Bam-201sas 2324 129-Pages Merged

PHINMA EDUCATION
College of Management & Accountancy
COURSE OUTLINE
Course Code: BAM 201

Descriptive Title: Partnership and Corporation Accounting
Credit Unit: 3 lecture units
Time Allocation: 54 hours
Pre-requisite: BAM 040 – Managerial Economics
A. Course Description:
Partnership and Corporation Accounting deals with transactions, financial statements,
and problems peculiar to the operations of partnership and corporations as distinguished
from sole proprietorships. The topics included are partnership formation and operations
including accounting for the admission of partners, changes in capital, and profit-and loss
sharing ratios, the conversion of an unincorporated enterprise into a corporation; accounting
for incorporated enterprises, including the preparation of financial statements for internal
and external purposes; and sample financial statements of companies in the service,
manufacturing and trading industries.
B. Course Objectives: Upon completion of this course, students will be able to:
1. Achieve a thorough understanding of the principles, theories, concepts, structures and
relationships of a partnership and the corporate form of business enterprise
2. Establish a thorough and working understanding of the overall concepts and principles of
accounting as applied to the partnership and corporate forms of business organization.
3. Knowledge in the accounting of partnership transactions including conversion of sole
proprietorship to partnership as well as the provision of partnership laws related to the
formation, objections, dissolution and liquidation.
4. Provisions of corporate law related to formation, capital structure and operations of a
corporate form of organization and knowledge in the accounting of corporate
transactions, including conversion of partnership to corporation.
5. Accept the business and social responsibilities attached to both the partnership and
corporate forms of business.
6. Value the importance of basic accounting principles leading to the construction of
financial information for decision-making.
C. Subject Outline and Time Allotment (3 hrs/week):

Duration Day /
Unit Topic/Objective
(hour/s) Session
Orientation
I Basic Considerations and Formation
Definition
Characteristics of a Partnership 1.5 hour 1
Advantages and Disadvantages of a
Partnership
Partnership Distinguished from Corporation
Classification of Partners
Kinds of Partners
Articles of Partnership
SEC Registration
Accreditation to Practice Public Accountancy
II Accounting for Partnerships
Partnership Formation 1.5 hour 2
Limited Liability Company
QUIZ 1 1 hour 3
Partnership Operations and Financial
III Reporting
Partners’ Equity in Assets Contrasted with
Share in Profits or Losses
Factors to Consider in Arriving at a Plan for 1.5 hour 4
Dividing Profits or Losses
Rules for the Distribution of Profits or Losses
Correction of Prior Period Errors
Distribution of Profits or Losses Based on
1.5 hour 5
IV Partner’s Agreement
V Financial Reporting 1.5 hour 6
QUIZ 2 1 hour 7
FIRST PERIODICAL EXAMINATION 2 hours 8
VI Dissolution – Changes in Ownership
Definition
1.5 hour 9
Cause of Dissolution
Admission of a Partner
VII Withdrawal or Retirement of a Partner
Death of a Partner 1.5 hour 10
Incorporation of a Partnership
QUIZ 3 1 hour 11
VIII Liquidation
Definition
Rules in Settling Accounts After Dissolution 1.5 hour 12
Methods of Partnership Liquidation
Entries Related to Liquidation
IX Lump-Sum Liquidation
Installment Liquidation 1.5 hour 13
Cash Priority Program
QUIZ 4 1 hour 14
SECOND PERIODICAL EXAMINATION 2 hours 15
Accounting for Corporations - Basic
Considerations (per Revised Corporation
X Code)
1.5 hour 16
Revised Corporation Code
Definition
Attributes of a Corporation
Advantages of a Corporation
Disadvantages of a Corporation
Classes of a Corporations
Other Classifications of Corporations
Components of a Corporation
Classes of Shares in General
Articles of Incorporation
Registration, Incorporation and
Commencement of Inoperation Existence
Non-Use of Corporate Charter and
Continuous Inoperation
By-Laws 1.5 hour 17
No Minimum Capital Stock
Basic Corporate Organizational Structure
Rights of a Shareholder
Corporate Books and Records
One Person Corporation
QUIZ 5 1 hour 18
XI Share Capital
Overview
Two Basic Types of Shares
Terms Related to Share Capital
1.5 hour 19
Accounting for Issuance of Share Capital
Considerations for Issuance of Shares
Share Issuance of Cash
Subscription of Shares
Share-Based Payments
Two Methods of Accounting for Share Capital
Treasury Stock per IAS No. 32
Summary of the Effects on Assets, Liabilities
and Equity
1.5 hour 20
Donated Capital
Callable Preference Shares
Redeemable Preference Shares
Convertible Preference Shares
Recapitalization
QUIZ 6 1 hour 21
XII Retained Earnings
Overview
Dividends in General
Cash Dividends
1.5 hour 22
Property Dividends per IFRIC 17
Share Dividends
Liquidating Dividends
Share Splits
Summary of the Effects of Dividends and
Share Splits
Dividends on preference and Ordinary Shares
Prior Period Errors
Restrictions on Retained Earnings
Statement of Retained Earnings
Statement of Changes in Shareholders’ Equity
Book Value per Share
QUIZ 7 1 hour 23
THIRD PERIODICAL EXAMINATION 2 hours 24
D. Textbook and References:

Fundamentals of Financial Accounting and Reporting by Win Ballada
E. Grading System:
FINAL GRADE (FG): (33% x P1) + (33% x P2) + (34% x P3)
P1 = 40% Periodical Exam + 40% Quiz + 20% Class Standing
P3 = 40% Comprehensive (Phinma Ed Common) Exam + 40% Quiz + 20% Class Standing
Class Standing shall include recitation, Student Activity Sheets, board/seat work,
assignment and attendance.
Legend:
P1 = 1st Periodical Grade
P2 = 2nd Periodical Grade
P3 = 3rd Periodical Grade
F. Course Policy and Standards.

1. Students are required to attend all class sessions as listed on the school calendar.
Students will be dropped if he/she exceeds allowable number of absences. Allowable
absences are 20% of all sessions.
2. Students are required to be punctual, hence are expected to follow the course outline
and submit daily activity sheets within the given timeline.
3. A written assessment / quiz shall be given every end of each topic and unit or chapter.
4. All students should undergo a formal questioning schedule after each chapter.
Questioning maybe conducted outside the class session if class hours are not sufficient.
Two to three thought questions will be asked to assess the student’s ability to understand
and process information. A student progress chart should be maintained to record the
student’s performance.
5. No special written assessment/examination will be allowed except for uncontrollable
circumstances.
6. Comprehensive Examination will cover the whole course outline. Cheating will not be
tolerated and will result to Failure Grade.
Approved By:
EMERITA J. MODESTO, CPA, CIA, MBA

Dean, College of Management and Accountancy
Student Activity Sheet #1
Name: ______________________________________________ Class number: _________________
Section: ________________ Schedule: _________________ Date: ________________________
Lesson title: Orientation Materials:

Objectives: Course Syllabus
1. To become familiar with the FLM, class rules, policies
and grading system References:
2. Have an overview on the content of the course subject. Partnership and Corporation
3. Familiarize the course requirements and rules Accounting by Win Ballada
Productivity Tip: Getting shy because it’s the first day of class? Everybody is shy at first but having
new friends is a sure way to start a new semester fresh. Try having study groups or exchanging
phone numbers so that you can help each other out for assignments.
A. LESSON PREVIEW/REVIEW
1) Introduction (2 mins)
This is a three-unit course which exposes students to partnership and corporation accounting.
Partnership and Corporation Accounting deals with transactions, financial statements, and problems
peculiar to the operations of partnership and corporations as distinguished from sole proprietorships.
The topics included are partnership formation and operations including accounting for the admission of
partners, changes in capital, and profit-and loss sharing ratios, the conversion of an unincorporated
enterprise into a corporation; accounting for incorporated enterprises, including the preparation of
financial statements for internal and external purposes; and sample financial statements of companies
in the service, manufacturing and trading industries.
B. MAIN LESSON
1) Activity 1: Pre-Printed Content Notes (25 mins)
What is flexible learning set-up?

In response to the on-going pandemic, the university will conduct a flexible learning setup. This
flexible learning setup is a combination of face-to-face classes and home-based learning. For this type
of leaning setup, students will attend face-to-face classes for 2 days and study at home for the next 4
days.
The primary instructional material for the flexible learning set-up is the Flexible Learning
Module. The learning experiences in the modules are designed for full self-study in the event that
students will need or be required to stay home.
This document is the property of PHINMA EDUCATION

Flexible Learning Module
Our learning framework remains to be Active Learning. In response to the needs of this
new normal, we will be adopting a Flexible Learning Approach. It is a combination of
face-to-face classes and home-based learning.
For school year 2022, we will follow the 2-4 schedule, which means:
1. Students will attend face-to-face classes for 2 days in a week;
2. Study at home for the next four (4) days
A. In class, face-to-face, (2 days)

1. Mentor
2. Collect Flexible Learning Module Student Activity Sheets
3. Give summative assessments (quizzes, examinations)
4. Facilitate supplementary group activities
5. Provide supplementary content via videos, etc.
B. At home, self -study, (4 days)

1. Check and grade collected output.
2. Monitor work through phone calls and chats, provide guidance, answer
questions, and check understanding.
Class Rules
a. Smile upon entering the classroom.
b. Set your cellphone on silent mode.
c. Come to class on time.
d. Listen when somebody is talking.
e. Follow the given instructions.
f. Always pay attention to the facilitator.
g. Maintain classroom cleanliness and chair arrangement.
h. Be responsible of your portfolio
i. Raise hand and wait for recognition if you have questions and clarifications
j. Leave the room silently for personal necessity
k. Maintain physical distancing

Course Objective
Upon completion of this course, students will be able to:
1. Achieve a thorough understanding of the principles, theories, concepts, structures and
relationships of a partnership and the corporate form of business enterprise
2. Establish a thorough and working understanding of the overall concepts and principles of
accounting as applied to the partnership and corporate forms of business organization.
3. Knowledge in the accounting of partnership transactions including conversion of sole
proprietorship to partnership as well as the provision of partnership laws related to the
formation, objections, dissolution and liquidation.
4. Provisions of corporate law related to formation, capital structure and operations of a corporate
form of organization and knowledge in the accounting of corporate transactions, including
conversion of partnership to corporation.
5. Accept the business and social responsibilities attached to both the partnership and corporate
forms of business.
6. Value the importance of basic accounting principles leading to the construction of financial
information for decision-making.
Grading System
FINAL GRADE (FG): (33% x P1) + (33% x P2) + (34% x P3)

P3 = 40% Comprehensive (Phinma Ed Common) Exam + 40% Quiz + 20% Class Standing
Class Standing shall include recitation, Student Activity Sheets, board/seat work, assignment and
attendance.
Legend:
P1 = 1st Periodical Grade
P2 = 2nd Periodical Grade
P3 = 3rd Periodical Grade

C. LESSON WRAP-UP
1) Activity 2: Thinking about Learning (5 mins)
Congratulations for finishing this module! Shade the number of this module that you have finished.
b) Think about your learning by filling up your “My Learning Tracker” below. Write your learning targets,
your scores, and learning experience for this session and deliberately plan for our next learning
session.
Date Learning Target/Topic Scores Action Plan

What module# did you do? What What contributed to the quality of your performance today?
What’s the date What were your scores
were the learning targets? What What will you do next session to maintain your performance or
today? in the activities?
activities did you do? improve it?

Lesson title: Partnerships: Basic Considerations and Formation Materials:

(Part 1) Module #3
Objectives:
1. Define partnership and identify its characteristics and References:
classifications Partnership and Corporation
2. Differentiate partnership from corporation Accounting by Win Ballada
3. Prepare entries and discuss accounting procedures in
partnership formation
Productivity Tip: Spend a few minutes reviewing new information as soon as you've learned it. Look
through the material again and add to any notes that you've already made. It can also help to
explain any key points out loud.
This first review is a good way of checking that you've got everything you need, and that you've
understood it. It will also avoid you having to "relearn" it completely when you review it again later.
“Alone we can do so little; together we can do so much.” – Hellen Keller

Business entails so many undertakings. So if you can’t do it only by yourself, one great option is to
engage business partners. Building alliances through a partnership form of business will help you in
achieving business success. Is this sound interesting?
So, we encourage you to go through this module which will help you learn more about partnership as a
form of business organization. Also, we encourage you to take note for the unfamiliar words or phrases
you find challenging to understand and look its meaning in your dictionary. Enjoy learning!
B. MAIN LESSON
Dear student, this content notes will help you to understand the partnership form of business. We
encourage you to finish all of these together with your reference book as your guide. Smile as you read!
Basic Consideration of Partnership

As a start, let’s define partnership!

DEFINITION
In a contract of partnership, two or more persons bind themselves to contribute money,
property or industry to a common fund, with the intention of dividing the profits among themselves.
(Civil Code of the Philippines, Article 1767).
(Read Basic of Financial Accounting and Reporting by WIN Ballada, Brief History of Partnership and
Definition, pages 12-2 to 12-3 to lead you in further details about partnership)
Now, I know you are excited to know more about partnership, so go next to its characteristics!
CHARACTERISTICS OF PARTNERSHIP
✓ Ease of Formation. Partnership may be created by mere agreement of the partners (owners)
thus, require less formality as compared to corporations
✓ Separate Juridical Personality. Partnership has a juridical/legal personality separate and
distinct from that of each of the partners. For example, if Lex and Leo formed a partnership, three
persons are involved, namely, (1) the partnership and the partners, (2) Lex and (3) Leo.
✓ Mutual Contribution. There cannot be a partnership without contribution of money, property or
industry (talents and knowledge) which will form part their common funds.
✓ Division of Profit or Loss. Profit and losses as a result of the business operation are shared
among the partners in any manner to which they agree. (This will be discussed further in the next
modules.)
✓ Mutual Agency. The partners are agents of the partnership thus, any partner can bind the other
partners to a contract or agreement if he/she acting within his express/implied authority for the
purpose of business operations.
✓ Limited life. It may be dissolved by admission (if new partner/s will join the partnership), death,
insolvency, incapacity, withdrawal of partners or expiration of the term specified in the partnership
agreement.
✓ Unlimited Liability. All partners (except limited partners), including industrial ones, are personally
liable for all the debts incurred by the partnership to the extent of his personal assets after all
partnership assets have been exhausted.
✓ Income taxes. Partnerships are subject to tax at the rate of 30% of taxable income (except
general professional partnership).
✓ Partners’ Equity Account. Each partner has a capital account and withdrawal account

After enumerating and identifying its characteristics, maybe you find partnership as a good form
of business organization. Then, it’s time to balance out its pros and cons!
ADVANTAGES AND DISADVANTAGES

Advantages versus Sole Proprietorship
1. Bring greater financial capability to the business
2. Combines special skills, expertise and experience of the partners.
3. Offers relative freedom and flexibility of action in decision-making.
Advantages versus Corporation
1. Easier and less expensive to organize
2. More personal and informal
Disadvantages
1. Easily dissolved and thus unstable compared to a corporation.
2. Mutual Agency and unlimited liability may create personal obligations to partners.
3. Less effective than a corporation in raising large amounts of capital.
Let’s have another differentiation of partnership and corporation! Please, do proceed to the table
below for your evaluation!
PARTNERSHIP DISTINGUISHED FROM CORPORATION

Differences Partnership Corporation
1. Manner of Creation Agreement of the partners Operation of law
2. Number of Persons 2 or more At least 5 but not more than 15
3. Commencement of Issuance of Certificate of
Execution of Articles of Partnership
Juridical Personality Incorporation by SEC
4. Management Managing partner; if no appointed
Board of Directors
every partner is an agent
5. Extent of Liability All partners except limited partners
Stockholder are liable only to the
are liable to the extent of his
extent of their investment
personal assets.
6. Right of Succession None There is right
7. Term of Existence For any period of time stipulated by Not to exceed 50 years but subject
the partners to extension
How’s your learning so far? Did you find it interesting? Yes, partnership is really interesting
because of its variety of classes! Presented below are the classifications of partnership and kinds of
partners who owns the business:

CLASSIFICATIONS OF PARTNERSHIP
Category Type of Partnership Characteristics
1. a. Universal All contributions become part of partnership fund or common
According partnership of all property of all partners as well as the profits which they may
to object or present property acquire therewith.
subject b. Universal All that the partners may acquire by their industry or work
matter partnership of profits during the existence of the partnership and the use of
whatever the partners contributed at the time of the institution
of the contract belong to the partnership.
c. Particular The object of the partnership is determinate – its use or fruit,
Partnership specific undertaking, or the exercise of a profession or
vocation.
2. a. General All partners are liable to the extent of their separate
According Partnership properties.
to liability of b. Limited The limited partners are liable only to the extent of their
partners Partnership personal contributions.
3. a. Partnership with a The term for which the partnership to exist is fixed or agreed
According fixed term or for a upon or one formed for a particular undertaking
to duration particular
undertaking
b. Partnership at will One in which no term is specified and not formed for a
particular undertaking
4. a. Commercial/ One formed for the transaction of business
According Trading Partnership
to purpose: b. Professional/ Non- One formed for the exercise of profession
trading Partnership.
5. a. De jure One which has complied with all the legal requirements for its
According Partnership establishment
to legality of b. De facto One which has failed to comply with all the legal
existence: Partnership requirements for its establishment

KINDS OF PARTNERS
1. General partner. One who is liable to the extent of his separate property after all the assets of
the partnership are exhausted.
2. Limited partner. One who is liable only to the extent of his capital contribution
3. Capitalist partner. One who contributes money or property to the common fund
4. Industrial partner. One who contributes his knowledge or personal service
5. Capitalist-Industrial partner. One who contributes both property and service
6. Managing partner. One whom the partners has appointed as manager of the partnership
7. Liquidating partner. One who is designated to wind up or settle the affairs of the partnership
after dissolution
8. Dormant partner. One who does not take active part in the business of the partnership and is
not known as partner
9. Silent partner. One who does not take active part in the business of the partnership though
may be known as a partner
10. Secret partner. One who takes active part in the business of the partnership but is not known
to be a partner by outside parties
11. Nominal partner/Partner by estoppel. One who is actually not a partner but who represents
himself as one
Registration is important in an organization as well as in partnership. As your guide, read Fundamentals

of Financial Accounting and Reporting by WIN Ballada, Articles of Partnership & SEC Registration.
ARTICLE OF PARTNERSHIP
• Embodied the partnership agreement in writing which contains essential provisions such as:
name, nature, purpose, location, date of formation and duration of the partnership; names,
citizenship and residences, rights and duties, capital contributions, drawings and salaries
allowed, method of sharing profit or loss of the partners.
SEC REGISTRATION
• When partnership capital is P3,000 or more, in money or property, the pubic instrument
must be recorded with Securities and Exchange Commission.
• Even if it is not registered, the partnership having a capital of P3,000 or more is still valid
and therefore has legal personality
ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY
• Certified public accountants (CPAs), firms and partnerships of CPAs, engaged in the practice
of public accountancy, including the partners and staff members thereof, shall register with
the Professional Regulation Commission and the Professional Regulatory Board of
Accountancy. The registration shall be renewed every three years (The Philippine
Accountancy Act of 2004, Sec, 31). The rules and regulations covering the accreditation for
the practice of public accountancy are specified in Annex B of The Rules and Regulations
Implementing Republic Act 9298 otherwise known as the Philippine Accountancy Act of 2004.

2) Activity 2: Skill-building Activities (with answer key) (18 mins + 2 mins checking)
Getting-To-Know-You Activity
I know that since this is your first day, you are not familiar yet with your classmates. We will be
having various activities for this subject so to help you know them well and assist you with our
activities; I want you to find an ‘accounting buddy’ from the class that will act as your
teammate for the rest of the semester. But I want you to get to know one another before you
continue. So, as our first activity, each one will have a turn to introduce him/ herself. Include in
your introduction what you have learned from the main topic in a short but meaningful
statement. Once done, share with the class a screenshot photo of your team while doing the
discussion.
3) Activity 3: Directions: Try this exercise and see how well do you understand the concepts about
partnership. In the spaces provided, write T if the statement below is true otherwise F if it is false.
_____ 1) A partnership is a legal entity separate and distinct from its owner.
_____ 2) Partnership is a contract which has force of law between the contracting parties.
_____ 3) All partnership are subject to tax at the rate of 30% of taxable income.
_____ 4) Partnership is created by operation of law.
_____ 5) There can be a partnership without agreement.
_____ 6) The essence of partnership is that each partner must share profits and losses of the
business.
_____ 7) There is unlimited life in partnership.
_____ 8) Partnership is easier to form than sole proprietorship because it can be created by mere
agreement of partners.
_____ 9) Corporation has a greater capability to raise large amount of capital than partnership.
_____ 10) In a partnership, each of the partners including limited partner is liable to the extent of his
personal assets.
4) Activity 4: Check for Understanding (5 mins)
Direction: Write your brief explanation in the space provided for the given case below:
Mary Rose and Mary Joy are partners in logistics delivery business. Mary Rose, the managing partner,
purchased equipment to be used in the entity’s operation. Is this purchase binding on Mary Joy even
though she was not involved in the transaction? Explain.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
_____________________________________________

C. LESSON WRAP-UP
session.

FAQs
1. Is the agreement between partners valid even if it is for illegal purpose?
- No. Since partnership is a contract, all the agreement between partners has the force of law
between contracting parties provided it is not contrary to law, moral, good custom, public order
and public policy.
2. In the definition of partnership, what does person refer to?

- The definition of partnership in the Civil Code refers to both natural (human person) and juridical
entity (personality created by operation of law).

KEY TO CORRECTION
Activity 3
1. T
2. T
3. F – this is not true for general professional partnerships as such are exempt from 30% tax.
4. F
5. F – partnership, from its definition is an agreement between two or more persons. A partnership cannot
be formed without the mutual agreement of partners therein.
6. T
7. F – partnership has limited life as it may be dissolved due to admission, death, insolvency, incapacity,
withdrawal of a partner or expiration of the term specified in the partnership agreement.
8. F
9. T
10. F – limited partners are only liable to the extent of their capital contribution.
Activity 4
Yes, the purchase binding on Mary Joy even though she was not involved in the transaction because of the
mutual agency principle of partnership wherein one partner can bind the other partners to a contract if he is
acting within his express authority. Since Mary Rose is the managing partner of the business, her transaction or
contract is binding on Mary Joy.

Lesson title: Partnerships: Basic Considerations and Formation Materials:

(Part 2) Module #4
Objectives:
1. Define partnership and identify its characteristics and References:
classifications Partnership and Corporation
2. Differentiate partnership from corporation Accounting by Win Ballada
3. Prepare entries and discuss accounting procedures in
partnership formation
Productivity Tip: Stay organized and be thorough.

• Have a designated study space that is free of distractions so you can focus on your work.
• Prepare as if you have to teach the information you are studying.
• Organize information by creating charts, outlines, study guides, flashcards, concept maps.
By mutual understanding, a partnership is formed. But even if an oral mutual agreement

between parties already binds them into an undertaking, there are still factors to consider how the
partnership will commence business operations.
Let us get through this module and continue to learn more about partnership as a form of
business organization.
B. MAIN LESSON
ACCOUNTING FOR PARTNERSHIP

Accounting for proprietorship is almost the same with partnership except the accounting for equity.
Since partnership has two or more owners, separate capital and drawing accounts are established for
each partner and these are used to record the following transactions presented in t-accounts below:

Partner's Capital Account
debit credit
1. Permanent withdrawals* 1. Original and additional investment***
2. Debit balance of drawing 2. Credit balance of drawing
account at the end of the period account at the end of the period
Partner's Drawing Account

debit credit
1. Temporary withdrawals** 1. Share in profit (this may be
2. Share in loss (this may be debited credited directly to capital
directly to capital)
Important Notes:
* Permanent withdrawals are made with the intention of permanently decreasing the partner’s
capital
** Temporary withdrawals are regular advances made by the partners in anticipation of their
share in profit
*** Net Investment (Asset contributed less liabilities assumed by the partnership)
Share in P/L may be recorded directly to capital account, if the partners do not wish to maintain
their capital accounts for investment and permanent withdrawal.
Loan Transactions between Partners and Partnership

Loan transaction is normal between partnership and its partners. The partnership may extend
loan or credit to a partner which result to an asset account recorded as loans receivable from
the partner and not as permanent withdrawal because of the intention of the transaction is
clearly loan purpose. On the other hand, the partnership may obtain loan from a partner which is
to be recorded in a liability account particularly loans payable to partner. Distinction is
important to determine the priority of payments in case of liquidation.
PARTNERSHIP FORMATION
Partnership formation is the first stage in the life cycle of a partnership followed by operation,
dissolution and liquidation. In the formation of partnership, the capital contributions of partners are
recorded as debit to asset accounts and credit to partner’s capital account. Proper accounting
measurement must also be considered to determine the appropriate value or amount must the
investment of the partners be recorded.

Important Notes:
Valuation of Investments by the Partners

Partners may invest cash or non-cash assets in the partnership. When a partner invests non
cash assets they are to be recorded at:
• Values agreed upon by partners
• In the absence of any agreement, Fair market value or the price at which an asset or
liability could be exchanged in a current transaction between knowledgeable, unrelated
willing parties.
Adjustment of Accounts Prior to Formation

In cases when the prospective partners have existing business, their respective books will have
to be adjusted
• to reflect the adjusted fair market values of their assets or
• to correct misstatement in the accounts
A partnership may be formed in any of the following ways:

1. Individuals with no existing business form a partnership
2. Conversion of a sole proprietorship to a partnership
a. A sole proprietorship and an individual without existing business
b. Two or more sole proprietorship form a partnership
Case 1. Individuals with no existing business form a partnership

Let’s do it!
Illustration 1.1 On July 1, 2020, Lex and Leo formed a partnership. Lex contributed cash
P700,000 while Leo contributed land with carrying amount of P1,000,000 and fair market value of
P1,300,000. The land has an unpaid mortgage of P300,000 to be assumed by the partnership
The entries with correct valuation of the partners’ contributions are as follows:
Cash 700,000
Land 1,300,000
Mortgage Payable 300,000
Lex, Capital 700,000
Leo, Capital 1,000,000
Observe the following:
✓ The land is recorded at fair market value because of the absence of any agreement of the
partners.
✓ The mortgage is recognized because it is assumed by the partnership which result to a
decreased of capital credit of the contributing partner.
Before we proceed to the next illustration, analyze further the succeeding illustrations.

Illustration 1.2 Suppose that Lex and Leo formed partnership with Allister. Allister who has a
significant managerial experience will contribute his skills by handling the day-to-day operation of
the partnership as industrial partner. Aside from his service, the partnership did not receive any
asset from Allister.
What is the journal entry to record the investment of Allister?
In this case, only memorandum entry in the general journal will be made because no value
is provided for the services since its value cannot be quantified unless it is paid for.
Case 2. A sole proprietorship and an individual without existing business

Illustration 2.1 The statement of financial position of the proprietor, Emi on August 1, 2021, before
accepting Emma who’s not engaged in any business is shown as follows:
Emi Enterprises
Statement of Financial Position
October 1, 2021
Assets
Cash P 60,000
Notes receivable 30,000
Accounts receivable 240,000
Less: Allowance for Uncollectible Accounts 10,000 230,000
Inventory 80,000
Furniture and Fixtures 60,000
Less: Accumulated Depreciation 6,000 54,000
Total Assets P 454,000
Liabilities and Equity
Notes Payable P 40,000
Accounts Payable 100,000
Emi, Capital 314,000
Total Liabilities and Equity P 454,000
Emma offered to invest cash to get a capital credit equal to one-half of Emi’s capital after
giving effect to the adjustments below. Emi accepted the offer.
a. The inventory is to be valued at P74,000
b. The accounts receivable is estimated to be 95% collectible.
c. Interest accrued on the notes will be recognized: P10,000, 12% dated July 1, 2021 and
P20,000, 12% dated August 1, 2021
d. Interest on notes payable to be accrued at 14% annually from April 1, 2021
e. The furniture and fixtures are to be valued at P46,000
f. Office supplies on hand that have been charged to expense in the past amounted to
P4,000. These will be used by the partnership.

Here are the following procedures may be used in recording the formation of the partnership:
Books of the Sole Proprietor

1. Adjust the assets and liabilities of the sole proprietorship based on the agreement of the partners
directly to capital account.
Computation Adjusting Entries
a Inventory, per ledger 80,000 Emi, Capital 6,000
Inventory, as agreed 74,000 Inventory 6,000
Decrease in Inventory 6,000
b AR net per ledger 230,000 Emi, Capital 2,000

AR, net as agreed (95% x 2,000
228,000 Allowance for uncollectibles
240,000)
Increase in Allowance 2,000
c 10,000 x 12% x 3/12 300 Interest Receivable 700

20,000 x 12% x 2/12 400 Emi, Capital 700
Increase in Allowance 700
d 40,000 x 14% x 6/12 2,800 Emi, Capital 2,800

Interest Payable 2,800
e Furniture & Fixtures, per ledger 54,000 Emi, Capital 8,000

Furniture & Fixtures, as agreed 46,000 Accumulated Depreciation 8,000
Increase in Accumulated Dep’n 8,000
f Increase in Office Supplies 4,000 Office Supplies 4,000

Emi, Capital 4,000
2. Close the book of the sole proprietorship
Notes Payable 40,000

Allowance for uncollectible accounts (10,000 + 2,000) 12,000
Accumulated Depreciation (6,000 + 8,000) 14,000
Emi, Capital (314,000-6,000-2,000+700-2,800-
299,900
8,000+4,000)
Cash 60,000
Note Receivable 30,000
Account Receivable 240,000
Interest Receivable 700
Inventory (80,000 – 6,000) 74,000
Office Supplies 4,000
Furniture and Fixtures 60,000

Books of the Partnership
1. Record the investment of the proprietor (Emi)
Cash 60,000
Note Receivable 30,000
Account Receivable 240,000
Interest Receivable 700
Inventory 74,000
Office Supplies 4,000
Furniture and Fixtures 46,000*
Allowance for uncollectible accounts 12,000
Emi, Capital 299,900
*14,000 writedown of furniture and fixtures
2. Record the investment of the other partner (Andi)

Unadjusted Capital of Emi 314,000 Cash 149,950
Net Adjustments to Capital 14,100 Emma, Capital 149,950
Decrease in Inventory 299,900
Agreed Capital of Emma 50%
Cash Investment of Emma 149,950
Now, you may check what happened to the accounts of business after partnership formation.
Additional Activity! Do this on your notes! After the formation of partnership, compute the
following:
1. Total assets, ________________
2. Total liabilities and ________________
3. Total equity of the partnership ________________

Directions: Try this exercise and see how well do you understand the concepts about manufacturing. In
the spaces provided, write T if the statement below is true otherwise F if it is false.
_____ 1) Partner by estoppel is one who is actually not a partner but who represents himself as one.
_____ 2) Non-cash investment should always be valued at fair market value.
_____ 3) When the partnership capital is P3,000 or more, the public instrument must be recorded with
the Securities and Exchange Commission.
_____ 4) The agreed valuation of partners with respect to their investment should use with priority in
partnership formation.
_____ 5) The partner’s capital is debited for additional investment and credited for his share in profit.
_____ 6) A partnership agreement should include the procedure for ending the business.
_____ 7) In a general partnership, -each partner's liability for losses is -limited to his investment in the
firm.
_____ 8) The partner's capital account is debited for additional investments and credited for his share
in profit.
_____ 9) Adjustments prior to formation may be omitted since these will not affect the partners' capital
credits.
_____ 10) The essence of partnership is that each partner must share in the profits or losses of the
venture.
Direction: Write your answer in the space provided for the given case below:
Sabio, as her original investment in the firm of Sabio and Mariano, contributed equipment that had been
recorded in the books of her own business as costing P900,000, with accumulated depreciation of
P620,000. The partners agreed on a valuation of P400,000. They also agreed to accept Sabio’s
accounts receivable of P360,000, realizable to the extent of 85%.
Required: Prepare the journal entry to record Sabio’s investment in the partnership.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

C. LESSON WRAP-UP
session.

KEY TO CORRECTION
Activity 2
1.T
2.F – non cash assets should be recorded or valued at values agreed upon by partners. In the absence of
agreement, the contributions must be recognized at their fair market values.
3.T
4.T
5.F -partner’s capital is credited for additional capital and share on investment
6.F
7.F
8.F
9.F
10.T

Activity 3
Equipment 400,000
Accounts receivable 360,000
Allowance for uncollectible accounts 54,000
Sabio, Capital 706,000

Lesson title: Partnerships Operation: Rules for the Distribution Materials:

of Profits or Losses Module #6
Objectives:
1. Summarize and discuss the rules for the distribution of
profits or losses References:
2. Explain prior period errors and interpret the effects on Partnership and Corporation
partners’ share in profits or losses Accounting by Win Ballada
Productivity Tip: After finishing this module, make your summary notes of the important rules for
dividing profits or losses among partners and explain this to your friends or classmates.
To further understand the process of accounting for partnership, let’s check the basic considerations
when after formation, partnership will perform its regular business operation or its day-to-day business
activities. Like any other businesses, we know that the partnership’s primary target is to achieve its goal
and objectives specifically the earning of profit. This hard earned profit will then be divided among
partners as a reward for their work done for the business success. However, the result of operation is
not always profit it can also be a loss. Same as through with profit, loss shall also be divided among
partners.
In this module, we will explore and discuss the rules followed for the distribution of profits or losses
among partners. As you go along, you may be encounter words which may seem unfamiliar to you. So
it is highly suggested that you take note of those words and find its meaning using your dictionary.
B. MAIN LESSON
PARTNERS' EQUITY IN ASSETS CONTRASTED WITH SHARE IN PROFITS OR LOSSES

The basis on which profits or losses are shared is a matter of agreement among the partners and may
not necessarily be the same as their capital contribution ratio. The equity of a partner in the net assets
of the partnership should be distinguished from a partner’s profit or losses.
Illustration. "Nelson Daganta is a one-third partner" is an ambiguous statement. Daganta may have
one-third equity in the net assets of the partnership but might have a larger or smaller share in the profit
or loss of the firm. Such a statement may also be interpreted to mean that Daganta is entitled to one-
third of the profit or loss, although his capital account may represent much more or much less than one-

third of the total partners' capital. Simply put, partners may agree on any type of profit and loss ratio
regardless of the amount of their respective capital account balances.
FACTORS TO CONSIDER IN ARRIVING AT A PLAN FOR DIVIDING PROFITS OR LOSSES
• Money, Property or Industry

The amount of capital invested by each partner, the amount of time each partner devotes to the
business and other contributions are the factors being considered in the formulation of an equitable
profit and loss ratio.
There are profit-sharing plans which emphasize either the value of personal services rendered
by individual partners or the amounts of capital invested by each partner. Some agreements
consider the importance of both the amount and quality of managerial services rendered, and the
amount of capital invested by the partners for the success or failure of a partnership.
In this case, allowances may be provided for salaries to partners and interest on their respective
capital balances as a preliminary step in the division of profits or losses; the balance may then be
divided in a specified ratio.
• Performance Method
Many partnerships use profit and loss sharing arrangements that give some weight to the specific
performance of each partner to provide incentives to perform well. This allocation of profits to a
partner on the basis of performance is frequently referred to as a bonus.
RULE FOR DISTRIBUTION OF PROFITS OR LOSSES
1. Profits
a. the profits will be divided according to the partners’ agreement
b. if there is no agreement:
• Share of capitalist partner is according to his capital contribution (according to ratio of original capital
investment or in its absence, ratio of capital balances at the beginning of the year)
• Share of industrial partner such share as may be just and equitable under the circumstances
2. Losses
a. the losses will be divided according to partners agreement.
b. if there is no agreement as to the distribution of losses but there is an agreement as to profits, the
losses shall be distributed according to the profit sharing ratio
c. in the absence of any agreement:
• Share of Capitalist partner is according to his capital contribution (according to ratio of original capital
investment or in its absence, ratio of capital balances at the beginning of the year)
• Purely industrial partner shall not be liable for any losses because he cannot withdraw the work
already done by him.

CORRECTION OF PRIOR PERIOD ERRORS
Any business entity will from time to time discover errors made in the measurement of profit in prior
accounting periods even if good internal control was taken place.
Prior period errors are omissions from and other misstatements of the entity’s financial statements for one
or more periods that are discovered in the current period. (Example: errors in estimation of depreciation, errors
in inventory valuation, and omission of accruals of revenue and expenses)
Here are the important notes in correcting prior period errors:

• Material prior periods must be restated to report financial position and results of operations as they
would have been presented had the error never taken place.
• The amount of correction of a prior period error that related to the prior periods should be reported by
adjusting the opening balances of partners’ equity and affected assets and liabilities.
• The correction of prior period error is excluded from profit or loss for the period in which the error is
discovered.
• If an error resulted in an understatement (overstatement) of profit in previous periods, a correcting
entry would be needed to increase (decrease) capital.
The effect of correction will be divided based on the applicable profit and loss ratio.
Directions: Try this exercise and see how well do you understand the concepts about manufacturing. In
the spaces provided, write T if the statement below is true otherwise F if it is false.
_____ 1) A partnership agreement may validly stipulate that one partner shall receive no share in
profits or losses.
_____ 2) If a partnership agreement does not specify how profits or losses are to be distributed, they
should be allocated based on relative capital account balances.
_____ 3) In the absence of agreement for distribution of profit, the share of industrial partner in profit is
not fixed because it is based on what is just and equitable under circumstances.
_____ 4) The industrial partner is not liable for losses since he cannot withdraw the work or labor
already done.
_____ 5) The capitalist-industrial partner is not liable for any losses.
_____ 6) Profits or losses are divided equally among the partners unless partnership agreement
specifies otherwise.
_____ 7) In the absence of a specific agreement, the law requires that partnership profits be divided
equally among partners.
_____ 8) If only the share of each partner in the profits has been agreed upon, the share of each in the
losses shall be in the same proportion.
_____ 9) If an error resulted in an understatement of profit in previous periods, a correcting entry would
be needed to increase capital.

_____ 10) If an error resulted in an overstatement of profit in previous periods, a correcting entry would
be needed to increase capital.
Direction: Use the table below to summarize the rules for the distribution of profits or losses. Try to
complete the exercise before looking at the Key to Corrections for feedback.
Distribution of Profits Distribution of Losses

With agreement
Without 1. 1.
agreement
2.
2.
3.
C. LESSON WRAP-UP
session.


FAQs
1. Is the agreement to exclude partners from any share in the profits or losses void?
- Partnership was established for common benefit or interest of the partners. Hence, stipulation
which excludes one or more partners from any share in the profits or losses is void. Note further
that only the agreement as to profit and loss is void not the partnership itself.
2. What is the share in profits of an industrial partner who is also a capitalist partner?
- As for the profits, the industrial partner shall receive such share as may be just and equitable
under circumstances. If besides his services he has contributed capital, he shall also receive a
share in the profits in proportion to his capital.

KEY TO CORRECTION
Activity 2
1. F – Partnerships were established to earn profit and share the same among partners.
2. T
3. T
4. T
5. F – Having the characteristic of capitalist, capitalist-industrial partners must have a share in losses of
the partnership.
6. F – Share in profit/loss if there is no agreement regarding such between the partners, must follow
certain hierarchies.
7. F
8. T
9. T
10. F – Overstatement of profit in the prior period may, in effect, decrease the capital of partners.
Activity 3
Distribution of Profits Distribution of Losses

With According to agreement According to agreement
agreement
Without 1. Share of capitalist partner is in proportion to his capital 1. In the absence of loss sharing
agreement contribution (ratio of original capital investment or in its agreement, use profit sharing
absence, ratio of capital balances at the beginning of the agreement
year)
2. In the absence of any
2. Share of industrial partner is not fixed – as may be just agreement, losses shall be
and equitable under the circumstances divided according to capital
contribution
3. Purely industrial partner is not

liable for losses

Lesson title: Partnership: Distributing Profits or Losses based Materials:

on Agreement Module #7
Objectives:
1. Identify and account for the different methods of References:
distributing profits or losses based on agreement Partnership and Corporation
2. Show the treatment of interest on capital, partners’ Accounting by Win Ballada
salaries and bonus in the distribution of profits or
losses.
Productivity Tip: Go to your place of happiness. Choose a background noise that suits your
assignment best. Experiment with the noise that works best to stimulate your creative juices, one
that helps you focus while reading, and another that helps you to enter statistics into a spreadsheet.
Dearest student, great day! This module is the sequel or continuation of our last module where you
learned the rules for the distribution of profits and losses as a result of the performance of business. In
this module, it is helpful that you keep yourself reminded of those rules which you will use in applying
the different methods or scheme in dividing profits and losses.
Stay in focus, calm yourself, and enjoy this new learning experience!!
B. MAIN LESSON
Ready to learn more? Let’s begin!
METHODS OF DIVIDING PROFITS OR LOSSES
The partners may agree on any of the following method or scheme in distributing profits and losses:
1. Equally or in other agreed ratio (arbitrary ratio)
2. Based on partners’ capital contribution
a. ratio of original capital investments
b. ratio of capital balances at the beginning of the year
c. ratio of capital balances at the end of the year
d. ratio of average capital balances
3. By allowing interest on partners’ capital and the balance in an agreed ratio
4. By allowing salaries to partners and the balance in an agreed ratio
5. By allowing bonus to the managing partner based on profit and the balance in an agreed ratio
6. By allowing salaries to partners, interest on partners’ capital, bonus to the managing partner
and the balance in an agreed ratio (combination of 3 to 5)

ILLUSTRATION
The Medina and Detoya Partnership had a profit of P300,000 for the year ended December 31,
2019, the first year of operations. The partnership contract provided that each partner may withdraw
P5,000 on the last day of each month which both of them did so during the year.
Medina invested P400,000 on January 1, 2019 and an additional P100,000 on April 1. Detoya
invested P800,000 on January 1 and withdrew P50,000 on July 1.
Required: Compute the respective share of each partner in profit or loss using the above methods and
prepare journal entries.
1. Equally or in other agreed ratio (arbitrary ratio)
a. Equally. In case the partners agreed to share in profit (loss) equally, simply divide the profit
based on the number of partners. (300,000 / 2)
Income Summary 300,000
Medina, Capital 150,000
Detoya, Capital 150,000
b. Other agreed ratio (arbitrary ratio). In case the partners agreed to share in profit (loss)
using ratio, fraction or percentage, simply divide the profit in accordance with the agreed ratio.
Example: Assume instead that Medina and Detoya share profits and loss in a ratio of 60:40, the
profit of 300,000 would be divided as follows:

Computation: Medina 60% x 300,000 180,000

Detoya 40% x 300,000 120,000
2. Based on partners’ capital contribution

It is essential that the partnership contract be specific with respect to the capital concept. Capital
may refer to either of the following:
a. ratio of original capital investments. Assume that the partnership agreement provides for
the division of profits in the ratio of original capital investment. The original investment of Medina
and Detoya are P400,000 and P800,000, respectively. The profit of 300,000 would be divided as
follows:


Computation: Medina (400,000 / 1,200,000) x 300,000 100,000

Detoya (800,000 / 1,200,000) x 300,000 200,000
b. ratio of capital balances at the beginning of the year. Assume that the partnership
agreement provides for the division of profits in the ratio of capital balances at the beginning of
the year. In this case, the original capital investment is also the capital balance at the beginning
of the year since the partnership is only on its first year of operations. The profit distribution
therefore is the same as in the example above.
However, in the next years, beginning capital may change depending on the results of business
operation and other transaction affecting capital such as investment and permanent withdrawal.
c. ratio of capital balances at the end of the year. Assume that the partnership agreement
provides for the division of profits in the ratio of capital balances at the end of the year before
drawing and distribution of profit. The ending balances are 500,000 for Medina and 750,000 for
Detoya. The profit of 300,000 would be divided as follows:


Detoya (750,000 / 1,250,000) x 300,000 180,000
d. ratio of average capital balances. Assume that the partnership agreement provides for the
division of profits in the ratio of average capital balances. Based on the computation in your book,
the ending balances are 475,000 for Medina and 775,000 for Detoya. The profit of 300,000 would
be divided as follows:


Detoya (775,000 / 1,250,000) x 300,000 186,000
3. By allowing interest on capital and the balance in an agreed ratio

To allow interest on partners’ capital account balances is almost similar to dividing part of profits in the
ratio of partners’ capital balances. If the partners agree to allow interest on capital as a first step in the division
of profit, they should specify the interest rate to be used. It should also state whether interest is to be
computed on capital balances on specific dates or on average capital balances during the year.

Assume that the partnership agreement provides allowed 15% interest on average capital account
balances, with the balance to be divided equally. Based on the computation in your book, the average capital
account balances are 475,000 for Medina and 775,000 for Detoya. The profit of 300,000 would be divided
as follows:
Medina Detoya Total

15% Interest on Average Capital:
Medina: 475,000 x 15% 71,250
Detoya: 775,000 x 15% 116,250
Subtotal 187,500
Balance to be Divided Equally [300,000 - 187,500 = 112,500]:
Medina: 112,500 x 50% 56,250
Detoya: 112,500 x 50% 56,250
Subtotal 112,500
Share of Partners in Profits 127,500 172,500 300,000

Comparison of distribution based solely on capital ratios as against distribution with interest on
capital balances.
Under the interest plan, the partner who invested more capital is credited (increased) for an interest on his
capital and is ultimately debited (decreased) with a lesser share of the loss; in some cases, the result may
even be a net credit (increase).
4. By allowing salaries to partners and the balance in an agreed ratio

The partnership agreement should be clear on the treatment of salary allowances when losses are
incurred. In the absence of an agreement to govern this situation, salary, allowances will be provided even
when operations yielded losses. This allowance should be confused with salaries expense or with the
partner's drawing account which is debited for periodic salary allowances. The cash withdrawals will in no
way affect the division of profits; the division of profits is governed by the sharing agreement.
Assume that the partnership agreement provided for an annual salary of P100,000 to Medina and
P60,000 to Detoya, and the balance to be divided equally. The profit of P300,000 for 2019 is divided as
follows:
Medina Detoya Total
Salary Allowances 100,000 60,000 160,000
Balance to be Divided Equally [300,000 - 160,000 = 140,000]:
Medina: 140,000 x 50% 70,000
Detoya: 140,000 x 50% 70,000
Subtotal 140,000


5. By allowing bonus to managing partner based on profit and the balance in an agreed ratio
A partnership contract may provide for a special compensation in the form of bonus to the managing
partner when the results of operations of the partnership are favorable. This allowance is given in order to
encourage the partner to maximize the profit potentials of the partnership. Bonus is not being considered
in the computation of profit, rather it is a mere technique to distribute profits.
Assume that the Medina and Detoya Partnership agreement provided for a bonus of 25% of profit
before bonus to Partner Medina and the balance to be divided equally. The profit is P300,000.
Medina Detoya Total

Bonus [25% x 300,000]: 75,000 75,000
Balance to be Divided Equally [300,000 – 75,000 = 225,000]:
Medina: 225,000 x 50% 112,500
Detoya: 225,000 x 50% 112,500
Subtotal 225,000

6. By allowing salaries to partners, interest on partners’ capital, bonus to the managing partner and
the balance in an agreed ratio
Partnership agreement may also stipulate allowances which normally provided first to respective partners
considered and the remaining amount of profit or loss is divided among the partners based on their profit or
loss sharing ratio. These allowances enumerated below are considered as mere techniques to distribute
profits or losses equitably and not as expense of the partnership:
• Salaries - to industrial partners who devote services for the business
• Bonuses - to the managing partners when the results of operations of the partnership are
favorable
• Interest on partners’ capital - partnership may agree to allow capitalist partners specified rate of
interest on their capital contribution
Example: Assume that the profit for the year is P400,000 and the partnership agreement provided the
following:
• Bonus to Medina of 25% of profit after salaries and interest but before bonus
• Annual salaries of P100,000 to Medina and P60,000 to Detoya
• Interest of 15% on average capital balances of Medina and Detoya
• Balance to be divided in a ratio of 40:60

Medina Detoya Total

Salary Allowances 100,000 60,000 160,000
Interest on Average Capital Balances
Medina: 15% x 475,000 71,250
Detoya: 15% x 775,000 116,250 187,500
Bonus [ 25% (400,000 - 160,000 – 187,500) ] 13,125 13,125
Balance 40:60 : (400,000 - 160,000 – 187,500 –
13,125 = 39,375)
Medina: 39,375 x 40% 15,750
Detoya: 39,375 x 60% 23,625 39,375
Share of Partners in Profits P200,125 P199,875 P400,000

Directions: Determine the partners’ share in profit or loss for each of the following situation:
Pozon and Digao established a general professional partnership by investing P200,000 and P350,000,
respectively.
a. Loss is P330,000 and the partners have no written partnership agreement.
b. Profit is P330,000 and the partnership agreement states that the partners share profits or losses
on the basis of their capital contributions
c. Profit is 625,000. The first 300,000 is shared on the basis of capital contribution. The next
225,000 is based on partner’s service, with Pozon receiving 30% and Digao receiving 70%. The
remainder is shared equally.
Direction: Determine how a profit of P105,000 would be allocated among partners.
AA, BB, CC and DD own a publishing company that they operate as partnership. The
partnership agreement includes the following:

• AA receives a salary of 20,000 and a bonus of 3% of income after all bonuses.

• BB receives a salary of 10,000 and a bonus of 2% of income after all bonuses.
• All partners are to receive 10% interest on their average capital.
The average capital balances are AA, 50,000; BB 45,000; CC, 20,000 and DD, 47,000. Any
remaining profits and losses are to be allocated equally among the partners.
A. LESSON WRAP-UP
session.


FAQs
1. What would be the rule, if the partnership agreement is not clear on the treatment of salary allowances
when losses are incurred?
- In the absence of an agreement to govern this situation, salary allowances will be provided even
when operations yielded losses.
2. What is the effect to the allocation of profits or losses when partners’ agreement allows salaries,
interest on capital and bonus?
- The service contributions and capital contributions of the partners are often not equal. If the
service contributions are not equal, salary allowances can compensate for the differences. Or,
when capital contributions are not equal, the interest allowances can make up for the unequal
investments.
KEY TO CORRECTION
Activity 2
a. Pozon – (120,000); Digao – (210,000)
b. Pozon – 120,000; Digao – 210,000
c. Pozon – 226,591; Digao – 398,409
Activity 3
The allocation of profits among partners is as follows:

AA – 41,450
BB – 29,950
CC – 15,450
DD – 18,150

Lesson title: Partnership: Financial Reporting Materials:

Objectives: Module #8
1. Discuss the differences of the financial statements of a
partnership as compared to a sole proprietorship References:
2. Develop skills in the preparation of basic financial Partnership and Corporation
statements. Accounting by Win Ballada
Productivity Tip: The easiest way to mimic the focus and productivity that you have in school is by
working on the same schedule you would when you are in school. Similarly, to how you spend
consecutive periods in different subjects during the school day, you can set a schedule for yourself
that has you spend a certain number of consecutive hours studying each subject every day.
Dearest student, great day! As we continue to study partnership, we now move to the preparation of
financial statements and compare how it differs to a sole proprietorship. But first, let us begin our day
by activating your prior knowledge through answering the following pre-test.
B. MAIN LESSON
Purpose of Financial Statements

• Financial statements are a structured representation with the objective of providing Information
about the financial position, financial performance and cash flows of an entity that is useful to a
wide range of users in making economic decisions.
• Financial statements also show the results of the management's stewardship of the resources
entrusted to it.
• To meet the objective, financial statements provide information about an entity's assets, liabilities,
equity, income and expenses, other changes in equity and cash flows.
Overall Considerations
• Fair Presentation and Compliance with International Financial Reporting Standards
(IFRSs). The financial statements shall present fairly the financial position, financial performance
and cash flows of the entity. Entities are required to make an explicit and unreserved statement
of compliance with IFRS in the notes.

• Going Concern. Financial statements should be prepared on a going concern basis unless
management intends to liquidate the entity or cease trading or has no realistic option but to do
so.
• Accrual Basis of Accounting. An entity shall prepare its financial statements, except for cash
flow information, using the accrual basis of accounting.
• Materiality and Aggregation. An entity shall present separately each material class of similar
items. Material items that are dissimilar in nature or function should be separately disclosed.
• Offsetting. An entity shall not offset assets and liabilities, income and expenses unless required
or permitted by an IFRS.
• Frequency of Reporting and Comparative Information. At least annually, an entity shall
present with equal prominence each financial statement in a complete set of financial statements
including comparative information in respect of the previous period for all amounts reported in the
current period's financial statements.
• Consistency of Presentation. An entity shall retain the presentation and classification of items
in the financial statements in successive periods unless an alternative would be more appropriate
or an IFRS requires a change in presentation.
• Identification of the Financial Statements. An entity shall clearly identify the financial
statements and distinguish them from other information in the same published document. An
entity shall clearly identify each financial statement and the notes. An entity shall display the
following information prominently:
o name of the reporting entity;
o whether the financial statements are of the individual entity or a group of entities;
o the date of the end of the reporting period or the period covered by the set of financial
statements or notes;
o the presentation currency;
o and the level of rounding used fin presenting amount in the financial statements.
Complete Set of Financial Statement

Per revised International Accounting Standards (IAS) No. 1, Presentation of Financial Statements, a
complete set of financial statements comprises:
a. a statement of financial position as at the end of the period;
b. a statement of comprehensive income for the period;
c. a statement of changes in equity for the period,'
d. a statement of cash flows for the period;
e. notes, comprising a summary significant accounting policies and other explanatory information;
and

f. a statement of financial position as at the beginning of the earliest Comparative period when an
entity applies an accounting policy retrospectively or makes a retrospective restatement of items
in its financial statements, or when if reclassifies items in its financial statements.
Statement of Comprehensive Income

The form and content of the income statement of the partnership resemble those of the sole proprietorship
with the exception of the presentation of the division of profits or losses at the lower portion of the
statement.
The components of profit or loss may be presented either as part of a single statement of comprehensive
income or in an income statement, as permitted by paragraph 81 of AIS No. 1 (revised 2007). When an
income statement is presented, it is part of a complete set of financial statements and shall be displayed
immediately before the statement of comprehensive income.
As a minimum, the statement of comprehensive income shall include line items that present the following
amounts for the period:
a. Revenue;
b. Finance costs;
c. Share of profit pr loss of associates and joint ventures accounted for using the equity method;
d. Tax expense;
e. A single amount comprising the total of:
i. The post-tax profit or loss of discontinued operations; and
ii. The post-tax gain or loss recognized on the measurement to fair value less costs to sell
on the disposal of the assets or disposal group(s) constituting the discontinued operations
f. Profit or loss;
g. Each component of other comprehensive income classified by nature (excluding amounts in (h)
below);
h. Share Of the other comprehensive income of associates and joint ventures accounted for using
the equity method; and
i. Total comprehensive income

Statement of Changes in Equity

An entity shall present a statement of changes in equity, showing in the statement:
a. total comprehensive income for the period showing separately the total amounts attributable to
owners of the parent and to minority interests;
b. for each component of equity, the effects of retrospective restatement recognized L in accordance
with IAS No. 8, Accounting Policies, Changes in Accounting Estimates and Errors;
c. the amounts of transactions with owners in their capacity as owners, showing separately
contributions by and distributions to owners; and
d. for each Component of equity, a reconciliation between the carrying amount at the beginning and
the end of the period, separately disclosing each change.
The components of equity referred to above include for example, each class of contributed equity, the
accumulated balance of each class of other comprehensive income and retained earnings (these are
applicable to corporations). The amount of dividends recognized as distributions to owners during the
period, and the related amount per share, shall be presented either in the statement of changes in equity
or in the notes.
Statement of Financial Position

After all the components of the statement of comprehensive income along with the changes in partners'
equity for the period have been properly presented, the preparation of the statement of financial position
will present no major difficulty. The assets and liabilities will be presented in the statement of financial
position as those of a sole proprietorship but the owners' equity section should exhibit separately the
capital balance of P590,000 and P840,000 for Biore and Besario, respectively.

Though some of the items are not as familiar yet, per revised International Accounting Standards (IAS)
No. 1, Presentation of Financial Statements, as a minimum, the face of the statement of financial position
shall include line items that present the following amounts:
a. Property, plant and equipment;

b. Investment property;
c. Intangible assets;
e. Financial assets (excluding amounts shown under e, h and i);
f. Investment accounted for using the equity method;
g. Biological assets;
h. Inventories;
i. Trade and other receivables;
j. Cash and cash equivalents;
k. The total of assets classified as held for sale and assets included in disposal groups classified as
held for sale in accordance with IFRS 5;
l. Trade and other payables;
m. Provisions;
n. Financial liabilities (excluding amounts shown under k and l);
o. Liabilities and assets for current tax, as defined in IAS 12;
p. Deferred tax liabilities and deferred tax assets, as defined in IAS 12;
q. Liabilities in disposal groups classified as held for sale -in accordance with IFRS
r. Minority interest, presented within equity; and
s. Issued capital and reserves attributable to equity holders of the parent.
AIS No, 1 (revised 2007) does not prescribe the order or format in which an entity presents items. The
above enumeration (from Paragraph 54 of IAS No. 1, revised 2007) simply provides a list of items that
are sufficiently different in nature or function to warrant a separate presentation in the statement of
financial position.
Note that an entity makes the judgment about whether to present additional items separately on the basis
of an assessment of:
a. the nature and liquidity of assets;
b. the function of assets within the entity; and
c. the amounts, nature and timing of liabilities.
Current and noncurrent assets and liabilities should be separately classified on the face of the statement
of financial position except when a presentation based on 'liquidity provides more reliable and relevant
information.

Statement of Cash Flows

The cash flow statement serves as a basis for evaluating the entity's ability to generate cash and cash
equivalents and the needs to utilize these cash flows.
The statement of cash flows provides information about the cash receipts and cash payments of an entity
during a period. It is a formal statement that classifies cash receipts (inflows) and cash payments
(outflows) into operating, investing and financing activities. This statement shows the net increase or
decrease in cash during the period and the cash balance at the end of the period; it also helps project
the future net cash flows of the entity.

Activity 2: Skill-building Activities (with answer key) (18 mins + 2 mins checking)
Directions: Determine the correct answer to the following questions. Encircle the correct answer.
1. It is the first process used in accounting. It refers to the identification of events as to

whether they are recognized or not in the financial statements.
A. Identifying
B. Measuring
C. Communicating
D. Auditing
2. Events involving an entity and an external party.

A. External events
B. Non-reciprocal transfers
C. External events other than transfers
D. Internal events
3. Financial accounting applies to which of the following:

A. Businesses
B. Non-profit organizations
C. Government
D. All of these
4. The function of measuring and reporting information to absentee investors is called the:
A. Accounting function
B. Stewardship function
C. Auditing function
D. Management function
5. The primary objective of financial reporting is to provide information:

A. About a firm’s financing and investing activities
B. About a firm’s economic resources and obligations
C. About a firm’s products and services
D. Useful in predicting cash flows
6. In the conceptual framework for financial reporting, what provides "the why"--the purpose
of accounting?
A. Recognition, measurement, and disclosure concepts such as assumptions, principles,
and constraints
B. Qualitative characteristics of accounting information
C. Elements of financial statements
D. Objective of financial reporting

7. The underlying theme of the conceptual framework is

A. Decision usefulness.
B. Understandability.
C. Faithful representation.
D. Comparability.
8. The objective of general-purpose financial reporting is to provide financial information

about a reporting entity to each of the following except
A. Potential equity investors.
B. Potential lenders.
C. Present investors.
D. All of these answers are correct.
9. The objective of general-purpose financial reporting is?

A. To provide financial information about the reporting entity that is useful to present and
potential equity investors, lenders, and other creditors in making decisions in their capacity as
capital providers
B. To provide companies with the option to select information that favours one set of
interested parties over another
C. To provide users with financial information that implies total freedom from error.
D. To provide a metric for financial information used to determine when the boundary
between two or more entities should be disregarded and the entities considered to be a
licensing arrangement.
10. Which of the following is a characteristic describing the fundamental quality of

relevance?
A. Predictive value.
B. Neutrality.
C. Verifiability.
D. Understandability
Problem-Solving. Use a separate paper in solving the problem below and attach it to this SAS after
answering.
The following are the adjusted account balances of Calamba and Santiago as at Dec. 31, 2019:
Accounts Payable P677,820
Accounts Receivable 545,070
Accumulated Depreciation-Equipment 462,870
Allowance for Uncollectible Accounts 18,790
Cash 132,310
Calamba, Capital 612,000
Calamba, Drawing 326,400

Equipment 753,150
Transportation In 224,880
General Expenses (control) 149,390
Interest Expense 35,000
Merchandise Inventory, December 31 1,320,420
Prepaid Insurance 9,350
Purchases 5,407,160
Purchases Discounts 43,050
Purchases Returns and Allowances 259,600
Santiago, Capital 499,600
Santiago, Drawing 244,800
Sales 7,155,000
Sales Returns and Allowances 375,750
Selling Expenses (control) 385,880
There were no changes in the partners’ capital accounts during the year. The merchandise
inventory at the beginning of the year was P1,440,590. The partnership agreement provides for salary
allowances of P330,000 for Calamba and P290,000 for Santiago. It also stipulates an interest
allowance of 10% on invested capital at the beginning of the year, with the remainder of the profit to be
divided equally.
Required:
a. Prepare an income statement for the year. Show the division of profit.
b. Prepare a statement of changes in partners’ equity for the year.
c. Prepare a statement of financial position at the end of the year.
C. LESSON WRAP-UP

session.


KEY TO CORRECTIONS
Activity 2
1. A
2. A
3. D
4. B
5. D
6. D
7. A
8. D
9. A
10. A

Lesson title: Partnership Dissolution – Changes in Ownership Materials:

(Part 1) Module #11
Objectives:
1. Define dissolution and identify and describe the manner References:
of admitting a new partner. Partnership and Corporation
2. Distinguish between admission by purchase of an Accounting by Win Ballada
interest and admission by investment of assets in a
partnership.
Productivity Tip: To increase concentration and memory, play music for studying while working on
this module. Relax. Now, start reading the module content and take note of the relevant information.
As everything in this world is bound to end, especially the relationship that once was built, but now were
lost, partnership is no exception to this. When one party in a partnership decided to break and end his
involvement in the business, dissolution happens. How does this work out in the end? Let’s find out in
the discussion below.
B. MAIN LESSON
DISSOLUTION
The dissolution of a partnership is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on as distinguished from the winding up of the business of the
partnership. On dissolution, the partnership is not terminated, but continues until the winding up of partnership
affairs is completed. When partnership dissolution occurs, a new accounting entity is formed. The old
partnership should first adjust its books so that all accounts are properly stated at the date of dissolution
WINDING UP
Winding up is the process of settling the business or partnership affairs after dissolution.
LIQUIDATION
A partnership is said to be liquidated when the business is terminated.

CAUSES OF DISSOLUTION
1. Admission of a partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of the partnership
1. ADMISSION OF A PARTNER
A new partner can only be admitted into a partnership with the consent of all the continuing partners.
This is based on the principle of delectus personae: No one becomes a member of the partnership
without the consent of all the members. This is because a partnership is based on mutual trust and
confidence of the partners.
A person may become a partner in an existing partnership by either of the following:
a. Purchase of an interest from one or more of the existing partners.

With the consent of all continuing partners, a person may be admitted into an existing partnership
by purchasing an interest directly from one or more of the existing partners. Payment is made
personally to the partner from whom the interest is obtained resulting to mere transfers among
capital accounts.
Illustration. Froilan Labausa and Reynaldo San Mateo are partners with capital balances of
P400,000 and P200,000, respectively. They share profits in the ratio of 3:1. Their business has
been very successful. All indications show that it will continue to be.
Case 1. Payment to old partners is equal to interest purchased. Partners Froilan Labausa and
Reynaldo San Mateo received an offer from Janet Matuguinas to purchase directly one-fourth of
each of their interest in the partnership for P150,000. The partners agreed to admit Janet
Matuguinas into the firm.
Froilan Labausa, Capital 100,000

Reynaldo San Mateo, Capital 50,000
Janet Matuguinas, Capital 150,000
To record admission of Matuguinas.
Computation:
Labausa: P400,000 x 1/4 P100,000
San Mateo: P200,000 x 1/4 50,000
Interest transferred to Matuguinas P150,000
Case 2. Payment to old partners is less than the interest purchased. Assume that Janet
Matuguinas directly purchased one-third of each partner's interest in the business. Matuguinas
paid P160,000 for one-third of each partner’s capital.


Reynaldo San Mated, Capital 66,667
To record admission Of Matuguinas.
Computation:
Labausa: P400,000 x 1/3 P133,333
San Mateo: P200,000 x 1/3 66,667
Case 3. Payment to old partners is more than the interest purchased. Partners Froilan Labausa
and Reynaldo San Mateo received an offer from Janet Matuguinas to purchase directly of each of
their interest in the partnership for P200,000. The partners agreed to admit Janet Matuguinas as a
member of the firm.

Reynaldo San Mateo, Capital 60,000
To record admission of Matuguinas.
Computation:
Labausa: P400,000 x 30% P120,000
San Mateo: P200,000 x 30% 60,000
b. Investment of assets in the partnership by the new partner.

A person may be admitted into a partnership by investing cash or other assets in the business. The
assets are invested into the partnership and not given to the individual partners, The investment
will increase the total assets and the total partners' equity.
• Total Contributed Capital. It is the sum of the capital balances of the old partners and the actual
investment of the new partner.
• Total Agreed Capital. It is the total capital of the partnership after considering the capital credits given to
each of the partners. Under the bonus method/ total agreed capital is equal to the total contributed capital
though the capital credits to each partner may be equal to, greater than or less than his capital contributions.
• Bonus. It is the amount of capital or equity transferred by one partner to another partner.
• Capital Credit. It is the equity of a partner in the new partnership and is obtained by multiplying the total
agreed capital by the applicable percentage interest of the partner.
• Bonus to Old Partners

A partnership may be exceptionally attractive because of superior earnings record such that
the old partners may demand a premium from a new partner. This premium increases the old
partners' capital interest.
Illustration. Rebecca Miranda and Kareen Leon are partners with capital balances of P400,000
and P200,000, respectively. They share profits in the ratio of 3:1. The partners agreed to admit
Gualberto Magdaraog Jr. as a member of the firm. The foregoing information will be the basis of
the following cases.
Case 1. Total agreed capital is stated. Assume that Gualberto Magdaraog Jr. invested P250,000
for a one-fourth interest in the business. The partners decided not to revalue the assets of the
partnership and that the total agreed capital is P850,000.
Contributed Bonus Agreed

Rebecca Miranda P400,000 P28,125 P428,125
Kareen Leon 200,000 9,375 209,375
Total P600,000 P37,500 P637,500
Gualberto Magdaraog Jr. 250,000 (37,500) 212,500* ¼ of Total Agreed Capital
Total P850,000 P0 P850,000
*P850,000 x 1/4 = P212,500
Distribution of Bonus:
Miranda: P37,500 x 3/4= P28,125
Leon: P37,500 x 1/4 = P9,375
Journal Entries:
Cash 250,000
Gualberto Magdaraog Jr., Capital 250,000
To record the investment of Magdaraog.

Rebecca Miranda, Capital 28,125
Kareen Leon, Capital 9,375
To record bonus to old partners.
Case 2. Total agreed capital is not explicitly stated. Assume that Gualberto Magdaraog Jr.
invested P400,000 in the business. Out of the total cash investment, P100,000 is considered as a
bonus to Partners Rebecca Miranda and Kareen Leon. The investment of Magdaraog resulted to a
bonus as stated. Under the bonus method, the total contributed capital is equal to the total agreed
capital. • It is also clearly specified that the old partners will receive the bonus.

Contributed Capital Bonus Agreed Capital

Rebecca Miranda P400,000 P75,000 P475,000
Kareen Leon 200,000 25,000 225,000
Total P600,000 P100,000 P700,000
Gualberto Magdaraog Jr. 400,000 (100,000) 300,000
Total P1,000,000 P0 P1,000,000
Miranda: P100,000 x 3/4= P75,000
Leon: P100,000 x 1/4 = 25,000
Journal Entries:
Cash 400,000

To record bonus to old partners.
• Bonus to New Partner

A new partner may be admitted into the partnership because of his vast financial resources,
extensive business network, distinctive reputation unique management and/or technical
skills. The old partners may be willing to give a premium for all of these exceptional
qualifications by allowing a capital credit greater than the prospective partner's investment
just to ensure his association with the partnership. This premium will be treated as a bonus
from the equities of the old partners and credited to the new partner.
Case 1. Total agreed capital is stated. Assume that Gualberto Magdaraog Jr. invested 240,000
for a one-third interest in the business. The total agreed capital is P840,000. e investment of
Magdaraog resulted to a bonus as shown by the following table:
Rebecca Miranda P400,000 (P30,000) P370,000
Kareen Leon 200,000 (P10,000) 190,000
Total P600,000 (P40,000) P560,000
Gualberto Magdaraog Jr. 240,000 40,000 280,000* 1/3 of Total Agreed
Capital
Total P840,000 P0 P840,000
*P840,000 x 1/3 = P280,000
Miranda: P40,000 x 3/4 = P30,000
Leon: P40,000 x 1/4 = 10,000

Journal Entries:
Cash 240,000

To record bonus to new partner.
Case 2. Total agreed capital is not explicitly stated. Assume that Gualberto Magdaraog Jr.
invested P300,000 for a 50% interest in the business. Rebecca Miranda and Kareen Leon
transferred part of their capital balance to that of Gualberto Magdaraog Jr. as a bonus. The
investment of Magdaraog resulted to a bonus as stated. Under the bonus method, the total
contributed capital is equal to the total agreed capital. It is also clearly specified that the new
partner will receive the bonus.

Rebecca Miranda P400,000 (P112,500) P287,500
Kareen Leon 200,000 (P37,500) 162,500
Total P600,000 (P150,000) P450,000
Gualberto Magdaraog Jr. 300,000 150,000 450,000* 50% of Total Agreed
Capital
Total P900,000 P0 P900,000
*P900,000 x 50% = P450,000
Miranda: P150,000 x 3/4 = P112,500
Leon: P150,000 x 1/4 = 37,500
Journal Entries:
Cash 300,000

To record bonus to new partner.

Direction: Determine the capital balances of Maniquiz, Monte, and Galang after Galang's admission to
the partnership.
The capital accounts of the Maniquiz and Monte partnership on Sept. 30, 2019 were:
Maniquiz, Capital (75% profit percentage) P140,000
Monte, Capital (25% profit percentage) 56,000
Total Capital P196,000
On Oct. 1, Galang was admitted to a 35% interest in the partnership when he purchased 35% of each
existing partner's capital for P100,000, paid directly to Maniquiz and Monte.
Direction: Prepare the journal entries to record the admission of Labalan and Magada.
The capital accounts of Loida Cardenas and Cristina San Jose have balances of P150,000 and
P110,000, respectively. Daria Labalan and Helen Magäda are to be admitted to the partnership.
Labalan buys one-fifth of Cardenas' interest for P35,000 and one-fourth of Sah Jose's interest for
P25,000. Magada contributes P70,000 cash to the partnership, for which she is to receive an ownership
equity of P70,000.

C. LESSON WRAP-UP
session.

KEY TO CORRECTIONS
Activity 2
Maniquiz, Capital 49,000

Monte, Capital 19,600
Galang, Capital 68,600
Computation:
Maniquiz (P140,000 x 35%) = P49,000
Monte (P56,000 x 35%) = _19,600__
Interest transferred to Galang P68,600
Activity 3
Cardenas, Capital 30,000

San Jose, Capital 27,500
Labalan, Capital 57,500
Computation:
Cardenas (P150,000 x 1/5) = P30,000
San Jose (P110,000 x 1/4) = _27,500__
Interest transferred to Labalan P57,500

Lesson title: Partnership Dissolution – Changes in Ownership Materials:

(Part 2) Module #12
Objectives:
1. Define dissolution and identify and describe the manner References:
of admitting a new partner. Partnership and Corporation
2. Distinguish between admission by purchase of an Accounting by Win Ballada
interest and admission by investment of assets in a
partnership.
Productivity Tip: It’s not about better time management. It’s about better life management
We’re done with partnership dissolution when a partner is admitted to the partnership, now let’s discuss
what happens to a partnership when a partner retires or become demised.
B. MAIN LESSON
WITHDRAWAL OR RETIREMENT OF A PARTNER

A partner may withdraw or retire from a partnership for various reasons. Disputes with other partners, old
age, and pursuit for better opportunities are among the possible explanations. The withdrawal of a partner
dissolves the old partnership. This type of dissolution may be accomplished by either of the following
ways:
1. selling his equity interest to one or more of the remaining partners
2. by selling his equity interest to an outsider
3. by selling his equity interest to the partnership
Sale of Interest to a Partner or an Outsider

When a partner's interest is sold to another partner or an outsider, the withdrawing partner is paid from
the personal assets of the buyer. Accounting for this sale is similar to admission by purchase of interest.
The total assets of the partnership are not affected by the consideration involved. The required entry will
only be a debit to the seller's capital account for his capital balance and a credit to the buyer's capital
account for the same amount.

Sale of Interest to the Partnership

When a withdrawing partner sells his interest to the partnership, the partner is paid from the assets of
the partnership. He may receive an amount equal to, greater than or less than the balance of his capital
account. The effect of withdrawal is to reduce the assets and the owners' equity of the partnership.
Illustration. Suppose that Remedios Palaganas is retiring in midyear from the partnership of Almazan,
Saclot and Palaganas because of family relocation. Physical distance will prevent her from coping with
the daily rigors of their fashion and beauty consulting business. After the books have been adjusted for
the semi-annual profits but before revaluation, their capital balances are as follows:
Melinda Almazan, Capital P540,000
Greg Saclot, Capital 430,000
Remedios Palaganas, Capital 210,000
An independent appraiser revalued their cosmetics inventory to P380,000 (a decrease of P60,000)

and their land to (an increase of P460,000). The profit and loss ratio of the partners is 1:2:1.
The entries to record the revaluation of assets follow:

Melinda Almazan, Capital 15,000
Cosmetics loventory 60,000
To revalue cosmetics inventory per appraisal.
Land 460,000
To revalue land per appraisal.
After revaluation, the capital balances of the partners are shown below:
Melinda Almazan, Capital P640,000
Remedios Palaganasr Capital 310,000
Case 1. Withdrawal at book value. Assume that Remedios Palaganas agreed to accept payment
equal to her interest. The entry to record the payment of cash and the closing of her Capital account
will be:


Cash 310,000
To record retirement of Palaganas.
Case 2. Withdrawal at more than book value. Assume that Remedios Palaganas demanded a
P400,000 settlement for her interest because she firmly believed that she has contributed so much to
the success of the business. The remaining partners agreed for old time's sake. 'If the current fair
value of the partnership's net assets exceeded book value, the settlement price to the withdrawing
partner will be greater than his capital account balance. The excess payment is treated either as a
bonus to the retiring partner from the continuing partners.

Remedios Palaganas, capital 310,000
Cash 400,000
To record retirement of Palaganas with bonus from continuing partners.
Case 3. Withdrawal at less than book value. Assume that Remedios Palaganas is very eager to
retire and is willing to accept settlement at P280,000. When Palaganas, the retiring partner, received
as settlement an amount less than her capital balance, in effect, the partner is giving a part of her
equity interest to the continuing partners as bonus, The amount of the bonus is credited to the capital
accounts of the continuing partners in their profit and loss ratio.

Cash 280,000
To record retirement of Palaganas with bonus to continuing partners.
DEATH OF A PARTNER
The death of a partner dissolves a partnership. When the death of a partner does not result to
liquidation, the accounting procedures to be followed are similar to those discussed in the withdrawal of
a partner. The deceased partner may be considered to have retired from the partnership and his heirs or
estate can expect to receive the amount of his interest from the business. If payment to the estate of the
deceased cannot be made immediately, the balance in the capital account of the deceased partner
should be transferred to a liability account, payable to the estate.

INCORPORATION OF A PARTNERSHIP
A partnership may decide to incorporate after evaluating the various advantages of having a corporate
form of business organization. After the necessary adjusting and closing entries, the assets and
liabilities of the partnership are transferred to the corporation in exchange for shares of stock.
Illustration. Partners Madelyn Rialubin and Juanita Rabena, who share equally in profits and losses,
have the following items in their partnership's statement of financial position as at Dec. 31, 2019:
Cash P120,000 Accounts Payable P172,000

Accounts Receivable 100,000 Accum. Depreciation 8,000
Inventory 140,000 Madelyn Rialubin, Capital 140,000
Equipment 80,000 Juanita Rabena, Capital 120,000
Total P440,000 Total P440,000
They agreed to incorporate their partnership, with the new corporation absorbing the net assets after the
following adjustments: providing for allowances for doubtful accounts of P10,000; restatement of the
inventory to its current fair Value of P160,000; and, additional recognition of depreciation on the
equipment of P3,000.
The corporation's share capital will have a par value of P 100, and the partners will be issued the shares
equivalent to their adjusted capital balances. The journal entries to incorporate the partnership will be:
Cash 120,000
Accounts Receivable 100,000
Inventory 160,000
Equipment 69,000
Allowance for Doubtful Accounts 10,000
Ordinary Shares 267,000
Directions: Try this exercise and see how well do you understand the concepts about partnership
dissolution. In the spaces provided, write T if the statement below is true otherwise F if it is false.
_____ 1) When a partner leaves a partnership, it is possible that total assets will be unaffected.
_____ 2) When new partners invest more than the equity interest they are to receive in the net assets
of an existing partnership, part of the entry to record the new partners' investments is an
increase in the capital accounts of the old partners.
_____ 3) When a new partner is given 30% interest in a partnership, he will receive 30% of all future
profits and losses.
_____ 4) In admission by purchase, payment is personally made to the partner from whom the interest
is obtained resulting to mere transfers among capital accounts.

_____ 5) The dissolution of a partnership is the same as the liquidation of a partnership.

_____ 6) Goodwill is the amount of capital or equity transferred by one partner to another partner.
_____ 7) When Yolanda Garcesa purchased Esperanza Nolasco’s P200,000 capital interest for
P200,000, the ensuing entry on the books of the partnership would contain a debit to cash for
P200,000.
_____ 8) It is possible to invest assets into a partnership and be given a zero-capital balance.
_____ 9) A partnership may be dissolved at any time by any of the partners.
_____ 10) The withdrawal of partner from a partnership is a type of dissolution.
Direction: Determine the answer required of the problem.
Problem 1
Rita, Sisa, and Tina are partners with capital balances on June 30, 2020 of P60,000, P60,000 and
P40,000, respectively. Profits and losses are shared equally. Tina withdraws from the partnership. The
partners agree that Tina is to take certain furniture at their second-hand value of P2,400 and cash for
the balance of her interest. The furniture is carried on the books as fully depreciated. The amount of
cash to be paid to Tina and the capital balances of the remaining partners after the retirement of Tina
are:
Cash Rita capital Sisa capital
a. P40,000 P60,000 P60,000
b. P37,600 P61,200 P61,200
c. P38,400 P60,800 P60,800
d. P42,800 P58,800 P58,800
Problem 2
In May 2020, Imelda, a partner of an accounting firm, decided to withdraw when the partners' capital
balances were: Mikee, P600,000; Raul, P600,000; and Imelda, P400,000. It was agreed that Imelda is
to take the partnership's fully depreciated computer with a second-hand value of P24,000 that cost the
partnership P36,000. If profits and losses are shared equally, what would be the capital balances of the
remaining partners after the retirement of Imelda?
Mikee Raul
a. P600,000 P600,000
b. P592,000 P592,000
c. P608,000 P608,000
d. P612,000 P612,000

C. LESSON WRAP-UP
session.


KEY TO CORRECTIONS
Activity 2
1. False – Total assets will be affected.

2. True
3. True
4. True
5. False – Partnership dissolution is different with partnership liquidation.
6. False – Partnership bonus is the amount of capital or equity transferred by one partner to another
partner.
7. False – Credit to cash.
8. False – Assets invested in partnership will be the partner’s capital.
9. True
10. True
Activity 3
Problem 1
Problem 2

Lesson title: Partnership Liquidation (Part 1) Materials:

1. Define liquidation.
2. Distinguish between dissolution from liquidation References:
3. Explain the concept of right offset. Partnership and Corporation
Accounting by Win Ballada
Productivity Tip: When you’re trying to study, avoid your bed as much as you can. Try to study in a
chair or at a desk, where you have to sit up and pay attention. If you let yourself lie down or try to
study in bed, you are guaranteed to feel sleepier and not be as productive. If you don’t really have
any other space to study, try to sit on your bed a different way, away from your pillows, so you’re
less tempted to fall asleep.
A partnership starts with an agreement between two or more people who want to go into business
together. When a partnership ends, the partners begin a complicated process of fulfilling financial
obligations to creditors and each other. Partnership liquidation marks the official ending of a partnership
agreement. To end the partnership, the parties involved sell the property the business owns, and each
partner receives a share of the remaining money.
So let us now begin to discuss how partnership business relationship ends. We encourage you to take
note for the unfamiliar words or phrases you find challenging to understand and look its meaning in
your dictionary. Enjoy learning!

B. MAIN LESSON
LIQUIDATION
The liquidation of a partnership is the winding up of its business activities characterized by sale of
all non-cash assets, settlement of all liabilities and distribution of the remaining cash to the partners.
REALIZATION
The conversion of non-cash assets into cash is referred to as realization. This may either result to a
gain or loss on realization and shall be divided in the profit and loss ratio of the partners.
CAPITAL DEFICIENCY
A substantial loss on realization which might yield for a partner.
PARTNER’S INTEREST
The sum of partner’s capital and loan accounts in the partnership.
RULES IN SETTLING ACCOUNTS AFTER DISSOLUTION
ASSETS OF THE
1 outside creditors
PARTNERSHIP
inside creditors in the form of loans or advances
• partnership property 2 for business expenses by the partners
• additional contributions of
the partners needed for 3 partners with respect to their capital contributions
the payment of all
liabilities
4 partners with respect to their share of the profits
The second preference above gives the partner with the loan account the option to exercise his right of
offset. This privilege is the legal right of a partner to apply part or all of his loan account balance against
his capital deficiency resulting from losses in the realization of the partnership assets.

Illustration. Winston Apalisoc, Beatriz Onate and Emerita Geron are partners in a prawn export
business. initially, Winston Apalisoc contributed P300,000; Beatriz Onate, P200,000 and Emerita Geron
P100,000. On the date of dissolution, the remaining assets of the partnership amounted to P1,000,000.
The partnership has outstanding obligations with Neo Aglugub, P140,000; Placido Tuddao, P100,000
and loans payable to Winston Apalisoc, P40,000. The accounts of the Apalisoc, Onate and Geron
partnership shall be settled as follows:
1. First, Neo Aglugub and Placido Tuddao who are outside creditors shall be paid the total sum of
P240,000; thus, leaving a balance of P760,000 (P1,000,000 - P240,000) in partnership assets;
2. Second, Winston Apalisoc who is an inside creditor shall be paid his loan to the partnership of
P40,000; balance at P720,000 (P760,000 - P40,000);
3. Third, the total contributions of Apalisoc, Onate and Geron to the initial partnership capital in the
amount of P600,000 will be paid; balance of assets at P120,000 (P720,000 - P600,000);
4. Lastly, the balance of P120,000 shall be distributed to the partners in the ratio of their capital
contributions since there was no mention of an agreement governing the division of profits or
losses. Therefore, Winston Apalisoc shall be entitled to 3/6 of P120,000 or P60,000; Beatriz
Onate, 2/6 or P40,000 and Emerita Geron, 1/6 or P20,000.
Insufficient Partnership Assets

In cases when the partnership assets are insufficient to settle all outside liabilities, the partners should
make additional contributions in the partnership. Any partner who contributed in excess of his share in
this liability has a right to collect the supposed additional contributions from the other partners.
Preference of Partnership Creditors and Partners' Separate Creditors

The creditors of the partnership shall have priority in payments over those of the partners' separate
creditors as regards the partnership properties. On the other hand, the creditors of the partners are
preferred with respect to the separate or personal properties of the partners.
Distribution of Separate Properties of an Insolvent Partner

If a partner is insolvent, his personal properties shall be distributed as follows:
1. First, those owing to separate creditors,
2. Second, those owing to partnership creditors,
3. Lastly, those owing to the partners by way of additional contributions when the assets of the
partnership were insufficient to settle all obligations.

Directions: Try this exercise and see how well do you understand the concepts about partnership
liquidation. In the spaces provided, write T if the statement below is true otherwise F if it is false.
_____ 1) The creditors of the partnership shall have priority in payments over those of the partners'
separate creditors as regards the partnership properties.
_____ 2) The loss absorption balances represent the maximum loss that the partners could absorb
without reducing their equity below zero.
_____ 3) Gains and losses on the sale of assets in liquidation are divided equally among partners.
_____ 4) A partnership may be dissolved without being liquidated but liquidation is always preceded
by dissolution.
_____ 5) A partner's inability to meet his obligations at the time of liquidation relieves that individual of
his liabilities to the other partners.
_____ 6) A partner's unrestricted interest represents the portion of a partner's interest which should
remain available to absorb possible future losses.
_____ 7) In partnership liquidation, one partner may haye make up for the deficit in another partner's
account.
_____ 8) When a partnership goes out of business, all the remaining non-cash assets will be declared
as a total loss. This loss on liquidation shall be divided among the partners in their profit and
loss ratio.
_____ 9) Liquidation of a partnership is the winding up of its business activities characterized by sale
of all non-cash assets, settlement of all liabilities and distribution of the remaining cash to
the partners.
_____ 10) Partnership creditors shall have priority in payments than those of the partners' separate
creditors as regards the separate properties of the partners.
Direction: Discuss the role of an accountant in the accounting process of partnership liquidation.
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________

C. LESSON WRAP-UP
session.


KEY TO CORRECTIONS
Activity 2
1. True
2. True
3. False – Gains and losses on the sale of assets in liquidation are divided according to partnership
agreement.
4. True
5. True
6. False – Partner’s interest should remain unavailable.
7. True
8. False – The assets will not be declared as loss.
9. True
10. True

Lesson title: Partnership Liquidation (Part 2) Materials:

1. Differentiate lump-sum method from installment method
of liquidation. References:
2. Determine cash distribution to partners using schedule Partnership and Corporation
of safe payments or a cash priority program. Accounting by Win Ballada
Productivity Tip:
If you think virtual study groups will help your productivity, try to connect with some friends
and form such a group. Even if you don’t get as much out of it academically, it may be beneficial for
your mental health while you’re studying at home.
Hold on, dear student, we are now on the last part of our modules for partnership. So let us continue
our discussion for partnership liquidation.
B. MAIN LESSON
METHODS OF PARTNERSHIP LIQUIDATION
• Lump-sum Method
Under this method, all non-cash assets are realized and the related gains or losses distributed
and all liabilities are paid before a single final cash distribution is made to the partners
• Installment Method.
Under this method, realization of non-cash assets is accomplished over an extended period of
time. When cash is available, creditors may be partially or fully paid. Any excess may be
distributed to the partners in accordance with a program of safe payments or a cash priority
program. This process persists until all the non-cash assets are sold.

Illustration. Assuming that because of the total partnership liabilities amounting to P1,120,000. Emerita
Geron is still personally liable to partnership creditors in the amount of P20,000. Her separate properties
in the amount of P90,000 shall first be applied to settle her personal obligations of P80,000 to Patrocinio
Abad and the balance of P 10,000 to pay one-half of her liability of P20,000 to the creditors of the
partnership. This is in consonance with the rule that separate creditors are preferred over partnership
creditors as regards separate properties of a partner.
The procedures in liquidation after the adjustment and closing of books will be dependent on the above
rules. It will be advisable to have a mastery of these principles to be able to fully understand the
liquidation of partnerships.
The use of a statement of liquidation will greatly aid the liquidating partner summarize the events and
transactions associated with the liquidation of the partnership.
ENTRIES RELATED TO LIQUIDATION

The steps in the liquidation of a partnership will need the following pro-forma entries:
1. Sale of Non-Cash Assets
a. At Book Value
Cash xx
Non-Cash Assets xx
b. Above Book Value
Cash xx
Non-Cash Assets xx
Gain on Realization xx
c. Below Book Value
Cash xx
Loss on Realization xx
Non-Cash Assets xx
2. Distribution of Gain or Loss on Realization based on Partners' P/L Ratio
a. Distribution of Gain on Realization
Gain on Realization xx
Elizabeth Figueroa, Capital xx
Carmelita Mercado, Capital xx
Lovell Abello, Capital xx
b. Distribution of Loss on Realization


Loss on Realization xx
3. Payment of Liabilities
Liabilities xx
Cash xx
4. Exercise of Right of Offset
Elizabeth Figueroa, Loan xx
5. Additional Investment by Deficient Partner
Cash xx
6. Deficiency Absorbed by Solvent Partner
7. Distribution of Cash to Partners
Cash xx

LUMP-SUM LIQUIDATION
Realization of non-cash assets and distribution of gain or loss on realization among

the partners based on their profit and loss ratio.
Payment of liabilities.
Elimination of partners capital deficiencies. If after the distribution of loss on

realization a partner incurs a capital deficiency, this deficiency must be eliminated by:
a. Deficient partner has a loan balance, exercise the right of offset.
b. Deficient partner is solvent, invest cash to eliminate deficiency.
c. Deficient partner is insolvent, other partners should absorb his deficiency.
Payments to partners, in the order of priority:

a. Loan accounts
b. Capital accounts

INSTALLMENT LIQUIDATION
Realization of non-cash assets and distribution of gain or loss on realization among

the partners based on their profit and loss ratio.
Payment of liquidation expenses and adjustment for unrecorded liabilities; both of

these items will be distributed among the partners in their profit and loss ratio.
Payment of liabilities to outsiders.
Distribution of available cash based on a schedule of safe payments which assumes

possible losses due to inability of the partnership to dispose of part or all the
remaining non-cash assets and failure of the partners with capital deficiencies to
make additional contributions. Payments to partners can also be made based on a
cash priority program.
CASH PRIORITY PROGRAM

The use of safe payment schedules is a reliable method of computing the amount of safe payments to
partners for it prevents excessive payments to any partner. However, the approach distributions are to
be made to partners.
The partnership made two payments and for each, a schedule of safe payments is made. The
procedure of preparing safe payment schedules will go on as long as there is cash to be distributed and
until the capital balances are aligned with the P/L ratio.
This repetitious procedure can be avoided with the introduction of an alternative device called the cash
priority program. This program which is prepared at the start of the liquidation process will help the
partners project when they can expect to be included in the cash distribution.
If the program is prepared, any amount of cash received from the realization of partnership assets may
be paid immediately to partnership creditors and later, the partners as specified in the program.

Directions: Determine the partners’ share in profit or loss for each of the following situation:
On January 1, 20x1, A and B decided to liquidate their partnership. As of this date, their capital
balances were ₱400,000 and ₱800,000, respectively. The partners share profits and losses on a
60:40 ratio. Before liquidation, the partnership had ₱80,000 cash and ₱120,000 liabilities. The
partnership incurred loss of ₱480,000 on the sale of non-cash assets. A is solvent but B is insolvent.
Direction: Determine the answers to the following questions.
The following condensed statement of financial position is presented for the partnership of AA,
BB and CC, who share profits and losses in the ratio of 4:4:2, respectively:
Cash P 160,000
Other Assets 320,000
Total Assets P 480,000
Liabilities P 180,000
AA, Capital 48,000
BB, Capital 216,000
CC, Capital 36,000
Total Liabilities and Capital P 480,000
The partners agreed to dissolve the partnership after selling the other assets for P200,000.
Requirement:
1. How much should each partner receive upon liquidation?

2. Assume instead that the other assets were sold for P10,000 and that deficient partners, if any,
are solvent. How much should each partner receive upon liquidation?
3. Assume instead that the other assets were sold for P50,000 and that deficient partners, if any,
are insolvent. How much should each partner receive upon liquidation?

C. LESSON WRAP-UP
session.

FAQs
1. What would be the rule, if the partnership agreement is not clear on the treatment of salary allowances
when losses are incurred?
- In the absence of an agreement to govern this situation, salary allowances will be provided even
when operations yielded losses.
2. What is the effect to the allocation of profits or losses when partners’ agreement allows salaries,
interest on capital and bonus?
- The service contributions and capital contributions of the partners are often not equal. If the
service contributions are not equal, salary allowances can compensate for the differences. Or,
when capital contributions are not equal, the interest allowances can make up for the unequal
investments.

KEY TO CORRECTIONS
Activity 2
Activity 3
1.
2.

3.

Lesson title: Accounting for Corporations Basic Consideration Materials:

(Part 1) Module #18
Objectives:
1. Define corporation and identify its attributes, References:
classifications, components and classes of shares Partnership and Corporation
2. Identify and explain the advantages and disadvantages Accounting by Win Ballada
of a corporation
3. Distinguish the comparisons of articles of incorporation
per revised corporation code and the corporation code
Productivity Tip: Warm up your mind before studying. Just like your muscles before a workout, your
brain needs warming up before a learning session in order to wake up and function properly.
Hi there! We hope that you are doing well because today another exciting lesson awaits you in this
module! Today, we will talk about accounting for corporation.
Corporations influence the economy of our country as well as our lives. These corporations are
responsible in providing us essential products available for our daily living. A corporation, like sole
proprietorship and partnership, may be engaged in rendering services, buying and selling goods and
even manufacturing of products.
So, we encourage you to go through this module and learn more about corporation as a form of
business organization. Also, we encourage you to take note for the unfamiliar words or phrases you
find challenging to understand and look its meaning in your dictionary. Enjoy learning! ☺
B. MAIN LESSON
Let your journey of understanding today’s topic begins here! Before anything else, let’s discuss the
revised corporation code.
REVISED CORPORATION CODE

• Republic Act 11232, otherwise known as the Revised Corporation Code of the Philippines
(RCCP), was signed into law by President Rodrigo Duterte on Feb. 20, 2019 and became effective
Feb. 23, 2019.
• For over 39 years, the Corporation Code of the Philippines (Corporation Code) or Batas
Pambansa Blg. 68, was the law that governed corporations. The Corporation Code took effect on
May 1, 1980.

• The RCCP aims to introduce the following reforms:
1. Policies that would enhance the ease of doing business in the Philippines;
2. Rules that prioritize corporate and stockholder protection;
3. Provisions that instill corporate and civic responsibility; and
4. Amendments that will strengthen the country's policy and regulatory corporate framework.
DEFINITION
A CORPORATION is an artificial being created by operation of law, having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its existence (Revised
Corporation Code of the Philippines, Sec. 2).
ATTRIBUTES OF A CORPORATION
1. Artificial being – having only an artificial personality separate and distinct from its individual
shareholders or members.
2. Created by operation of law – formation of corporation is based not merely on agreement of the
shareholders but on special authority or grant from the state, either by special incorporation law
or by means of a general corporation law.
3. Right of success – it enables the corporation to continue its existence subject to the period stated
in the Articles of Incorporation, thus death, withdrawal, insolvency or incapacity of the individual
shareholders will not dissolve corporation.
4. Has the powers, attributes and properties expressly authorized by law or incident to its
existence – as a juridical entity, it is vested with powers by the state
Is corporation a good form of business organization? Here are the lists of its advantages and
disadvantages for your evaluation:
ADVANTAGES DISADVANTAGES
1. Has legal capacity to act as legal entity 1. Relatively complicated in formation and
2. Shareholders have limited liability management
3. Has continuity of existence 2. Greater degree of government control
4. Shares of stocks can be transferred and supervision
without the consent of other 3. Requires relatively high cost of
shareholders formation and operation
5. Management is centralized in the board 4. Subject to heavier taxation
of directors 5. Minority shareholders are subservient to
6. Shareholders are not general agents of the wish of the majority
the business 6. In large corporations, management and
7. Greater ability to acquire fund control have been separated from
ownership
7. Transferability of shares permits the
uniting of incompatible and conflicting
elements in one venture.
How’s your learning so far? Did you find it interesting? Yes, corporation is really interesting

because of its variety of classes! Presented below are the classifications of corporation:
CLASSES OF CORPORATIONS
Type Distinction
Stock Corporation have capital stock divided into shares and are authorized to distribute the
holders of such shares dividends or allotment of surplus profits on the
basis of the shares held
Non-stock no part of its income is distributable as dividends to its members, trustees
Corporation or officers
OTHER CLASSIFICATIONS OF CORPORATIONS
Category Type of Corporation Distinctions

1. According to number a. Corporation aggregate more than one corporator
persons b. Corporation sole one member or corporator
2. According to a. Domestic corporation organized under Philippine law
nationality (country of b. Foreign corporation organized under foreign law
creation
3. According whether a. Public corporation formed for the government of a portion of the
for public or private state
purpose b. Private corporation created for private aim, benefit or purpose
4. According to whether a. Ecclesiastical organized for religious purposes
charitable purpose or corporation
not b. Eleemosynary established for public charity
corporation
c. Civil corporation established for business or profit
5. According to their a. De jure corporation exist in fact and in law
legal right to corporate b. De facto corporation exist in fact but not in law
existence
6. According to the a. Close corporation share ownership is limited to selected
degree of public persons or members
participation with regard b. Open corporation share is available to any person
to share ownership c. Publicly-held corporation with a class of equity securities listed on an
exchange or with assets in excess of
P50,000,000 and having 200 or more
holders, at least 200 of which are holding at
least 100 shares of a class of its equity
securities
7. According to their a. Parent or holding related to another corporation that it has
relation to another corporation power to either directly or indirectly elect the
corporation majority of the directors of a subsidiary
corporation
b. Subsidiary corporation controlled by another corporation

People are important resource of every organization. So, let’s meet the different person behind a
corporation.
COMPONENTS OF A CORPORATION
Components Distinctions
1. Corporators Those who compose the corporation whether shareholders or members, at
any time. This term includes incorporators, shareholders or members.
2. Incorporators Are shareholders or members mentioned in the articles of incorporation as
originally forming and composing the corporation and are signatories to
said article.
3. Shareholders (stockholders) are corporators in a stock corporation
4. Members corporators of a non-stock corporation
5. Subscribers Persons who have agreed to take nad pay for original, unissued shares of
a corporation formed or to be formed.
6. Promoters Persons who bring out or cause to bring about the formation and
organization of a corporation.
7. Underwriters Usually investment bankers who have agreed, alone or with others, to buy
the stated terms an entire or a substantial part of an issue of securities
8. Independent director Person, apart from shareholdings and fees received from the corporation,
is independent of management and free from any business or other
relationship which could, or could reasonably be perceived to, materially
interfere with the exercise of independent judgment in carrying out the
responsibilities as a director
CLASSES OF SHARES
Classes Distinctions
1. Par value shares One in which a specific amount is fixed in the articles of incorporation
and appearing on the certificate of stock. Par value is the minimum
issue price of the shares
2. No-par value shares One without any value appearing on the face of the certificate of stock. It
may have stated value which may be fixed in the articles of
incorporation or by board of directors, or the shareholders
3. Minimum stated value minimum stated value of no-par value shares is P5 per share
4. Voting shares Those issued with right to vote
5. Non-voting shares Those issued without right to vote
6. Ordinary shares Shares that entitle the holder to an equal pro-rata division of profits
(Common stocks) without any preference
7. Preference shares Shares that entitle the holder to a certain advantage or benefits over the
(Preferred stocks) holders of ordinary shares
8. Founders’ shares may be given certain rights and privileges not enjoyed by the owners of
other stocks

Classes Distinctions
9. Redeemable shares may be issued by the corporation when expressly provided in the
articles of incorporation
10. Treasury shares A stock that has been issued by the corporation as fully paid and later
reacquired but not retired
11. Promotion shares issued to promoters as compensation in promoting the incorporation of
a corporation, or for services rendered in launching or promoting the
welfare of the corporation
12. Convertible shares A stock which is convertible or changeable from one class to another
class
Direction: Try this exercise and see how well do you understand the concepts about corporation. In the
spaces provided, write T if the statement below is true otherwise F if it is false.
_____ 1) A corporation can come into existence by mere agreement of the parties as in the case of
partnership.
_____ 2) A corporation can be held liable for the personal indebtedness of a shareholder.
_____ 3) Shares of stock cannot be transferred without the consent of the other shareholders.
_____ 4) The liability of the shareholders for the payment of corporate debts is limited to the value of
their shares.
_____ 5) A corporation may exercise only powers expressly authorized by law or incident to its existence
_____ 6) A corporation as an artificial being can be an incorporator.
_____ 7) A corporation or a partnership can be a corporator.
_____ 8) Preferred stock can be issued without par value.
_____ 9) All corporators are incorporators.
_____ 10) All incorporators are subscribers but subscriber need not be an incorporator.
_____ 11) No-par value shares have a minimum stated value of P5.00 per share.
_____ 12) The transfer of ownership of shares of stock does not dissolve the corporation
_____ 13) A de jure corporation is a corporation existing in fact and in law
_____ 14) Paid up capital cannot be less than P 5,000
_____ 15) There is a minimum authorized capital stock required by law.
Determine the minimum subscription and the minimum paid in capital in the following cases below:
a. Arielle Corporation is being incorporated with an authorized share capital of P 3,000,000. The
share capital is divided in 300,000 shares with a par value of P10 per share.
b. Julia Corporation is being organized with a share capital of P 50,000. The share capital is
divided into 10,000 shares at P5 per share.

C. LESSON WRAP-UP
session.


FAQs
1. Does a corporation entitled to moral damages?

- No. Corporation, being an artificial person having existence only in legal contemplation, has no
feeling, no emotion, no senses; therefore, it cannot experience physical suffering, mental
anguish, fright, serious anxiety, wounded feelings, etc.
2. Is the corporate term of a corporation subject to extension?

- Yes. 50 years corporate term may be extended for periods not exceeding fifty years in any single
instance by an amendment of the articles of incorporation. No extension can be made earlier than
five years prior to the original or subsequent expiry date unless there are justifiable reasons for
an earlier extension.
KEY TO CORRECTION
Activity 2
1. F
2. F
3. T
4. T
5. T
6. F
7. T
8. F
9. F
10. T
11. T
12. T
13. T
14. T
15. F
Activity 3
a. Minimum subscription – P 750,000; minimum paid in capital – P 187,500
b. Minimum subscription – P 12,500; minimum paid in capital – P 5,000

Lesson title: Accounting for Corporations Basic Consideration Materials:

(Part 2) Module #19
Objectives:
1. Define corporation and identify its attributes, References:
classifications, components and classes of shares Partnership and Corporation
2. Identify and explain the advantages and disadvantages Accounting by Win Ballada
of a corporation
3. Distinguish the comparisons of articles of incorporation
per revised corporation code and the corporation code
Productivity Tip: Warm up your mind before studying. Just like your muscles before a workout, your
brain needs warming up before a learning session in order to wake up and function properly.
Good Day! I hope you’re enjoying our study of corporations.

Corporations are entities that act like a single, fictional person. And just like an actual person, it can
borrow and lend fund, likewise, it can also sue and be sued.
So, as we go through this module and learn more about corporation as a form of business
organization, let us take a look at how corporation differs from an actual person. Enjoy learning! ☺
B. MAIN LESSON
ARTICLES OF INCORPORATION
All corporations organized under the Corporation Code of the Philippines shall file with the
Securities and Exchange Commission articles of incorporation in any of the official languages
duly signed and acknowledged by all of the incorporators.
BY-LAWS
These are rules of action adopted by the corporation for its internal government and for the
government of its officers, shareholders or members.

MINIMUM SUBSCRIPTION AND PAID-IN CAPITAL

• 25 % of the authorized capital stock must be subscribed in the Corporation Code (BP 68)
have been in RCCP (RA 11232)
• 25% of the total subscription be paid in the Corporation Code (BP 68) have been in RCCP
(RA 11232)
• Note that the 25% subscribed and 25% paid-up rule is still applicable when the corporation
increases its capital stock
• In no case the paid-up capital be less than P5,000
STEPS IN THE CREATION OF A CORPORATION
2. INCORPORATION
3. FORMAL
1. PROMOTION / ORGANIZATION AND
✓ Verification of proposed
CONCEPTUALIZATION COMMENCEMENT OF
corporate name
BUSINESS OPERATIONS
✓ Drafting and execution of
articles of incorporation
✓Adoption of by-laws
✓ Deposit by treasurer of the
✓ Gathering of ✓ Election of Board of
cash paid for the shares
incorporators Directors
subscribed
✓ Procuring ✓Taking other necessary
✓ Filing of Articles of
subscriptions or steps to transact legitimate
Incorporation with the
capital business or accomplish its
SEC
purpose
✓ Payment of filing and
publication fee
COMPARISON OF ARTICLES OF INCORPORATION PER RCCP AND CORPORATION CODE
RCCP Corporation Code

(RA 11232) (BP 68)
Name If the corporation is an OPC, the letters OPC is not allowed
"OPC" is included in the corporate name.
Who Can Be An Any natural person, partnership, corporation, Only natural persons
Incorporator or association
Number of One incorporator is enough. At least five (5) incorporators needed
Incorporator(s)
Residence of No residency requirement for incorporators. A majority of the incorporators must
Incorporators be residents of the Philippines.
Term Shall have perpetual term by default unless Not exceeding 50 years.
the AOI provides otherwise.

Number of Directors No minimum number of directors/trustees Minimum number of directors is five
except for educational corporations and (5).
religious societies.
Residence of No residency requirement for directors. A majority of the directors must be
Directors Phil. residents.
Amount of N0 minimum capital stock required unless At least 25% Of the authorized
Subscribed and required by special law. There is also no capital stock must be subscribed and
Paid-ln Capital minimum subscribed capital and no at least 25% Of the 9ubscribed
minimum paid-in capital. capital must be paid-up.
Statement of Subscribed and paid-in capital are in the 8th In two (2) separate clauses (8th and
Subscribed and clause of the AOI (Sec. 14, RCCP). 9th) of the AOI, (Sec, 15, Corporation
Paid-ln Capital Code).
Treasurer's Affidavit A separate treasurer’s affidavit is no longer A separate treasurer's affidavit is
required but the certification of the treasurer required.
is part of the AOI (9th Clause).
Undertaking to No longer required to submit a separate There is a separate undertaking to
Change Name undertaking, see the 10th Clause of the AOI. change the corporate name to be
signed by directors.
Signatories The incorporators and the treasurer sign the Only incorporators sign the AOI.
AOI.
RIGHTS OF A SHAREHOLDER
1. Right to be issued certificate of stock or other evidence of share ownership and to transfer such
shares.
2. Right to vote via remote communication or in absentia (Note: under BP68, in person or by proxy
only) at shareholders' meetings (Sec. 57).
3. Right to elect and remove directors.
4. Right to adopt, amend or repeal the by-laws.
5. Right to purchase a portion of any new shares issued to maintain the same percentage of stock
ownership. This right is known as the pre-emptive right. However, this right is not absolute and may
be denied.
6. Right to receive dividends when declared.
7. Right to inspect corporate books and records, and to receive financial reports of the corporation's
operations.
8. Right to participate in the distribution of corporate assets upon dissolution.

CORPORATE BOOKS AND RECORDS
Books and Records Distinctions

1. Minutes book It contains the minutes of the meetings of the directors and
shareholders.
2. Stock and transfer book It is a record of the names of shareholders, installments paid and unpaid
by shareholders and dates of payment, any transfer of stock and dates
thereof, by whom and to whom made.
3. Books of accounts These represent the record of all business transactions. The books of
accounts normally include the journal and the ledger.
4. Subscription book It is a book of printed blank subscription.
5. Shareholders' ledger It is a ledger which details the number of shares issued to each
shareholder.
6. Subscribers’ ledger It is a subsidiary ledger for the subscriptions receivable account; it
reports the individual subscriptions of the subscribers.
7. Stock certificate book It is a book of printed blank certificates of stock.
ONE PERSON CORPORATION (OPC)
• The Revised Corporation Code of the Philippines added a new type of corporation, the One Person
Corporation (OPC). OPC is a corporation with a single stockholder, who may be a natural person, a
trust or an estate (Sec. 116). One person may incorporate two or more OPCs.
• Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and non-
chartered government-owned and controlled corporations may not incorporate as OPCs.
• A natural person who is licensed to exercise a profession may not organize as an OPC for the
purpose of exercising such profession except as otherwise provided under special laws.
• The OPC has a personality separate and distinct from the single stockholder. The sole shareholder's
liability IS limited to his investment. He has the burden of affirmatively showing that the corporation
was adequately financed.
• An OPC shall not be required to have a minimum authorized capital stock except as otherwise
provided by special law.
• The OPC is not required to submit and file corporate by-laws. But, the OPC is required to file the
Articles of Incorporation.

_____ 1) Any person, partnership, association or corporation, singly or jointly with others but not more
than fifteen (15) in number, may organize a corporation for any lawful purpose or purposes.
_____ 2) Natural persons who are licensed to practice a profession, and partnerships or associations
organized for the purpose of practicing a profession, are allowed to organize as a corporation.
_____ 3) Under the old Corporation Code, the minimum number of incorporators was five. Under the
RCCP, one person can form a corporation, the one person Corporation.
_____ 4) Corporations vested with public interest shall have independent directors constituting at least
25% of such board.
_____ 5) Foreign corporations are allowed to give donations in aid of any political party or candidate or
for purposes of partisan political activity.
_____ 6) In the articles of incorporation, the principal place of business must be a specific address
within the Philippines.
_____ 7) A majority of the incorporators must be residents of the Philippines.
_____ 8) The incorporators and the treasurer sign the articles of incorporation.
_____ 9) If a corporation does not formally organize and commence its business within 3 years from
the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the
day following the end of the 3-year period.
_____ 10) If the corporation is vested with public interest, the board has the option to elect a compliance
officer.
_____ 11) The OPC has a personality separate and distinct from the single stockholder as such the sole
shareholder's liability is always limited to his investment.
_____ 12) The treasurer who may or may not be a director is not required to be a resident of the
Philippines.
_____ 13) The single stockholder shall be the sole director and president of the OPC.
_____ 14) The single stockholder may be appointed as the corporate secretary of the OPC.
_____ 15) A corporation shall have a corporate term of 50 years unless its articles of incorporation states
it as of perpetual existence.
Determine and draw the hierarchy of corporate structure.

C. LESSON WRAP-UP
session.


KEY TO CORRECTIONS
Activity 2
1. True
2. False - Natural persons who are licensed to practice a profession, and partnerships or associations
organized for the purpose of practicing a profession, shall not be allowed to organize as a corporation.
3. True
4. False - Independent directors constituting at least 20% of such board.
5. False - Corporation Code, imposes an absolute prohibition for corporations, both foreign and domestic, from
giving political donations to any political party, candidate or for the purpose of any partisan political activity.
6. True
7. True
8. False – Incorporators are the signatories of the Articles of Incorporation.
9. False – Within the five (5) year period.
10. True
11. False - The rule on separate personality remains applicable to OPCs. With regard to liability, the RCC
states that a single stockholder who claims limited liability has the burden of proof of affirmatively showing the
OPC is adequately financed.
12. False – The treasurer must be a resident of the Philippines.
13. True
14. False - The single stockholder cannot be appointed as Corporate Secretary.
15. False – Under revised corporation code, a corporation shall have perpetual existence unless its articles of
incorporation provides otherwise
Activity 3
Hierarchy of Corporate Structure
Shareholders
elect the
Board of Directors
elect the
Officers
hire
Employees

Lesson title: Corporations: Share Capital (Part 1) Materials:

1. Distinguish the term related to the share capital
2. Record the accounting for issuance of share capital, References:
subscription of share and treasury stock Partnership and Corporation
Productivity Tip: Comprehend not memorize. When studying, paraphrase your notes instead of
trying to remember everything word-for-word. This will help especially for essay questions where
elaboration is necessary.
In this module, you will learn the accounting for share capital, subscriptions, and treasury stocks which
are important for each shareholder in a corporation. Have a great day ahead!
B. MAIN LESSON
The accounting for assets and liabilities is similar regardless of the form of a business organization. The
only difference is the owners’ equity section. Sole proprietorships and partnerships use capital accounts
while corporation has shareholder’s equity in its statement of financial position.
Shareholders’ Equity is the residual interest of the shareholders in the assets of a corporation
after deducting all of its liabilities. It is divided into three subsections, namely:
1. Share Capital – represents the amount invested by shareholders
2. Reserve – includes share premium, appropriation reserve, revaluation surplus reserve and
foreign currency translation reserve
3. Retained Earnings – represents the accumulated profits and losses gained and incurred from the
previous years of operation
ACCOUNT TITLES IN SHARE CAPITAL TRANSACTION
1. Share Capital
✓ It is the shares to be subscribed and paid in or secured to be paid in by the
shareholders, either in money, property or services, at the time of organization of the
corporation or afterwards, and upon which is to conduct its operations.
✓ It is the amount of capital fixed or indicated in the articles of incorporation which is
divided in shares of stock
✓ The share, contributed or paid-in capital is further divided into the following:

a. Legal Capital is the portion of the contributed capital of the minimum amount of
paid-in capital, which must remain in the corporation for protection of corporate
creditors. In case of:
Par value shares, legal capital is the aggregate par value of all issued and
subscribed shares.
No-par shares, legal capital is the total consideration received by the corporation
for the issuance of its shares to the shareholders including the excess of issue
price over stated value (Section 6, par. 3, Corporation of the Phils.).
b. Share Premium (Additional Paid-In Capital). It is the portion of the paid capital
representing amounts by paid b shareholders in excess of par.
✓ It is basically classified into two, namely:
a. Ordinary share - This share represents the basic ownership class of the
corporation that bears the ultimate risk of loss which guaranteed neither dividends
nor assets upon dissolution.
b. Preference share - This share gives the ownership certain advantages over
ordinary shareholders either to the receipt of dividends when declare or to priority
claims on assets in the events of corporate liquidation.
2. Authorized Share Capital
✓ The number of authorized share indicates the maximum number of share the corporation
can issue as specified in the article of incorporation.
3. Issued Share Capital

✓ These are shares which have a sold and paid in full.
4. Unissued Share Capital
✓ Represents the total number of available shares in the control of a corporation at any
point.
5. Subscribed Share Capital
✓ It is the portion of the authorized share capital that has been subscribed but not yet fully
paid.
6. Outstanding Share Capital
✓ These are issued shares, which are in the hands of the shareholders.
✓ The number of outstanding shares will equal the difference between the issued shares
and the treasury shares.
7. Treasury Stock
✓ These are issued shares acquired by the corporation but not retired and are therefore,
awaiting to be reissued at a later date.
ACCOUNTING FOR ISSUANCE OF SHARE CAPITAL
When shares are sold

✓ with par value, the proceeds should be credited to the share capital account to the extent of
the par value of the shares, with any excess being reflected as share premium.

✓ without par value, the proceeds should be credited to the share capital account. If the non-
par stock has a stated value, the excess proceeds over stated value may alternatively be
credited to share premium
CONSIDERATION FOR ISSUANCE OF SHARES
Share capital may be issued in exchange for any of the following considerations.
1. Actual cash paid to the corporation;
2. Tangible or intangible properties actually received by the corporation;
3. Labor already performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion;
7. Shares of stock in another corporation; and/or
8. Other general accepted form of consideration.
SHARE ISSUANCE FOR CASH
1 With Par Value

Narsan Holdings is authorized to issue shares, P1,000,000 ordinary shares divided into 10,000 with
par value of P100 per share.
a) Issuing share capital at par Cash 200,000
The diversified corporation issued on cash basis Ordinary Shares 200,000
2,000 shares at par
b. Issuing Share Capital above Par Cash 300,000
Suppose the 2,000 shares were sold at P150 per Ordinary Shares 200,000
share Share Premium 100,000
2 Without Par Value
Morning Star Travel is a domestic corporation engaged in the business of organizing tour packages
for Asian and European visitors to the Philippines. The entity which is located at J. Bocobo St.
Manila, has two classes of shares – preference shares and no-par ordinary shares.
a) Issuing no-par share capital Cash 85,000
5,000 ordinary shares were issued for P85,000. Ordinary Shares 85,000
b. Issuing no-par share capital without stated Cash 125,000

value. Ordinary Shares 125,000
Suppose that Morning Star Travel’s no- par Alternatively,
ordinary shares have a stated value of P20. The Cash 125,000
entity issued 5,000 shares at P25 per share. Ordinary Shares 100,000
Share Premium 25,000

SUBSCRIPTION OF SHARES
There are times when a corporation sells its shares directly to investors on subscription basis. A
subscriber becomes a shareholder upon subscription but the stock certificates evidencing ownership
over shares of stock are not issued until the full collection of the subscription.
Illustration. Warranty Auto Shop, Inc. is a quality car care center located at St. Paul St., San Antonio
Village, Makati City. Assume that 5,000 shares of P10 par value ordinary shares of the corporation
were sold on subscription at P12 per share on Sept. 1, 2019 to Ashley Langga. Subscription
installments of P24,000 and P36,000 will be due on Sept. 16 and 30, respectively.
The related entries follow:

Subscriptions Receivable 60,000
Subscribed Ordinary Share 50,000
To record subscriptions above par.
Cash 24,000
To record initial installment
Cash 36,000
To record final installment
Subscribed Ordinary Shares 50,000

To record issuance of stock certificate
Think of it! What if the subscriber fails to settle the subscriptions in full on the date specified in the
subscription contract?
In such case, the subscribed shares are declared delinquent shares. The usual remedy is to dispose
of these shares in a public auction of the account of the delinquent subscriber to the highest bidder
who is willing to pay the “offer price” which includes the full amount of the subscription balance accrued
interest, cost of advertisement and expenses of auction sale in exchange for the smallest number of
shares.

Illustration. Assuming the same facts as above except that the subscriber failed to settle part of his
subscriptions in the amount of 48,000. After complying with legal procedures pertaining to delinquency
sales, a public auction was held. The offer price is P56,000 including P3,000 accrued interest and
P5,000 expenses of sale. Three bidders are willing to pay the offer price namely:
Lemore Loqueloque 4,300 shares
Luz Un 4,500 shares
Winnie Villanueva 4,700 shares
Who is the highest bidder among the three? How many shares the original subscriber will get?
Loqueloque is the highest bidder because he is willing to pay the offer price for smallest number of
shares which is 4,300 shares. Ashley Lannga, the original subscriber, gets 700 shares.

To record subscription above par
Cash 12,000
To record partial initial installment
Receivable from Highest Bidder 3,000

Interest Revenue 3,000
To record accrued on Delinquent shares

Cash 5,000
To record auction expense
Cash 56,000
To record sale and public auction

To record issuance of stock certificates
Think of it! What if there is no any bidder? In this case, the corporation may bid for the delinquent
shares and the total amount due shall be credited as paid in full in the book of corporation. These
shares shall be considered as treasury shares. All the other entries will be the same except for the
following:
Treasury Stock 56,000

Subscription Receivable 48,000

To record purchase of own shares
_____ 1) Legal Capital is the portion of the contributed capital of the minimum amount of paid-in capital,
which must remain in the corporation for protection of corporate creditors.
_____ 2) Treasury stock is reported as an asset on the statement of financial position because treasury
shares may be sold later
_____ 3) The highest bidder in delinquency sale is the person willing to pay the “offer price” which
includes the full amount of the subscription balance accrued interest, cost of advertisement
and expenses of auction sale in exchange for the largest number of shares.
_____ 4) Treasury stock may either be ordinary or preference share.
_____ 5) The sale of treasury stock at an amount greater than cost results in a gain to be reported on
the income statement
_____ 6) In the event of liquidation, shareholders whose stock is preferred as to assets are entitled to
receive the par value of their shares before any amounts are distributed to ordinary
shareholders.
_____ 7) The reissuance of treasury stocks for less than their par or issued value is prohibited by law.
_____ 8) When ordinary shares with par value are sold for a price higher than par value the Ordinary
Shares account is credited only for the par value of the shares sold.
_____ 9) Ordinary shares may be issued at a price lower than its par value
_____ 10) Outstanding shares is the difference between issued shares and treasury shares
_____ 11) A person owning stock on the date of record will receive share dividends that have been
declared.
_____ 12) The declaration of a cash dividend causes an increase in a corporation’s liabilities at the
date of record.
_____ 13) A share dividend will cause an increase in total share capital at the date the dividend is
declared.
_____ 14) Retained earnings represent cash readily available for dividends.
_____ 15) A share dividend does not affect the total amount of shareholders’ equity

Roa Corporation's articles authorized the issuance of 100,000 ordinary shares. Roa sold the following ordinary
shares during 2018.
Feb. 12 sold 1,000 shares for P100,000.

July 10 sold 5,000 shares for P630,000.
Nov. 5 sold 7,500 shares for P1,050,000
Required:
Prepare journal entries to record each issuance, assuming that:
1. the ordinary shares has P100 par value.
2. the ordinary shares has a P10 stated value.
3. the ordinary shares has no-par or stated value.
C. LESSON WRAP-UP
session.


KEY TO CORRECTION
Activity 2
1. T 9. F
2. F 10. T
3. F 11. T
4. T 12. F
5. F 13. F
6. T 14. F
7. T 15. T
8. T
Activity 3
1.
2.

Teacher’s Guide Module #20
3.

Lesson title: Corporations: Share Capital (Part 2) Materials:

1. Distinguish the term related to the share capital
2. Record the accounting for issuance of share capital, References:
subscription of share and treasury stock Partnership and Corporation
Productivity Tip: Comprehend not memorize. When studying, paraphrase your notes instead of
trying to remember everything word-for-word. This will help especially for essay questions where
elaboration is necessary.
We are now on the second part of learning about share capital.

In this module, we will discuss the share-based payments and the two methods of accounting
for share capital. Not only that, but we will also tackle about the different types of preference shares.
So, what more are we waiting for? Let’s now continue our discussion. Happy learning!
B. MAIN LESSON
SHARED-BASED PAYMENTS
Form Classification and Features

Equity-Settled Entity receives goods or services as consideration for its own
equity instruments including shares and share options
Cash-Settled Entity acquires goods or services by incurring liabilities for
amounts based on the value of its own equities
Equity-Settled with Cash Alternative Entity receives or acquires goods or services and the entity or
the supplier, has the choice of whether the transaction is settled
in cash or equity instruments.
Measurement
• Share-based payments to non-employees are measured at fair value of the goods or
services received. If the fair value of the goods or services received cannot be reliably
determined, then the fair value of the equity instruments is used. The measurement date is the
date the entity obtains the goods or the counterparty renders services.
• Share-based payments to employees including share options, the transaction should be
measured at the fair value of the equity instruments granted because the fair value of the

service provided by the employees generally is not reliably measurable. The fair value of the
share options must be determined at the date the options are granted.
Definition of Terms
• The grant date is the date at which the entity and another party (including an employee)
agree to a share-based payment arrangement. At grant date, the entity confers on the
counterparty the right to cash or equity instruments of the entity, provided the specified vesting
conditions, if any, are met.
• To vest means to become an entitlement. Under a share-based payment arrangement, a
counterparty's right to receive cash or equity instruments of the entity vests when the
counterparty's entitlement is no longer conditional on the satisfaction of any vesting
conditions. The vesting date is when the cash or equity instruments granted vest.
• The vesting period is the period during which all the specified vesting conditions of a Share-
based payment arrangement are to be satisfied.
• Vesting conditions are the conditions that determine whether the entity receives the services
that entitle the counterparty to receive cash or equity instruments of the entity, under a share-
based payment arrangement.
o Service conditions require the counterparty to complete a specified period of service.
o Performance conditions require the counterparty to complete a specified period of
service and specified performance targets to be met.
Recognition
Vesting Circumstances Treatment

Equity instrument vests immediately Recognize the services as employee benefits expense (in
full) and the increase in equity on grant date.
Equity instrument does not vest until the Recognize the services and the increase in equity as they
counterparty completes a specified period are across the vesting period.
of service
Equity-Settled Share-Based Payment Transactions

Where a grant of equity instruments cis conditional upon satisfying specific vesting conditions, the
total expense (total employee benefits expense) should be measured using the grant date fair
value of the share-based payment and this total expense should be recognized over the vesting
period.
Total Expense No. of Equity % of Equity Instruments Grant Date Fair Value (of
= Instruments Granted x Expected to Vest x Equity Instruments Granted)
Cash-Settled Share-Based Payment Transactions

For cash-settled share-based payment transactions, the entity should measure the goods or
services acquired and incurred at the fair value of the liability. Until the liability is settled, the
liability is remeasured to fair value at the end of each reporting period and at the date of
settlement. Any changes in fair value are recognized in profit or loss for the period.

TREASURY STOCKS
• are shares of stock which have been issued and fully paid for, but subsequently reacquired by the
issuing corporation either by purchase, redemption, donation or through other lawful means.
• Section 40 of the Revised Corporation Code provides that a stock corporation has the power to
purchase its own shares for a legitimate purpose provided it has unrestricted retained earnings.
• If an entity reacquires its own equity instruments, these instruments (‘treasury shares’) shall be
deducted from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale,
issue or cancellation of an entity’s own equity instruments. (IAS No.32, par.33)
• Treasury stock is not an asset because the corporation may not own shares of itself. To reiterate, it
is reported as a deduction from the total shareholders' equity.
Illustration. Plantation EcoResort is a world class destination in Indang, Cavite. The operations have
been successful. To consolidate control over the enterprise and thus avoid a corporate takeover by
outsiders, the board of directors decided to minimize outstanding shares by purchasing 1,500 shares
with par value of P1,000 for P2,000. The entry will be:
1. Purchase of Treasury Stock

Treasury Stock 3,000,000
Cash 3,000,000
To record acquisition of treasury shares
2. Reissuance of Treasury Stock

a. At cost. Assume that the treasury shares were subsequently reissued at cost.
Cash 3,000,000
To record reissue of treasury shares at cost
b. Above cost. Assume that all treasury shares were reissued at P2,500 per share
Cash 3,750,000
Share Premium – Treasury 750,000
To record reissue of treasury shares above cost.
b. Below cost. Assume that the 1,500 treasury shares were reissued at P1,500 per share.
Cash 2,250,000
Retained Earnings 750,000
To record reissue of treasury shares below cost.
The excess of the cost over reissue price of P750,000 should be debited to share
premium-treasury to the extent of its balance. In the absence of any balance in this account, the

“loss” is debited to retained earnings. It is assumed in the above illustration that the share
premium-treasury has a zero balance.
3. Retirement of Treasury Stock

The shares purchased may be subsequently retired. The Ordinary Shares account is reduced
by its par value.
a. With gain on retirement. Assume that the Plantation Eco Resort purchased the treasury
shares for P750 per share.
Ordinary Share 1,500,000
To record retirement of treasury shares.
b. With loss on retirement. Assume that a total of 10,000 shares have been issued at P1,500
per share prior to the purchase or treasury shares. Plantation EcoResort purchaced 1,500
treasury shares for 2,000 per share; these were not reissued and were ultimately retired.
Ordinary Shares (1,500 shs. x P1,000 par) 1,500,000

Share Premium* 750,000
Treasury Stock (1,500 shs.x P2,000 cost ) 3,000,000
To record retirement of treasury shares
*1,500 retired shares x (P1,500 issue – P1,000 par ) = P750,000
The “loss” on retirement of P1,500,000 should be debited to the following accounts in the order
given:
1. share premium to the extent of the credit when the share is issued.
2. share premium from treasury stock transactions of the same class or share;
3. retained earnings.
DONATED CAPITAL
• Contributions, including shares of the corporation, received from shareholders should be
recorded at the fair market value of the items received, with the credit going to share premium.
• If significant, such contributions may be designated as donated capital.
• If the donation is in the form of shares of the corporation, the account share premium or
donated capital is credited at the time the shares are reissued.

TYPES OF PREFERENCE SHARES
Preference Share Distinctions

1. Callable Preference Callable preference shares give the issuing corporation the right to
Shares purchase (retire) the shares from its holders at a specified price. The
amount paid to call and retire a preference share is its call price. It is
important to state that the redemption date is not definite for it is
dependent on the corporation exercising its "call."
2. Redeemable Some financial instruments take the legal form of equity but are liabilities
Preference Shares in substance and others may combine features associated with equity
instruments and features associated with financial liabilities.
International Accounting Standards (IAS) No. 32, Financial Instruments,
paragraph 17, states that:
a. a preference share that provides for mandatory redemption by the
issuer for a fixed or determinable amount at a fixed or
determinable future date, or gives the holder the right to require
the issuer to redeem the instrument at or after a particular date for
a fixed or determinable amount, is a financial liability.
b. a financial instrument that gives the holder the right to put Lit back
to the issuer for cash or another financial asset (a 'puttable
instrument'), is a financial liability.
3. Convertible Preference Preference share is more attractive to investors if it carries a right to.
Shares exchange preference shares for a fixed number of ordinary shares.
When a corporation prospers and its ordinary shares increases in value,
convertible preference shareholders can share in this success by
converting into the more valuable ordinary shares.
RECAPITALIZATION
Recapitalization is manifested when there is a change in the capital structure of the corporation. The
typical capitalizations are as follows:
Change from Par to No-Par

Ordinary Shares, P50 par value, 50,000 shares P2,500,000
Retained Earnings 1,250,000
If all the par value shares are cancelled and replaced with the same number of P25 stated value
shares, the recapitalization entries will be:
Ordinary Shares 2,500,000
Share Premium-Ordinary 250,000
Ordinary Shares (50,00 shs. x P25) 1,250,000
Share Premium-Recapitalization 1,500,000

Change from No-Par to Par
Ordinary Shares, no-par, P50 stated value, 50,000 shares P2,500,000
If all the no-par value shares are cancelled and replaced with the same number of P75 par value
shares, the recapitalization entries will be:
Ordinary Shares, no-par 2,500,000
Ordinary Shares, P75 par (50,00 shs. x P75) 3,750,000
Reduction of Par Value
Ordinary Shares, P100 par value, 25,000 shares P2,500,000
If the par value is reduced to P80, the recapitalization-entries will be:
Ordinary Shares (25,000 shs. P20) 500,000
Share Premium-Recapitalization 500,000
Reduction of Stated Value
Ordinary Shares, P100 stated value, 25,000 shares P2,500,000
If the stated value is reduced to P80, the recapitalization entries will be:
Ordinary Shares (25,000 shs. x P20) 500,000
Share Premium-Recapitalization 500,000
Direction: Encircle the letter of the correct answer.
1. Treasury stock is considered to be

a. authorized and issued shares
b. issued and outstanding shares
c. authorized and unissued shares
d. unissued and outstanding shares
2. Authorized shares are the

a. number of shares that have been issued to shareholders
b. total number of shares that can be issued by the company at any time
c. number of shares that are owned by shareholders at the balance sheet date
d. number of shares the company has repurchased

3. When ABC Company Inc., it was authorized to issue 1,000,000 shares of common stock. It
immediately issued 50,000 shares. In 2015, it issued an additional 20,000 shares. In 2019, it
repurchased 5,000 shares with the intent of reissuing them. On December 31, 2019, balance sheet,
ABC Company would show
a. 50,000 shares issued and 45,000 shares outstanding
b. 70,000 shares issued and 70,000 shares outstanding
c. 70,000 shares issued and 65,000 shares outstanding
d. 1,000,000 shares issued and outstanding
4. On a statement of financial position, treasury stock is shown as a (an)

a. asset
b. liability
c. deduction from ordinary shares account
d. deduction from total shareholders’ equity
5. Which of the following is a characteristic of ordinary shares?

a. Voting rights
b. guaranteed dividends
c. Maturing date
d. Receives dividends before preference shareholders
6. Which of the following is a characteristic of preference shares?

a. Voting rights
b. guaranteed dividends
c. Maturing date
d. Receives dividends before preference shareholders
7. XYZ, Inc. has issued 200,000 shares of P1 par value ordinary shares at P15. If it repurchases 5,000
shares during 2019 at P20
a. profit would decrease by P25,000
b. profit would decrease by P100,000
c. shareholders’ equity would decrease by P25,000
d. shareholders’ equity would decrease by P100,000
8. When ordinary shares are sold on subscription
a. a shareholders’ equity account called Subscription Receivable is used to record the par
value of the shares issued
b. the Ordinary Shares account is credited when the subscription contract is signed and a
down payment is received
c. the Ordinary Shares account is credited when the subscription price has been fully paid
and there is issued
d. the Ordinary Shares account is not used. Shares issued on subscription are credited to
Subscribed Ordinary Shares, a permanent shareholders’ equity account.

9. How would the declaration of 25% share dividend by a corporation affect each of the following?
Retained Earnings Share Premium
a. No Effect No Effect
b. No Effect Decrease
c. Decrease No Effect
d. Decrease Decrease
10. The journal entry to record the declaration of a large dividend included
a. a debit to retained earnings for the market value of the shares to be distributed
b. a credit to shares distributable for the fair value of the shares to be distributed
c. a credit to share premium for the difference between the fair market value and par value
of the shares to be distributed
d. a debit to retained earnings for the par value of the shares to be distributed
The Dec. 31, 2018 shareholders' equity section of Refozar Corporation's statement Of financial position is as
follows:
Refozar Corporation
Partial Statement of Financial Position
December 31, 2018
Shareholders’ Equity
Share Capital
Ordinary Shares, P4 par, 200,000 shares authorized,
150,000 shares issued and outstanding P 600,000
Total Share Capital P 975,000
Total Shareholders' Equity P1,340,000
Required:
Prepare the journal entries to record the following transactions that took place during January 2019:
Jan. 4 Purchased 24,000 shares of its own Refozar's stock for P168,000.
10 Sold 4,000 shares of the treasury stock for P9 per share.
29 Sold 14,000 shares of the treasury stock for P6 per share.
31 Sold the remaining 6,000 shares of treasury stock for P 7 per share.

C. LESSON WRAP-UP
session.

FAQs
1. What is the difference between share capital and capital stock?

- The Corporation Code uses the term capital stock while the Philippine Financial Reporting
Standards (PFRS) uses the term share capital. Although both terms mean the same thing,
officially changing the term capital stock to share capital needs the intervention of the
Philippine Congress. (Aduana, Nick L., 2016, Partnership and Corporation Accounting)
2. What will happen in case the amount of retained earnings is not sufficient to absorb the so called
“losses on treasury shares?
- In the first place, the corporation will not be able to acquire its own shares if the amount of its
retained earnings is not sufficient to cover the cost of the treasury shares. In other words,
there is no possibility of having treasury share; there can be no reissuance. (Aduana, Nick L.,
2016, Partnership and Corporation Accounting)

KEY TO CORRECTION
Activity 2
1. A
2. B
3. C
4. D
5. A
6. D
7. D
8. C
9. C
10. D
Activity 3
Journal Entries:
January 4 Treasury Shares 168,000

Cash 168,000
January 10 Cash 36,000
Treasury Shares 28,000
Share Premium 8,000

Lesson title: Corporations: Retained Earnings (Part 1) Materials:

1. Define dividends in general.
2. Discuss the three important dates in the distribution of References:
any dividend. Partnership and Corporation
Productivity Tip: Write Everything Down. An easy memory trick is to write everything down in class.
Our brain tends to remember the things we write down much more than the things we hear. Taking
notes, makes the words more visual and helps them store in your long-term memory.
Welcome! This module contains the last part of our discussion of accounting for corporation. Are you
ready to learn more about the topic? Let’s go!
B. MAIN LESSON
RETAINED EARNINGS
Retained earnings represent the component of the shareholders' equity arising from the retention of
assets generated from the profit-directed activities of the corporation.
DIVIDENDS
Distributions to shareholders of cash, property or stocks from unrestricted retained earnings on the
basis of all issued and fully paid shares, and all subscribed par value shares except treasury shares
are called dividends. Dividend declarations reduce retained earnings.
PRIOR PERIOD ERRORS

Prior period errors are errors discovered in the current period that are of such significance that the
financial statements of one or more prior periods can no longer be considered to have been reliable
at the date of their issue.
DEFICIT
A debit balance in the Retained Earnings account resulting from accumulated losses.

DIVIDENDS in General
• Retained earnings is not a cash fund waiting to be distributed as dividends. It is an owners'
equity account representing claim on all assets in general and not on any asset in particular.
• Shareholders are not guaranteed dividends and dividends do not become a liability of the
corporation until the board of directors has formally declared a dividend distribution.
• Dividends may take the form of cash, property or additional shares of stock of the corporation.
• As a general rule, any form of dividend declaration should be based on the total subscription of
a shareholder and not merely on the shares already paid.
• The declaration and payment of dividends involve three important dates.
Date of Declaration
On the date of declaration, the board of directors will adopt a resolution declaring that a dividend
is to be paid. The resolution will specify the amount, type and date of payment of this dividend. It
will also set a date of record. An entry is made debiting Retained Earnings and crediting a
dividend liability or Shares Distributable account.
- Cash dividends - declared solely by the board of directors
- Share dividends - concurrence of at least 2/3 of the outstanding shareholders
Date of Record
A list of shareholders entitled to the declared dividends is prepared at the date of record. If an
investor buys a share of stock after this date, he will not receive the dividend. The share is said to
be traded ex-dividend. No entry is required on this date.
Date of Payment
The corporation settles its liability on this date. An entry is made debiting the dividend liability or
shares distributable account and crediting cash, property distributed or share capital.
CASH DIVIDENDS
In declaring cash dividends, a corporation must have both an appropriate amount of retained earnings
and the necessary amount of cash. Dividends on par value shares are stated as a certain percentage of
the par value. As to no-par value shares, the dividends are stated at a certain amount per share. When
the board of directors declares a cash dividend, an entry is made debiting Retained Earnings and
crediting Cash Dividends Payable.
Illustration. Made Easy Bookstore, Inc., a nationally-known business books distribution entity, declared
a cash dividend of P12 per share of ordinary shares on July 1. The dividends are payable on August 1 to
shareholders of record on July 21. The entity has 100,000 ordinary shares issued of which 7,000 shares
are held in treasury. The entries to record the dividend declaration and payment are as follows:
Retained Earnings* 1,116,000

Cash Dividends Payable 1,116,000
To record declaration of dividend.
* P12 per share (100,000 issued shares — 7,000 treasury shares) = P1,116,000
The account, Cash Dividends Declared, may be used in place of the debit to Retained Earnings, At the
end of the accounting period, this temporary shareholders' equity account will be closed by debiting
Retained Earnings and crediting Cash Dividends Declared.

Cash Dividends Payable 1,116,000

Cash 1,116,000
To record payment of dividend.
Cash dividends payable are reported as current liabilities in the statement of financial position. Note that
cash dividends decrease total assets and total shareholders' equity. It is worthwhile to reiterate that with
the exception of treasury shares, all issued and fully paid shares, and all subscribed par value shares
are entitled to dividends when declared. The subscribed shares must be par value shares. No-par value
shares are considered as legally issued only when fully paid. Unissued shares, subscribed no-par
shares and treasury shares are not entitled to dividends.
PROPERTY DIVIDENDS
A distribution to shareholders that is payable in non-cash assets is generally referred to as property
dividends or dividends in kind. An entity shall measure a liability to distribute non-cash assets as a
dividend to its owners at the fair value of the assets to be distributed.
Illustration. 3S Food Industries, Inc. based in Pulilan, Bulacan has 5,000 shares investment in another
entity accounted for as nonmarketable equity investment. The carrying amount of this investment is
P500,000. On Dec. 1, 2019, this growing food corporation declared as property dividends this
investment to all it outstanding par value shares to be distributed on Dec. 15, 2019. The fair market
value of the investment at the declaration date was P950,000. There was no change in fair value on
settlement date, The entries to record the dividend declaration and distribution are as follows:

Property Dividends Payable 950,000
To record declaration of dividend.
Property Dividends Payable 950,000

Investment in Equity Securities 500,000
Gain on Distribution of Property Dividends 450,000
To record distribution of dividend.
SHARE DIVIDENDS
A corporation may distribute to shareholders additional shares of the entity's own share as share
dividends. Share dividends or bonus issues are fundamentally different from cash or property dividends
because share dividends do not transfer assets to the shareholders. This type of dividend affects only
the accounts within the shareholders' equity. Share dividends increase the total share capital and
decrease the retained earnings account. Because both of these are components of shareholders' equity,
total shareholders' equity is unchanged.
Small Share Dividends

Small share dividends are dividends in which the additional shares issued are less than 20% of the
previously outstanding shares. These share dividends are recorded by transferring from retained

earnings to share capital (ordinary shares and share premium accounts) the fair market value of the
additional shares to be issued. In cases when the fair market value is lower than the par or stated value,
the par or stated value will be the basis for recording.
Illustration. Siobe! Your Japanese Fastfood, Inc. chain is blessed with years of profitable operations for
its commitment to serve affordable and healthy Japanese food favorites. The shareholders equity before
declaration of a 10% share dividend is as follows:
Ordinary Shares, P50 par/ 20,000 shares issued P1,000,000

and outstanding
Total Share Capital P1,200,000
Total Shareholders' Equity P1,850,000
The declaration of a 10% share dividend will require the issuance of an additional 2,000 shares. Assume
that the corporation's share is being traded at the stock exchange and that the stock market price per
share is P10. The fair market value of the shares to be distributed is P220,000. The entries will be:

Shares Distributable 100,000
To record declaration of 10% share dividends.

To record issuance of share dividends.
Large Share Dividends

If the share dividend is 20% or more of the previously outstanding shares such that the effect is to
reduce materially the market value per share, then only the par or stated value is credited to ordinary
shares with a corresponding debit to retained earnings.
Illustration. Assume instead that Siobe! Your Japanese Fastfood, Inc. chain declared a 20% share
dividend on its 20,000 issued and outstanding P50 par value shares. The corporation will issue
additional 4,000 shares due to the share dividend. The entries will be:
To record declaration of 20% share dividends.

To record issuance of shard dividends.

LIQUIDATING DIVIDENDS
Liquidating dividends are not distributions of earnings but rather returns of capital to the investing
shareholders. This type of dividend can be legally paid only under either of the following circumstances:
(1) when the corporation is under dissolution and liquidation or (2) when the corporation is engaged in
the exploration of natural resources.
_____ 1) Share dividends increase the proportionate interests of the shareholders because of the
increase in their shareholdings.
_____ 2) For most companies, the amount and timing of dividend declarations are determined by the
shareholders at their annual meeting.
_____ 3) Retained earnings consist of a pool of funds to be distributed to shareholders.
_____ 4) A liquidating dividend is usually paid when a corporation is going out of business or reducing
its operations.
_____ 5) Dividends are contractual obligations of the corporation which must be paid at regular
intervals.
_____ 6) In case of liquidation, the claims of the preference shareholders are given preference over the
claims of creditors.
_____ 7) Retained earnings represent cash readily available for dividends.
_____ 8) Dividends in arrears refer to passed preference dividends which must be satisfied before any
dividends may be paid on ordinary shares.
_____ 9) In most cases, corporations pay out dividends equal to profit unless specific restrictions, either
legal or financial, are stated in the annual report.
_____ 10) The date on a statement of changes in shareholders' equity is for a period of time rather than
for a specific point in time.
Direction: Provide the answer to the following questions.
Problem 1. Oledan Corp. earned P1,450,000 during the first year of its operations. Prepare an entry to
close the income to the retained earnings account.

Problem 2. Sajorda Corp., a corporation with listed shares, declares a 10% share divided (less than
20%). It has 10,000 shares issued and outstanding with par value of P100. On the date of declaration,
the market value per share is P105. Prepare the necessary journal entries.
C. LESSON WRAP-UP
b) Think about your learning by filling up your “My Learning Tracker” below. Write your learning targets, your
scores, and learning experience for this session and deliberately plan for our next learning session.


KEY TO CORRECTIONS
Activity 2
1. False - From the shareholders' point of view, a share dividend does not change their percentage interests in
the corporation although total outstanding shares have increased.
2. False - the amount and timing of dividend declarations are determined by the shareholders anytime.
3. False - Retained earnings is not a cash fund waiting to be distributed as dividends. Instead, it is an owners'
equity account representing claim on all assets in general and not on any asset in particular.
4. False – Liquidating dividend is paid when the corporation is under dissolution and liquidation or when the
corporation is engaged in the exploration of natural resources.
5. False – Dividends are constructive obligation, not contractual.
6. True
7. False - Retained earnings is not a cash fund waiting to be distributed as dividends.
8. True
9. False – The corporation may have a sizeable balance in this account but may not have cash to pay a cash
dividend.
10. True
Activity 3
Problem 1
Income Summary P1,450,000
Retained Earnings P1,450,000
Problem 2
Retained Earnings P105,000
Share Dividend P100,000
Distributable
Share Premium 5,000

Lesson title: Corporations: Retained Earnings (Part 2) Materials:

1. Define dividends in general.
2. Discuss the three important dates in the distribution of References:
any dividend. Partnership and Corporation
Productivity Tip: Write Everything Down. An easy memory trick is to write everything down in class.
Our brain tends to remember the things we write down much more than the things we hear. Taking
notes, makes the words more visual and helps them store in your long-term memory.
Welcome! We are now on our last module for this subject and this will be the last part of our discussion
for corporations and retained earnings. So let’s now continue with our discussion.
B. MAIN LESSON
SHARE SPLITS
Corporations reduce the par or stated value of its share capital and issues additional shares to its
shareholders through the practice referred to as share splits. The par or stated value per share will
decrease with a corresponding increase in the number of authorized, issued and outstanding shares. In
effect, there is no change in the balances of the shareholders' equity accounts. The following are some
reasons behind a share split:
• To adjust the market price of the corporation's shares to a level where more individuals can
afford to invest in the stock.
• To spread the shareholder base by increasing the number of outstanding shares.
• To benefit existing shareholders by allowing them to take advantage of an imperfect
adjustment following the split.
When shares are selling below a desired price or when management wishes to take control of the entity,
the corporation may consider a reverse split that can be accomplished by increasing the par or stated
value of its share and reducing the shares outstanding. There will be no journal entry required; a memo
entry is sufficient.

DIVIDENDS ON PREFERENCE AND ORDINARY SHARES
A corporation may issue both preference and ordinary shares. Preference shares enjoy preference as to
dividends. When the board of directors declares cash dividends, preference shareholders are entitled to
dividends before ordinary shareholders receive any distribution.
Non-Cumulative Preference Shares

- entitle the holders only to the payment of current dividends, if and when dividends are declared,
to the extent of the preference rate, before the ordinary shareholders are paid. If there is no
dividend declaration for a certain year, then the dividend for that year is forfeited.
Cumulative Preference Shares
- entitle the holder to payment not only of current dividends but also of back dividends or dividends
in arrears, if and when dividends are declared, before the ordinary shareholders are paid.
Non-Participating Preference Shares
- entitle the holders only to the extent of the stipulated preference dividend.
Participating Preference Shares
- entitle the holders to participate with the holders of ordinary shares pro-rata in the remainder
after the ordinary shareholders have received their initial share based on the preference rate.
PRIOR PERIOD ERRORS

Prior period errors are omissions from and other misstatements of the entity's financial statements for
one or more prior periods that are discovered in the current period. Material prior periods must be
restated to report financial position and results of operations as they would have been presented had the
error never taken place. The amount of the correction of a prior period error that relates to prior periods
should be reported by adjusting the opening balances of retained earnings and affected assets and
liabilities. The correction of a prior period error is excluded from profit or loss for the period in which the
error is discovered.
RESTRICTIONS ON RETAINED EARNINGS

A corporation may be required by law or contractual arrangements to set aside a portion of the retained
earnings for specified purposes. In addition, the board of directors may voluntarily designate a portion of
retained earnings for future expenses, contingencies or other purposes. This portion of the retained
earnings is referred to as restricted or appropriated retained earnings.
BOOK VALUE PER SHARE

Book value per share is the amount that would be paid on each share if the corporation is liquidated.
The amount available to shareholders is exactly the amount reported as shareholders’ equity. When
only a single class of share is outstanding, the book value per share is computed by dividing the total
shareholders' equity by the number of shares outstanding.
Illustration. Assume that Severino Ramos Security Agency has a total share equity of P180,000 and
5,000 shares of ordinary shares outstanding. The book value per share is P36 (P180,000/5,000 shares).
When both preference and ordinary shares are outstanding, the preference shareholders have
preference over ordinary shareholders as to the distribution of assets upon corporate liquidation.

The preference shareholders have the right to receive assets equal to the par value or a larger stated
liquidation value per share. Liquidation value is the cash price or other consideration that can be
received in a forced sale of assets such as that occurring when a firm is in the process of going out of
business. Typically, the liquidation value is less than what could be received from selling assets in the
ordinary course of business.
The book value per share of the preference shares is the sum of its liquidation value, if applicable, plus
any current and dividends in arrears divided by the number of preference shares' outstanding.
Ordinary shareholders' equity is obtained by deducting from total shareholders' equity the preference
shareholders' equity. The book value per share of the ordinary shares is computed by dividing the
ordinary shareholders' equity by the number of ordinary shares outstanding.
Direction: Try this exercise and see how well do you understand the concepts about retained earnings.
Encircle the letter of the correct answer.
1. The cumulative feature of preference shares

a. Limited amount of cumulative dividends to the value of the preference shares.
b. Requires that dividends paid in any year must be made up in a later year before dividends are
distributed to ordinary shareholders.
c. Means that the shareholder can accumulate preference shares equal to the par value of ordinary
shares which time preference shares can be converted into ordinary shares.
d. Enables preference shareholder to accumulate dividend to the par value of the shares.
2. Which feature of preference share would most likely be opposed by ordinary shareholders?
a. Callable
b. Convertible
c. Redeemable
d. Participating
3. How should cumulative preference dividends in arrears be reported?

a. Increase in noncurrent liabilities
b. Note disclosure
c. Increase in current liabilities
d. Increase in shareholder's equity
4. Which of the following rights is most commonly enhanced in an issue of preference share?
a. The right to vote for the board of directors.
b. The right to vote on major corporate issues.
c. The right to maintain proportional interest.
d. The right to receive a full cash dividend before dividends are paid to other classes of share capital.

5. Noncumulative preference dividends in arrears
a. Are disclosed is liability until paid.
b. Are not paid and not disclosed
c. Must be paid before any other cash dividends can be distributed.
d. Are paid to preference shareholders if sufficient funds remain after payment of ordinary dividend.
Direction: Determine the correct answer to the following problems.
Problem 1
Tarr Company reported the following shareholders’ equity on December 31, 2020:
Preference Share capital - 12%, 50 par, 20,000 shares 1,000,000

Ordinary Share capital, P25 par, 100,000 shares 2,500,000
Retained Earnings appropriated 100,000
Revaluation Surplus 300,000
Dividends on preference share have not been paid since 2013. The preference share has a liquidating
value of P55 and a call price of P58. What is the Book Value per preference share? ______________
Problem 2
Lawin Company provided the following information for 2020 and 2021:
Ordinary shareholders equity, December 31, 2020 4,400,000

Ordinary shareholders equity, December 31, 2021 5,000,000
Outstanding Ordinary Share, December 31, 2021 160,000
Preference Dividends paid for 2021 100,000
What is the book value per ordinary share for 2021? ____________________
Problem 3
On December 31, 2020 and 2021, Can Company had outstanding 40,000, 6% cumulative preference
shares of P100 par value and 200,000 ordinary shares of P10 par value. On December 31, 2020
preference dividends in arrears amounted to P120,000. Cash dividends declared in 2021 totaled
P440,000. What amount should be reported as dividend payable to preference and ordinary shares,
respectively in 2021?
Preference Shares Dividend: _________________________
Ordinary Shares Dividend: _________________________

C. LESSON WRAP-UP
b) Think about your learning by filling up your “My Learning Tracker” below. Write your learning targets, your
scores, and learning experience for this session and deliberately plan for our next learning session.


KEY TO CORRECTIONS
Activity 2
1. B
2. D
3. B
4. D
5. B
Activity 3
Problem 1
Problem 2
Book value per ordinary share (5,000,000/160,000) 31.25
Problem 3

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PHINMA EDUCATION

College of Management & Accountancy

Course Code: BAM 201

C. Subject Outline and Time Allotment (3 hrs/week):

D. Textbook and References:

F. Course Policy and Standards.

EMERITA J. MODESTO, CPA, CIA, MBA

Lesson title: Orientation Materials:

What is flexible learning set-up?

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Flexible Learning Module

A. In class, face-to-face, (2 days)

B. At home, self -study, (4 days)

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P1 = 40% Periodical Exam + 40% Quiz + 20% Class Standing

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Date Learning Target/Topic Scores Action Plan

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Lesson title: Partnerships: Basic Considerations and Formation Materials:

“Alone we can do so little; together we can do so much.” – Hellen Keller

Basic Consideration of Partnership

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ADVANTAGES AND DISADVANTAGES

PARTNERSHIP DISTINGUISHED FROM CORPORATION

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Registration is important in an organization as well as in partnership. As your guide, read Fundamentals

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4) Activity 4: Check for Understanding (5 mins)

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Date Learning Target/Topic Scores Action Plan

2. In the definition of partnership, what does person refer to?

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Lesson title: Partnerships: Basic Considerations and Formation Materials:

Productivity Tip: Stay organized and be thorough.

By mutual understanding, a partnership is formed. But even if an oral mutual agreement

ACCOUNTING FOR PARTNERSHIP

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Partner's Drawing Account

Loan Transactions between Partners and Partnership

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Valuation of Investments by the Partners

Adjustment of Accounts Prior to Formation

A partnership may be formed in any of the following ways:

Case 1. Individuals with no existing business form a partnership

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What is the journal entry to record the investment of Allister?

Case 2. A sole proprietorship and an individual without existing business

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Books of the Sole Proprietor

b AR net per ledger 230,000 Emi, Capital 2,000

c 10,000 x 12% x 3/12 300 Interest Receivable 700

d 40,000 x 14% x 6/12 2,800 Emi, Capital 2,800

e Furniture & Fixtures, per ledger 54,000 Emi, Capital 8,000

f Increase in Office Supplies 4,000 Office Supplies 4,000

Notes Payable 40,000

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2. Record the investment of the other partner (Andi)