CORPORATION PART 3

RETAINED ERANINGS
CLOSING OF PROFIT TO RE
DIVIDENDS
PREFERENCE SHARES –CUMULATIVE, NON-CUMULATIVE, PARTICIPATING
AND NON-PARTICIPATING
BOOK VALUE PER SHARE/BVS
EARNINGS PER SHARE/EPS
RETAINED EARNINGS (RE)

 The account Retained Earnings represents the firm’s accumulated

profit or loss, including prior-period adjustments less the dividends
declared and other amounts transferred to the contributed capital
accounts.
 A debit balance in retained earnings account is referred to as a
deficit.

 ACCUMULATED PROFITS- IFRS term for RE.

 ACCUMULATED LOSSES – IFRS term for deficit.
RETAINED EARNINGS
 Among the common transactions affecting retained earnings are
summarized below in the form of increases (credits) and decreases
(debits) to the account.

RETAINED EARNINGS
▪ Current Loss ▪ Current Profit
▪ Dividends ▪ Adjustments for
▪ Treasury Share Correction of prior
Transactions period errors (IAS 8)
▪ Share Capital Retirement
▪ Adjustments for
Correction of prior
period errors (IAS 8)

Note: The list is not exhaustive because there are other

items affecting retained earnings account.
RETAINED EARNINGS

Kinds of RE
a. Unappropriated RE= portion of RE which is free and can
be declared as dividends to shareholders.
b. Appropriated RE = portion which has been restricted
and is not available for any dividend declaration.
RETAINED EARNINGS

1. Current Profit or Loss

 At the end of each accounting period, closing entries are made to

separate the effects of transactions of the currents period with the
ensuing period.
 The final closing entry in a corporation’s books transfers the profit
(credit balance in Profit or Loss Summary account) or loss (debit
balance in Profit or Loss Summary account) to the Retained
Earnings Account.
 Dividends

A dividend is a distribution of corporate income to the shareholders

on a pro rata basis. They are distributed out of accumulated earnings
of the corporation, except for a liquidating dividend which represents
a return of the shareholder’s investment.

Dividend classification:

1. Dividends out of earnings

2. Dividends out of capital

POWER TO DECLARE DIVIDENDS OUT OF
UNRESTRICTED RETAINED EARNINGS (URE)
Section 42. Power to declare dividends. - The board of
directors of a stock corporation may declare dividends out of
the unrestricted retained earnings which shall be payable
in cash, in property, or in stock to all stockholders on the
basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock
shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends
shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid:
POWER TO DECLARE DIVIDENDS OUT OF
UNRESTRICTED RETAINED EARNINGS (URE)
Section 42. Power to declare dividends. –
Provided, further, That no stock dividend shall be
issued without the approval of stockholders
representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special
meeting duly called for the purpose. (16a)
POWER TO DECLARE DIVIDENDS OUT OF
UNRESTRICTED RETAINED EARNINGS (URE)
Section 42, cont’d.
Stock corporations are prohibited from retaining surplus
profits in excess of one hundred (100%) percent of their
paid-in capital stock, except:
(1) when justified by definite corporate expansion projects
or programs approved by the board of directors; or
(2) when the corporation is prohibited under any loan
agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet
been secured; or
POWER TO DECLARE DIVIDENDS OUT OF
UNRESTRICTED RETAINED EARNINGS (URE)
Section 42, cont’d.
Stock corporations are prohibited from retaining surplus
profits in excess of one hundred (100%) percent of their
paid-in capital stock, except:
3. when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve
for probable contingencies. (n
 Dividends

The important dates concerning dividends are:

a. Date of Declaration. The date when the BOD formally approves and announces
the dividend. This is date that the reduction in retained earnings is recognized
or recorded in the accounts.
b. Date of Record. A list of current shareholders who will be entitled to the
dividend is prepared and the dividend payment is based on this list. No journal
entry is made on this date.
c. Date of Payment/Distribution. On this date, an entry is made to record the
settlement of the dividend either by payment of cash or distribution of noncash
assets or the company’s own shares.
 Dividends

A dividend is a distribution of corporate income to the shareholders on a pro rata basis.

They are distributed out of accumulated earnings of the corporation, except for a
liquidating dividend which represents a return of the shareholder’s investment.

The important dates concerning dividends are:

a. Date of Declaration. The date when the BOD formally approves and announces
the dividend. This is date that the reduction in retained earnings is recognized
or recorded in the accounts.
b. Date of Record. A list of current shareholders who will be entitled to the
dividend is prepared and the dividend payment is based on this list. No journal
entry is made on this date.
c. Date of Payment/Distribution. On this date, an entry is made to record the
settlement of the dividend either by payment of cash or distribution of noncash
assets or the company’s own shares.
Dividend Policy

Few companies pay dividends in amounts equal to their

legally available retained earnings. Why?
◆ Maintain agreements with creditors.

◆ Meet state incorporation requirements.

◆ To finance growth or expansion.

◆ To smooth out dividend payments.

◆ To build up a cushion against possible losses.

LO 6 Describe the policies used in distributing dividends.

Dividends out of Earnings

Types of Dividends

1. Cash dividends. 3. Liability dividends in the

2. Property dividends. form of bond and scrip.
4. Share dividends.
All dividends, except for share dividends, reduce the
total equity in the corporation.
Dividends out of Earnings

 Cash Dividends –this is the most common type of dividend.

For a cash dividend to occur, a corporation must have retained
earnings and adequate cash to pay the dividend.

 Property Dividends –dividend that is payable in assets rather

than cash. Property dividend may also be in the form of equity
or debt securities held in other companies. Distribution of
Treasury shares as dividends is also considered as a property
dividend and not as a share dividend.

LO 7 Identify the various forms of dividend distributions.

Dividends out of Earnings

 Share Dividends (Bonus Issue) –is a pro rata distribution of a

corporation’s own shares to its shareholders. Unlike cash and property
dividends, a bonus issue does not affect total assets and total
shareholder’s equity because it simply represents a transfer of capital
from retained earnings to contributed capital.

a. Small Share Dividend –when the number of shares represents LESS

THAN 20% of the shares previously outstanding, the basis of the
measurement would be the current market value of the additional
shares to be issued.
b. Large Share Dividend –when the proportion of the additional
shares issued is 20% OR MORE, the amount capitalized is equal to
the par or stated value of the share capital.

LO 7 Identify the various forms of dividend distributions.

Cash Dividends

Cash Dividends
◆ Board of directors vote on the declaration of cash
dividends.

◆ A declared cash dividend is a liability.

◆ Companies do not
Three dates:
declare or pay cash
a. Date of declaration
dividends on treasury
b. Date of record
shares.
c. Date of payment

LO 7 Identify the various forms of dividend distributions.

 CASH DIVIDENDS
 Cash dividends may be:
1. A certain amount of pesos per share – ex. cash dividend of P5 per
share.
2. A certain percent of the par or stated value- if 5% of dividend is
declared on a P100 par value per share, it shall receive P5 as
dividend.
 CASH DIVIDENDS

Illustration: Roadway Freight Corp. on June 10 declared a cash dividend

of 50 cents a share on 1.8 million shares payable July 16 to all
shareholders of record June 24.
At date of declaration (June 10)
Retained Earnings 900,000
Dividends Payable 900,000

At date of record (June 24) No entry

At date of payment (July 16)

Dividends Payable 900,000
Cash 900,000
 PROPERTY DIVIDENDS

Property Dividends
◆ Dividends payable in assets other than cash.

Issues:

1. Measurement of the property dividend payable.

2. Measurement of the noncash asset to be distributed as

property dividend. Restate at fair value the property it
will distribute, recognizing any gain or loss.
 PROPERTY DIVIDENDS
IFRIC 17, PAR 11 – measure a liability to distribute noncash asset as a
dividend to its owners at the fair value of the asset to be distributed.
Par. 17 – at the end of each reporting period, and at the end of settlement,
review and adjust the carrying amount of the dividend payable with any
change recognized in equity as adjustment to the amount of distribution.

Date of declaration – the dividend payable is initially recognized at fair

value of the noncash asset.
Year-end and date of settlement – increase or decrease dividend payable
as a result of the change in FV of the asset at year-end and date of
settlement.
 PROPERTY DIVIDENDS
IFRIC 17, PAR 14 – when an entity settles the dividend payable, the
difference between the carrying amount of the dividend payable ant
the carrying amount of the asset distributed shall be recognized in
profit or loss.
Note:
An entity shall measure a noncurrent asset classified for distribution to
owners at the lower of carrying amount and FV less cost to distribute.
Accordingly, if the FV less cost to distribute is lower than the carrying
amount of the asset at the end of the reporting period, the difference
is accounted for as impairment loss.
 PROPERTY DIVIDENDS
IFRIC 17, PAR 14 – when an entity settles the dividend payable, the
difference between the carrying amount of the dividend payable ant
the carrying amount of the asset distributed shall be recognized in
profit or loss.
Note:
An entity shall measure a noncurrent asset classified for distribution to
owners at the lower of carrying amount and FV less cost to distribute.
Accordingly, if the FV less cost to distribute is lower than the carrying
amount of the asset at the end of the reporting period, the difference
is accounted for as impairment loss.
 PROPERTY DIVIDENDS
Illustration:
Knox Company declared a property dividend of machinery on October 1,
2022 payable on April 1, 2023. the carrying amount of the machinery is
P4M on October 1, 2022. the machinery had the ff. FV:
October 1, 2022 3,800,000
December 31, 2022 3,700,000
April 1, 2023 3,500,000

Required: prepare journal entries for 2022 and 2023 in connection with
the property dividend.
 PROPERTY DIVIDENDS
Illustration 2: October 1, 2022 RE 3,800,000
Knox Company declared a property Dividend payable 3,800,000
dividend of machinery on October 1, December 31, Dividend payable 100,000
2022 payable on April 1, 2023. The 2022 RE 100,000
carrying amount of the machinery is
Impairment loss 300,000
P4M on October 1, 2022. the
Machinery 300,000
machinery had the ff. FV:
April 1, 2023 Dividend payable 200,000
October 1, 2022 3,800,000
RE 200,000
December 31, 2022 3,700,000
April 1, 2023 3,500,000 Dividend payable 3,500,000
Loss on distribution 200,000
of property 3,700,000
dividend
Machinery
 PROPERTY DIVIDENDS
Illustration 1: October 31, RE 1,300,000
2022 Dividend payable 1,300,000
CNN Company owned 10,000 equity
(10,000 x P130)
shares of FOX Company with
December 31, RE 200,000
carrying amount of P90 per share. 2022 Dividend payable 200,000
On October 31,, 2022, CNN declared (10,000 x P20)
these shares as property dividend March 31, 2023 Dividend payable 400,000
to be paid on March 31, 2023. RE 400,000
(10,000xP40)
The quoted price for FOX share is
P130 on October 31, 2022, Dividend payable 1,100,000
Investment in 900,000
P150 on December 31, 2022, and equity shares
P110 on March 31, 2023 Gain on distribution 200,000
of property dividend
PROPERTY DIVIDENDS
October 31, 2022 RE 1,300,000 To recognize the dividend payable
Dividend payable 1,300,000
(10,000 x P130)

December 31, RE 200,000 To recognize the increase in dividend payable

12/31/22
2022 Dividend payable 200,000 FV, 12/31/22= P150
(10,000 x P20) FV, 10/31/22= 130
Increase in div pay per share 20

March 31, 2023 Dividend payable 400,000 To recognize the decrease in dividend
RE 400,000 payable on the date of settlement.
FV, 3/31/23 = P110
(10,000xP40)
FV, 12/31/22 = 150
Decrease in dividend 40
payable, per share

Dividend payable 1,100,000 To record the settlement of the dividend

Investment in equity payable on 3/31/23.
Dividend payable, 3/31/23
shares
(10,000 sh x P110) 1,100,000
Gain on distribution of 900,000 Carrying amount of investment 900,000
property dividend (10,000 sh x P90)
200,000 Gain on distribution of dividend 200,000
SCRIP DIVIDENDS

 SCRIP DIVIDEND – a dividend in the form of note payable which is a formal

evidence of indebtedness to pay a sum of money at some future time.
Illustration:
Scrip dividends are declared in the amount of P200,000 payable in 6 months at 12%
interest.
JEs:
RE 200,000
Scrip dividends payable 200,000

When the scrip dividends are redeemed:

Scrip dividends payable 200,000
Interest expense (200,000x12%x6/12) 12,000
Cash 212,000
BOND DIVIDEND
Bond dividend- dividends payable in the form of bonds.
Illustration:
Dividends are declared in the amount of P1M payable in the entity’s own
bonds, 12% interest payable annually, P1M face amount. The bonds mature
in 5 years.

Journal entries:
a. To record the declaration of the bond dividend:
Retained earnings 1,000,000
Bond dividends payable 1,000,000

b. To record the issuance of the bonds in payment for the dividends:

Bond dividends payable 1,000,000
Bonds payable 1,000,000
BOND DIVIDEND
Illustration:
Dividends are declared in the amount of P1M payable in the entity’s own
bonds, 12% interest payable annually, P1M face amount. The bonds
mature in 5 years.

Journal entries:
c. To record the payment of annual interest on the bonds:
Interest expense 120,000
Cash ( P1M x 12%) 120,000

d. To record the redemption of the bonds on maturity date:

Bonds payable 1,000,000
Cash 1,000,000
Share Dividends (Bonus Issue)

 Share Dividends (Bonus Issue) –is a pro rata distribution of a corporation’s own
shares to its shareholders. Unlike cash and property dividends, a bonus issue does
not affect total assets and total shareholder’s equity because it simply
represents a transfer of capital from retained earnings to contributed capital.

a. Small Share Dividend –when the number of shares represents LESS

THAN 20% of the shares previously outstanding, the basis of the
measurement would be the current market value of the additional shares to
be issued.
b. Large Share Dividend –when the proportion of the additional shares
issued is 20% OR MORE, the amount capitalized is equal to the par or
stated value of the share capital.
Share Dividends (Bonus Issue)
Illustration:
Share capital, P100 par, 20,000 shares authorized,
10,000 shares issued and outstanding P1,000,000
Share premium 500,000
Retained earnings 500,000

The entity declared a 20% share dividend or 2 shares for every 10 shares held, or a total of
2,000 shares as share dividend. (20% x 10,000 shares issued and outstanding)
Journal entries:
RE (2,000 shares xP100) 200,000
Share dividends payable 200,000
Share dividends payable 200,000
Share capital 200,000
Note: the share dividend payable is an addition to share
capital.
Share Dividends (Bonus Issue)
Illustration:
Share capital, P100 par, 10,000 shares issued P1,000,000
Share premium 500,000
Retained earnings 750,000

If a 10% share dividend is declared, and the market value of the share is P150, the journal
entries on the date of declaration and issuance are:

RE (1,000 shares xP150) 150,000

Share dividends payable (1,000shares xP100) 100,000

Share premium 50,000

Share dividends payable 100,000
Share capital 100,000
 PROBLEMS
On December 31, 2022, Europe Company showed the following SHE:
Share capital, P100 par, 100,000 shares authorized,
50,000 shares issued----------------P5,000,000
Share premium-------------------------1,000,000
Retained earnings----------------------2,000,000
Treasury shares, 5,000, at cost-----------------600,000

On December 31, 2022, Europe declared a cash dividend of P30 per share to
shareholders of record on January 15, 2023 and payable on January 31,
2023.
PROBLEMS
Declaration date- December 31, 2022

Record date- January 15, 2023

--no entry—

Payment date- January 31, 2023

PROBLEMS
On January 1, 2022, Coleen Company had 220,000 P5 par value shares
outstanding. On June 1, the entity acquired 20,000 shares to be held in the
treasury. On December 1, when the market price of the share was P20, the entity
declared a 10% share dividend to be issued to shareholders of record on
December 16, 2022. What was the impact of the share dividend on retained
earnings?

a. 100,000 decrease
b. 400,00 decrease
c. 440,000 decrease
d. No effect
PROBLEMS
On January 1, 2022, Coleen Company had 220,000 P5 par value shares
outstanding. On June 1, the entity acquired 20,000 shares to be held in the
treasury. On December 1, when the market price of the share was P20, the entity
declared a 10% share dividend to be issued to shareholders of record on
December 16, 2022. What was the impact of the share dividend on retained
earnings?
a. 100,000 decrease
b. 400,00 decrease
c. 440,000 decrease
d. No effect
220,000 shares – 20,000 treasury shares= 200,000 shares outstanding\
x 10%
Market value of shares x P20
Share dividend payable P400,000
 PROBLEMS
Elvis Company reported the following shareholders’ equity on January 1, 2022:

Share Capital, P5 par, 600,000 shares authorized,

200,000 shares issued and outstanding 1,000,000
Share Premium 6,000,000
Retained Earnings 2,800,000

On January 31, 2022, the entity reacquired 10,000 shares at P30 per share to be held as
treasury. On July 1, 2022, the entity declared and issued a 30% stock dividend. On December
31, 2022, the entity declared and paid cash dividend of P10 per share. The net income for
the current year was P3, 000,000. What is the unappropriated balance if retained earnings
on December 31, 2022?
a. 2,745,000
b. 3,045,000
c. 2,700,000
d. 2,600,000
 PROBLEMS
RE – 01/1/22 2,800,000
Share Dividend (57,000 x 5) (285,000)
Cash Dividend (247,000 x 10) (2,470,000)
NI 3,000,000
Appropriation for TS (10,000 x 30) (300,000)
Unappropriated Balance – 12/31/22 = 2,745,000
 PROBLEMS
Gem Company reported the following shareholders’ equity on January 1,
2022: RETAINED EARNINGS

Share Capital, P20 par, authorized 200,000 shares, 900,000 7,500,000

(15,000 shares x P60)
issued and outstanding 100,000 shares 2,000,000
Share Premium 3,000,000 1,000,000
Retained Earnings 7,500,000
5,600,000
On March 1, 2022, the board of directors declared a 15% share dividend,
and accordingly 15,000 additional shares were issued. On March 1, 2022,
the fair value of the share was P60. The entity sustained a net loss of P1,
000,000 for the current year. What amount should be reported as retained
earnings on December 31, 2022?
a. 5,600,000
b. 6,200,000
c. 6,600,000
d. 7,200,000
 PROBLEMS
 At the beginning of the current year, Flash Company had
RETAINED EARNINGS
retained earnings of P4,000,000. During the year, the
entity reported net income of P2,000,000, sold treasury
shares at a “gain” of P720,000, declared a cash dividend 1,200,000 4,000,000
of P1,200,000, and declared and issued a small share
dividend of 60,000 shares with P10 par value when the 1,200,000 2,000,000
(60,000 sharesxP20)
fair value of the share was P20. What is the amount of
retained earnings available for dividends at the end of 3,600.000
current year?
a. 3,600,000
b. 4,200,000
c. 4,320,000
d. 4,920,000
 PROBLEMS
Kremlin Company reported the following shareholders’
equity on December 31, 2022: Shares outstanding= 3,000,000/P50
par = 60,000 shares
Share Capital, P50 par value 3,000,000 60,000 shares x 1.15= 69,000 shares
Share Premium 600,000 x P50 par
Retained Earnings 4,200,000 P3,450,000

A 15% share dividend was declared and distributed on

December 31, 2022 when entity’s share was selling at P65. RE (9,000x 65) 585,000
What amount should be reported as Share Capital Share dividends payable 450,000
Outstanding?
a. 3,450,000 (3,000,000 x 1.15) Share premium 135,000
b. 3,585,000 Share div payable 450,000
c. 3,615,000 Share capital 450,000
d. 4,185,000
 PROBLEMS
Cyan Company issued share capital of 20,000 shares with
Retained earnings – January 1 300,000
P5 par at P10 per share. On January 1, 2022, the retained
Net income 60,000
earnings were P300,000. In March 2022, the entity Appropriated for Treasury Shares
reacquired 5,000 shares at P20 per share. In June 2022, (4,000 x 20) ( 80,000)
the entity sold 1,000 of these shares to its corporate Unappropriated retained earnings
officers for P25 per share. The cost method is used to – December 31 280,000
record treasury shares. Net income for 2022 was P60,000.

On December 31, 2022, what amount should be reported

as unappropriated retained earnings?

A. 280,000

B. 365,000
C. 375,000
D. 360,000
 PROBLEMS
East Company had sufficient retained earnings in 2022 as a
4/1/22
basis for dividends but was temporarily short of cash.
Retained earnings 100,000
Scrip dividend payable 100,000
The entity declared a dividend of P100,000 on April 1, 2022 12/31/22
and issued promissory notes to its shareholders in lieu of cash. Interest expense (100,000 x 10% x 9/12) 7,500
Accrued interest payable 7,500
The notes, which were dated April 1, 2022, had a maturity date
of March 31, 2023 and a 10% interest rate. 3/31/23
Scrip dividend payable 100,000
How should the scrip dividend and related interest be Accrued interest payable 7,500
accounted for? Interest expense (100,000 x 10%x3/12) 2,500
Cash 110,000
A. Debit retained earnings for P100,000 on April 1, 2022.
B. Debit retained earnings for P100,000 on March 31, 2023.
C. Debit retained earnings for P100,000 on April 1, 2022 and
debit interest expense for P10,000 on March 31, 2023.
D. Debit retained earnings for P100,000 on April 1, 2022 and
debit interest expense for P7,500 on December 31, 2022.
 MORE PROBLEMS
1. Honesty Company has the following balances:
Authorized share capital P100 par, 50,000 shares P5,000,000
Unissued share capital, 20,000 shares 2,000,000
Subscribed share capital, 10,000 shares 1,000,000
Treasury shares, 5,000 shares at cost 600,000
Share premium 500,000
Retained earnings 1,500,000

Market value of share:

on declaration date P140
on issuance date 150
Prepare journal entries assuming the Board of directors declared:
1. A share dividend from unissued share capital of one share for each ten shares outstanding.
2. A share dividend from treasury shares of one share for each ten shares outstanding. The cost
of the treasury share is capitalized.
NOTES TO HONESTY PROBLEM
 For purposes of dividend computations, compute the outstanding shares by including the
shares outstanding itself and the subscribed shares, whether delinquent or not delinquent and
deduct treasury shares.
Issued shares xx
Subscribed shares xx
Treasury shares (xx)
# of shares entitled to dividends xxx

The declaration of treasury shares as dividend is termed as property dividend under the
Philippine Corporation Code.
However, such declaration shall be accounted for as share dividend because the entity’s
obligation is not to convey or transfer a noncash asset but to reissue its own share capital, and
therefor no accounting liability arises.
Under PAS 32, treasury shares are a component of SHE and not a financial asset.
This is an example of economic substance of a transaction prevailing over the legal form.
Note: The cost of the treasury shares is charged to retained earnings in case they
are declared as dividends.
SOLUTION TO HONESTY PROBLEM
NOTES TO HONESTY PROBLEM
Note: The cost of the treasury shares is charged to retained earnings in
case they are declared as dividends.
There are 35,000 shares outstanding. So if one share of treasury for every ten shares are
declared,
35,000/10 = 3,500 treasury shares will be issued as dividends. But the total cost which is
P600,000 is for the 5,000 Treasury shares. So just compute for the cost of the 3,500.
(3500/5000) x P600,000 = 420,000
Problem 2
Perseverance Company reported the following SHE on January 1, 2022:
Share capital, P1,500,000
Share premium, 3,000,000
Retained earnings 5,000,000

The entity had 400,000 authorized shares of P5 par value, of which 300,000 shares were issued
and outstanding.
On March 1, 2022, the entity acquired 50,000 shares for P10 pe share to be held as treasury. The
shares were originally issued at P8 per share. The entity used the cost method to account for
treasury shares.
On July 1, 2022, the entity declared a property dividend of inventory payable on March 1, 2023.
the inventory had a P1,200,000 carrying amount and a fair value of P1,500,000 on July 1, 2022,
P1,800,000 on December 31, 2022, and P2,000,000 on March 1, 2023.
The net income for 2022 was P3,000,000

Prepare journal entries for 2022 and 2023 in connection with the treasury shares, property
dividend and net income.
Problem 2
2022

2023
PROBLEM 3
Nam Company reported the following amounts in the shareholders’
equity on January 1, 2022:
Preference share capital, P150 par value 20,000 shares 3,000,000
Ordinary share capital, P50 par value, 100,000 shares 5,00,0000
Share premium 6,000,000
Retained earnings 4,500,000
On January 1, 2022, the entity sold 20,000 additional ordinary shares of
P90 per share. Late in 2022, it was learned that because of mathematical
error, an overstatement of depreciation expense by P500,000 had
occurred in 2021. The entity reported net income of P4,000,000 for
2022. The entity declared cash dividend of P1,000,000 on preference
shares and P2,000,000 on ordinary shares during 2022. The income tax
rate is 30%. What amount should be reported as retained earnings on
December 31, 2022?
a. 5,850,000 b. 6,000,000 c. 5,150,000 d. 4,450,000
PROBLEM 3

RETAINED EARNINGS
4,500,000 beginning balance
Cash dividend-preference 1,000,000 4,000,000 NI

Cash dividend-ordinary 2,000,000 350,000 Prior Period Adjustment

(500,000 x 70%) net of tax
5,850,000 Balance, end
Problem 3
On January 1, 2023, the board of directors of Blake Company declared a cash dividend of P800,000
to shareholders of record on January 15, 2023, and payable on February 15, 2023. The entity
reported the following data on December 31, 2022:
Accumulated Depletion 500,000
Share Capital 9,000,000
Share Premium 300,000
Retained Earnings – December 31, 2022 600,000
Net Income for 2022 150,000
What amount should be reported as liquidating dividend?
a. 600,000 b. 300,000 c. 200,000 d. 50,000
Dividend Declared 800,000
RE Balance 600,000
Liquidating Dividend 200,000
Problem 4
In 2022, Sydney Company bought 10,000 shares of Oil Company at a cost of
P200,000. On December 1, 2022, Sydney Company declared a property
dividend of the Oil stock to shareholders of record on February 1, 2023,
payable on February 15, 2023. The Oil stock had the following market value:

December 1, 2022 250,000

December 31, 2022 260,000
February 15, 2023 240,000

What is the net charge of this property dividend against retained earnings
during 2022?
a. 200,000 b. 240,000 c. 250,000 d. 260,000
 PROBLEM 5
During 2022, Cagayan Company reported the following cash dividends on the P10 par value share capital:
1st quarter 800,000
2 quarter
nd 900,000
3 quarter
rd 1,000,000
4 quarter
th 1,100,000

The 4th quarter cash dividend was declared on December 20, 2022 to shareholders of record December 31, 2022 payable on
January 31, 2023. In addition, the entity declared a 5% stock dividend on December 1, 2022 when there were 300,000
shares issued and outstanding and the market value was P20 per share on declaration date and P25 on distribution date. The
shares were issued on December 21, 2022.

What was the effect on shareholders’ equity accounts as a result of the dividend transactions?
Share capital Share premium Retained earnings
a. Zero Zero 3,800,000 debit
b. 150,000 credit 225,000 credit 4,175,000 debit
c. 150,000 credit 150,000 credit 4,100,000 debit
d. 300,000 credit 300,000 credit 3,800,000 debit

Retained earnings 3,800,000

Cash 2,700,000
Dividends payable 1,100,000

Retained earnings (*15,000 x 20) 300,000

Share capital (*15,000 x 10) 150,000
Share premium 150,000
*5% x 300,000 = 15,000 shares
Problem 6
Isabela Company was authorized to issue share capital of 100,000 shares with
P50 par value in January 1, 2022. Eighty thousand shares were sold during the first
year at P50 per share and P4,000 shares were later reacquired as treasury at P65 per share.
A share split of 5 for 1 was approved on December 31, 2022. On January 31, 2023, a 10%
stock dividend was paid and on March 1, 2023, the treasury shares were reissued at P68 per
share.
What is the number of shares issued and outstanding on March 1, 2023?
a. 418,000
b. 438,000
c. 440,000
d. 422,000

Shares issued as split (80,000 x 5) 400,000

Less: Treasury shares (4,000 x 5) ( 20,000)
Outstanding 380,000
10% stock dividend 38,000
Reissuance of treasury 20,000
Total issued and outstanding 438,000
Problem 6
Dayron Company had 80,000 ordinary shares outstanding in January 2022. The entity
distributed a 15% stock dividend in March and a 10% stock dividend in June. After
reacquiring 10,000 shares of treasury in July, the entity split the share 4 for 1 in
December. How many ordinary shares are outstanding in December 31, 2022?
a. 364,800 b. 488,000 c. 498,000 d. 451,500

Original shares 80,000

Stock dividend in March (15% x 80,000) 12,000
Total 92,000
Stock dividend in June (10% x 92,000) 9,200
Total issued shares before split 101,200

Total issued shares after split (101,200 x 4) 404,800

Treasury shares after split (10,000 x 4) ( 40,000)
Outstanding shares 364,800
Problem 7
Solace Company declared and distributed 10% stock dividend with fair value of
P1,500,000 and par value of P1,000,000 and 25% stock dividend with fair value of
P4,000,000 and par value of P3,500,000. What aggregate amount should be debited to
retained earnings for the stock dividends?

a. 4,500,000
b. 3,500,000
c. 5,000,000
d. 5,500,000

10% stock dividend at fair value 1,500,000

25% dividend at par value 3,500,000

Total amount debited to retained earnings 5,000,000

Problem 8
On May 31, 2015, Sol Company declared a 10% stock dividend. The market price of the
30,000 outstanding shares of P20 par value was P90 per share on that date. The stock
dividend was distributed on July 31, 2015, when the share market price was P100. What
amount should be credited to share premium for the stock dividend?

a. 210,000
b. 240,000
c. 270,000
d. 300,000

Market value on date of declaration (10% x 30,000 = 3,000 shares x 90) 270,000

Par value of stock dividend (3,000 x 20) 60,000

Share premium 210,000

PROBLEM 3
END OF TOPICS FOR
MIDTERM EXAM
MIDTERM TOPICS
REVIEW
Accounting for Share Issuance
w/ par or stated value no-par, no stated value
Ratios Using Equity Related Amounts
Source of pictured illustrations:

Intermediate Accounting, IFRS Edition, Kieso, Weygandt, and Warfield

TOPICS FOR FINALS
Preference Shares
Features of Preference Shares
◆ Cumulative A corporation may attach
◆ Participating whatever preferences or
◆ Convertible restrictions, as long as it
◆ Callable does not violate its
country’s incorporation law.
◆ Redeemable

The accounting for preference shares at issuance is

similar to that for ordinary shares.
Preference Shares

 Features often associated with preference shares.

1. Preference as to dividends.

2. Preference as to assets in the event of liquidation.

3. Convertible into ordinary shares.

4. Callable at the option of the corporation.

5. Non-voting.
Allocation of Cash Dividends Between
Preference Shares and Ordinary Shares

 Preference shares have priority over ordinary shares in terms of

dividends.

 The amount of dividend payment to preference shares depends on the

type and preferential rights attached to the share, which could be
cumulative or non cumulative and participating or non-participating.

A cumulative preference share has a right to receive current dividends in

arrears before ordinary shareholders receive any dividends.
A participating preference share provides for additional dividends to be paid
to its holder after dividends of a specified amount or rate are paid to
ordinary shareholders.
PREFERENCE SHARES
 Preference as to assets- the preference shareholders are entitled to payment not
only for the liquidation value but also for dividends in arrears.

 Preference as to dividends – if dividends are declared, the preference shareholders

have the right to receive dividends first before the ordinary shareholders are paid a
dividend.

Note: in the absence of evidence to the contrary, the preference shares has preference
as to dividends.
When preference share has preference as to dividends, the dividend right may be:
1. Noncumulative
2. Cumulative
3. Nonparticipating
4. Participating
PREFERENCE SHARES
1. Noncumulative – one on w/c the right to receive dividends is forfeited in any
one year in w/c the dividends are not declared. The PS is entitled only to current
year dividends.

2. Cumulative – one on w/c any undeclared dividends accumulate each year until
paid. The cumulative PS is entitled to all dividends in arrears.

3. Nonparticipating – one that is entitled to receive only the dividends equal to the
fixed rate.

4. Participating – one w/c is entitled to receive dividends in excess of the basic or

fixed rate. Participating PS may be fully participating with ordinary share on a
prorate basis or participating only to a certain amount or percentage.
PREFERENCE SHARES
Important Notes :
1. In the absence of specific designation, PS is assumed to be noncumulative and
nonparticipating.
2. Dividends in arrears usually include current dividends. Dividends in arrears in
prior years shall be specifically disclosed, otherwise, there are no arrearages.
3. In case where there are two classes of PSs with different dividend rates and
both are participating, the lower rate shall be the basis for allocation to the
ordinary share.

4. If only one PS is participating, the rate of the participating PS shall be used as

basis for ordinary share dividend.
 EXERCISES
Rensing, Inc., has P800,000 of 8% preference shares and P1,200,000 of ordinary shares
outstanding, each having a par value of P10 per share. No dividends have been paid or
declared during 2019 and 2020. As of December 31, 2021, it is desired to distribute
P488,000 in dividends.

Instructions
How much will the preference and ordinary shareholders receive under each of the
following assumptions:
(a) The preference is noncumulative and nonparticipating.
(b) The preference is cumulative and nonparticipating.
(c) The preference is cumulative and fully participating.
(d) The preference is cumulative and participating to 12% total.
 EXERCISES
Rensing, Inc., has P800,000 of 8% preference shares and P1,200,000 of ordinary shares
outstanding, each having a par value of P10 per share. No dividends have been paid or
declared during 2019 and 2020. As of December 31, 2021, it is desired to distribute P488,000
in dividends.
(a) The preference is noncumulative and nonparticipating.

Preference Ordinary Total

Current year's dividend (8% of P800,000) P 64,000 — P 64,000
Remainder to ordinary 424,000 424,000
P 64,000 P424,000 P488,000
 EXERCISES
Rensing, Inc., has P800,000 of 8% preference shares and P1,200,000 of ordinary shares outstanding,
each having a par value of P10 per share. No dividends have been paid or declared during 2019 and
2020. As of December 31, 2021, it is desired to distribute P488,000 in dividends.
Instructions
How much will the preference and ordinary shareholders receive under each of the following
assumptions:
(b) The preference is cumulative and nonparticipating.
Preference Ordinary Total
Dividends in arrears, 8% of P800,000 for two years P128,000 P — P128,000
Current year's dividend 64,000 — 64,000
Remainder to ordinary 296,000 296,000
P192,000 P296,000 P488,000
 EXERCISES
Rensing, Inc., has P800,000 of 8% preference shares and P1,200,000 of ordinary shares outstanding,
each having a par value of P10 per share. No dividends have been paid or declared during 2019 and
2020. As of December 31, 2021, it is desired to distribute P488,000 in dividends.
(c) The preference is cumulative and fully participating.
Preference Ordinary Total
Dividends in arrears, 8% of P800,000 for two years P128,000 P — P128,000
Current year's dividend (8% for both) 64,000 96,000* 160,000
Participating dividend 10% (P200,000 ÷ P2,000,000) 80,000** 120,000 ** 200,000
P272,000 P216,000 P488,000
* 8% x 800,000 = 64,000 for preference
8% x 1,200,000 = 96,000 for ordinary

OR:
PS 800,000 (800,000/2,000,000)X 200,000 = 80,000
OS 1,200,000 (1,200,000/2,000,000) X 200,000 = 120,000
TOTAL 2,000,000
 EXERCISES
Rensing, Inc., has P800,000 of 8% preference shares and P1,200,000 of ordinary shares outstanding,
each having a par value of P10 per share. No dividends have been paid or declared during 2019 and
2020. As of December 31, 2021, it is desired to distribute P488,000 in dividends.
(d) The preference is cumulative and participating to 12% total.
Preference Ordinary Total
Dividends in arrears, 8% of P800,000 for two years P128,000 P — P128,000
Current year's dividend 64,000 96,000 160,000
Participating dividend (4%) 32,000 48,000 80,000
Remainder to ordinary — 120,000 120,000
P224,000 P264,000 P488,000
12% - 8% = 4%
4%x 800,000 = 32,000 for Preference
4% x 1,200,000 = 48,000 for ordinary
 EXERCISES
Bennett Company paid cash dividends totaling P150,000 in 2023 and P75,000 in
2024. In 2025, Bennett intends to pay cash dividends of P800,000. Compute the
amount of cash dividends per share to be received by common stockholders in
2025 under each of the following assumptions. Treat each case independently.
There were no dividends in arrears as of January 1, 2023.

(1) 25,000 shares of common; 100,000 shares of 6 percent, P50 par cumulative
preferred.
(2) 25,000 shares of common; 50,000 shares of 6 percent, P50 par noncumulative
preferred.
(3) 25,000 shares of common; 70,000 shares of 6 percent, P100 par cumulative
preferred.
 EXERCISES

(1) 25,000 shares of common; 100,000 shares of 6 percent, P50 par cumulative preferred.
Cumulative preferred

Preferred dividends per year: 6% x P50 = P3 100,000 shares x P3 = P300,000

Paid In Arrears
Preferred dividends in 2023 P150,000 P150,000

Preferred dividends in 2024:

Arrearage from 2023 P 75,000 (75,000)
Arrearage from 2024 P300,000
Total in arrears at
12/31/2024 P375,000

Dividends for
2025:
Arrearage from years 2023 and 2024
P375,000
Current year preferred dividend 300,000
Total preferred dividends paid in 2025
P675,000
Remainder to common: P800,000 - P675,000 = P125,000
Common dividends per share: P125,000/25,000 shares = P5.00 per share
EXERCISES

(2) 25,000 shares of common; 50,000 shares of 6 percent, P50 par noncumulative preferred.
.

Noncumulative preferred
Preferred dividends per year: 50,000 shares x P3 = P150,000
Dividends in arrears for 2023: P 0
Dividends in arrears for 2024: 0
Dividends for 2025: 150,000
Total preferred dividends P150,000

Remainder to common: P800,000 - P150,000 = P650,000

Common dividends per share: P650,000/25,000 shares = P26.00 per
share
EXERCISES

((3) 25,000 shares of common; 70,000 shares of 6 percent, P100 par cumulative preferred.

Cumulative
. preferred
Preferred dividends per 70,000 shares x P6 = P420,000
year:
Paid In Arrears
Preferred dividends in 2023 P150,000 P270,000
Preferred dividends in 2024:
Arrearage from 2023 P 75,000 (75,000)
Arrearage from 2024 420,000
Total in arrears at 12/31/2024 P615,000
Dividends for 2025:
Total dividends paid in 2025 P800,000
Arrearage from years 2023 and 2024 615,000
Amount available for preferred dividend in 2025 P185,000
kulang pa para sa 2025
Total preferred dividends P800,000

Remainder to common: P0
Common dividends per share: P0
 EXERCISES
In each of the following independent cases, it is assumed that the corporation has
P400,000 of 6% preference shares and P1,600,000 of ordinary shares outstanding, each
having a par value of P10. No dividends have been declared for 2019 and 2020.

(a) As of 12/31/21, it is desired to distribute P250,000 in dividends. How much will the
preference shareholders receive if their shares are cumulative and nonparticipating?

(b) As of 12/31/21, it is desired to distribute P400,000 in dividends. How much will the
preference shareholders receive if their shares are cumulative and participating up to 11%
in total?

(a) P72,000 (P400,000 x .06 x 3 yrs.)

(b) P92,000 (P400,000 x .06 x 3 yrs.) + [P400,000 x (.11 -.06)]
BOOK VALUE PER SHARE (BVS)

BVS – the amount that would be paid on each share assuming the
entity is liquidated and the amount available to shareholders is
exactly the amount reported as SHE.

If only one class of share:

BVS = Total SHE/Number of shares outstanding

If there are 2 classes of shares:

Book value per PS = PS equity/number of PS outstanding
Book value per OS = OS equity/ Number of ordinary shares outstanding
BOOK VALUE PER SHARE (BVS)
Procedures for apportionment:
1. An amount equal to the par or stated value is allocated to the PS
and OS.
2. Any balance of the SHE in excess of the par or stated value is then
apportioned taking into account the liquidation value and dividend
rights of the PS’holders.
For BV purposes, the following are assumed to be available for
dividends:
a. RE
b. Share premium
c. Revaluation surplus
BOOK VALUE PER SHARE (BVS)
Procedures for apportionment:
If there are treasury shares and subscribed share capital, the amount of
par or stated value assigned to the pertinent share capital is computed as
follows:

Shares Amount
Share capital issued xx xx
Add: Share capital xx xx
subscribed
Total xx xx
Less: Treasury shares at xx xx
par
Amount and shares xxx xxx
outstanding
BOOK VALUE PER SHARE (BVS)
Notes:
 For purposes of BVS computation, treasury shares shall be treated as retired.
 Accordingly, any gain on retirement is credited to share premium, and any loss
on retirement is charged first to share premium and then to RE.

 Liquidation value of PS- is the amount w/c the PS’holders normally receive
upon the liquidation of the corporation. The liquidation value may be more
than the par value.
 In the absence of a liquidation value, the PS’holders shall receive an amount
equal to the par or stated value, unless there is a deficit, in w/c case the
PS’holders would share on a prorata basis with the OS’holders.

 The PS may have a call price, but this is ignored for BVS
computations.
 The call price is the amount paid to PS’holders upon the redemption of PS
during the lifetime of the corporation.
ILLUSTRATION
Kae Company’s SHE in the statement of financial position on December 31, 2022
showed the ff:
Share capital, P100 par, 50,000 shares P5,000,000
Share premium 1,000,000
Retained earnings 2,000,000
Revaluation surplus 1,500,000
Total SHE P9,500,000

BVS = SHE/Number of shares outstanding

= 9,500,000/50,000 shares
= P190/share
ILLUSTRATION
Antz Company’s SHE in the statement of financial position on December 31, 2022
showed the ff:

Preference share capital, 12% P100 par, 25,000 shares 2,500,000

Ordinary share capital 5,000,000
Share premium 600,000
Retained earnings 3,000,000
Total SHE 11,100,000

Dividends have been paid on the PS up to December 31, 2020. Compute for the BVS
of PS and OS under the ff. cases:
1. PS is noncumulative and nonparticipating.
2. PS is cumulative and nonparticipating.
3. PS is cumulative and participating.
4. PS is cumulative and participating up to 16%.
5. PS is cumulative , nonparticipating and with liquidation value of P106 per share.
ILLUSTRATION
Dividends have been paid on the PS up to December 31, 2020. compute for the BVS of PS
and OS under the ff. cases:
1. PS is noncumulative and nonparticipating.

Excess over par PS OS

Balances 3,600,000 2,500,000 5,000,000
PS dividend (300,000) 300,000
Balance to OS 3,300,000 3,300,000
Total Equity 2,800,000 8,300,000
Divide by shares outstanding 25,000 50,000
BVS P112 P106
ILLUSTRATION
Dividends have been paid on the PS up to December 31, 2020. compute for the BVS of PS
and OS under the ff. cases:
2. PS is cumulative and nonparticipating.

Excess over par PS OS

Balances 3,600,000 2,500,000 5,000,000
PS dividend (600,000) 600,000
Balance to OS 3,000,000 3,000,000
Total Equity 3,100,000 8,000,000
Divide by shares outstanding 25,000 50,000
BVS P124 P160
ILLUSTRATION
Dividends have been paid on the PS up to December 31, 2020. compute for the BVS of PS
and OS under the ff. cases:
3. PS is cumulative and participating.
. Excess over par PS OS
Balances 3,600,000 2,500,000 5,000,000
PS dividend (600,000) 600,000
OS dividend (12% x 5,000,000) (600,000) 600,000
Balance for participation 2,400,000
PS (1/3 x 2,400,000) 800,000
OS (2/3 x 2,400,000) 1,600,000
Total Equity 3,900,000 7,200,000
Divide by shares outstanding 25,000 50,000
BVS P156 P144
ILLUSTRATION
Dividends have been paid on the PS up to December 31, 2020. compute for the BVS of PS
and OS under the ff. cases:
4. PS is cumulative and participating up to 16%.
. Excess over par PS OS
Balances 3,600,000 2,500,000 5,000,000
PS dividend (600,000) 600,000
OS dividend (12% x 5,000,000) (600,000) 600,000
Balance for participation 2,400,000
PS (4% x 2,500,000) 100,000
OS (balance to common) 2.300,000
Total Equity 3,200,000 7,900,000
Divide by shares outstanding 25,000 50,000
BVS P128 P158
ILLUSTRATION
Dividends have been paid on the PS up to December 31, 2020. compute for the BVS of PS
and OS under the ff. cases:
5. PS is cumulative , nonparticipating and with liquidation value of P106 per share.

Excess over par PS OS

.
Balances 3,600,000 2,500,000 5,000,000
Liquidation premium (25,000 (150,000) 150,000
shares x P6)

PS dividend (600,000) 600,000

Balance to OS 2,850,000 2,850,000
Total Equity 3,250,000 7,850,000
Divide by shares outstanding 25,000 50,000
BVS P130 P157
PROBLEMS-BVS

Book Value Per Share = P8,800,000/(P1,000,000/100 par)]

=P880
EARNINGS PER SHARE (EPS)
EPS- INDICATES THE INCOME EARNED BY EACH ORDINARY SHARE.
 The EPS figure is the amount attributable to every OS outstanding
during the period.
 EPS pertains only to ordinary shares.

 Two presentations of EPS:

1. Basic Earnings per share (BEPS)
2. Diluted Earnings per share (DEPS)

Public entities are required to present EPS.

Nonpublic entities are not required but are encouraged to present EPS.
EPS Simple Capital Structure

◆ Simple Structure--Only ordinary shares; no

potentially dilutive securities.

◆ Complex Structure--Potentially dilutive securities

are present.

◆ “Dilutive” means the ability to influence the EPS

in a downward direction.
EARNINGS PER SHARE (EPS)

Presentation of EPS – on the face of the income

statement. An entity shall present BEPS and DEPS even if
the amounts are negative. (Basic loss per share)
Uses of EPS:
1.Determinant of the market price of OS, indicating the
attractiveness of the OS as an investment.
2. It is a measure of performance of management in
conducting operations.
3. It is the basis of dividend policy of an entity.
Computing Earnings Per Share
Earnings per share indicates the income earned by each ordinary
share.

◆ Companies report earnings per share only for ordinary

shares.

◆ When the income statement contains discontinued

operations, companies are required to report earnings per
share from continuing operations and net income on the face
of the income statement.
Illustration 16-12
COMPUTING BEPS

BEPS = Net income/ ordinary shares outstanding

If there are PSs, the net income is the amount after deduction
dividends on PS.

If the PS is cumulative, the PS dividend for the current year is

deducted from the NI, whether such dividend is declared or not.
If the PS is noncumulative, the preference dividend for the
current year is deducted from the NI, only if there is declaration.
EPS Simple Capital Structure

Preferred Stock Dividends

Subtracts the current-year preference share dividend from
net income to arrive at income available to ordinary
shareholders.

Preference dividends are subtracted on cumulative

preference shares, whether declared or not.
 COMPUTATION OF AVERAGE SHARES
OUTSTANDING
JANUARY 1 BEGINNING BALANCE 100,000 shares
May 1 Additional issuance 150,000 shares
September 1 Additional issuance 150,000 shares
Total shares outstanding 400,000 shares

Date Shares Months Peso months OR

outstanding
January 1 100,000 12 1,200,000 100,000 X4/12 = 33,333.33
May 1 150,000 8 1,200,000 250,000 X 4/12 = 83,333.33
September 1 150,000 4 600,000 400,000 X 4/12=133,333.33
3,000,000 AVERAGE SHARES = 250,000
AVERAGE SHARES = 3,000,000/12 MONTHS = 250,000
 COMPUTATION OF AVERAGE SHARES
OUTSTANDING
JANUARY 1 BEGINNING BALANCE 100,000 shares
May 1 Additional issuance 150,000 shares
September 1 Additional issuance 150,000 shares
Total shares outstanding 400,000 shares

Date Shares Months Peso months OR

outstanding
January 1 100,000 12 1,200,000 100,000 X12/12 = 100,000
May 1 150,000 8 1,200,000 150,000 X 8/12 = 100,000
September 1 150,000 4 600,000 150,000 X 4/12=50,000
3,000,000 AVERAGE SHARES = 250,000
AVERAGE SHARES = 3,000,000/12 MONTHS = 250,000
EPS Simple Capital Structure

Weighted-Average Number of Shares

Companies must weight the shares by the fraction of the
period they are outstanding.
When share dividends or share splits occur, companies
need to restate the shares outstanding before the share
dividend or split.
EPS Simple Capital Structure

Illustration: Sabrina Company has the following changes in

its ordinary shares during the year.

Compute the weighted-average number of shares

outstanding for Sabrina Company.
EPS Simple Capital Structure
EPS Complex Capital Structure

Complex Capital Structure exists when a business has

◆ convertible securities,

◆ options, warrants, or other rights

that upon conversion or exercise could dilute earnings per

share.

Company reports both basic and diluted earnings per

share.
EPS Complex Capital Structure

Diluted EPS includes the effect of all potential dilutive ordinary

shares that were outstanding during the period.
Illustration 16-22

Companies will not report diluted EPS if the securities in their capital
structure are antidilutive.
END