000. At this date, Tostitos’ ordinary share was selling P 20 per
share and the convertible preference share was selling for P 30 per share.

Questions:
44. What amount should be reported as Share premium – preference?
45. How much of the proceeds should be allocated to the ordinary shares?

Problem12:
The shareholders’ equity section of the Enrique Corporation revealed the following information on December 31, 2013:

Preference share (P 100 par), P 2,300,000; share premium – preference, P 805,000; ordinary share (P 16 par), P
5,250,000; share premium – ordinary, P2,750,000; subscribed ordinary share, P 50,000; accumulated profits and losses, P
1,900,000; and subscription receivables – ordinary, P 24,000 (collectible in 2014).

Questions:
46. How much is the legal capital?
47. Average issue price of preference shares?
48. Average issue price of subscribed ordinary shares paid? Assume the subscription price per share is P 23.
~~~~

“ To get up when you are down, to fight more intensely when you are struggling; to put in the
extra effort when you are in sheer pain, to comeback when nobody expects you to, and to stand
tall when everyone is pulling you down are what make a champion.”

~Apoorve Dubey

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*Suggested Key*
I. CONCEPTS
A. Multiple Choices.
1. C 9. C
2. C 10. D
3. C 11. B
4. A 12. D
5. B 13. C
6. A 14. D
7. C 15. A
8. C
B. True or False
16. W 26. C
17. C 27. W
18. C 28. W
19. C 29. C
20. C 30. W
21. C 31. W
22. W 32. W
23. C 33. W
24. C 34. C
25. W 35. W
II. APPLICATIONS
1. P 10,630,400 25. P 4,380,100
2. P 1,421,100 26. P 111,000
3. 10,000 Shares 27. P 242,600
4. P 57/Share 28. P 7,978,000
5. 500,000 Shares 29. P 23,419,500
6. P 15.52/Share 30. 450,000 Shares
7. P 50,000 31. P 44,867,500
8. 28,800 Shares 32. P 174.75/ Share
9. 136,000 Shares 33. P 15,279,300
10. 14,400 Shares 34. P 62,921,800
11. 28,000 Shares 35. P 584,000
12. 55/Share 36. P 1,322,500
13. 12/Share 37. P 2,415,000
14. 25/Share 38. P 4,001,700
15. 5.50/Share 39. P 3,081,000
16. X; P 75,750 40. P 338,700
17. P 185,625 41. P 3,478,000
18. 2,840 Shares 42. P 4,022,000
19. 6,701 Shares 43. P 85,000
20. P 1,611,100 44. P 950,000
21. P 568,000 45. P 450,000
22. P 1,260,040 46. P 7,600,000
23. P 500,000 47. P 135/Share
24. P 3,120,060 48. 15.32/Share