Retained

Earnings:
Dividend
Prepared by:
Nick Freddy R. Bello
2013-43169

Pre-Test

Quick
Pre - Test

Pre-Test

For 30 seconds
1. Cumulative preferred dividends in arrears
should be shown in a corporation's balance
sheet as
a. an increase in current liabilities.
b. an increase in stockholders' equity.
c. a footnote.
d. an increase in current liabilities for the
current portion and long-term liabilities
for the long-term portion.

Pre-Test

For 30 seconds
2. Oraaayt Inc. owns 4,000,000 shares of
stock in Royal House Corporation. On
December 31, 2015, Oraaayt distributed
these shares of stock as a dividend to its
stockholders. This is an example of a
a. dividends in kind.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.

Pre-Test

For 30 seconds
3. The IAS term when the retained
earnings account has a debit balance.

Pre-Test

For 30 seconds
4. A share that is entitled to receive only
the dividends equal to the fixed rate.

Pre-Test

For 60 seconds
5. Carlo Angelo Co. has outstanding 50,000
shares of 8% preferred stock with a P10 par
value and 125,000 shares of P4 par value
common stock. Dividends have been paid
every year except last year and the current
year. If the preferred stock is cumulative and
nonparticipating and P250,000 is distributed,
the common stockholders will receive
a. P85,000.
b. P105,000.
c. P170,000.
d. P210,000.

Pre-Test

For 60 seconds
6. At the beginning of 2011, Tatlong Bebe Inc.
had retained earnings of P150,000. During the
year Hamilton reported net income of P75,000,
sold treasury stock at a gain of P27,000,
declared a cash dividend of P45,000, and
declared and issued a small stock dividend of
1,500 shares (P10 par value) when the market
value of the stock was P30 per share. The
amount of retained earnings available for
dividends at the end of 2011 was:
a. P184,500.
b. P162,000.
c. P157,500.
d. P135,000.

Pre-Test

For 120 seconds

7. Lola-Vilma, Inc., has P800,000 of 8%
preferred stock and P1,200,000 of
common stock outstanding, each having a
par value of P10 per share. No dividends
have been paid or declared during 2014
and 2015. As of December 31, 2016, it is
desired
to
distribute
P488,000
in
dividends. How much will the preferred
and common stockholders receive if the
preferred is cumulative and participating
up to 12%? (Both answers should be
correct to garner a point.)

Pre-Test

For 60 seconds
8. On October 1, 2015, Deli Company
declared a property dividend of machinery
payable on April 1, 2016. The carrying amount
of the machinery is P3,000,000 on October 1,
2014. The machinery had the following fair
value:
October 1, 2015 2,500,000
December 31, 2015 2,400,000
April 1, 2016 2,000,000

What is the P/L effect on April 1, 2016 based

on the transaction above? (Indicate if increase
or decrease.)

Pre-Test

Times Up!

Pre-Test

For 30 seconds
1. Cumulative preferred dividends in arrears
should be shown in a corporation's balance
sheet as
a. an increase in current liabilities.
b. an increase in stockholders' equity.
c. a footnote.
d. an increase in current liabilities for the
current portion and long-term liabilities
for the long-term portion.

Pre-Test

For 30 seconds
2. Oraaayt Inc. owns 4,000,000 shares of
stock in Royal House Corporation. On
December 31, 2015, Oraaayt distributed
these shares of stock as a dividend to its
stockholders. This is an example of a
a. dividends in kind.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.

Pre-Test

For 30 seconds
3. The IAS term when the retained
earnings account has a debit balance.

Answer: Accumulated Losses

Pre-Test

For 30 seconds
4. A share that is entitled to receive only
the dividends equal to the fixed rate.

Answer: Non-participating Preferred Share

Pre-Test

For 60 seconds
5. Carlo Angelo Co. has outstanding 50,000
shares of 8% preferred stock with a P10 par
value and 125,000 shares of P4 par value
common stock. Dividends have been paid
every year except last year and the current
year. If the preferred stock is cumulative and
nonparticipating and P250,000 is distributed,
the common stockholders will receive
a. P85,000.
b. P105,000.
c. P170,000.
d. P210,000.

Pre-Test

For 60 seconds
6. At the beginning of 2011, Tatlong Bebe Inc.
had retained earnings of P150,000. During the
year Hamilton reported net income of P75,000,
sold treasury stock at a gain of P27,000,
declared a cash dividend of P45,000, and
declared and issued a small stock dividend of
1,500 shares (P10 par value) when the market
value of the stock was P30 per share. The
amount of retained earnings available for
dividends at the end of 2011 was:
a. P184,500.
b. P162,000.
c. P157,500.
d. P135,000.

Pre-Test

For 120 seconds

7. Lola-Vilma, Inc., has P800,000 of 8%
preferred stock and P1,200,000 of
common stock outstanding, each having a
par value of P10 per share. No dividends
have been paid or declared during 2014
and 2015. As of December 31, 2016, it is
desired
to
distribute
P488,000
in
dividends. How much will the preferred
and common stockholders receive if the
preferred is cumulative and participating
up to 12%? (Both answers should be
correct to garner a point.)
Answer: P/S P224,000;
O/S P264,000

Pre-Test

For 60 seconds
8. On October 1, 2015, Deli Company
declared a property dividend of machinery
payable on April 1, 2016. The carrying amount
of the machinery is P3,000,000 on October 1,
2014. The machinery had the following fair
value:
October 1, 2015 2,500,000
December 31, 2015 2,400,000
April 1, 2016 2,000,000

What is the P/L effect on April 1, 2016 based

on the transaction above? (Indicate if increase
or decrease.)

Answer: 400,000 decrease

Retained
Earnings:
Dividend
Prepared by:
Nick Freddy R. Bello
2013-43169

Outline
Retained
Kinds

Earnings Definition

of Appropriation

Dividends
Out

of Earning
Cash
Property
Stock
Out of Capital/Liquidating Dividend
Others
Dividend

Allocation

Earnings
Retained earnings represent the
cumulative balance of periodic net income
or loss, dividend distributions, prior period
errors, effects of changes in accounting
policy and other capital adjustments.

Under IAS, the term for retained earnings is

accumulated profits.

Earnings

What are the two kinds of RE?

Unappropriated

RE represent that
portion which is free and can be
declared as dividends to stockholders.
Appropriated RE represent that portion
which is restricted and therefore not
available for any dividend declaration.

Earnings

What is the meaning of deficit?

When the retained earnings account has a
debit balance, it is called a deficit. A
deficit is not an asset but a reduction from
SHE. The IAS term for a deficit is
accumulated losses.

Earnings

What are three kinds of

appropriation?
Legal

required by law.
Ex. For the cost of treasury shares
Contractual required by contract.
Ex. For bond or preference share
redemption
Voluntary

a matter of discretion on the

part of management.
Ex. For expansion or covering possible
losses

Earnings

Note: Whatever the purpose is, the

appropriation is just limiting the amount
of dividends to be declared. RE
appropriation doesnt mean appropriation
or setting aside of assets.

Earnings
Illustration
An entity purchased treasury shares at
a cost of P1,000,000.
Treasury Shares 1,000,000
Cash
1,000,000
RE

1,000,000
RE-appropriated 1,000,000

Earnings
Continuing illustration
The treasury shares are subsequently
issued for P2,000,000.
Cash
2,000,000
Treasury Shares 1,000,000
APIC - TS
1,000,000
RE-appropriated 1,000,000
RE
1,000,000

Dividends
What are dividends?
Dividends are distribution of earnings or
capital to shareholders in proportion to
their shareholdings. Dividends are broadly
classified into:
Dividends

out of earnings
Dividends out of capital

Dividends

Dividends out of earnings

Legally, dividends can be declared
only from retained earnings.
If the entity has a deficit, it is illegal to
pay dividends because it violates the
Trust Fund Doctrine.
The common forms of dividends out of
earnings are cash dividend, property
dividend and stock dividend.

Dividends
Dividend declaration is reposed on
the board of directors. When
dividends are formally declared,
three dates are essential for
accounting purposes.

Dividends

Date of declaration
the

date on which the directors

authorize the payment of dividends to
shareholders.
Under IFRIC 17, the dividend liability are
recognized on this date.
Reduction to RE is recognized.

Dividends

Date of record
the

date on which the stock and transfer

book of the corporation will be closed.
only those who are listed as of this date
are entitled to received dividend.
Usually, no journal entry is needed.
The actual amount of dividend is
determined on this date.

Dividends

Date of payment
the

date on which the dividend liability

will be paid.

Dividends
Illustration
The Board of Directors at their meeting
on December 31, 2014 declared a
dividend of P5 per share, payable March
31, 2015, to shareholders of record on
January 31, 2015.
Date of declaration Dec. 31, 2014
Date of record
Jan. 31, 2015
Date of payment
Mar. 31, 2015

Dividends

What are Cash Dividends?

These are the most common type of

dividend. The term dividend alone implies
distribution of cash.

Cash dividends ma be expressed as follows:

A certain amount of peso per share
Ex. P5 per share

A certain percentage of par or stated value

Ex. Thus, if a 7% dividend is declared, a P200
par value share will receive P14 as dividend.

Dividends
Illustration
The Board of Directors at their meeting on November 30, 2014
declared a dividend of P20 per share, payable April 30, 2015,
to shareholders of record on December 31, 2014. The entity
had 20,000 shares issued and outstanding with par value of
P100.

Nov. 30, 2014

RE

400,000

Div Payable 400,000

Dec. 31, 2014
No Entry
April 30, 2015
Div Payable 400,000
Cash400,000

Dividends

What are Property Dividends?

Also

known as dividends in kind.

These are dividends in the form of
noncash assets.

Two
1.
2.

accounting issues:
Measurement of the property dividend
payable.
Measurement of the noncash assets to
be distributed as dividend.

Dividends
Measurement of the property
dividend payable.
Under IFRIC 17, dividend payable is initially
recognized at fair value of the noncash asset on
the date of declaration and is increased or
decreased as a result of the change in fair value of
the asset at year-end and the date of settlement.
The offsetting debit or credit is through equity or
directly retained earnings.
At the date of payment, the difference between
the carrying amount of the dividend payable and
of the noncash asset distributed shall be
recognized in profit or loss.

Dividends
Measurement of the noncash
asset distributed.
PFRS 5, provides that an entity shall measure a
noncurrent asset classified for distribution to
owners at lower of carrying amount and
fair value less cost to distribute.
If FVLCTD < CA of the asset, the difference is
accounted for as impairment loss at yearend.
Moreover, if FVLCTD > CA, no journal entry
is needed.

Dividends
Illustration

An entity owned 50,000 shares of another

entity accounted for as nonmarketable equity
investment. The carrying amount of the
investment is P1,000,000.
On December 1, 2014, the entity declared
these shares as property dividend to be
distributed on Jan. 31, 2015.
The investment had the following fair value
less cost to distribute:
December 1, 2014
1,500,000
December 31, 2014
1,800,000
January 31, 2015
1,900,000

Dividends
Dec 1, 2014
RE 1,500,000
Div Pay
1,500,000
Dec 31, 2014
RE 300,000
Div Pay
300,000

Under IFRIC 17, dividend payable

is initially recognized at fair
value of the noncash asset on
the date of declaration
and is increased or decreased as
a result of the change in fair
value of the asset at year-end
and the date of settlement.

(Note: No impairment loss since FVLCTD > CA)

Jan 1, 2015
RE 100,000
Div Pay

100,000

Div Pay 1,900,000

Inv in Securities
1,000,000
Gain on distribution
900,000

At the date of payment, the

difference between the
carrying amount of the
dividend payable and of the
noncash asset distributed
shall be recognized in profit or
loss.

Dividends
Illustration
On November 1, 2014, an entity declared
a property dividend of equipment
payable on March 1, 2015. The carrying
amount of the equipment is P3,000,000
and the fair value is P2,500,000 on
November 1, 2014.

However, the fair value less cost to

distribute the equipment is P2,200,000
on December 31, 2014 and P2,000,000
on March 1, 2015.

Dividends
Nov 1, 2014
RE 2,500,000
Div Pay
2,500,000
Dec 31, 2014
Div Pay 300,000
RE
300,000
Impairment loss 800,000
Equipment
800,000
Mar 1, 2015
Div Pay 200,000
RE
200,000
Div Pay 2,000,000
Loss on dist. 200,00
Equipment
2,200,000

Under IFRIC 17, dividend payable

is initially recognized at fair
value of the noncash asset on
the date of declaration
and is increased or decreased as
a result of the change in fair
value of the asset at year-end
and the date of settlement.
If FVLCTD < CA of the asset,
the difference is accounted for
as impairment loss at yearend.

At the date of payment, the

difference between the
carrying amount of the
dividend payable and of the
noncash asset distributed
shall be recognized in profit or
loss.

Dividends

What are stock dividends?

These are distribution of earnings in the form of the
entitys own shares.
Its IAS term is bonus issue.
Since it is in the form of the entitys own share, the
entitys asset remain the same before and after
the issuance of stock dividends.
Moreover, Stock Dividend Distributable is not a
liability but an addition to the share capital in
the SHE (Sir Carlo prefers using SD Distributable
than SD Payable because of that reason).

Dividends
If

the stock dividend is large (20% or

more), the par or stated value is
debited to RE.

If

the stock dividend is small (less

than 20%), the fair value of the
share on the date of declaration or
the par/stated value, whichever is
higher, is debited to RE.
If the FV > par/stated value, the
difference
is credited
to share premium.

Dividends
Illustration
Share capital, P100 par 200,000 authorized 10,000,000
shares, 100,000 shares issued and
outstanding.
Share Premium 500,000
RE 500,000
The company declared a 20% stock dividend to its shareholders.
Date of Declaration:
RE 2,000,000
Div Dist
2,000,000
Date of Payment:
Div Dist 2,000,000
Share Capital
2,000,000

Dividends
Illustration
Share capital, P100 par 200,000 authorized 10,000,000
shares, 100,000 shares issued and
outstanding.
Share Premium
500,000
RE
500,000
The company declared a 15% stock dividend to its
shareholders. The fair value of the shares are 150 and 120 on
the date of declaration and date of payment, respectively.
Date of Declaration:
RE
2,250,000
Div Dist
1,500,000
Share Premium
750,000
Date of Payment:
Div Dist
1,500,000
Share Capital
1,500,000

Dividends
May treasury shares be declared
as dividend?
Under Philippine GAAP, treasury shares
may be issued as dividends in which case
the cost of the shares shall be charged
to RE.
Valix believes that such declaration shall
be accounted for as stock dividend
because the entity is reissuing its own
share capital rather than conveying
noncash asset.

Dividends
Illustration
The entity distributed as stock dividend 1,000
treasury shares with cost of P100,000 and market
value of P150,000.
(Note: The cost of TS is charged to RE, not
the market value.)
Date of Declaration
RE
100,000
SD Dist
100,000
Date of Payment
SD Dist
100,000
Trea Shares 100,000

Dividends

Dividends out of capital

Also known as liquidating dividend.
This is a distribution or return of capital to
shareholders. This type of dividend can
legally be paid under the following
circumstances:
When the entity is undertaking a
complete dissolution and liquidation
When the entity is engaged in the
exploitation of natural resources
(Wasting Asset Corporation).

Dividends
Illustration
The following accounts appear in the financial
statements of a wasting asset entity:
Resource Property
10,000,000
Accumulated Depletion 2,000,000
RE
3,000,000
The maximum dividend dividends that may be
declared is 5,000,000. If the maximum amount of
divided is declared, the journal entry on the date
of declaration is:
RE
3,000,000
Cap Liquidated 2,000,000
Div Pay
5,000,000

Others
May dividends be considered as
an expense?
Yes. PAS 32 provides that distributions to
holders of an equity instrument classified
as financial liability are recognized in
the same way as interest expense on a
bond payable.
Ex. Dividends given to redeemable
preference shares holder

Others
What is quasi-reorganization?
A quasi-reorganization is a permissive but
not a mandatory procedure under which a
financially troubled entity restates its
accounts and establishes a fresh start
in accounting sense.
Also called corporate readjustment.
Its purpose is to eliminate the entitys
deficit.

Others
What is a statement of retained
earnings?
The statement of RE shows the changes
directly affecting the RE of an entity
and relates the income statement to the
balance sheet.
It is no longer required as a
component of financial statements
but it is a part of the statement of
changes in equity.

Dividend Allocation

Kinds of Preference Shares

Noncumulative

entitled only to the

current year dividends.
Cumulative entitled to all dividends
in arrear.
Nonparticipating entitled to receive
only the dividends equal to the fixed
rate.
Participating entitled to receive
dividends in excess of the fixed rate.
Could be fully participating or
participating to a certain extent.

Dividend Allocation
Illustration
Chin Ong Inc. provided the following on Dec 31, 2016:
Ordinary share capital, P20 par
4,000,000
value, 200,000 shares
Preference share capital, 6%
1,000,000
P100 par value, 100,000 shares
Preference dividends have been arrears for 2014 and
2015. on Dec. 31, 2016, a cash dividend of P900,000
was declared. What is the dividend payable on the PS
and OS assuming:
a. PS is noncumulative and nonparticipating.
b. PS is cumulative and nonparticipating
c. PS is noncumulative and participating
d. PS is cumulative and participating
e. PS is noncumulative and participating up to 20%
f. PS is cumulative and participating up to 15%

Dividend Allocation

PS is noncumulative and
nonparticipating.

Dividend Allocation

PS is cumulative and
nonparticipating

Dividend Allocation

PS is noncumulative and
participating

Dividend Allocation

PS is cumulative and participating

Dividend Allocation

PS is noncumulative and
participating up to 20%

Dividend Allocation

PS is cumulative and
participating up to 15%

Quiz

Quiz!

Quiz

For 45 seconds
1. On September 1, 2010, N. Hirai
Company reacquired 12,000 shares of its
$10 par value common stock for $15 per
share. Valdez uses the cost method to
account for treasury stock. What is the
journal entry to record the reacquisition of
the stock?

Quiz

For 45 seconds
2. Ikkin Company has 350,000 shares of
$10 par value common stock outstanding.
During the year, Ikkin declared a 10%
stock dividend when the market price of
the stock was $30 per share. Four months
later Ikkin declared a $.50 per share cash
dividend. As a result of the dividends
declared during the year, retained
earnings decreased by ____________.

Quiz

For 45 seconds
3. Gibbs Corporation owned 20,000 shares of
Oliver Corporations $5 par value common
stock. These shares were purchased in 2007
for $180,000. On September 15, 2011, Gibbs
declared a property dividend of one share of
Oliver for every ten shares of Gibbs held by a
stockholder. On that date, when the market
price of Oliver was $14 per share, there were
180,000 shares of Gibbs outstanding. What
NET reduction in retained earnings would
result from this property dividend?

Quiz

For 120 seconds

4. Yoder, Inc. has 50,000 shares of $10
par value common stock and 25,000
shares of $10 par value, 6% participating
preferred stock outstanding. Dividends on
the preferred stock are one year in
arrears. Assuming that Yoder wishes to
distribute $135,000 as dividends, the
common
stockholders
will
receive
___________.

Quiz

For 120 seconds

5. At December 31, 2010 and 2011, Plank
Corp. had outstanding 2,000 shares of
$100 par value 8% cumulative preferred
stock and 10,000 shares of $10 par value
common stock. At December 31, 2010,
dividends in arrears on the preferred stock
were $8,000. Cash dividends declared in
2011 totaled $30,000. What amounts
were payable on each class of stock?

Quiz

Times Up!

Quiz

For 45 seconds
1. On September 1, 2010, N. Hirai
Company reacquired 12,000 shares of its
$10 par value common stock for $15 per
share. Valdez uses the cost method to
account for treasury stock. What is the
journal entry to record the reacquisition of
the stock?

Quiz

For 45 seconds
2. Ikkin Company has 350,000 shares of
$10 par value common stock outstanding.
During the year, Ikkin declared a 10%
stock dividend when the market price of
the stock was $30 per share. Four months
later Ikkin declared a $.50 per share cash
dividend. As a result of the dividends
declared during the year, retained
earnings decreased by ____________.

1,242,50
0

Quiz

For 45 seconds
3. Gibbs Corporation owned 20,000 shares of
Oliver Corporations $5 par value common
stock. These shares were purchased in 2007
for $180,000. On September 15, 2011, Gibbs
declared a property dividend of one share of
Oliver for every ten shares of Gibbs held by a
stockholder. On that date, when the market
price of Oliver was $14 per share, there were
180,000 shares of Gibbs outstanding. What
NET reduction in retained earnings would
result from this property dividend?

252,000

Quiz

For 120 seconds

4. Yoder, Inc. has 50,000 shares of $10
par value common stock and 25,000
shares of $10 par value, 6% participating
preferred stock outstanding. Dividends on
the preferred stock are one year in
arrears. Assuming that Yoder wishes to
distribute $135,000 as dividends, the
common
stockholders
will
receive
___________.

90,000

Quiz

For 120 seconds

5. At December 31, 2010 and 2011, Plank
Corp. had outstanding 2,000 shares of
$100 par value 8% cumulative preferred
stock and 10,000 shares of $10 par value
common stock. At December 31, 2010,
dividends in arrears on the preferred stock
were $8,000. Cash dividends declared in
2011 totaled $30,000. What amounts
were payable on each class of stock
assuming
the
preferred
stock
is
participating up to 12%?

PS 24,000; CS 6,000


End