CHAPTER 16: Accounting for Dividends
o the date on which the stock and
Retained earnings
• represent the cumulative profits (net of
losses, distribution to owners, and other
adjustments) that are retained to the business
and not yet distributed to owners
• consists of:
o unrestricted
▪ the portion of retained
earnings that is available for
future distribution to the
shareholders
o appropriated (restricted)
▪ the portion of retained
earnings that is not available
for distribution unless the
restriction is subsequently
reversed
▪ appropriations do not mean
that a cash fund has been set
aside, only indicate amounts
that are not available for
distribution to the owners
• when retained earnings has a negative
balance, it is described as “deficit”
• when total shareholders’ equity has a
negative balance, it is described as “capital
deficiency”
Dividends
• distributions to shareholders
• may be in the form of
o cash dividends
▪ distributions in the form of
cash
o property dividends
▪ distributions in the form of
noncash assets
o share dividends
▪ distributions in the form of
the entity’s own share
Dates relevant to the accounting for dividends
• date of declaration
o the date when the board of directors
formally announces the distribution
of dividends
• date of record
transfer book of the corporation is
closed for registration
o only those listed as of this date are
entitled to dividends
• date of distribution
o the date when the dividends declared
are distributed to the shareholders
Accounting for cash dividends
• the most common for of distribution to
owners
• may be declared as a certain amount per
share or as a certain percentage of the par
value of the shares
• only outstanding shares are entitled to
dividends
• outstanding shares = issued shares +
subscribed shares – treasury shares
• the ‘dividends account’ may be debited in
lieu of ‘retained earnings’ and may be used
if dividends are declared more than once a
year
• the dividends account is closed to retained
earnings, similar to the drawings account
Accounting for share dividends
• if share dividends are considered ‘small’
meaning less than 20% of the outstanding
shares, the share dividends are accounted for
at fair value
o retained earnings is debited at fair
value on declaration date
o difference between the fair value and
par value is credited to share
premium
• if share dividends are considered ‘large’
meaning 20% or more of the outstanding
shares, the share dividends are accounted for
at par value
o retained earnings are debited for the
par value of the share dividends
o no share premium arises
• share dividends do not affect total
shareholders’ equity, a portion of the
retained earnings is just transferred to the
share capital and share premium accounts
• the stock dividends payable or share
dividends payable is an adjunct equity
account, not a liability account
Treasury shares declared as dividends
• the accounting for ‘small’ or ‘large’ share Preference over dividends
dividends do not apply to treasury shares • upon declaration, preference shares that are
• the cost method is used ‘preferred as to dividends’ are paid first
o retained earnings is debited for the before ordinary shareholders
cost of the treasury shares declared • preference dividends may be
o no share premium arises o noncumulative
▪ is one which the dividend
Preference shares entitlement for a year is
• preference shares have one or both of the forfeited when dividends are
following preferences over ordinary shares not declared in that year
o preference in the distribution of o cumulative
assets in case of liquidation ▪ is one which the dividend
(preferred as to assets) entitlement accumulates each
o preference in the distribution of year until paid
dividends (preferred as to • accumulated unpaid
dividends) dividends are
disclosed as dividends
Preference over assets in arrears but not
• upon liquidation and after creditors’ claims accrued as liability
(liabilities) are settled, preference shares that unless the dividends
are preferred as to assets are settled first are declared
and any remaining amount is paid to o nonparticipating
ordinary shareholders ▪ is one which is entitled only
• if the preference shares are not preferred as to a fixed amount of
to assets, the remaining amount after dividends
settlement of liabilities is shared o participating
proportionately by the preference and ▪ is one which is entitled to an
ordinary shareholders amount in excess of the fixed
• preference shares that are preferred as to amount of dividends
assets are normally entitled to liquidation ▪ the amount of participation is
value computed after both the
o liquidation value pertains to the preference and ordinary
amount that preference shareholders shares are allocated their
are entitled to receive in case of basic dividends
liquidation • the basic dividend of
o usually more than the par value of cumulative
the preference shares preferred shares
• in case where the net assets after settlement includes dividends in
of liabilities are insufficient to pay the arrears
liquidation value, the preference • the basic dividend of
shareholders will be entitled only to the noncumulative
remaining net assets preferred shares
o none will be paid to ordinary includes only the
shareholders, but they will not be current-year dividends
obliged to provide any additional entitlement
capital • the basic dividend of
o in accordance with the limited ordinary
liability characteristic of a shareholders is equal
corporation, the personal assets are to the aggregate par
not subject to corporate claims value of the
 outstanding ordinary o P5 preference
shares multiplied by share
the preference rate ▪ In the absence of evidence to
• if there is more than the contrary, preference
one class of shares are presumed to be
preference shares, the ‘preferred as to dividends’
lowest preference rate with dividend preference of
is used to compute for ‘noncumulative and
the basic dividend nonparticipating’
• any excess of ▪ when preference shares are
dividends declared participating only up to a
after deducting the certain percentage, the
basic dividends is the participation is computed as
amount subject to the excess of the participation
participation percentage over the fixed
▪ participating preference dividend rate multiplied by
shares may be either the aggregate par value of
• fully participating preference shares outstanding
o participates on
a pro rata Liquidating dividends
basis (based • are dividends declared out of capital, rather
on aggregate than from retained earnings
par values of • normally declared only upon liquidation
outstanding • however, the wasting asset doctrine permits
shares) with wasting asset corporations to declare
ordinary dividends of capital during their existence
shareholders • there may be instances where unintentional
• partially participating liquidating dividends occur such as when
o participates dividends are declared out of retained
only up to a earnings that is overstated
certain • when unintentional liquidating dividends are
amount or subsequently discovered, a correcting entry
percentage is made to adjust the retained earnings and
▪ preference shares may have other affected accounts
more than one dividend • dividends declared in excess of unrestricted
preference retained earnings are considered liquidating
▪ preference shares may be dividends
both cumulative and • liquidating dividends are charged to the
participating capital liquidated account which is a
▪ the dividend entitlement of deduction from total shareholders’ equity
preference shares may be
expressed as: Share split
• percentage of par • share splits may be in the form of
value (fixed rate o split up or share split
based on par value) o split down or reverse share split
o 12% • split up occurs when old shares are cancelled
preference and replaced by a larger number of new
share shares but with a reduced par value (stated
• specific monetary value) per share
amount per share
 o share split increases the number of
shares available for issuance while
decreasing the fair value per share
o the fair value of the entity’s net
assets will be divided by a larger
number of outstanding shares
o with decreased fair value per share,
the shares become more affordable to
potential investors
• split down is whereby old shares are
cancelled and replaced by a smaller
number of new shares but with an
increased par value (stated value) per share
• share splits only affect the number of
outstanding shares and par value per share
• they do not affect assets, liabilities, equity,
or the aggregate par value of issued shares
• share splits are recorded only through memo
entry