AQE 2023 Review Material: DIVIDENDS – are distributions of earnings or capital to

ADVANCED SHAREHOLDER’S EQUITY shareholders in proportion to their shareholdings. Note:

(RETAINED EARNINGS & DIVIDENDS) If the entity has a deficit, it is illegal to pay dividends.
RELEVANT DATES WHEN ACCOUNTING FOR
RETAINED EARNINGS (RE) – is a component of DIVIDENDS:
shareholder’s equity that represents the cumulative  Date of Declaration – This is the date when the
profits and losses which are retained and not yet liability for dividend must be recognized.
distributed as dividends to the shareholders.  Retained Earnings XX
Dividend Liability XX
 Unappropriated RE – portion which is free and can  Date of Record – The date when those entitled to
be declared as dividends. receive dividends are listed.
 Appropriated RE – portion which is restricted and  NO ENTRY
therefore not available for any dividend declaration  Date of Payment or Distribution (Settlement Date)
unless the restriction is subsequently reversed. – The date when dividends declared are distributed to
 Legal Appropriation – required by law. the shareholders entitled to the dividends.
 Contractual Appropriation – required by  Dividend Liability XX
contract. Cash/Property/Share XX
 Voluntary Appropriation – a matter of discretion
on the part of the management. Important: Only OUTSTANDING SHARES are
entitled to dividends. Outstanding Shares = Issued
The appropriation of RE is recorded as: Shares + Subscribed Shares – Treasury Shares.
RE – Unappropriated -------------- XX
RE – Appropriated ---------------- XX TYPES OF DIVIDENDS
1. Cash Dividends – most common form of dividends.
Note: Appropriations of Retained Earnings do not affect Can be declared as a certain amount per share or a
shareholder’s equity as well as total Retained Earnings certain percentage of the par value.
since both comprise total retained earnings. Illustration 2:
 When RE account has a debit balance, it is called a MILA AZORES INC. declared a cash dividend of
“deficit”. This is a deduction from total SHE. P12 per share of ordinary shares on July 1. The
 When total SHE has a negative balance, this is dividends are payable on August 1 to shareholders of
described as “capital deficiency”. record on July 21. The entity has 100,000 ordinary
shares issued of which 7,000 shares are held in treasury.
COMPONENTS OF RETAINED EARNINGS REQUIREMENT: Provide the journal entries to
The important data that should be disclosed in the record the dividend declaration and dividend settlement.
statement of retained earnings are:
2. Property Dividends (dividends in kind) – it is in the
Retained Earnings – Beginning XX form of non-cash assets such as inventory, PPE,
+/- Adjustments for Retrospective investments, etc.
Restatement of Prior Period Errors XX/(XX) The accounting for this type of dividend has two
+/- Adjustments for Retrospective accounting issues: (1) Accounting for property dividends
Application of Change in Acctng Policy XX/(XX) payable (The Liability); and (2) Accounting for noncash
Adjusted Retained Earnings – Beginning XX assets to be distributed as property dividends (The
+/- Net Income or (Loss) XX/(XX) Asset).
- Dividends (XX)  Measurement at Date of Declaration
+/- Movement in Appropriations Property Dividends Asset to be Distributed
XX/(XX) Payable (PDP) (NCAHFD)
Unappropriated RE – End XX RE XX NCAHFD XX
PDP XX PPE XX
Illustration 1: PDP is always measured NCAHFD is measured at
As of the current year-end, December 31, 2021, at Fair Value. the lower of Carrying
BUHOS COMPANY reported the following Amount or Fair Value
shareholders' equity account balances: ordinary share less Cost to Sell.
capital (P10 par value) P1,400,000; subscribed share
capital P600,000, ordinary share premium P800,000; If FV-CtS is lower than
treasury shares (cost is @ P20 per share) P400,000; CA, the difference is
retained earnings P900,000. treated as an impairment
BUHOS declared a P2.50 cash dividend per share loss.
on June 30, 2022 to ordinary shareholders on record on  Year-End Remeasurement?
July 15, 2022. These dividends are to be settled on Yes, always. Yes, if FV-CtS is lower
August 1, 2022. During 2022, BUHOS reported a profit than CA.
or loss amounting to P560,000 The changes are adjusted If FV is higher than CA,
Based on the bond indenture, the company is to RE. the difference is
required to make monthly appropriations for a bond accounted for as a
sinking fund of P60,000. The bonds were issued on reversal of impairment
September 30, 2022. In addition, the entity is to make a loss.
yearly appropriation for contingencies amounting to  Date of Settlement Remeasurement?
P50,000 as stated in the company's policy. Yes, always. NO.
REQUIREMENT: How much is the balance of PDP XX
retained earnings - unappropriated as of December 31, *Loss XX
2022? NCAHFD XX
*Gain XX

Illustration 3:
 MC CORP. owned 50,000 shares of CNSC CORP.
accounted for as a long-term equity investment. The
carrying amount of the investment is P1,200,000. On
August 1, 2022, the entity declared a dividend of 1 share
of CNSC CORP. on every two shares of MC CORP.
owned. The dividends are to be settled on February 1,
2023. On the date of declaration, MC CORP. has 80,000
outstanding shares. The investment had the following
fair value:
August 1 P25 per share
December 31 P30 per share
February 1 P27 per share
REQUIREMENT: Prepare the journal entries
pertaining to the property dividends on August 1, 2022,
December 31, 2022, and February 1, 2023.
3. Share Dividends (bonus issue) – it is in the form of
the entity’s own shares. It could be from:
 Unissued Shares
 Large Share Dividends – if the stock dividend
is 20% or more of the previously Outstanding
Shares, the par or stated value is capitalized
or debited to RE.
 Small Share Dividends – if the stock dividend
is less than 20% the fair value of the share on
the date of declaration is capitalized. However,
if the fair value is lower than the par or stated
value, the par or stated value is capitalized. If
the fair value is higher, the difference is
credited to share premium from the stock
dividend.
 Retained Earnings XX
Stock Dividend Payable
(@ Par Value) XX
*Share Premium XX
*If FV is higher than the Par Value.
 Treasury Shares – The cost method is used by
debiting RE for the cost of treasury shares
declared. No share premium arises.
 Retained Earnings XX
Treasury Shares XX
Illustration 4:
The shareholder’s equity before the declaration of
20% share dividends of KEM INC. is as follows:
Ordinary Shares, P50 par, 20,000
shares issued and outstanding 1M
Share Premium 200k
Total Share Capital 1.2M
Retained Earnings 650K
Total Shareholder’s Equity 1.850K
Assume that KEM is being traded on the stock
exchange with the stock market price per share of P110.
REQUIREMENT: (1) Prepare the journal entries on
the date of declaration and date of settlement.
(2) Assume instead that KEM declared only 10%
share dividends. Prepare the journal entries on the date
of declaration and date of settlement.
Additional concept: Corporations reduce the par or
stated value of their share capital and issue additional
shares to their shareholders through the practice referred
to as share splits.
4. Scrip or Liability Dividends (deferred cash
dividends) – it is measured at face or present value of
the dividend. If scrip dividends bear interest, the
interest portion of the cash payment should be
debited to Interest Expense and should not be treated
as dividends.
Illustration 5:
KING CORP, a calendar year entity has a sufficient
balance of unappropriated retained earnings for dividend
declaration but currently was temporarily short of cash.
On June 30, 2022, KING declared a cash dividend of
P1,000,000 on its ordinary shares. Due to the said
insufficiency in cash, KING declared the amount of
P1,000,000 payable in twelve months at 10% interest.
The scrip dividends were redeemed on July 1, 2023.
REQUIREMENT: Prepare the journal entries on June
30, 2022, December 31, 2022, and June 30, 2023.
5. Liquidating Dividends – this is a return of capital to
shareholders.
 This type of dividend can be legally paid only
under the following circumstances: (1) When a
corporation is under dissolution or liquidation; and
(2) When the corporation is engaged in the
exploration and evaluation of natural resources.
DIVIDENDS ON PREFERENCE SHARES VS.
ORDINARY SHARES
Rule: When dividends are declared, preference
shares are paid first before the ordinary shareholders.
Now, preference shares may contain one of the
following combinations of features:
 A cumulative preference share – one on which any
undeclared dividends accumulate each year until
paid. Hence, entitled to dividends in arrears.
 A non-cumulative preference share – one on which
the right to receive dividends is forfeited in any one
year in which dividends are not declared.
 A participating preference share – one which is
entitled to receive dividends in excess of the basic or
fixed dividend rate.
 A non-participating preference share – one that is
entitled to receive only the dividends equal to the
fixed preference rate.
Illustration 6:
Kuya Koyunsi Mark Publishers, Inc. has the
following selected accounts in its shareholder’s equity:
12% Preference Shares, P100 par,
authorized 4,000 shares, 2,000
shares issued and outstanding 200,000
Ordinary Shares, P100 par,
authorized 6,000 shares, 3,000
shares issued and outstanding 300,000
Retained Earnings 260,000
Kuya Koyunsi Mark’s board failed to declare
dividends for the past two years. The current year’s
results of operation gave the board reasons to declare
cash dividends of P200,000.
REQUIRED: Compute the amount of dividends per
share to be allocated to preference shareholders and
ordinary shareholders under the following assumptions
that the preference shares are:
(1) Non-Cumulative and Non-Participating
(2) Non-Cumulative and Participating
(3) Cumulative and Non-Participating
(4) Cumulative and Participating.
 Question: What if the problem is silent as to the
features of the preference shareholders? Answer: The
preference share is assumed to be non-cumulative
and non-participating.
 Question: What if there are 2 or more classes/types of
participating preference shares? Answer: Use the
lowest participation rate to determine the basic
dividend the ordinary share should receive first.
“The more you sweat in training,
the less you bleed in combat.”
-Richard Marcinko
Prepared:
KFA