EXERCISE 1 – Answer the following:

1. What is the meaning of retained earnings?

 Retained earnings represent the cumulative balance of periodic net income or loss,
dividend distributions, prior period errors, changes in accounting policy and other
capital adjustments. The IAS term for retained earnings is “accumulated profits”.
2. Distinguish between appropriated and unappropriated retained earnings?
 Retained earnings are of two kinds, namely, unappropriated retained earnings and
appropriated retained earnings.
 Unappropriated retained earnings represent that portion which is free and can be
declared as dividends to shareholders. Appropriated retained earnings represent
that portion which has been restricted and therefore is not available for any
dividend declaration.
3. What is deficit?
 When the retained earnings account has a debit balance, then it is called a
“deficit”. A deficit is not an asset but a deduction from shareholder’s equity. The
IAS term for deficit is “accumulated losses”.
4. What is the meaning of dividends?
 Dividends are distribution of earnings or capital to the shareholders in proportion
to their shareholdings.
5. Distinguish between dividends out of earnings and dividends out of capital?
 The dividends out of earnings are usually in the form of the following: a) Cash
Dividends, b) Property dividends, c) Liability dividends in the form of bond and
scrip, and d) Stock dividends or bonus issue.
 When capital is returned to shareholders, it is known as dividend out of capital or
liquidating dividend. As a rule, liquidating dividends are paid to the shareholders
when the entity is dissolved and liquidated. During the lifetime of the entity, it is
illegal to return capital to the shareholders.
6. What are property dividends?
 Property dividends or dividends in kind are distribution of earnings of the entity
to the shareholders in the form of noncash assets. Property dividends are
considered as “distribution of noncash assets to owners” in accordance with
IFRIC 17.
7. Explain measurement of property dividend payable.
 IFRIC 17, paragraph 11, provides that an entity shall measure a liability to
distribute noncash asset as a dividend to its owners at the fair value of the asset to
be distributed. Paragraph 13 further provides that at the end of each reporting
period and at the date of settlement, the entity shall review and adjust the carrying
amount of the dividend payable with any change recognized in equity as
adjustment to the amount of distribution. This simply means that the dividend
payable is initially recognized at the fair value of the noncash asset on date of
declaration and is increased or decreased as a result of the change in fair value of
the asset at year-end and date of settlement. The offsetting debit or credit is
through equity or directly retained earnings.
8. Explain share dividend.
 The IAS term for share/stock dividend is “bonus issue”. Stock dividends are
distributions of the earnings of the entity in the form of the entity’s own shares.
When stock dividends are declared, the retained earnings of the entity are in effect
capitalized, meaning transferred to share capital. The assets of the entity remain
the same before and after the issuance of the stock dividends. The stock dividends
create only a change in the components of the shareholder’s equity – decrease in
retained earnings but increase in share capital. Stock dividends may be referred to
as ordinary stock dividends or special stock dividends.
9. How much retained earnings should be capitalized when share dividends are
declared?
  If the share dividend is 20% or more, the par or stated value is capitalized because
this is conceived to materially effect a reduction in the share market value. Share
dividend of 20% or more is considered as large stock dividend.
10. May dividends be accounted for expense?
 Yes, dividends may be accounted for as expense. PAS 32, paragraph 35, provides
that distributions to holders of an equity instrument shall be debited by the entity
directly to equity. In other words, dividends out of earnings are charged to
retained earnings. However, Paragraph 36 provides that distributions to holders of
an equity instrument classified as financial liability are recognized in the same
way as interest expense on bond. Paragraph 40, further provides that dividends
classified as an expense may be presented in the income statement either with
interest on other liabilities or as a separate line item.

EXERCISE 2
Tasked: Prepare journal entry on December 31, 2020, January 15, 2021 and January 31,
202. (Provide an explanation on each entry)
2020
Dec. 31 Retained Earnings 1,350,000
Cash Dividends Payable 1,350,000
- to recognize the dividend payable on the date of declaration.
2021
Jan. 15 No entry on the date of record.
Jan. 30 Cash Dividends Payable 1,350,000
Cash 1,350,000
- to record the settlement of the dividend payable on the date of payment.

EXERCISE 3
Tasked: Prepare journal entries in connection with the property dividends. (Indicate the
date and provide an explanation on each entry)

2020
Oct. 31 Retained Earnings 1,300,000
Property Dividends Payable 1,300,000
- to recognize the property dividend payable on the date of declaration.
Dec. 31 Retained Earnings 200,000
Property Dividend Payable 200,000
- to recognize the increase in dividend payable at the end of the reporting
period.

Fair Value – December 31, 2020 ₱ 1,500,000

Fair Value – October 31, 2020 1,300,000
Increase in Dividend Payable ₱ 200,000

2021
March 31 Property Dividend Payable 400,000
Retained Earnings 400,000
- to recognize the decrease in dividend payable on the date of settlement.
Fair Value – March 31, 2021 ₱ 1,100,000
Fair Value – December 31, 2020 1,500,000
Decrease in Dividend Payable ₱ (400,000)

2021
 March 31 Dividend Payable 1,100,000
Gain on Distribution of Property Dividend 200,000
Investment in Equity Securities 900,000
- to record the settlement of the dividend payable on the date of payment

EXERCISE 4
Tasked: For each of the following, prepare journal entries on the date of declaration and
date of payment.
Requirement A: A 20% share dividend is declared
Retained earnings 1,000,000
Stock dividends payable 1,000,000
- to record the declaration of stock dividend

Stock dividends payable 1,000,000

Share capital 1,000,000
- to record payment of the stock dividends

Requirement B: A 10% share dividend is declared

Retained earnings 750,000
Stock dividends payable 500,000
Share premium 250,000
- to record the declaration of stock dividends

Stock dividends payable 500,000

Share capital 500,000
- to record the stock dividends.

EXERCISE 5
Tasked: Prepare journal entries for 2020 and 2021 in connection with the property dividend.
2020
Oct. 1 Retained Earnings 3,800,000
Property Dividend Payable 3,800,000
- to record declaration of Property Dividend

Oct. 1 Asset held for distribution 4,000,000

Machine 4,000,000
- to record Assed held for Distribution

Dec. 31 Property Dividends Payable 100,000

Retained Earnings 100,000
- to record re-measurement of the liability at fair value of asset

31 Impairment Loss 300,000

Machinery 300,000
- to record the impairment loss of the machinery

2021
Apr. 1 Property Dividends Payable 200,000
Retained Earnings 200,000
- to record the re-measurement of the liability at fair value of asset

2021
Apr. 1 Property Dividends Payable 3,500,000
 Loss on Disposal of Asset 200,000
Asset held for Distribution-Machinery 3,700,000
- to record distribution of Property dividend of machinery.

EXERCISE 6 - Answer the following:

1. What is statement of retained earnings?
 It shows the changes affecting directly the retained earnings of an entity and
relates the income statement of financial position. The statement of retained
earnings is no longer a required component of financial statements but it is a part
of the statement of changes in equity.
2. What are the usual items that affect directly retained earnings?
 Net income or loss for the period - net income is added because it increases
retained earnings and net loss is deducted. The IAS term for net income
or loss is “profit or loss”.
 Prior period errors - the prior period errors are shown as adjustment to the
beginning balance of retained earnings to arrive at the corrected
beginning balance
 Dividends to shareholders - the dividends declared or paid during the year shall
be deducted from the retained earnings.
 Effect of change in Accounting Policy - this is shown as an adjustment to the
beginning balance of retained earnings. If the net income of prior period
is understated because of the change in accounting policy, the effect is
added to the beginning retained earnings. If the net income of prior
period is overstated because of the change in accounting policy, the effect
is deducted from beginning retained earnings.
 Appropriation of retained earnings - the amount of appropriation is deducted
from the unappropriated balance of retained earnings. Conversely, if the
appropriation is canceled, it is reverted or added back to the
unappropriated balance.

3. Explain the meaning of the term reserves.

 The term reserves is not officially defined in any accounting standard or in the
Conceptual framework. Reserves form a substantial part of the equity of an entity.
Under international accounting standard, the use of equity reserves is based on
whether a reserve is part of distributable equity or non-distributable equity.
4. What are the items that may be included in the caption “nondistributable reserves”.
 Share premium reserve is the excess over par or stated value
 Appropriation reserve is the earmarking of retained earnings for a certain purpose
which may be legal, contractual, or voluntary.
 Asset revaluation reserve arises from the revaluation of property, plant, and
equipment. It is the excess of fair value or depreciated replacement cost of the
revalued property over its carrying amount.
 Other comprehensive income reserve

5. What is quasi-reorganization?
 A quasi-reorganization is a permissive but not a mandatory procedure under
which a financially troubled entity restates its account and establishes a “fresh
start” in accounting sense. Specifically, a quasi-reorganization is the procedure of
restating assets, liabilities and share capital balances in conformity with fair value
for the purpose of eliminating a deficit.

6. What are the two-ways of accomplishing a quasi-reorganization?

 The two-ways of accomplishing a quasi-reorganization are: recapitalization and
revaluation of property, plant and equipment.
 7. What are the circumstances that would justify quasi-reorganization?
The following are circumstances that would justify quasi-reorganization:
 When a large deficit exists
 When approved by the shareholders and creditors
 When the cost basis of the accounting for property, plant and equipment becomes
unrealistic. An entity in financial difficulty may be permitted by the SEC to
undergo a quasi-reorganization and in the process may be allowed to revalue its
property, plant and equipment if their current value is substantially more than
their cost.
 When a fresh start appears to be desirable or advantageous to all parties
concerned.

8. What are the SEC requirements for a quasi-reorganization?

The SEC requirements for a quasi-reorganization are the following:
 If the quasi-reorganization is the result of revaluation of property, plant and
equipment, the appraisal must be made by an independent expert or specialist.
 The increase in value of the property, plant and equipment is credited to
revaluation surplus.
 The adjustment concerning other assets, (inventory, investment, intangibles, etc.)
are made through retained earnings.
 The resulting deficit from the reorganization is offset against the revaluation
surplus.
 Retained earnings subsequent to the quasi-reorganization shall be restricted to the
extent of the deficit wiped out during the reorganization and therefore cannot be
declared as dividend.
 Losses subsequent to quasi-reorganization cannot be charged to the remaining
revaluation surplus.
 The quasi-reorganization shall be disclosed for at least 3 years- the date,
mechanics, purpose and effect of the quasi- reorganization on the entity’s
statements.

EXERCISE 7
Tasks:
1. Prepare journal entries to give effect to the quasi-reorganization.

Retained Earnings 150,000

Inventory 150,000
- to record the obsolete amount of inventory charged to retained earnings.

Note payable 500,000

Retained earnings 300,000
Accumulated depreciation 1,200,000
Equipment 2,000,000
- to record the sale of equipment in satisfaction of note payable.

Mortgage payable 4,200,000

Preferred share capital 4,000,000
Share premium 200,000
- to record payment of mortgage payable through 40,000 new preference
shares.

Ordinary share capital 4,000,000

 Share premium 4,000,000
- to record the reduction of par value of the ordinary shares.

Share premium 3,250,000

Retained earnings 3,250,000
- to record the resulting deficit offset against the share premium.

2. Prepare statement of financial position immediately after the reorganization.

S Company
Statement of Financial Position
December 31, 2020
ASSETS
Cash ₱ 200,000
Accounts Receivable 300,000
Inventory 350,000
Property, Plant and Equipment 7,900,000
Accumulated Depreciation (1,900,000)
Goodwill 1,200,000
TOTAL ASSETS ₱ 8,050,000

LIABILITIES & SHAREHOLDER’S EQUITY

Accounts Payable ₱ 1,100,000
Preferred Share Capital, P100 par 4,000,000
Ordinary Share Capital, P20 par 1,000,000
Share Premium 1,950,000
TOTAL LIABILITIES & SHAREHOLDER’S EQUITY ₱ 8,050,000

EXERCISE 8 - Answer the following:

1. What is statement of changes in equity?
 The statement of changes in equity is a formal statement that shows the
movements in the elements or components of the shareholder’s equity.
2. What items are disclosed in the statement of changes in equity?
An entity shall present a statement of changes in equity showing the following:
 Total comprehensive income for the period
 For each component of equity, the effects of changes in accounting policies and
corrections of errors.
 For each component of equity, a reconciliation between the carrying amount at
the beginning and end of the period, separately disclosing changes from:
 Profit or loss
 Each item of other comprehensive income
 Transactions with owners in their capacity as owners showing separately
contributions by and distributions to owners.

3. What are the components of other comprehensive income?

The components of other comprehensive income are:
 Unrealized gain or loss on financial assets at fair value through other
comprehensive income
 Gain or loss from translating the financial statements of a foreign operation
 Change in revaluation surplus
  Unrealized gain or loss from derivative contracts designated as cash flow hedge
 Remeasurements of defined benefit plan, such as actuarial gain or loss recognized
in the current year
 Change in the fair value attributable to the “credit risk” of a financial liability
irrevocably designated at fair value through profit or loss.

4. Explain other comprehensive income.

 Other comprehensive income which comprises items of income and expense that
are not recognized in profit or loss as required or permitted by PFRS. Other
comprehensive income refers to that income, expenses, revenue or loss in the
company/entity which has not been realized at the time of preparation of the
financial statements of the entity during an accounting period and are thus
excluded from the net income and shown after the net income on the income
statement of the company.

EXERCISE 9
1. Prepare journal entries to record the transactions above relation to shareholder’s equity.

2020
Jan. 5 Cash 5,400,000
Preferred share capital 5,000,000
Share premium – preferred 400,000
- to record the issuance of 100,000 preference share.

Feb. 1 Treasury shares 320,000

Cash 320,000
- to record the reacquisition of 10,000 ordinary shares.

Apr. 30 Cash 8,500,000

Ordinary share capital 5,000,000
- to record the sale of 250,000 ordinary shares.

June 18 Retained earnings 2,480,000

Dividends payable 2,480,000
- to record dividends payable for July 12.

July 12 Dividends payable 2,480,000

Cash 2,480,000
- to record payment of dividend.

Nov. 19 Cash 210,000

Treasury shares 160,000
Share premium – treasury 50,000
- to record the sale of 5,000 treasury shares.

Dec. 31 Retained earnings 450,000

Dividends payable 450,000
- to record dividends payable for January 14, 2021.
2020
Dec. 31 Net income 3,500,000
Retained earnings 3,500,000
- to record the net income for the year.

31 Retained earnings 160,000

 Appropriated retained earnings
on treasury shares 160,000
- to record the appropriated retained earnings for the year.

2. Prepare statement of changes in equity for 2020.

N COMPANY
Statement of Changes in Equity
For the Year Ended December 31, 2020

Share Retained Treasury

Share Capital
Premium Earnings Shares
Beginning Balance ₱ 20,000,000 ₱ 6,000,000 ₱ 5,000,000
Issuance of 250,000 ordinary shares 5,000,000 3,500,000
Issuance of 100,000 preferred shares 5,000,000 400,000
Acquisit ion of Treasury Shares (10,000 shares) ₱ 320,000
Reissuance of Treasury Shares (5,000 shares) 50,000 (160,000)
Dividends to ordinary shares (2,480,000)
Dividends to preferred shares (450,000)
Net Income 3,500,000
Appropriat ed for Treasury Shares 160,000 (160,000)
Ending Balance ₱ 30,000,000 ₱ 10,110,000 ₱ 5,410,000 ₱ 160,000

3. Present the shareholder’s equity on December 31, 2020.

N COMPANY
Shareholder’s Equity
December 31, 2020

Ordinary share capital, 4,000,000 aut horized,

1,250,000 shares outst anding ₱ 25,000,000
Preferred share capital, 400,000 authorized,
100,000 outstanding 5,000,000
Share premium, beginning balance 6,000,000
Share premium - ordinary 3,500,000
Share premium - preferred 400,000
Share premium - treasury 50,000
Appropriated Ret ained Earnings 160,000
Retained Earnings 5,410,000
Treasury Shares (160,000.00)
Total Shareholder's Equity ₱ 45,360,000