PROBLEM2 – CHAPTER 16 (FAR)

Accounting for dividends

Use the following information for the next four questions:
The shareholders’ equity of Entity A on September 1, 20x1 is as follows:
Share capital, P10 par value 1,000,000
Subscribed share capital 200,000
Share premium 400,000
Retained Earnings 650,000
Treasury shares (P15 cost per share) (150,000)
Total shareholders’ equity 2,100,000
Case 1: Cash dividends
1. Entity A declares cash dividends of P2 per share on September 15, 20x1 to
shareholders of record as of September 21, 20x1, for distribution on September 30,
20x1. Provide the journal entries.
Shares Issued (1,000,000/₱10 par) ₱ 100,000
Shares Subscribed (200,000/₱10 par) ₱ 20,000
Treasury Shares (150,000/₱15 cost) ₱ 10,000
Outstanding Shares ₱ 110,000

Outstanding Shares ₱ 110,000

multiply by: Dividends per share ₱ 2
Total Cash Dividends ₱ 220,000

Sept.15, 20x1 Retained earnings (or dividends) ₱ 220,000

(Date of Cash Dividends Payable ₱ 220,000
Declaration)
Sept. 21, 20x1
(Date of no entry
record)
Sept. 30, 20x1 Cash Dividends Payable ₱ 220,000
(Date of Cash ₱ 220,000
Distribution)

Case 2: “Small” share dividends

2. Entity A declares a “1 for 20 share dividends” on September 15, 20x1 to shareholders
of record as of September 21, 20x1, for distribution on September 30, 20x1. The fair
values per share were P14, P15 and P14.80, on September 15, 21 and 30, respectively.
Provide the journal entries.
Outstanding Shares ₱ 110,000
multiply by: Dividends declared 1/20
Number of Shares declared as Dividends ₱ 5,500
multiply by : Fair value per share ₱ 14
Total Share Dividends ₱ 77,000

Retained earnings (or dividends) ₱ 77,000

Sept.15, 20x1
Stock Dividends Payable ₱ 55,000
(Date of
₱ 22,000
Declaration)

Sept. 21, 20x1

(Date of no entry
record)
Sept. 30, 20x1 Stock Dividend Payable ₱ 55,000
(Date of Share Capital ₱ 55,000
Distribution)
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 Case 3: “Large” share dividends
3. Entity A declares a “1 for 4 share dividends” on September 15, 20x1 to shareholders
of record as of September 21, 20x1, for distribution on September 30,20x1. The fair
values per share were P14, P15 and P14.80, on September 15, 21 and 30, respectively.
Provide the journal entries.
Outstanding Shares ₱ 110,000
multiply by: Dividends declared 1/4
Number of Shares declared as Dividends ₱ 27,500
multiply by : par value per share ₱ 10
Total Share Dividends ₱ 275,000

Sept.15, 20x1 Retained earnings (or dividends) ₱ 275,000

(Date of Stock Dividends Payable ₱ 275,000
Declaration)
Sept. 21, 20x1
(Date of no entry
record)
Sept. 30, 20x1 Stock Dividend Payable ₱ 275,000
(Date of Share Capital ₱ 275,000
Distribution)

Case 4: Treasury shares declared as share dividends

4. Entity A declares a “1 for 20 share dividends” out of treasury shares on September
15, 20x1 to shareholders of record as of September 21, 20x1, for distribution on
September 30,20x1. The fair values per share were P14, P15 and 14.80, on September
15, 221 and 30, respectively. Provide the journal entries.
Shares Issued (1,000,000/₱10 par) ₱ 100,000
Shares Subscribed (200,000/₱10 par) ₱ 20,000
Treasury Shares (150,000/₱15 cost) ₱ 10,000
Outstanding Shares ₱ 110,000

Outstanding Shares ₱ 110,000

multiply by: Dividends declared 1/20
Number of Shares declared as Dividends ₱ 5,500
multiply by : cost per treasury share ₱ 15
Total Share Dividends ₱ 82,500

Sept.15, 20x1 Retained earnings (or dividends) ₱ 82,500

(Date of Stock Dividends Payable ₱ 82,500
Declaration)
Sept. 21, 20x1
(Date of no entry
record)
Sept. 30, 20x1 Stock Dividend Payable ₱ 82,500
(Date of Treasury Shares ₱ 82,500
Distribution)
Retained earnings - appropriated ₱ 82,500
Retained earnings - unrestricted ₱ 82,500
Sept. 30, 20x1
to reserve the restriction on retained earnings for the treasury
shares issued as dividends

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 Accounting for dividends on preference shares
Use the following information for the next five questions:
Entity A declared P600,000 cash dividends to its preference and ordinary shareholders
in 20x3. No dividends have been declared since 20x1. Entity A’s shareholders equity
immediately before the dividend declaration is as follows:
10% Preference share capital, P200 par 500,000
Ordinary share capital, P100 par 1,000,000
Retained earnings 5,000,000
Total shareholders’ equity P6,500,000

Case #1: Noncumulative and Nonparticipating

5. How much are the respective shares of the preference and ordinary shareholders on
the dividends declared if the preference shares are noncumulative and
nonparticipating?

Case #1
Total dividends declared ₱ 600,000
Allocation:
① Allocation to preference share (500K*10%*1 yr.) ₱ 50,000
② Excess allocated to ordinary shares (600K-50K) ₱ 550,000
as allocated ₱ -

Case #2: Cumulative and Nonparticipating

6. How much are the respective shares of the preference and ordinary shareholders on
the dividends declared if the preference shares are cumulative and nonparticipating?

Case #2
Total dividends declared ₱ 600,000
Allocation:
① Allocation to preference share (500K*10%*3 yr.) ₱ 150,000
② Excess allocated to ordinary shares (600K-150K) ₱ 450,000
as allocated ₱ -

Case #3: Noncumulative and Fully Participating

7. How much are the respective shares of the preference and ordinary shareholders on
the dividends declared if the preference shares are noncumulative and fully
participating?

Case #3
Total dividends declared ₱ 600,000
Allocation:
① Basic allocation to preference share (500K*10%*1 yr.) ₱ 50,000
② Basic allocation to ordinary shares (1M par *10%) ₱ 100,000
excess subject to participation (600K-50K-100K) ₱ 450,000
③ Participation of preference share(450K*500K par*/1.5M) ₱ 150,000
④ Participation of ordinary share (450K*1M par*/1.5M) ₱ 300,000
as allocated ₱ -

Preference Shares: ₱ 200,000

Ordinary Shares: ₱ 400,000
Total dividends ₱ 600,000
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 Case #4: Cumulative and Fully Participating
8. How much are the respective shares of the preference and ordinary shareholders on
the dividends declared if the preference shares are cumulative and fully participating?

Case #4
Total dividends declared ₱ 600,000
Allocation:
① Basic allocation to preference share (500K*10%*3 yr.) ₱ 150,000
② Basic allocation to ordinary shares (1M par *10%) ₱ 100,000
excess subject to participation (600K-150K-100K) ₱ 350,000
③ Participation of preference share(350K*500K par*/1.5M) ₱ 116,667
④ Participation of ordinary share (350K*1M par*/1.5M) ₱ 233,333
as allocated ₱ -

Preference Shares: ₱ 266,667

Ordinary Shares: ₱ 333,333
Total dividends ₱ 600,000

Case #5: Cumulative and Participating up to 18%

9. How much are the respective shares of the preference and ordinary shareholders on
the dividends declared if the preference shares are cumulative and participating up to
18%?

Case #5
Total dividends declared ₱ 600,000
Allocation:
① Basic allocation to preference share (500K*10%*3 yr.) ₱ 150,000
② Basic allocation to ordinary shares (1M par *10%) ₱ 100,000
excess subject to participation (600K-150K-100K) ₱ 350,000
③ Participation of preference share [(18% - 10%) * 500K par] ₱ 40,000
④ Participation of ordinary share (350K-40K) ₱ 310,000
as allocated ₱ -

Preference Shares: ₱ 190,000

Ordinary Shares: ₱ 410,000
Total dividends ₱ 600,000

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 More than one class of preference shares
10. Entity A declared P1,200,000 cash dividends to its preference and ordinary
shareholders in 20x3. No dividends have been declared since 20x1. Entity A’s
shareholders’ equity immediately before dividend declaration is as follows:
10% Preference share capital, cumulative & participating 500,000
14% Preference share capital, noncumulative & participating 300,000
Ordinary share capital, P100 par 1,000,000
Retained earnings 4,700,000
Total shareholders’ equity P6,500,000
Requirement: Compute for the dividends to be received by each of the different
classes of share capital.

Total dividends declared ₱ 1,200,000

Allocation:
① Basic allocation to 10% preference share (500K par*10%*3 yrs.) ₱ 150,000
① Basic allocation to 14% preference share (300K par*14%*1 yrs.) ₱ 42,000
② Basic allocation to ordinary shares (1M par*10%) ₱ 100,000
excess subject to participation (1,200K-150K-42K-100K) ₱ 908,000
③ Participation of 10% preference share (908K*500K/1.8M par) ₱ 252,222
③ Participation of 14% preference share (908K*300K/1.8M par) ₱ 151,333
③ Participation of ordinary share (908K*1M/1.8M par) ₱ 504,444
as allocated ₱ -

10% Preference Shares: ₱ 402,222

14% Preference Shares: ₱ 193,333
Ordinary Shares: ₱ 604,444
Total dividends ₱ 1,200,000

Liquidating dividends
11. On December 31, 20x1, Entity A declares P500,000 cash dividends, 75% of which
are out of capital rather from retained earnings. Provide the journal entry on the date of
declaration.
Dec. 31, 20x1 Capital Liquidated (500K*75%) ₱ 375,000
(Date of Retained earnings (500K*25*) ₱ 125,000
Declaration Cash dividends payable ₱ 500,000
)

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