RECAPITALIZATION

Recapitalization occurs when there is a change in the capital structure of the company. The old
shares are canceled and new shares are issued. Examples include:
 Change from par to no-par
 Change from no-par to par
 Reduction of par value or stated value
 Split up or split down

Illustration 1: Recapitalization of Share Capital

The Shareholders’ equity of Steven Co. on December 31 is as follows:

Ordinary share P50 par, 100,000 shares issued P 5,000,000

Share premium 1,000,000
Accumulated Profits 20,000,000
Treasury shares at cost (2,500 shares) 250,000

Required: Provide the journal entry to be made on the corporation books under the following
independent scenarios:
1. All the 100,000 ordinary shares are called in for cancellation. Instead, the company issued
100,000 no-par ordinary shares with the following stated value: a. P50 b. P150
2. A recapitalization is effected whereby the par value of the ordinary shares is reduced to P40
per share.
3. The company effected a 5 for 1 stock split on the ordinary shares.

RETAINED EARNINGS/ACCUMULATED PROFITS

Retained earnings represent the cumulative amount of profits and/losses, dividends and other
capital adjustment. Retained earnings maybe appropriated or unappropriated.

Appropriation of Retained Earnings

1. Legal appropriation
2. Contractual appropriation
3. Voluntary appropriation

DIVIDENDS
Dividends are resources distributed to entity’s shareholders. Dividends may be in form of cash,
non-cash assets, short-term and long-term liabilities or shares of stocks.

Dividends maybe declared as either:

1. Dividends out of earnings; or
 2. Dividends out of capital

Illustration: Cash Dividends

On December 1 of the current year, Brayden Corp. declared P2 per share dividends on the
outstanding ordinary shares to the shareholders of record on December 15 payable on December
31. Brayden has 10,000 issued ordinary shares with par value of P100. These shares were issued on
January 1 of the current year. On February 1 of the current year, the company acquired 1,000
ordinary shares at cost of P110 per share which were held in treasury.
Required: Provide the journal entries at the date of
a. Declaration b. Record c. Payment

Illustration: Property Dividends (Current Assets)

On November 1, 2014, Elizabeth Company declared inventory as property dividend payable on
February 15, 2015. The carrying amount of the inventory is P700,000. Data relating to the fair
values of the inventory are as follows:

Date Fair Values

November 1, 2014 P 600,000
December 31, 2014 800,000
February 15, 2015 780,000

Assume the fair values are not materially different with the net realizable values.
Required: Provide the journal entries to record these transactions.

Illustration: Property Dividends (Property, Plant and Equipment)

On November 1, 2014, Aaron Company declared inventory as property dividend payable on
February 15, 2015. The carrying amount of the inventory is P700,000. Data relating to the fair
values of the inventory are as follows:

Fair Values (assume that the

costs to distribute are
Date immaterial)
November 1, 2014 P 600,000
December 31, 2014 800,000
February 15, 2015 780,000

Required: Provide the journal entries to record these transactions.

Illustration: Non-Cash or Cash Alternative
On January 1, 2015, Drenz Company had five outstanding ordinary shares. On December 31,
2015Drenz declared dividends on the ordinary shares. The corporation decided to give the
ordinary shareholders a choice between receiving a cash dividend of P10,000 per share or a
property dividend in the form of a non cash asset. Each noncash asset has a fair value of P12,000.
The corporation estimated that 60% of the ordinary shareholders will take the option of the cash
dividend and 40% will elect for the noncash asset. Journalize the transactions on December 31,
2015.
Required: Provide the journal entry on December 31, 2015.

Illustration: Fractional Share Rights or Warrants

The Shareholders’ equity section of UMBRA Co. on December 31, 2016 is as follows:
Ordinary share P10 par, 100,000 shares issued and outstanding 1,000,000
Share Premium on Ordinary shares 500,000
Accumulated Profits 4,000,000

On December 30, 2016, the company declared 20% share dividends to the shareholders of record
January 3, 2017 payable on January 31, 2017. Assume that of the share dividends declared, 18,000
shares relate to full shares issued while 2,000 relate to the fractional shares issued. Also assume
that 1,500 of the fractional shares were exercised at par while the rests were not exercised.
Required: Prepare all the necessary journal entries.

Illustration: Treasury Stock as Share Dividend

The Shareholders’ equity section of Kristine Erika Co. on December 31, 2016 is as follows:
Ordinary share P50 par, 105,000 shares issued 5,250,000
Share Premium on Ordinary shares 1,010,000
Treasury shares (5,000 shares) 300,000
Accumulated Profits 10,000,000

Required: Provide the journal entries to be made under the following independent assumptions:
1) The company declared 10% share dividends on the ordinary share when the market value
per share is P130.
2) The company declared 20% share dividends on the ordinary share when the market value
per share is P130.
3) The company declared and paid P2 per share liquidating dividends.
 4) Assume instead that the 5,000 treasury shares were declared as share dividends.

Illustration: Shareholders’ Equity – Comprehensive

The shareholders’ equity section of Roxas Company on January 1, 2016 showed the following:
Ordinary share, P100 par, 200,000 shares authorized, 60,000 shares issued P 6,000,000
Share Premium 1,200,000
Retained earnings 2,500,000

During the year, Roxas had the following transactions:

a. In February, Roxas reacquired 4,000 shares for P110 per share.
b. In June, Roxas sold 2,000 shares of its treasury share for P120 per share.
c. In September, each shareholder was issued for each share held one stock right to purchase
two additional shares of ordinary for P130 per share. The rights expire on December 31,
2015.
d. In October, 10,000 stock rights were exercised when the market value of the ordinary share
was P160 per share.
e. On December 15, 2015, Roxas declared its first cash dividend to shareholders of P15 per
share, payable on January 14, 2016, to shareholders of record on December 31, 2015.
f. On December 23, Roxas formally retired 1,000 trasury shares.
g. Net income for the year was P1,100,000.
h. Appropriated retained earnings equal to the cost of the treasury share.
Required: Determine the following:
1) How much is the ordinary share on December 31, 2015 statement of financial position?
2) How much is the share premium on the treasury shares on December 31, 2015?
3) How much is the total share premium on December 31, 2015 statement of financial
position?
4) How much is the retained earnings unappropriated on December 2015 statement of
financial position?