Retained Earnings Dividends

 Represents the component of the Shareholder’s Equity
arising from the retention of assets generated from
profit-oriented activities of the corporation.
Retained Earnings – profit
Retained Deficit – loss
Example: An entity earned 1,000,000 on the first year of its
operations.
Closing Entry: Pro-forma
 Refers to distribution to shareholders of cash, property,
or stocks from unrestricted retained earnings on the
basis of all issued and fully paid shares, and all
subscribed par value shares except treasury shares.
Dividends
Entitled

If profit:
Income Summary 1,000,000
Retained Earnings 1,000,000 Outstanding
Subscribed
(Issued - Treasury Shares)
If loss:
Retained Earnings 1,000,000
Income Summary 1,000,000 Cash Dividends: Important Dates
1. Date of Declaration
Case 1. Suppose that there is profit and entire amount of is  Corporation creates a constructive obligation to pay
declared as dividends, how much is the balance of retained dividends to their shareholders.
earnings?
Retained Earnings xx
- 0 Cash Dividends Payable xx
Case 2. Suppose that there is profit and P200,000 is declared
2. Date of Record
as dividends, how much is the balance of retained earnings?
 Date wherein holder of the stock is entitled for
- P800,000 dividend distribution. Not important for corporation.
Case 3. Suppose that there is profit and the entire amount is
No entry
set aside by management, how much is the balance of retained
earnings?
3. Date of Payment
- P1,000,000
 Actual payment of the constructive obligation.
Classification of Retained Earnings Cash Dividends Payable xx
Cash xx
1. Unappropriated
 Unrestricted, portion of retained earnings that is
available for future distribution to the shareholders. Property Dividends: Important Dates
 Appropriate and okay for dividends - Historical cost applies.
2. Appropriated 1. Date of Declaration
 Restricted, portion of retained earnings that is not  Fair value of property is declared as dividend.
available for distribution unless the restriction is
subsequently reversed. Retained Earnings xx
Property Dividends Payable xx
 Not okay for dividends
Reclassification Entry: Pro-forma 2. Date of Record
Retained Earnings xx
No entry
Retained Earnings - Appropriated xx

Types of Appropriated Retained Earnings 3. Date of Payment

1. Legal – treasury shares  Adjustment of fair value of property as dividend.
2. Contractual – loans  Actual payment of the obligation.
3. Voluntary – expansion
When there is an increase in fair value: Case 3.
Retained Earnings xx
Date of declaration
Property Dividends Payable xx Retained Earnings 200,000.00
Property Dividends Payable 200,000.00
When there is a decrease in fair value:
Date of record
Property Dividends Payable xx No entry
Retained Earnings xx
Date of payment
Property Dividends Payable 50,000.00
Calculation of change in fair value:
Retained Earnings 50,000.00
Fair value at the date of declaration xx
Property Dividends Payable 150,000.00
Fair value at the date of payment xx Non-cash Asset 100,000.00
Adjustment to Property Dividends Payable xx Gain on Distribution of Property Dividends Payable 50,000.00

To record payment of Property Dividends Payable Stock Dividends: Important Dates

Property Dividends Payable xx
Loss on Distribution of PDP xx 1. Date of Declaration
Property xx  Retained earnings are recorded at fair value. Hence
or when the case is a small stock dividend, there is a
Property Dividends Payable xx share premium. No share premium is recorded when
Property xx it is a large stock dividend.
Gain on Distribution of PDP xx
Retained Earnings xx
Stock Dividends Payable xx
Example:
Share Premium – Ordinary
Case 1 Case 2 Case 3
2. Date of Record
Cost 150,000.00 200,000.00 100,000.00
Fair value at
No entry
Date of declaration 150,000.00 100,000.00 200,000.00
Date of record 160,000.00 140,000.00 120,000.00
Date of payment 150,000.00 150,000.00 150,000.00 3. Date of Payment

Case 1. Stock Dividends Payable xx

Ordinary Share Capital xx
Date of declaration
Retained Earnings 150,000.00
Property Dividends Payable 150,000.00
Kinds of Stock Dividends
Date of record
No entry

Date of payment
Small Stock Dividend Large Stock Dividend
Property Dividends Payable 150,000.00
Non-cash Asset 150,000.00

Case 2. Less than 20% 20% or more

Date of declaration
Retained Earnings 100,000.00
Property Dividends Payable 100,000.00
Recorded at par value Recorded at fair value
Date of record at the date of at the date of
No entry the declaration the declaration

Date of payment
Retained Earnings 50,000.00
Property Dividends Payable 50,000.00

Property Dividends Payable 150,000.00

Loss on Distribution of Property Dividends Payable 50,000.00
Non-cash Asset 200,000.00
Example: Example: A 100 par value 10% preference share is declared
dividends on the 4th year.
Stock Dividends
Authorized share 100,000 Case 1. Cumulative
Issued share 15,000 1 2 3 4
Treasury share 5,000
Outstanding share 10,000

Each share is entitled for the date of declaration as well as the

Par value 50.00
arrears amounting to 40 per share.
Fair value 75.00
Case 2. Non-Cumulative
Case 1. Small Stock Dividend
1 2 3 4
Small stock dividend 10%

Date of declaration
Retained Earnings 75,000.00 Only entitled for the dividends at the time of declaration. Total
Stock Dividends Payable 50,000.00
Share Premium - Ordinary 25,000.00 amount of dividend is 10.

Date of record Four Types of Preference Share

No entry
1. Cumulative and Participating
Date of payment
2. Cumulative and Non -Participating
Stock Dividends Payable 50,000.00
Ordinary Share Capital 50,000.00 3. Non - Cumulative and Participating
4. Non - Cumulative and Non – Participating
Case 2. Large Stock Dividend
- Details as to the type and rate of preference share are
Large stock dividend 20%
found in the Stock Certificate.
Date of declaration
Retained Earnings 100,000.00 Case 1. Cumulative and Participating. Suppose the
Stock Dividends Payable 100,000.00 corporation declared 1,000,000 as dividends. 3 years in
dividend in arrears.
Date of record
No entry
10% Preference 10% Ordinary
Total
Date of payment Share Share
Stock Dividends Payable 100,000.00 Outstanding Share Capital 1,000,000.00 3,000,000.00 4,000,000.00
Ordinary Share Capital 100,000.00
Preferred Shares - Arrears 300,000.00 300,000.00
Preferred Shares 100,000.00 100,000.00
Preference Share Dividends: General Classification Ordinary Rate 300,000.00 300,000.00
Remainder 75,000.00 225,000.00 300,000.00
Is it cumulative? Dividends 475,000.00 525,000.00 1,000,000.00

1. Cumulative
 Holders of this type are entitled to receive dividends Case 2. Cumulative and Non-Participating. Suppose the
every year. corporation declared 1,000,000 as dividends. 3 years in
2. Non-cumulative dividend in arrears.
 Holders of this type are only entitled to receive 10% Preference
Ordinary Share Total
dividends on the years where there is declaration. Share
Outstanding Share Capital 1,000,000.00 3,000,000.00 4,000,000.00
Is it participating?
Preferred Shares - Arrears 300,000.00 300,000.00
3. Participating
Preferred Shares 100,000.00 100,000.00
 Entitle holders to the receipt of additional dividend Remaining - Ordinary Share 600,000.00 600,000.00
after holders of both preference and ordinary shares Dividends 400,000.00 600,000.00 1,000,000.00

have been paid up to the current year’s dividends.

4. Non-participating
 Dividends on preference share are limited only on the
preference rate.
Case 3. Non-cumulative and Participating. Suppose the
corporation declared 1,000,000 as dividends.

10% Preference 10% Ordinary

Total
Share Share
Outstanding Share Capital 1,000,000.00 3,000,000.00 4,000,000.00

Preferred Shares 100,000.00 100,000.00

Ordinary Rate 300,000.00 300,000.00
Remainder 150,000.00 450,000.00 600,000.00
Dividends 250,000.00 750,000.00 1,000,000.00

Case 4. Non-cumulative and Non-participating. Suppose the

corporation declared 1,000,000 as dividends.

10% Preference Ordinary

Total
Share Share
Outstanding Share Capital 1,000,000.00 3,000,000.00 4,000,000.00

Preferred Shares 100,000.00 100,000.00

Remaining - Ordinary Share 900,000.00 900,000.00
Dividends 100,000.00 900,000.00 1,000,000.00

Book Value Per Share

 Is the amount that would be paid to each share if the
corporation is liquidated.

Book value
Book value per share=
Outstanding share

Preference Shares

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Ordinary Shares
- Suppose there are no preference shares.

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- Suppose there are preference shares.

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Where:
LV Liquidation value
SHE Shareholder’s equity
PS Preference shares
OS Outstanding shares
DVD Dividends