MODULE 10.2 - Treasury Shares, Dividends and Retained Earnings

AE 112-
MODULE 10.2
(TREASURY SHARES,
DIVIDENDS AND ,
RETAINED EARNINGS)
COURSE LEARNING OUTCOMES

At the end of the module, you should
be able to:
1. explain the accounting for
treasury shares;
2. understand the various share
INSERT RELATED PICTURE HERE capital transactions subsequent to
original issuance;
3. identify different types of dividends
FINANCIAL and compute amount of
dividends; and
ACCOUNTING AND 4. know how to prepare the
REPORTING statement of changes in
shareholders’ equity.
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Albert Einstein
COURSE INTRODUCTION
This course provides an introduction to accounting, within the context of business
and business decisions. Students explore the role of accounting information in the
decision-making process and learn how to use various types of accounting information
found in financial statements and annual reports. This course starts with a discussion of
accounting thought and the theoretical background of accounting and the accounting
profession. The next topic is the accounting cycle - recording, handling, and summarizing
accounting data, including the preparation and presentation of financial statements for
merchandising and service companies. Moreover, it continues with transactions, financial
statements, and problems peculiar to the operations of partnerships and corporations as
distinguished from sole proprietorships. Topics include accounting for partnership formation
and operations; share capital issuances, treasury shares, other related transactions
affecting accumulated profits. Emphasis is placed on understanding the reasons
underlying basic accounting concepts and providing students with an adequate
background on the recording, classification, and summarization functions of accounting to
enable them to appreciate the varied uses of accounting data.
Additional contributed capital represents all capital contributed to a corporation other
than that defined as par or stated value. Additional contributed capital can arise from
proceeds received from the sale of ordinary and preference shares in excess of their par or
stated values. It can also arise from transactions relating to the following:
 Sale of shares previously issued and subsequently reacquired by the corporation

(treasury shares)
 Retirement of previously outstanding shares
 Payment of share dividends in a manner that justifies the dividend being recorded
at the market value of the shares distributed
A. TREASURY SHARES
A treasury share is the corporation's own share which has been issued and reacquired by
the issuing corporation but not for cancellation. Based on its definition, the following are
the requisites for a share to be classified as treasury share:
1. It must be the corporation’s own share. Otherwise acquisition of shares of other

corporations is recorded as an investment.
2. It must have been fully paid and issued before. This requisite distinguishes a treasury
share from unissued shares. A treasury share can be legally issued at an amount less
than its cost without any discount liability, while unissued shares must be issued at least
at par or stated value. They are similar with respect to being equity items not assets.
3. It is reacquired by the corporation in its name. The owner of the reacquired shares is
the corporation itself. And as such, treasury shares are not entitled to receive
dividends.
4. The reacquisition must not be for cancellation. If it is for cancellation then it is called a
retired share. Reasons for acquiring treasury shares include among others the
following: (a) Future source of funds (b) For distribution to employees in lieu of other
compensation (c) To bolster a sagging market for the share.
Section 41 of the Corporation Code of the Philippines states the cases when a
corporation is allowed to purchase or acquire its own stock, namely:
1. To eliminate fractional shares arising out of stock dividends

2. To collect or compromise an indebtedness of the corporation arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during
such sale, and
3. To pay dissenting or withdrawing shareholders entitled to payment of their shares under
the provision of this Code.
The Corporation Code also provides that "no corporation shall redeem, repurchase, or
reacquire its own shares, of whatever class, unless it has adequate amount of unrestricted
accumulated profits to support the cost of said shares". This means that the corporation
can acquire treasury share only to the extent of free or unappropriated retained earnings
or accumulated profits. Purchasing treasury shares with no restriction on the accumulated
profits would be tantamount to indirectly returning capital to shareholders, which is a
violation of the provisions of the Corporation Code. Therefore, in order to preserve the
legal capital, the retained earnings (accumulated profits/losses) must be appropriated to
the extent of the cost of treasury share and the same must not be declared as dividend
until the treasury share is subsequently sold.
ACCOUNTING FOR TREASURY SHARES
PAS 32 recognizes only one method of accounting for treasury share that is the COST
METHOD. Under this method, there is a two-step transaction. The first step is the acquisition
of treasury share and the second step is the issuance of the treasury share. The price
received for the share when originally issued does not affect the entries to record the
acquisition and issuance of the treasury share. Treasury share should be recorded at cost,
regardless of whether the share is acquired below or above the par or stated value.
 If the treasury share is acquired for cash, the cost is equal to the cash
payment
  If the treasury share is acquired for non-cash consideration, the cost

is usually measured by the recorded amount or book value of the

non-cash asset surrendered.
1. ACQUISITION OF TREASURY SHARES (REACQUISITION OF OWN SHARES)
Treasury shares are recorded at COST. To illustrate, assume JUAN-DEE Corporation

reacquired 1,000 of its own ordinary shares, par P40, at P45 per share. The entries are:
Treasury shares – ordinary (1,000 sh x P45 ) 45,000

Cash 45,000
To record reacquisition of own shares at
P45 per share
Accumulated profits(losses) 45,000

Accumulated profits(losses) - appropriated 45,000
To record appropriation for treasury shares.
The disclosure relating to treasury share account in the statement of financial position
should include the following information: (a) the number of shares held in the treasury;
and (b) the restriction on the availability of accumulated profits for distribution of
dividends.
In the statement of financial position, treasury shares are NOT ASSETS but rather they
may be shown as:
a. As a deduction from the total shareholders' equity; or
b. As a deduction from the pertinent share capital.
 The first presentation is preferred over the second.
Using assumed figures for the other shareholders’ equity accounts, the treasury share is
presented in the statement of financial position as follows:
SHAREHOLDERS’ EQUITY:
Ordinary share capital, P40 par, authorized
110,000 shares, 30,000 shares issued of
which 1,000 shares are in treasury 1,200,000
Reserves:
Share premium on Ordinary shares 150,000
Appropriated for Treasury shares 45,000 195,000
Accumulated Profits
Beginning balance 500,000
Less: Appropriated for Treasury shares 45,000 455,000
Total 1,850,000
Less: Treasury shares, 1,000 shares at cost 45,000
Shareholders’ Equity 1,805,000
 PAS 32, paragraph 33 states: “If an entity reacquires its own

instruments, those instruments (treasury shares) shall be
deducted from equity.

2. ISSUANCE OF TREASURY SHARES (RE-ISSUANCE OF OWN SHARES)
A. ISSUANCE AT COST ( ISSUE PRICE = COST )
When treasury shares are issued at cost, the entry is to DEBIT Cash and CREDIT Treasury
Shares.
To illustrate, assume JUAN-DEE Corporation issued 600 treasury shares at cost of P45 per
share, the entries are as follows:
Cash 27,000
Treasury shares – ordinary (600 sh x P45 ) 27,000
To record issuance of treasury shares at P45
per share

To record reversal of appropriation for
treasury shares
B. ISSUANCE ABOVE COST ( ISSUE PRICE > COST )
When treasury shares are issued at a price more than its acquisition cost, the excess is
not profit but represents share premium from shareholders. The proceeds would be
debited to Cash and credited to the Treasury Shares account to the extent of its cost,
and the excess credited as Share Premium from Treasury Shares.
To illustrate, assume JUAN-DEE Corporation issued 600 treasury shares at P51 per share,
the entries are as follows:
Cash (600 sh x P51) 30,600

Share premium – treasury shares (600 sh x P6 ) 3,600
per share

treasury shares
C. ISSUANCE BELOW COST ( ISSUE PRICE < COST )
When treasury shares are issued at a price lower than its acquisition cost, the proceeds
would be debited to Cash and credited to the Treasury Shares account to the extent of
its cost, and the excess debited in the order of priority:
1. Share Premium from Treasury Share of the same class

2. Retained Earnings or Accumulated Profits(losses)
To illustrate, continuing the previous example wherein the treasury shares were issued
above cost, assume JUAN-DEE Corporation issued additional 200 treasury shares at P35
per share, the entries are as follows:
Cash (200 sh x P35) 7,000

Share premium – treasury shares 2,000
per share

treasury shares
The “loss” of P2,000 is debited solely to Share Premium from Treasury Share because it
has an existing balance of P3,600 from the previous transaction.
Assume further that additional 100 treasury shares are issued at P25 per share, the
entries are:
Cash (100 sh x P25) 2,500
Share premium – treasury shares (3,600 – 2,000) 1,600
Accumulated profits(losses) 400
per share

treasury shares
The “loss” of P2,000 is debited first to Share Premium - Treasury Share up to its existing
balance of P1,600 (P3,600 – 2,000) from the previous transaction. The excess of P400
shall be charged to Accumulated Profits since the balance of the Share Premium -
Treasury share has been exhausted.
After the entries are posted, the shareholders’ equity section is presented below:
Ordinary share capital, P40 par,
authorized 110,000 shares, 30,000
shares issued of which 100 shares
1,200,000
are in treasury
Reserves:
Share premium on Ordinary
150,000
shares
Accumulated Profits
Balance (500,000 – 400) 499,600
Less: Appropriated for Treasury
4,500 495,100
shares
Total 1,849,600
Less: Treasury shares, 100 shares at
4,500
cost

In cases where treasury shares are acquired on different dates at
different costs, the First-In, First-Out or FIFO method is used in
recording issuances.
3.

RETIREMENT OF TREASURY SHARES
A. RETIREMENT AT PAR ( PAR = COST )
When treasury shares are subsequently retired, the entry is to DEBIT Share Capital at par
or stated value and CREDIT Treasury Shares at cost. No complications arise if the par or
stated value of the issued shares is equal to the cost of the reacquired shares.
To illustrate, assume JUAN-DEE Corporation acquired additional 200 ordinary shares, par
P40, held as treasury at a cost of P40 per share and subsequently retired, the entries are
ACQUISITION:
Cash 8,000
P40 per share
RETIREMENT
Ordinary share capital (200 sh x P40 par) 8,000
To record retirement of 200 treasury shares.

treasury shares
B. RETIREMENT BELOW PAR ( PAR > COST )
When treasury shares are subsequently retired at less than its par, the excess of the par
value over the cost is not profit and credited as Share Premium from Treasury Shares.
To illustrate, further assume JUAN-DEE Corporation acquired additional 100 ordinary

shares, par P40, held as treasury at a cost of P35 per share and subsequently retired, the
entries are
ACQUISITION:
Cash 3,500
P35 per share

RETIREMENT
Share premium – treasury shares 500

treasury shares
C. RETIREMENT ABOVE PAR ( PAR < COST )
When treasury shares are retired at more than its par, the excess of the cost over the
par value is not loss and debited in the order of priority:
1. Share Premium to the extent of the credit when the share was issued or
share premium form original issuance
2. Share premium from Treasury shares
3. Retained Earnings or Accumulated Profits(losses)
To illustrate, further assume JUAN-DEE Corporation acquired additional 250 ordinary

shares, par P40, held as treasury at a cost of P48 per share and subsequently retired, the
entries are
ACQUISITION:
Cash 12,000
P35 per share

RETIREMENT
Share premium-ordinary shares(250/30,000 sh x
1,250
P150,000)
Share premium – treasury shares 500
Accumulated profits(losses) 250

treasury shares
After the entries on retirement are posted, the shareholders’ equity section of the
statement of financial position is presented as:
Ordinary share capital, P40 par, authorized
110,000 shares, **29,450 shares issued of
which 100 shares are in treasury 1,178,000
Reserves:
Share premium on Ordinary shares
(150,000 – 1,250) 148,750
Accumulated Profits
Balance (500,000 – 400 - 250) 499,350
Less: Appropriated for Treasury shares 4,500 494,850
Total 1,826,100
Less: Treasury shares, 100 shares at cost 4,500
**Issued shares of 29,450 = 30,000 shares less retirement of 550 treasury shares

When no par value shares are reacquired and held as treasury, these
are accounted for in the same manner as illustrated for par value
treasury shares. The stated or assigned value is treated as if it were
par.
B.

CONVERTIBLE PREFERENCE SHARE CAPITAL
The shareholders may at their option exchange preference share capital for ordinary share
capital at a predetermined ratio. Shareholders of convertible preference share capital not
only enjoy a preferred claim on dividends but also have the option of converting into
ordinary share capital with unlimited participation in earnings.
The conversion of preference share capital into ordinary share capital is accounted for as
follows:
1. The account balances related to the preference share capital converted are
canceled.
2. The ordinary share capital issued is recorded to the extent of par.
3. The conversion either results to a gain or loss:
GAIN, if the total amount of the account balances related to the preference
share capital converted is greater than the ordinary share capital issued
LOSS, if the total amount of the account balances related to the preference
share capital converted is lesser than the ordinary share capital issued
4. If the conversion results to a “gain”, the gain is credited to Share Premium –
Ordinary.
5. If the conversion results to a “loss”, the loss is debited to Retained Earnings or
Accumulated Profits.
6. No gain or loss is reported in the statement of comprehensive income as a result of
conversion of preference share capital into ordinary share capital.
Thus, the entry is:

DEBIT: Preference share capital xx
Share premium – preference shares (if there is) xx
Retained Earnings or Accumulated Profits (loss on conversion) xx
CREDIT: Ordinary share capital xx
Share premium – ordinary shares (gain on conversion) xx
To illustrate, assume JUAN-DEE Corporation has the following:
Ordinary share capital, authorized 110,000 shares,

35,000 shares issued, P40 par 1,400,000
Preference share capital, authorized 15,000 shares,
10,000 shares issued, P50 par 500,000
Share premium – Ordinary 650,000
Share premium – Preference 320,000
Accumulated profits 2,100,000
Total 4,970,000
If the preference share capital is converted into ordinary share capital in the ratio of one
preference share capital for two ordinary share capital, the entry is:
Preference share capital 500,000

Share premium-preference shares 320,000
Ordinary share capital (10,000 sh x 2 x P40) 800,000
Share premium-ordinary shares 20,000
To record conversion of preference shares
(1PS: 2OS).
Thus, Equity will now be comprised only of:
 Ordinary share capital, authorized 110,000 shares

55,000 (35,000 + 20,000) shares issued, P40 par 2,200,000
 Share Premium – Ordinary (650,000 + 20,000) 670,000

 Accumulated Profits 2,100,000
But will still total to P4,970,000
If the preference share capital is converted into ordinary share capital in the ratio of one
preference share capital for four ordinary share capital, the entry is:
Preference share capital 500,000

Share premium-preference shares 320,000
Ordinary share capital (10,000 sh x 4 x P40) 1,600,000
To record conversion of preference shares
(1PS:4OS).
Thus, Equity will now be comprised only of:
 Ordinary share capital, authorized 110,000 shares

75,000 (35,000 + 20,000) shares issued, P40 par 3,000,000
 Share Premium – Ordinary 650,000

 Accumulated Profits (2,100,000 – 780,000) 1,320,000
But will still total to P4,970,000
 The conversion of preference share capital into ordinary share capital

does not affect total shareholders’ equity.

C. DONATED SHARES
Donated shares refer to shares of stock received by the corporation from its shareholders
by way of donation. These shares may be reissued at any price without any discount
liability.
The receipt of donated shares are not recorded through a journal entry, but
rather through a notation or memorandum entry in the books. It does not affect the
corporation’s assets, liabilities and equity, although it reduces outstanding shares.
However, the reissuance of such shares increases both the assets and share premium.
To Illustrate, assume JUAN-DEE Corporation received 120 ordinary shares, par P40, from its
shareholders as a donation.
1. The memo entry for the receipt of the donated shares :
"Received from shareholders as donation 120 shares of

ordinary share capital with P40 par value"
2. If the 120 shares are subsequently sold for P50 per share, the entry to record the
issuance:
Cash ( 120 sh x P50 ) 6,000

Donated Capital ( 120 sh x P50 ) 6,000
To record issuance of 120 donated
shares.
3. But if the 120 shares are not subsequently sold, but retired and canceled, the entry
to record the retirement:
Ordinary share capital ( 120 sh x P40 ) 4,800

Donated Capital ( 120 sh x P40 ) 4,800
To record retirement of 120 donated
shares.
 The Donated Capital account is shown as part of the share premium of

the reserves section of the shareholders’ equity.
 The Donated Capital account may also be used to record donation of assets
from shareholders. Assets donated shall be recorded at its fair market value at
the date of donation. But entities sometimes receive from non-shareholders
gifts or grants of funds or other assets that are restricted for property and
equipment additions. Capital gifts or grants shall be recorded at their fair
value when they are received or receivable. When such items are received,
they are generally subsidies and credited to income. In this rare case where
such items are not subsidies, the offsetting credit shall be a liability account
until the restrictions are met. At that time when the restrictions are met, they
are transferred to income.
To Illustrate, assume JUAN-DEE Corporation received a piece of land valued at P2,500,00 as

a gift from a shareholder.
1. The entry for the receipt of land:
Land (at fair value) 2,500,000

Donated Capital 2,500,00
To record receipt of donated land.
2. Any expenditures incurred in connection with the donated asset are charged to the
Donated Capital account. Thus, if the corporation paid P85,000 for the transfer of
the land title, the entry to record the expense:
Donated Capital 85,000

Cash 85,000
To record expenditures related to
donated land.
To modify the previous illustration, assume the entity received the land from a non-
shareholder.
1. The entry for the receipt of land:
Land (at fair value) 2,500,000

Deferred income 2,500,00
To record receipt of donated land.
2. The entry to record the expenditure:
Legal fees ( any appropriate expense

85,000
account)
Cash 85,000
To record expenditures related to
donated land.
STATEMENT OF FINANCIAL POSITION PRESENTATION OF SHAREHOLDERS’ EQUITY
Shareholders’ equity is the residual interest of owners in the assets of a corporation

measured by the excess of assets over liabilities. The elements of shareholders’ equity are:
1. Share capital – represents the total par or stated value of shares issued.
2. Subscribed Share Capital – represents the par or stated value of shares subscribed but
not yet fully paid and therefore still unissued.
3. Share Premium – represents the excess over the par or stated value of the shares issued
and subscribed. The most common sources of share premium are:
 Excess over par or stated value
 Premium from Treasury Share
 Premium from Stock Dividends
 Donated capital (represents assets and capital received by way of gift or
donation from shareholders)
 Premium from quasi-reorganization and recapitalization
 Issuance of detachable share purchase warrants ( share warrants or options
outstanding)
4. Retained Earnings or Accumulated Profits and Losses - represent the cumulative

balance of periodic earnings, dividend distributions, prior period adjustments and other
capital adjustments. It has two kinds:
 Unappropriated or Free or Unrestricted - represents the amount available for
dividend distribution
 Appropriated or Restricted - represents restrictions on accumulated profits as
required by law, contract or upon the option of the corporation (voluntary)
and thus, not available for dividend distribution. This is also known as the
Appropriation Reserve.
5. Revaluation Surplus/ Revaluation Reserve/Revaluation Increment in Property –

represents the excess of the revalued amount over the cost or book value of non-cash
assets, like land, building, equipment, etc.
6. Treasury Shares – represent the corporation's own shares that have been issued and
then reacquired but not canceled. This is shown as a deduction from equity.
Under PAS No. 1 entitled Presentation of Financial Statements, the shareholders’ equity
section of the statement of financial position shall be known as EQUITY, which is actually
the current trend, and is composed of the following:
SHARE CAPITAL OR PAID-IN SHARE CAPITAL
It includes the following: Preference Share Capital, Ordinary Share Capital, Subscribed
Preference Share Capital, Subscribed Ordinary Share Capital and Stock Dividends Payable
– all of these accounts are recorded at par or stated value.
The statement also requires the disclosure, either on the face of the statement of financial
position or in the notes to financial statements, of the following for each class of share
capital:
a. The number of shares authorized

b. The number of shares issued and fully paid, and issued but not fully paid (Issued but
not fully paid” as used here refers to subscribed but not fully paid shares).
c. Par value per share or that the shares have no par value
d. A reconciliation of the number of shares outstanding at the beginning and at the
end of the year.
Section 137 of the Corporation Code of the Philippines defines “outstanding
share capital” as the total shares of stock issued to subscribers or shareholders,
whether or not fully or partially paid (as long as there is a binding subscription
agreement), except treasury shares.
e. The rights, preferences and restrictions attaching to that class including restrictions
on the distribution of dividends and the repayment of capital
f. Shares in the enterprise held by the enterprise itself or by subsidiaries or associates of
the enterprise
g. Shares reserved for issuance under options and sales contracts, including the terms
and amounts
RESERVES
It represents those items of equity other than the aggregate par or stated value of share
capital and accumulated profits unappropriated. It includes the following:
a. Share premium reserve is the excess over the par or stated value.
b. Appropriation reserve is the earmarking of accumulated profits for a certain purpose
which may be required by law, contract or the result of a voluntary action of
management. This reserve is technically known as Accumulated Profits
appropriated.
c. Asset revaluation reserve arises from the revaluation of property, plant and
equipment. It is the excess of sound value of the revalued property over its net book
value. Specifically, this reserve is called revaluation surplus/revaluation increment in
property.
d. Foreign currency translation reserve is the result of translation of the financial
statements of a foreign entity which may be an accumulated translation gain or
accumulated translation loss.
e. Equity contra reserve is the item shown as a deduction from shareholders’ equity.
The best example is the net unrealized loss on market value of noncurrent equity
investment.
The statement requires a description of the nature and purpose of each reserve
within the owners’ equity either on the face of the statement of financial position or
on the notes to financial statements.
RETAINED EARNINGS / ACCUMULATED PROFITS AND LOSSES
It refers to that kind of retained earnings/accumulated profits and losses which is

unappropriated or free. The statement requires the following disclosures be made on the
face of the statement of financial position or in the notes to financial statements:
a. When dividends have been proposed or declared but not formally approved for
payment, the amount included or not included in liabilities
b. The amount of any cumulative preference dividends not recognized
The accumulated profits account has a normal credit balance. A debit balance in the
account is called a deficit. A deficit is not an asset but a deduction from shareholders’
equity. The IAS term for deficit is “accumulated losses”

The IAS term for retained earnings is “accumulated profits”. However,
the Accumulated Profits account is used in the succeeding illustrations,
although the illustrative statement of financial position and statement
of changes in equity in IAS1 and IAS8 still maintain the title Retained

Earnings.”
Illustrated below is the presentation of the shareholders' equity section of the statement of
financial position:
JUAN-TED CORPORATIION
Partial Statement of Financial Position
As of December 31, 2019
SHAREHOLDERS’EQUITY
Share Capital
Preference share capital, 8% cumulative, P100 par,
5,000 shares authorized, 3,000 shares issued and P 300,000
outstanding
Subscribed preference share capital – 1,000 shares 100,000
Ordinary share capital, no par, P50 stated value,
25,000 shares authorized, 15,000 shares issued of
which 2,500 shares are held in treasury 750,000
Subscribed ordinary share capital – 3,000 shares 150,000
Stock dividends payable, ordinary 112,500 P1,412,500
Reserves
Share premium – preference P 30,000
Share premium – ordinary, no par 75,000
Share premium – treasury shares, ordinary 20,000
Share premium – stock dividends 9,000
Donated capital 80,000
Appropriation reserve for treasury shares 137,500
Appropriation reserve for contingencies 40,000 391,500
Accumulated Profits and Losses
Beginning balance, unadjusted P 520,000
Add: Prior period adjustment 13,000
Beginning balance, adjusted P 533,000
Add: Net income 118,000
Total P 651,000
Less: Dividends declared 102,000
549,000
Total P2,353,000
Less: Discount on preference share P 15,500
Treasury shares, ordinary – 2,500 shares at cost 137,500
153,000
Total shareholders’ equity P2,200,000
But in conformity with the provision of the revised ASC Philippine Accounting Standards
(PAS) No. 1, which states that: As a minimum, the face of the statement of financial
position should include line items which present the amount of, among others, issued
capital and reserves. Thus, the equity section of the statement of financial position may be
shown as follows:
JUAN-TED CORPORATIION
Partial Statement of Financial Position
As of December 31, 2019
SHAREHOLDERS’EQUITY
Share Capital (Note 8) P 1,412,500
Reserves (Note 9) 391,500
Accumulated Profits and Losses 549,000
Total P 2,353,000
Less: Discount on preference share P 15,500
Treasury shares, ordinary – 2,500 shares at cost 137,500 153,000
Total shareholders’ equity P2,200,000
Note 8: Share Capital
Preference share capital, 8% cumulative, P100 par, 5,000

shares authorized, 3,000 shares issued and
outstanding. The preference share capital is
cumulative and there are no dividend in arrears P 300,000
Subscribed preference share capital – 1,000 shares 100,000
Ordinary share capital, no par, P50 stated value, 25,000
shares authorized, 15,000 shares issued of which 2,500
shares are held in treasury and recorded at cost of 750,000
P55 per share
Subscribed ordinary share capital – 3,000 shares 150,000
Stock dividends payable, ordinary – On December 18 of
the current year, the Board of Directors declared an 18%
ordinary share capital dividend to ordinary shareholders
on record on December 31 of the current year.
112,500
Total share capital P1,412,500
Note 9: Reserves
Share premium – preference P 30,000

Share premium – ordinary, no par 75,000
Share premium – treasury shares, ordinary 20,000
Share premium – stock dividends 9,000
Donated capital 80,000
Appropriation reserve for treasury shares 137,500
Appropriation reserve for contingencies 40,000
Total Reserves P391,500
RETAINED EARNINGS
The two principal sources of capital for a corporation are: (a) contributed capital or
paid-in capital and (b) earned capital or retained earnings.
The Share Capital account is not charged for losses suffered nor credited with
profits earned by the corporation. It is maintained in such a way as to show the amount of
capital paid in or invested by the shareholders. The reason for this is that shareholders of
the corporation have limited liability. They cannot be held personally liable for corporate
debts. As much as possible, therefore, the capital paid in by shareholders is maintained
intact for the protection of creditors. This paid-in capital is considered permanent capital
and cannot be returned to shareholders except upon the dissolution of the corporation
and only after all liabilities has been paid.
In the corporate records, a distinction is made between permanent capital –

capital invested by shareholders – and the increases and decreases in this permanent
capital due to corporate operations. The former is reflected in the Share Capital and
Share Premium accounts; the latter, in the Retained Earnings or Accumulated Profits
account.
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.” Other terms used
to describe Accumulated Profits are retained income, accumulated earnings and earnings
retained in business. The Accumulated Profits account will be used all throughout this
module.
There are two kinds of Accumulated Profits, namely:
1. Unappropriated or Free Accumulated Profits

- This represents that portion of Accumulated Profits which is free and can be
declared as dividends to shareholders.
2. Appropriated Accumulated Profits

- This represents that portion of Accumulated Profits which has been restricted
and therefore is not available for any dividend declaration.
- Accumulated Profits is said to be appropriated when it is earmarked or set aside

for a specific purpose required by law, contract or the result of a voluntary
action of management. This is accomplished by transferring part of the
Accumulated Profits to a separate account or accounts. The amounts
transferred to the other accounts are then no longer available for dividends to
the shareholders.
The different types of transactions which affect Accumulated Profits are summarized in
terms of debits and credits in the following T-account:
ACCUMULATED PROFITS
Debits
Credits
 Net Loss for the period  Net Income for the period
 Dividend declaration
 Adjustment due to prior period errors  Adjustment due to prior period errors
and changes in accounting policy and changes in accounting policy
which bring about: which bring about:
- overstatement of income - understatement of income
- understatement of expense - overstatement of expense
 Appropriations from Accumulated  Reversal of appropriations of
Profits Accumulated Profits
 PROFITS AND LOSSES

At the end of the accounting period, the books of the corporation are closed.
The closing process for a corporation follows the procedures outlined for sole
proprietorships and partnerships, except as to the closing of the Income
Summary account. In a corporation, the balance of the Income Summary
account is closed to Accumulated Profits. The journal entries to close this
account are as follows:
a. If the Income Summary account has a credit balance representing net income:
Income Summary xx
Accumulated Profits xx
b. If the Income Summary account has a debit balance representing net loss:
Income Summary xx
 DIVIDENDS
A dividend is a distribution of cash, non-cash asset or the corporation’s own
stock among the shareholders. The distribution is based on the proportion of
the number of shares held by the shareholder to the total shares issued and
outstanding. There are two sources of dividends, namely:
a. Dividends out of Earnings – taken from the profits earned by the corporation
b. Dividends out of Capital – also known as liquidating dividend
A. DIVIDENDS OUT OF EARNINGS
Corporate profit is set aside, declared and ordered to be paid by the Board of Directors
(BOD), through a board resolution, to shareholders on demand or at a fixed time. Profit
here refers to a credit balance in the Accumulated Profits account, whether the
corporation earned income or incurred a loss for the year. Therefore, it is illegal to pay
dividends if a corporation has a debit balance in the Accumulated Profits account or
deficit or at an amount in excess of the Accumulated Profits credit balance. This is so
because it violates the trust fund doctrine. However, the Securities and Exchange
Commission has ruled that stock dividends may be declared from the premium on par
value stock.
A dividend may be paid only after it has been declared by the Board of Directors. It is
paid out of the accumulated earnings of the corporation. Dividend declaration is made
by means of a formal resolution authorizing the payment to the shareholders. The following
is an example of a resolution passed by the Board of Directors of a corporation on March 1
of the current year:
“A cash dividend of P2 per share on the ordinary share of the

corporation payable on April 1 of the current year to shareholders of record
on March 15 of the current year is hereby declared.”
Notice that there are three different dates given in the foregoing example. They are as
follows:
1. Date of Declaration (March 1)

This is the date when the resolution is approved by the Board of Directors. As of this
date, the corporation becomes liable for the dividend and must be recorded. The
entry to record the declaration of dividends is as follows:
Dividends Payable xx
2. Date of Record (March 15)

On this date, a list of shareholders is prepared from the shareholders’ ledger. Those
whose names are included in the list are entitled to receive the dividends. Thus, even if
shares of stock are sold from one party to another, there would be no difficulty in the
identification of those who should receive the dividend. No entry is required on this
date.
3. Date of Payment (April 1)
This is date the when the dividend checks or non-cash assets or share capital are issued.
The payment of the dividend would cancel the liability set up upon declaration of the
dividend by the Board of Directors and also reduce the assets of the corporation. The
entry to record payment of dividends is:
Dividends Payable xx
Cash or Non-cash Assets or Share xx

Capital
TYPES OF DIVIDENDS
Dividends may be paid in cash, in shares of stock, in scrip, in bonds or in other
properties of the corporation.
1. Cash dividend is the most common type of dividend, given as a fixed amount per
share or as a percentage of paid-in capital at par value or stated value.
2. Stock dividend involves payment out of the corporation’s own stock, whether
unissued or from the treasury.
3. Scrip dividend or Bond dividend is actually cash dividend paid by distributing to the
shareholders, at the date of declaration, scrips or bonds which are written promises
to pay cash at a specified date. A scrip dividend is declared when the corporation
has Accumulated Profits but not enough cash for paying such dividend.
4. Property dividend or dividends in kind are distribution of earnings in the form of non-
cash assets or properties like inventories, fixed assets or investments in stocks of other
corporations.
I. CASH DIVIDENDS
Three conditions must be met before a cash dividend may be paid. They
are as follows:
1. There must be a declaration of such dividend by the board of directors
2. There must be sufficient cash with which to pay the dividend. The dividend
payment should not impair the working capital to such an extent as to bring
about reduced profits or to disrupt operations.
3. There must be an adequate amount of Accumulated Profits against which the
cash dividend may be charged.
A. THE CORPORATION HAS ONE CLASS OF SHARE
The accounting for cash dividend is very much simplified in the case of a corporation
that has one class of share. Cash dividend declaration may be expressed as follows:
1. As a certain percentage of par or stated value - applicable to par value shares only.
Dividends = (Par or stated value x % declaration rate) x Issued and Outstanding Shares*
 Issued and outstanding shares include issued and subscribed

shares EXCEPT treasury shares.

Any amount of dividends due to shareholders who purchased shares under a
subscription contract shall be applied first on the balance of their subscription before any
cash is distributed to the subscribers.
To illustrate, assume that the Board of Directors of JUAN-DEE Corporation, at their

meeting on March 31, declared a 10% cash dividend payable on July 1 to shareholders
of record on May 1. There are 35,000 issued and outstanding shares with P40 par value.
The pertinent entries are:
 On the date of declaration, March 31

Mar 31 Accumulated Profits 140,000
Cash dividends payable 140,000
To record dividend declaration.
Par value of shares P 40

Multiply by dividend rate 10%
Dividend per share P 4
Multiply by issued and outstanding shares 35,000
Cash dividends payable P 140,000
 On the date of record, May 1

No journal entry. A list of shareholders is prepared.
 On the date of payment, July 1

Jul 1 Cash dividends payable 140,000
Cash 140,000
To record payment of cash
dividend.
2. As a certain peso amount per share – applicable to both par and no-par value
shares
Dividends = Peso amount per share x Issued and Outstanding Shares
To illustrate, assume that the Board of Directors of JUAN-TED Corporation at their

meeting on June 1 declared a P10 cash dividend per share payable on August 1 to
shareholders of record on July 15. Issued and outstanding shares consist of 15,500 no-
par shares, P50 stated value. The entries are:
 On the date of declaration, June 1

Jun 1 Accumulated Profits 155,000
Cash dividends payable 155,000
Dividend per share P 10
Multiply by issued and outstanding shares 15,500
Cash dividends payable P 155,000
 On the date of record, July 15

No journal entry. A list of shareholders is prepared.
 On the date of payment, August 1

Aug 1 Cash dividends payable 155,000
Cash 155,000
To record payment of cash
dividend.
The Dividends account is different from the Dividends Payable account. The former is a
temporary account which will decrease Accumulated Profits when closed, while the
latter is a liability account.
B. THE CORPORATION HAS TWO CLASSES OF SHARES – PREFERENCE AND ORDINARY

SHARES
When a corporation has two classes of shares, preference and ordinary shares, the
amount of dividends on each class of share will depend on the terms of issuance of the
preference share. The different preferential rights and features of preference share and
their effects on the share of profits to be received by each class of stock are briefly
explained below. This is necessary for a better understanding of the dividend
computations in the case of a corporation issuing preference and ordinary shares.
1. Cumulative
- A provision which allows for the accumulation of preferred dividends not paid in
any particular year. Such provision further requires that no dividend may be
paid to ordinary share if any preferred dividends are in arrears. Undeclared
dividends in prior years, also known as dividends in arrears, are not liabilities of
the corporation until legally declared by the board of directors. Dividends in
arrears usually include current dividends.
2. Noncumulative
- Undeclared dividends in the past are deemed forfeited. Thus, the preference
share is entitled only to the current year dividends.
3. Participating
- It is a provision which allows the preference share to receive dividends in excess
of the stipulated amount. In this case, preference share participates or shares
with ordinary shares if the amount to be distributed exceeds the regular
preferred dividend and a comparable dividend on ordinary. The sharing is on a
pro-rata basis using the total par value of outstanding preference and ordinary
share capital.
- The participation of preference share may either be Full Participation with
ordinary share on a pro-rata basis or Partial Participation, whereby the
preference share is participating only to a certain amount or percentage.
In cases where there are two classes of participating preference share with
-
different dividend rates, the lower rate shall be the basis for allocation to the
ordinary share. If only one preference share is participating, the dividend rate of
the participating preference share shall be used as basis for the ordinary share
dividend.
4. Nonparticipating
- It is a provision which entitles the preference share to receive dividends equal to
a fixed rate or fixed amount.
 In the absence of specific designation, preference shares are

assumed to be non-cumulative and non-participating
II.
PROPERTY DIVIDENDS
A distribution to shareholders that is payable in some asset other than cash is generally
referred to as a property dividend. Frequently, the assets to be distributed are securities
of other companies owned by the corporation, merchandise, real estate, or whatever
forms the board designates. The corporation thus transfers to its shareholders its
ownership interest in such securities. Property dividends occur most frequently in closely
held corporations.
Measurement of the Dividend Payable
The liability should be measured at the fair value of the non-cash assets to be
distributed. If shareholders have a choice of receiving either a non-cash asset or a cash
alternative, the liability should be measured considering both the fair value of each
alternative and management’s assessment of the probabilities for each outcome.
Accounting for any difference
International Financial Reporting Interpretations Committee (IFRIC) 17 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.
When an entity settles the dividend payable, IFRIC 17 requires that it should recognize
the difference, if any, between the carrying amount of the dividend payable and the
carrying amount of the asset distributed in profit or loss.
Paragraph 15a further provides that an entity shall measure a non-current asset
classified for distribution to owners at the lower of carrying amount and fair value less
cost to distribute. Accordingly, if the fair value 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.
To illustrate, assume RAINBOW Corporation wishes to distribute land to its shareholders

with a carrying amount of P200,000. On October 1, 2019, the Board of Directors
approved the dividend and the land is currently appraised on this date at P300,000.
The dividend is to be issued on January 31, 2020. The pertinent entries are:
 On the date of declaration, October 1, 2019
Oct 1 Accumulated Profits 300,000

Property dividends payable 300,000
 If the liability remains outstanding at the end of the accounting period and the fair
value of the non-cash asset has changed, the liability is re-measured through equity.
To continue with the previous transaction, assume that on December 31, 2014, the
end of the entity’s accounting cycle, the fair value of the land has increased to
P320,000. The entry is:
Dec 31 Accumulated Profits 20,000
To record adjustment on the land.
 If on the date of payment/settlement, January 31, 2020, the fair value of the land
has increased further to P350,000
Jan 31 Accumulated Profits 30,000
To record adjustment on the land.
Jan 31 Property dividends payable (@Fair value) 350,000

Land ( always at Carrying/Book value ) 200,000
Gain on distribution on property
150,000
dividend
To record settlement of property
dividend.
III. LIABILITY DIVIDENDS
Liability dividends are actually deferred cash dividends. The corporation resorts to the
distribution of such when there is insufficient cash to cover its payment. It may be in the
form of a bond or scrip. Both bond and scrip are formal evidences of indebtedness to
pay a sum of money at some future time. Bond is usually long-term and normally bears
interest while scrip is short term and may or may not be interest-bearing.
A. SCRIP DIVIDEND
Assume that scrip dividends are declared in the amount of P100,000 payable in six
months. The entry to record its declaration is:
Accumulated Profits 100,000

Scrip dividends payable 100,000
To record dividend declared.
When the scrip dividends are redeemed or paid, the entry is:
Scrip dividends payable 100,000

Cash 100,000
To record payment of dividends.
B. BOND DIVIDEND
Assume that dividends are declared in the amount of P500,000 payable in the
company’s 12%, 5-year bonds. The pertinent entries are:
 On the date of declaration

Bond dividends payable 500,000
To record dividend declared.
 On the date of payment: Bonds are issued in payment of dividends

Bond dividends payable 500,000
Bonds payable 500,000
To record payment of dividends.
 Upon payment of interest on the credit instrument

Interest expense (P500,000 x 12% x 1 yr) 60,000
Cash 60,000
To record payment of interest on the
bonds.
 Upon redemption of bonds/settlement of obligation

Bonds payable 500,000
Cash 500,000
To record redemption of the bonds
IV. SHARE DIVIDEND
A corporation may distribute to shareholders additional shares of the company’s own

shares as a share dividend. A share dividend involves no transfer of cash or any other
asset to shareholders. Thus, a share dividend does not affect the assets and total
shareholders’ equity of the corporation. It merely represents a transfer from
Accumulated Profits to Contributed Capital. Hence, the total shareholders’ equity
before and after the declaration and distribution of share dividends are the same. The
IAS term for share dividend is “bonus issue.”
Share dividends may be classified as ordinary share dividends or special share
dividends. Ordinary share dividends are dividends of the same class, i.e. ordinary share
given to ordinary shareholders or preference share given to preference shareholders.
Special share dividends are dividends declared are of another class of share, i.e.
ordinary share given to preference shareholders or preference share given to ordinary
shareholders.
ASC PAS No. 18 states that an enterprises whose shares are registered with the Securities
and Exchange Commission and are listed in the stock exchange may account for share
dividend by transferring from accumulated profits to share capital (at par or stated
value) and share premium (if fair value of dividend is higher than the par or stated
value) of the additional shares issued. The fair value contemplated should be the fair
value on the date of declaration.
A share dividend representing less than 20% of the outstanding shares is considered a
small share dividend and accounted for at fair value. A share dividend representing
20% or more of the outstanding shares is considered a large share dividend and
accounted for at par or stated value.
To illustrate, assume the shareholders’ equity of RAINBOW Corporation is as follows:

Ordinary share capital, P100 par, authorized 5,000 shares;
4,000 shares issued and outstanding P 400,000
Share Premium on Ordinary Share 85,000
The ordinary share is selling at P120 per share in the open market.
The entries to record the declaration and distribution of the share dividend using two
independent cases follow:
Case 1: A share dividend of 10% was declared (Small Share dividend)

Accumulated Profits (10% x 4,000sh x
48,000
P120/sh)@Fair Value
Share dividends payable (10% x 4,000sh x
40,000
P100/sh) par
Share premium from share dividends 8,000
To record a 10% share dividend
declared.
 On the date of payment: Shares of stocks are issued in payment of dividends
Share dividends payable 40,000
Share capital 40,000
To record issuance of 400 shares as share
dividend.
In as much as the declaration is less than 20%, the fair market value of the share,
P120, is used in capitalizing the Accumulated Profits account. The Share Dividends
Payable account is credited only to the extent of the par or stated value of the shares.
This account is reported on the statement of financial position under the shareholders’
equity section as part of share capital. It cannot be classified as a current liability,
unlike Cash Dividends Payable, Property Dividends Payable and Scrip Dividends
Payable, because it is not payable from the current assets of the corporation.
The account Share Premium from Share Dividends is credited for the excess of the
fair market value of the share over its par or stated value. This account is reported on
the statement of financial position under the shareholders’ equity section as part of the
share premium.
The shareholders’ equity section after the declaration but before the distribution of
dividends is
Share Capital:
Ordinary share capital, P100 par, authorized 5,000 shares;
4,000 shares issued and outstanding P 400,000
Share Dividends Payable, 400 shares 40,000 P 440,000
Reserves:
Share Premium on Ordinary share P 85,000
Share Premium from Share Dividends 8,000 93,000
Total Equity P 585,000
The shareholders’ equity section after the distribution of dividends is:

Share Capital:
Ordinary Share capital, P100 par, authorized 5,000 shares;
4,400 shares issued and outstanding P440,000
Reserves:
Share Premium on Ordinary share P 85,000
Share premium from Share Dividends 8,000 93,000
Total Equity P 585,000
***Take note that the total shareholders’ equity is the same under the different dividend
dates.
Case 2: A share dividend of 25% is declared (Large Share dividend)
Accumulated Profits (25% x 4,000sh x
100,000
P100/sh)@Par
100,000
P100/sh) par
declared.

To record issuance of 1,000 shares as
share dividend
The par value of the share is used in capitalizing Accumulated Profits because this is a
large share dividend. The account Share Dividends Payable is credited for the par or
stated value of the shares to be distributed regardless of whether the share dividend is
small or large.
Share dividends may also be declared from Share Premium aside from Accumulated
Profits since there is no decrease in assets nor increase in liability but only a
reclassification of the capital accounts. Using the same example, except that the
share dividend declaration is 30%, the pertinent entries are:

Accumulated Profits (30% x 4,000sh x P100/sh) 100,000
Share premium on ordinary share (P120,000 –
20,000
P100,000)
120,000
P100/sh) par
declared.

To record issuance of 1,200 shares as
share dividend
The total debit to Accumulated Profits must be P120,000 (30% x 4,000 sh = 1,200 sh x
P100). Since, its balance is not sufficient to cover such amount, the difference is
charged to share premium.
Treasury Shares may also be declared as share dividends. In capitalizing the
Accumulated Profits account, the fair market value is used if the share dividend
declaration is less than 20%, otherwise the cost of Treasury Shares is used.
Effect on Shareholders’ Interest
A share dividend does not change the percentage of interest of the shareholder in the
business. After the payment of a share dividend, a shareholder owns a proportionately
greater number of shares. Since the total number of shares issued and outstanding
correspondingly increases, there would be no effect on the shareholder’s proportionate
interest.
Assume that Ms. Blue, before the 10% share dividend is declared, owns 100 shares of
RAINBOW Corporation in the preceding illustration. She will receive ten shares (10% of
100 shares) as share dividend. The computations of his percent of interest before and
after the share dividend are as follows:
Before the share dividend:
Owned by Blue = 100 shares

= 2.5%
Total shares issued = 4,000 shares
After the share dividend:
Owned by Blue = 110 shares

= 2.5%
Total shares issued = 4,400 shares
In either case, Black owns 1/40 or 2.5% of the share capital issued. This proves that the
shareholder’s percent of interest or ownership in the business remains the same
notwithstanding the greater number of shares he owns after he has received the share
dividend.
B. DIVIDENDS OUT OF CAPITAL
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 corporation is dissolved and liquidated. During the
lifetime of the corporation, it is illegal to return capital to the shareholders. This
legal prohibition on the payment of liquidating dividends is in conformance
with the trust fund doctrine.
However, wasting asset corporations may declare dividends which are in part
distribution of earnings and in part distribution of capital. This rule is in
conformity with the wasting asset doctrine which holds that a wasting asset
corporation can declare dividends not only to the extent of the Accumulated
Profits balance but also to the extent of the accumulated depletion balance.
To illustrate, assume the following accounts taken from a wasting asset

corporation:
Mineral properties P3,000,000
Accumulated Depletion 200,000
The maximum dividends that may be declared would be P700,000. If this

amount is declared as dividends, the entry is:

Capital liquidated 200,000
Dividends payable 700,000
To record a dividends declared.
It should be noted that any amount declared in excess of the Accumulated

Profits balance is treated as liquidating dividends and charged to the account
Capital liquidated which is shown as a deduction from the total shareholders’
equity.
 PRIOR PERIOD ADJUSTMENTS
In some situations, errors made in past years are discovered and corrected in
the current year by an adjustment to the Accumulated Profits account,
referred to as prior period adjustments. There are several types of errors that
may occur in measuring the results of operations and the financial status of an
enterprise. Accounting errors can result from:
a. mathematical mistakes
b. failure to apply appropriate accounting procedures
c. misstatement or omission of certain information
d. change from an accounting principle that is not generally accepted to one that is
accepted is considered a correction of an error.
 CHANGE IN ACCOUNTING POLICY
Accounting policies are the specific principles, bases, conventions, rules and
practices in preparing and presenting financial statements. The same
accounting policies are normally adopted from one period to another in order
that users would be able to compare the financial statements of an enterprise
over a period of time to identify trends in its financial position, performance
and cash flows. A change in accounting policy should be made only if:
o Required by statute (involuntary change)
o Required by an accounting standard or
o The change will result in a more appropriate presentation of events or transactions
in the financial statements of the enterprise (voluntary change)
Based on the requirements of PAS8, a change in accounting policy, other than

those covered by a transitional provision for the adoption of a new
accounting standard, is treated retrospectively unless the amount of any
resulting adjustment that relates to prior periods is not reasonably
determinable. Retrospective application results in the accounting policy
being applied to events and transactions as if the new accounting policy had
always been in use. Any resulting adjustments should be reported as an
adjustment to the opening balance of the retained earnings/accumulated
profits in the earliest period presented.
 APPROPRIATION OF ACCUMULATED PROFITS
Accumulated Profits are appropriated when it is set aside for some particular
purpose. Appropriation of Accumulated Profits is accomplished by transferring
part of the Accumulated Profits account to a separate Appropriated
Accumulated Profits account. In doing this, the total amount of Accumulated
Profits and total shareholders’ equity remains the same.
The effect of an appropriation is to restrict the amount of Accumulated Profits

that can be available for dividends to shareholders. The appropriation
account does not imply that there is a cash fund established for the same. It
simply indicates that the portion appropriated cannot be used as basis in
paying dividends to the shareholders. With the exception of stock dividends,
the declaration and payment of dividends decrease the assets and
Accumulated Profits of the corporation. Thus, when dividends are not
declared and paid the assets that might have otherwise been distributed to
the shareholders in the form of dividends will be preserved for some other
purpose.
The appropriation of Accumulated Profits may be classified as follows:
a. Legal Appropriation
This arises from the fact that the legal capital cannot be returned to the shareholders
until the corporation is dissolved and liquidated. Thus, if a corporation acquires its own
stock, it must have sufficient Accumulated Profits balance, otherwise, the acquisition is
illegal. To protect creditors of the corporation, the law or the Corporation Code of the
Philippines requires that a portion of the Accumulated Profits must be appropriated for
an amount equal to the cost of the treasury stock. Such appropriation is called
“Appropriated for Treasury Shares”.
b. Contractual Appropriation
This arises from the fact that the terms of the bond issue and preference share issue may
impose restrictions on the payment of dividends. This is to insure the eventual payment
of the bonds and redemption of preference share. The appropriated balance in this
case may be described as “Appropriated for Sinking Fund or Bond Redemption” and
“Appropriated for Redemption of Preference share”.
c. Voluntary or Discretionary Appropriation
This is a matter of discretion on the part of management. It may arise from the fact that
management wishes to preserve the fund for expansion purposes or for covering
possible losses or contingencies. The appropriation accounts may be described as
follows:
- Appropriated for Plant Expansion
- Appropriated for Investment in Plant Assets
- Appropriated for Increase in Working Capital
- Appropriated for Contingencies
- Appropriated for Possible Future Inventory Cost Declines
- Appropriated for Possible Loss on Pending Lawsuits
- Appropriated for Self-insurance
The establishment of the appropriation balance is recorded as follows:
Accumulated Profits Appropriated for (PURPOSE) xx
When the appropriation is no longer necessary because the condition for

which it is established no longer exists, the above entry is simply reversed as
follows:
Accumulated Profits Appropriated for (PURPOSE) xx

Once the appropriation is returned to unappropriated Accumulated Profits,

the full amount once again becomes available for dividends.
STATEMENT OF ACCUMULATED PROFITS
The statement of Accumulated Profits shows the changes affecting directly

the Accumulated Profits of an entity and relates the statement of
comprehensive income to the statement of financial position. The important
data affecting the Accumulated Profits that should be clearly disclosed in the
statement of the Accumulated Profits are:
A. Net income or loss for the period – Net income is added because it increases
Accumulated Profits and net loss is deducted. The IAS term for net income or loss is
“profit or loss”
B. Prior period errors – the prior period errors, formerly known as prior period
adjustments, are shown as adjustments to the beginning balance of Accumulated
Profits to arrive at the corrected beginning balance.
C. Dividends to shareholders – the dividends declared or paid during the year shall be
deducted from Accumulated Profits.
D. Effect of change in accounting policy – this is shown as an adjustment to the

beginning balance or Accumulated Profits
E. Appropriation of Accumulated Profits – the amount of appropriation is deducted

from the unappropriated balance of Accumulated Profits. Conversely, if the
appropriation is canceled, it is reverted or added back to the unappropriated
balance
 The statement of Accumulated Profits is NO LONGER a required

basic statement but it is a part of the statement of changes in
equity.
 STATEMENT OF CHANGES IN EQUITY
The statement of changes in equity is the new required basic statement that
shows the movement in the elements or components of the shareholders’
equity. In the old ASC SFAS No. 1, the statement of Accumulated Profits was
one of the required financial statements. But under the revised statement, it is
no longer a required basic statement but it is a part of the statement of
changes in equity. The statement of changes in equity contains the following
information:
a. The net income or loss for the period
b. Each item of income and expense, gain or loss, which, as required by other
Statements of Financial Accounting Standards, is recognized in equity and the total
of these items, and
c. The cumulative effect of changes in accounting policy dealt with under the
benchmark treatment, and the correction of fundamental errors under the required
treatment in ASC PAS No. 8, Net Income or Loss for the Period, Fundamental Errors
and Changes in Accounting Policies.
In addition, an enterprise should present, either within this statement or in the

notes:
d. Capital transactions with owners and distributions to owners
e. The balance of accumulated income or loss at the beginning of the period and at
the statement of financial position date, and the movements for the period; and
f. Reconciliation between the carrying amount of each class of share capital, share
premium and each reserve at the beginning and the end of the period, separately
disclosing each movement.
The approach adopted in presenting this information is by a columnar format which

reconciles between the opening and closing balances of each element within
shareholders’ equity, including items (a) to (f).
Rainbow Corporation
Statement of Changes in Equity
For the year ended December 31, 2019
(In thousands of current units)
Balances, January 1 P 5,000 P 2,000 P1,000 P 8,000

Correction of prior period error -2012 under (100) (100)
depreciation
Change in accounting policy from FIFO to 300 300
Average – credit
Foreign currency translation gain 150 150
Unrealized loss on noncurrent investment (100) (100)
Current appropriation for contingencies 200 (200)
Surplus Revaluation of Land 50 50
Net gains and losses not recognized in the
Statement of Comprehensive Income P 5,000 P 2,300 P1,000 P 8,300
Net income for the period 800 800
Dividends (400) (400)
Issuance of 10,000 shares of P100 par value
preference share at P150/share 1,000 500 1,500
Issuance of 500 shares of P50 par value ordinary
share at P100 per share 250 250 500
Balances, December 31 P6,250 P 3,050 P1,400 P10,700
Practice Exercise 10.2-1: (Recording the Acquisition, Issuance and Retirement of Treasury
Shares)
The following capital accounts are shown in the statement of financial position of SITAW
Corp.
Ordinary share, 20,000 shares authorized, 15,000 issued, par value P10 P150,000
Share premium-Ordinary shares 30,000
Accumulated profits 100,000
The following transactions took place for the month of December:
Dec 5 Reacquired 5,000 ordinary shares at P15 per share.

10 Sold 2,000 of the reacquired shares at P18 per share.
17 Sold 1,000 of the reacquired shares at P14 per share.
19 Retired 1,000 of the reacquired shares.
19 Appropriated accumulated profits equal to the remaining balance of
treasury shares.
Instruction: Journalize the above transactions of treasury shares (OMIT EXPLANATIONS)
Practice Exercise 10.2-2: (Share Capital Transactions and Financial Statement Presentation)
Transactions of BAWANG Corporation during 2020, the first year of operations, that
affected its shareholders’ equity were as follows:
a. Authorized 50,000 preference shares; and 200,000 ordinary shares
b. Sold 30,000 preference shares, 12%, P100 par, at P140.
c. Sold 100,000 ordinary shares of P50 par at P55.
d. Purchased 10,000 of its own preference shares at P120 and subsequently retired
these.
e. Purchased 15,000 ordinary shares at P52 to be held as treasury.
f. Sold 10,000 treasury shares (ordinary) at P60.
g. Shareholders donated to the entity 20,000 ordinary shares when shares had a
market price of P60. One half of these shares were sold for P65.
h. Net income for 2013 was P3,000,000
i. Appropriated retained earnings equal to the remaining cost of treasury shares.
Instructions:
1. Prepare the entries of the above transactions.
2. Prepare the shareholders’ equity section as of December 31, 2020.
3. Based on the above information, (a) how many shares were issued? (b) how many
shares were outstanding?
Practice Exercise 10.2- 3. (Recording Share Dividends)
On January 1, 2020, INDIGO Corporation had P1,200,000 of ordinary shares outstanding

that was issued at par. It also had accumulated profits of P850,000. The company issued
40,000 shares of ordinary shares at par on July 1 and earned net income of P400,000 for the
year. Share dividends were declared on December 1, 2020 and issued on December 31,
2020.
Instruction: Journalize the declaration and issuance of 40,500 shares as share dividend for
the following independent assumptions:
(a) Par value is P10, and market value on declaration date is P18
(b) Par value is P5, and market value on declaration date is P20
Practice Exercise 10.2-4. (Recording Dividends- Cash, Property and Share)
Before preparing financial statements for the current year, the chief accountant for VIOLET
Company discovered the following errors in the accounts.
 The declaration and payment of P50,000 cash dividend was recorded as a debit to
Interest expense of P50,000 and a credit to Cash of P50,000
 The issuance of land as property dividend was recorded as debit to Property dividend
payable at a book value of P280,000 and credit to Land at its book value of P280,000.
The land has a current fair value of P315,000
 A 10% share dividend (1,000 shares) was declared on the P5 par value share when the
market value was P18. The only entry made was a debit to Accumulated profits of
P5,000 and a credit to Dividends payable of P5,000. The shares have not been issued.
Instruction: Prepare the correcting entries at December 31.
Practice Exercise 10.2-5: (Recording Property Dividends)
YELLOW Company owned 8,500 ordinary shares of GRAPES Company with carrying value of
P95 per share. On September 12, 2019, YELLOW Company declared these shares as property
dividend to be paid on February 20, 2020. The quoted price for GRAPES Company share is P106
on September 12, 2019, P120 on December 31, 2019 and P118 on February 20, 2020.
Instruction: Journalize all indicated entries in connection with the property dividend.
Summative Assessments (Graded Activity)- Comprehensive Problem on Shareholders’
Equity
LUYA Corporation was organized on January 1, 2019. The entity was authorized to issue
share capital as follows: Preference share capital, P100 par value, 30,000 shares; Ordinary
share capital, P50 par value, 100,000 shares. On December 31, 2019, the following
accounts were extracted from its trial balance: Preference Share Capital, P750,000;
Ordinary Share Capital, P1,250,000; Share premium-preference, P60,000; Retained Earnings
– P1,380,000. During 2020, following transactions affecting shareholders’ equity are as
follows:
1. Forty thousand ordinary shares were issued for cash at P60 per share.
2. Ten thousand preference shares were issued for cash at P120 per share.
3. Ten thousand preference shares were subscribed at par value.
4. Four hundred thousand pesos was received on the above subscription to

preference shares.
5. One thousand preference shares were issued in payment of legal fees of P100,000 in
connection with organizing the corporation.
6. Twenty thousand ordinary shares were issued for a building which had a fair value of
P1,300,000 and an existing book value of P1,400,000 at the time of issue
7. Fifteen thousand ordinary shares were subscribed at P55.
8. Forty percent of the ordinary share capital subscription receivable was collected.
9. Collected in full the subscriptions receivable of the preference share, and the shares
were later issued.
10. Acquired 5,000 ordinary shares at P40 per share. These shares are to be held as
treasury.
11. Sold 2,800 treasury shares at P47
12. Sold 1,250 treasury shares at P35
13. Retired 450 treasury shares
14. Appropriated retained earnings to the extent of the cost of the treasury shares.
15. Closed net income of P2,000,000 to retained earnings.
Instructions:
1. Prepare the entries of the above transactions.
2. Prepare the shareholders’ equity section as of December 31, 2020. Assume the
subscriptions receivables are collectible currently.
3. Based on the above information, (a) how many shares were issued? (b) how many
shares were outstanding?
End of Module 10.2

MODULE 10.2 - Treasury Shares, Dividends and Retained Earnings

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MODULE 10.2 - Treasury Shares, Dividends and Retained Earnings

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AE 112-

COURSE LEARNING OUTCOMES

 Sale of shares previously issued and subsequently reacquired by the corporation

1. It must be the corporation’s own share. Otherwise acquisition of shares of other

1. To eliminate fractional shares arising out of stock dividends

ACCOUNTING FOR TREASURY SHARES

  If the treasury share is acquired for non-cash consideration, the cost

1. ACQUISITION OF TREASURY SHARES (REACQUISITION OF OWN SHARES)

Treasury shares are recorded at COST. To illustrate, assume JUAN-DEE Corporation

Treasury shares – ordinary (1,000 sh x P45 ) 45,000

Accumulated profits(losses) 45,000

 The first presentation is preferred over the second.

 PAS 32, paragraph 33 states: “If an entity reacquires its own

A. ISSUANCE AT COST ( ISSUE PRICE = COST )

Accumulated profits(losses) - appropriated 27,000

B. ISSUANCE ABOVE COST ( ISSUE PRICE > COST )

Cash (600 sh x P51) 30,600

Accumulated profits(losses) - appropriated 27,000

C. ISSUANCE BELOW COST ( ISSUE PRICE < COST )

1. Share Premium from Treasury Share of the same class

Cash (200 sh x P35) 7,000

Accumulated profits(losses) - appropriated 9,000

Accumulated profits(losses) - appropriated 4,500

A. RETIREMENT AT PAR ( PAR = COST )

Accumulated profits(losses) - appropriated 8,000

B. RETIREMENT BELOW PAR ( PAR > COST )

To illustrate, further assume JUAN-DEE Corporation acquired additional 100 ordinary

Accumulated profits(losses) 3,500

Accumulated profits(losses) - appropriated 3,500

To illustrate, further assume JUAN-DEE Corporation acquired additional 250 ordinary

Accumulated profits(losses) 12,000

Accumulated profits(losses) - appropriated 12,000

Thus, the entry is:

To illustrate, assume JUAN-DEE Corporation has the following:

Ordinary share capital, authorized 110,000 shares,

Preference share capital 500,000

Thus, Equity will now be comprised only of:

 Ordinary share capital, authorized 110,000 shares

 Share Premium – Ordinary (650,000 + 20,000) 670,000

But will still total to P4,970,000

Preference share capital 500,000

Thus, Equity will now be comprised only of:

 Ordinary share capital, authorized 110,000 shares

 Share Premium – Ordinary 650,000

But will still total to P4,970,000

 The conversion of preference share capital into ordinary share capital

1. The memo entry for the receipt of the donated shares :

"Received from shareholders as donation 120 shares of

Cash ( 120 sh x P50 ) 6,000

Ordinary share capital ( 120 sh x P40 ) 4,800

 The Donated Capital account is shown as part of the share premium of

To Illustrate, assume JUAN-DEE Corporation received a piece of land valued at P2,500,00 as

1. The entry for the receipt of land:

Land (at fair value) 2,500,000

Donated Capital 85,000

1. The entry for the receipt of land:

Land (at fair value) 2,500,000

2. The entry to record the expenditure:

Legal fees ( any appropriate expense

STATEMENT OF FINANCIAL POSITION PRESENTATION OF SHAREHOLDERS’ EQUITY

Shareholders’ equity is the residual interest of owners in the assets of a corporation

4. Retained Earnings or Accumulated Profits and Losses - represent the cumulative

5. Revaluation Surplus/ Revaluation Reserve/Revaluation Increment in Property –

SHARE CAPITAL OR PAID-IN SHARE CAPITAL