Module 6: Authorization, Subscription and Issuance • Cumulative preference shares – entitled to undeclared

dividends.
Corporation • Non-cumulative preference shares – not entitled to
– An artificial being created by law having the rights of undeclared dividends.
succession, powers, and attributes. • Participating preference shares – entitled to excess
- continuity dividends.
- unlimited life • Nonparticipating preference shares – not entitled to
- At least 15 founders/incorporators excess dividends.
- Required to submit to SEC an Articles of Incorporation • Convertible preference shares – Pref. to Ord.
containing location, nature and purpose, by laws, etc. • Redeemable preference shares – Redeemable at any
time.
Stock/Share – Profit (BoD)
Non-stock – Member-oriented (BoT) Processes
• Authorization
Equity • Subscription and Issuance
- Shareholder’s Equity/Stockholder’s Equity • Receipt of dividends
- The residual interest in the assets of the entity after deducting • Reacquisition and Reissuance
all its liabilities. • Retirement
- It is comprised of all funds contributed by shareholders,
retained earnings, reserves representing appropriations of Authorization
retained earnings and reserves representing capital maintenance Art. of Inc. to SEC = Go signal for authorization of
adjustments. shares.
Stock – can issue shares.
Categories of Shareholders’ Equity Non-stock – cannot issue shares.
1. Share capital, consisting of preference share capital and
ordinary share capital Authorized Shares – SEC approves the maximum number of
2. Share premium or paid-in capital accounts described shares that a company may issue.
appropriately as to source, such as
• Paid-in capital in excess of stated value Memorandum Entry Method (Most commonly used)
• Paid-in capital from sale of treasury shares - Authorized to issue XXX shares of XXX share capital with
• Paid-in capital from retirement of shares par value of PXX.
• Paid-in capital from donated shares
• Paid in capital arising from bond conversion privilege Journal Entry Method
• Share options outstanding • Share warrants Unissued Share Capital XX
outstanding Authorized Share Capital XX
3. Retained earnings (inclusive of prior period adjustments) –
Profit or Loss The amount recorded is by multiplying the number of
4. Other comprehensive income such as unrealized gains/losses authorized shares and the par value or stated value.
on equity investments at fair value through other
comprehensive income, revaluation surplus and actuarial gains Issuance of Share Capital
and losses from foreign currency translation adjustment gains • Issuance for cash (including lump-sum payment for
and losses. ordinary shares and preference shares)
5. Contra-shareholders’ equity accounts are deducted from the • Issuance in exchange for noncash assets or property
appropriate shareholders’ equity accounts such as subscriptions • Issuance in exchange for services rendered
receivable (if not payable within 12 mos.) and treasury shares. • Sale of share capital on a subscription basis

Share Capital or Capital Stock Issuance for Cash

- It is the amount fixed by the corporate charter to be subscribed • Issuance at par value/ stated value
or paid in or secured to be paid by a shareholder of a Cash XX
corporation. Ordinary/Preference Share Capital XX
- # Shares Issued x Par/Stated Value • Issuance above par value
- Subscribed Cash (at issue price or selling price) XX
Ordinary Share Capital (at par or XX
Classes of Share Capital stated value)
- Preference share capital (Preferred Stock) Ordinary Share Premium XX
- Priority as to liquidation and dividends distribution. • Cannot issue below Par/Stated Value
- Ordinary share capital (Common Stock)
- Residual Share Example: Issuance for Cash
- Right to Vote The Tinola Corp. was organized on Jan. 1, 2020. It is authorized
Corporation cannot issue preference share only. to issue 10,000, P200 par value, ordinary share. On Jan. 8, 2020,
Always at par/stated value in entries. the corporation issued 5,000 shares.
• Issuance at 200.
Terminologies in Share Capital Cash (5000 x 200) 1000000
- Par value Ordinary/Preference Share 1000000
- Stated in Articles of Incorporation, Certificate of Capital (5000 x 200)
Stocks • Issuance at 250.
- Stated value Cash (5000 x 250) 1250000
- Not indicated in the Certificate of Stocks, but stated Ordinary Share Capital (5000 x 1000000
in Articles of Incorporation. 200)
- No par, no stated value Ordinary Share Premium (5000 x 250000
- Not stated in both. 50)
- Minimum of P5.

Classification of Preference Shares

Issuance of Ordinary Shares and Preference Shares for Ordinary Share Capital (5000 x 100,000
Lump-Sum Price 20)
- Both two types of shares at one price. Ordinary Share Premium 50,000
- Lump-Sum Price x Fair Value of Share/Total Fair Value
Scenario 2: The fair value of the services is undeterminable and
The Adobo Corp. was organized on Jan. 1, 2020. It is, the fair value of the share is P23.
authorized to issue 10,000, P150 par value, ordinary share and Pre-operating Expenses (5000 x 23) 115,000
5%, 10,000, P200 par value, preference shares. On Jan. 8, 2020, Ordinary Share Capital (5000 x 100,000
a stockholder purchased 2,500 ordinary shares and 1,000 20)
preference shares at P900,000. Currently, the fair value of the Ordinary Share Premium 15,000
shares are as follows: ordinary shares- P200; preference shares-
P250. Sale of Shares on a Subscription Basis
- Sales of shares on an installment basis
Class No. of Fair Value Total Fair - Issuance of shares will only happen upon full payment of the
Shares per Share Value subscription.
Ordinary 2,500 200 500,000 Example: Sale of Shares on a Subscription Basis
Preference 1,000 250 250,000 On December 3, 2019, the Tocino Corp. received subscription
Total 750,000 for 5,000 shares of its P10 par value ordinary share at P15. A
downpayment of 25% was received and the balance is to be paid
Allocation in full on January 10, 2020.
Ordinary shares = P900,000 X 500,000/750,000 = 600,000
Preference shares = P900,000 X 250,000/750,000 = 300,000 Entries on December 3, 2019
Subscription Receivable 75,000
Cash (5000 x 250) 900,000 Subscribed Ordinary Capital (5000 50,000
Ordinary Share Capital (2500 x 375,000 x 10)
150) Ordinary Share Premium 25,000
Ordinary Share Premium 225,000
(600,000 - 375,000) Cash 18,750
Preference Share Capital (1,000 x 200,000 Subscription Receivable 18,750
200) 75,000 x 25%
Preference Share Premium 100,000
(300,000 - 200,000) Entries on January 10, 2020
Cash 56,250
Issuance in Exchange for Noncash Assets or Properties Subscription Receivable 56,250
Priority in recording the noncash asset or property: 75,000 x 25%
1. Fair value of the noncash asset or property.
2. Fair value of the share. Subscribed Ordinary Capital 50,000
If the two are not present, par value is accepted. Ordinary Share Capital 50,000

Example: Issuance in Exchange for Noncash Assets or Subscription Default

Properties - The board of directors may, by resolution, order the sale of
The Sinigang Corp. was organized on Jan. 1, 2020. It is delinquent stock and shall specifically state the amount due on
authorized to issue 10,000, P200 par value, ordinary share. On each subscription plus all accrued interest, and the date, time
Jan. 8, 2020, the corporation issued 5,000 shares in exchange of and place of the sale which shall not be less than thirty (30) days
a land. nor more than sixty (60) days from the date the stocks become
delinquent. (Revised Corporation Code sec. 67)
Scenario 1: The fair value of the land is P1,500,000 and the fair - Unless the delinquent stockholder pays to the corporation, on
value of the share is P230. or before the date specified for the sale of the delinquent stock,
Land 1,500,000 the balance due on the former’s subscription, plus accrued
Ordinary Share Capital (5000 1,000,000 interest, costs of advertisement and expenses of sale, or unless
x 200) the board of directors otherwise orders, said delinquent stock
Ordinary Share Premium 500,000 shall be sold at a public auction to the highest bidder.
Highest Bidder - bidder who shall offer to pay the full
Scenario 2: The fair value of the land is undeterminable and the amount of the balance on the subscription together
fair value of the share is P230. with accrued interest, costs of advertisement and
Land 1,150,000 expenses of sale, for the smallest number of shares or
Ordinary Share Capital (5000 1,000,000 fraction of a share.
x 200)
Ordinary Share Premium 150,000 Example: Sale of Shares on a Subscription Basis
Assuming that Tocino Corp.’s subscriber paid additional
P30,000 and defaulted to pay the remaining balance. Also, the
Issuance in Exchange for Services corporation offered the sale for a public action which cost the
Priority in recording: corporation P7,000 for advertising fee. The winning bidder is
1. Fair value of the services willing to get 1,500 shares.
2. Fair value of the shares
If the two are not present, par value is accepted. Cash 30,000
Subscription Receivable 30,000
Example: Issuance in Exchange for Services Entry for the additional
The Menudo Corp. was organized on Jan. 1, 2020. It is payment of the subscriber.
authorized to issue 10,000, P20 par value, ordinary share. On
Jan. 8, 2020, the corporation issued 5,000 shares in payment of Receivable from the highest bidder 26,250
the services performed by the lawyer (charged to pre-ops). Subscription Receivable 26,250
75,000 – 18,750 – 30,000 =
Scenario 1: The fair value of the services is P150,000 and the 26,250
fair value of the share is P23. Receivable from the highest bidder – account to
Pre-operating Expenses 150,000 indicate a subscription default.
 Receivable from the highest bidder 7,000
Cash 7,000
Entry for the payment of the
advertising fee.

Cash 33,250
Receivable from the highest bidder 33,250
26,250 + 7,000 = 33,250

Subscribed Ordinary Capital 50,000

Ordinary Share Capital 50,000
Included na ‘yung sa original tapos highest bidder.

No Highest Bidder
Should there be no bidder at the public auction who offers to
pay the full amount of the balance on the subscription together
with accrued interest, costs of advertisement, and expenses of
sale, for the smallest number of shares or fraction of a share, the
corporation may, subject to the provisions of this Code, bid for
the same, and the total amount due shall be credited as fully paid
in the books of the corporation.

Treasury Shares 33,250

Receivable from the highest bidder 33,250
Treasury Shares – Contra-SHE

Subscribed Ordinary Capital 50,000

Ordinary Share Capital 50,000

Additional Discussion on Issuance of Shares (RCC Sec. 6)

- Preferred shares of stock may be issued only with a stated par
value.
- Shares of capital stock issued without par value shall be
deemed fully paid and nonassessable and the holder of such
shares shall not be liable to the corporation or to its creditors in
respect thereto: Provided, that no-par value shares must be
issued for a consideration of at least Five pesos (P5.00) per
share: Provided, further, That the entire consideration received
by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.

Issue Costs
- Issue costs are direct costs incurred in the sale and issuance of
share capital, such as legal fees, professional fees for the CPA,
cost of printing certificates, underwriting fees and
commissions, documentary stamps, and filing fees paid to
Securities and Exchange Commission.
- These costs are recorded as a charge against (or reduction to)
share premium or additional paid-in capital arising from the
issuance of share capital.

Share Premium XX
Issue Costs XX

Additional Notes
Legal Capital
Share Capital
Subscribed Share Capital
Less: Net of Subscription Receivable w/
more than 12 mos. collection period
Share Dividends Distributable
Share Premium – excess of Stated Value

Contributed Capital
Legal Capital + Additional Paid-in Capital

Shareholder’s Equity
Contributed Capital + Retained Earnings – Treasury
Shares

Classifications of Subscription Receivable

- Current Asset (Collectible within 12 mos.)
- Contra-equity (Collectible more than 12 mos.)
If not stated, presumed to be collectible more than 12 mos.