Republic of the Philippines

CENTRAL LUZON STATE UNIVERSITY

Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
The maximum dividends that may be declared would be Php 5,000,000. If the maximum amount is declared, the
journal entry is:
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Retained Earnings 3,000,000
Capital Liquidated 2,000,000
Share Dividends Payable 5,000,000
To record declaration of shares for dividends.
Note: Any amount declared in excess of the retained earnings balance is treated as liquidating dividends and charged
to the capital liquidated account which is a deduction from the total shareholder’s equity.

DIVIDENDS AS EXPENSE
Distributions to holders of an equity instrument shall be debited by the entity directly to equity (Par. 35, PAS 32) –
dividends out of earnings are charged to retained earnings.

Distributions to the holders of an equity instrument classified as financial liability are recognized in the same way as
interest expense on a bond (Par. 36, PAS 32).

Dividends classified as an expense may be presented in the income statement either with interest on other liabilities or
as a separate line item, i.e. redeemable shares.

RETAINED EARNINGS – Appropriation and Quasi-Reorganization

Appropriation of Retained Earnings

➢ In order to limit or restrict the payment of the dividends, the entity may transfer a portion of the retained
earnings unappropriated to retained earnings appropriated.
➢ May be described as follows:
1. Legal appropriation – arises from the fact that the legal capital cannot be returned to the shareholders until the
entity is dissolved and liquidated.
- A portion of the retained earnings must be appropriated for an amount equal to the cost of the treasury
shares.
- Retained earnings appropriated for treasury shares
2. Contractual appropriation – arises from the fact that the terms of the bond issue and preference share issue may
impose restriction on the payment of dividends.
- This is to insure the eventual payment of the bonds and redemption of the preference share.
- Retained earnings appropriated for sinking fund or bond redemption; Retained earnings appropriated for
redemption of preference share
3. Voluntary or discretionary appropriation – a matter of discretion on the part of management.
- i.e. Retained earnings appropriated for plant expansion; Retained earnings appropriated for increase in
working capital; Retained earnings appropriated for contingencies.

Accounting for Appropriation

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Retained Earnings xxx
Retained Earnings Appropriated xxx
To record the establishment of appropriated
retained earnings.

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Retained Earnings Appropriated xxx
Retained Earnings xxx
To reverse the appropriation.

Items affecting directly retained earnings

a. Net income or loss for the period (Profit or loss, IAS)
Net income is added because it increases retained earnings and net loss is deducted.
b. Prior period errors
- Adjustment to the beginning balance of retained earnings to arrive at the corrected beginning balance.
c. Dividends to shareholders
- The dividends declared or paid during the year shall be deducted from the retained earnings.
d. Effect of change in accounting policy
- Shown as an adjustment to the beginning balance of retained earnings.
e. Appropriation of retained earnings
- The appropriation is deducted from the unappropriated balance of retained earnings; if it is reverted back,
it is added.
f. Components of other comprehensive income reclassified subsequently to retained earnings
g. Retirement of treasury shares
- If the retirement of treasury shares results in a “loss”, the excess of the loss over the share premium from
original issue and share premium from treasury shares is charged against retained earnings.

The loss on retirement of treasury shares occurs when the cost of treasury shares exceeds the par value of
the shares retired.

h. Recognition of share issuance costs

- If the share premium from current and previous issue of shares is insufficient to absorb the share issuance
cost, the difference is charged against retained earnings.

i. Call of preference shares

- If the call price exceeds the original issue price of the preference shares, the excess is charged to retained
earnings.

j. Conversion of preference shares into ordinary shares

- If the total par value of the ordinary shares issued in exchange exceeds the original issue price of the
preference shares, the excess is charged against retained earnings.

RESERVES (IAS)
- Either a part of distributable or non-distributable equity.
- Distributable Equity: portion that can be distributed to shareholders as dividends without impairing the legal
capital of the entity; unappropriated retained earnings
- Non-distributable Equity: portion that cannot be distributed to the shareholders in any form during the
lifetime of the entity; represent those items of equity other than the aggregate par or stated value of share
capital and retained earnings unappropriated.
Non-distributable equity reserves usually include the following:
a. Share premium reserve
b. Appropriation reserve (Retained earnings appropriated)
c. Asset revaluation reserve (Revaluation surplus)
d. Other comprehensive income reserves

STATEMENT OF CHANGES IN EQUITY – a formal statement that shows the movements in the elements or
components of the shareholders’ equity.
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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
It is inclusive of the following:
a. Total comprehensive income for the period
b. For each component of equity, the effects of changes in accounting policies and corrections of errors.
c. For each component of equity, a reconciliation between the carrying amount at the beginning and end of the
period, separately disclosing changes from:
1. Profit of loss
2. Each item of other comprehensive income
3. Transactions with owners in their capacity as owners showing separately contributions by and distributions
to owners.

Components of Comprehensive Income

1. Net income or loss
2. Other comprehensive income which comprises items of income and other expenses that are not recognized in
profit or loss as required or permitted by PFRS.
a. Unrealized gain or loss on equity investment designed at fair value through other comprehensive income.
b. Unrealized gain or loss on debt investment measured at fair value through other comprehensive income
c. Gain or loss from translating the financial statements of a foreign operation
d. Change in revaluation surplus
e. Unrealized gain or loss from derivative contracts designated as cash flow hedge
f. Remeasurements of defined benefit plan, such as actuarial gain or loss recognized in the current year
g. Change in the fair value attributable to the “credit risk” of a financial liability irrevocably designated at fair
value through profit or loss

Simple Illustration (All amounts are Assumed)

Share Capital Share Premium Retained
Earnings
Balance – January 1 Php 5,000,000 Php 2,000,000 Php 1,000,000
Issuance share capital of 10,000 shares with Php 100 1,000,000 500,000
par value at Php 150 per share
Net Income 1,550,000
Dividends Paid (200,000)
Balance – December 31 Php 6,000,000 Php 2,500,000 Php 2,350,000

Comprehensive (All amounts are Assumed)

Share Capital Reserves Retained
Earnings
Balance – January 1 Php 5,000,000 Php 2,000,000 Php 1,000,000
Correction of error – prior year (under depreciation) (100,000)
Change in accounting policy from average to FIFO - 300,000
credit
Issuance of 10,000 ordinary shares of Php 100 par 1,000,000 500,000
value at Php 150 per share
Issuance of 5,000 preference shares of Php 50 par 250,000 250,000
value at Php 100 per share
Comprehensive income:
Net income 1,550,000
Other comprehensive income 50,000
Dividends paid (400,000)
Current appropriation for contingencies 200,000 (200,000)
Balance – December 31 Php 6,250,000 Php 3,000,000 Php 2,150,000

QUASI-REORGANIZATION – a permissive but not a mandatory procedure under which a financially troubled entity
restated its accounts and established a “fresh start” in accounting sense.

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
- Procedure of restating assets, liabilities and share capital balances in conformity with fair value for the
purpose of eliminating deficit.
- Also known as corporate readjustment and can be accomplished through:
a. Recapitalization
b. Revaluation of property, plant and equipment
- Circumstances that may justify quasi-reorganization:
a. When a large deficit exists
b. When approved by the shareholders and creditors
c. When the cost basis of the accounting for property, plant and equipment becomes unrealistic. An entity
in financial difficulty may be permitted by the SEC to undergo a quasi-reorganization and in the proves
may be allowed to revalue its property, plant and equipment if their current value is substantially more
than their cost.
d. When a “fresh start” appears to be desirable or advantageous to all parties concerned.
- NOTE: It must be approved by SEC.
Illustration 1 - (Recapitalization)
An entity provided the following statement of financial position at year-end prior to quasi-organization:
Current assets Php 1,000,000
Property, plant and equipment Php 7,500,000
Accumulated depreciation (1,000,000) 6,500,000
Php 7,500,000

Liabilities Php 4,500,000

Share capital, Php 100 par, 50,000 shares 5,000,000
Retained earnings (deficit) (2,000,000)
Php 7,500,000

The shareholders and creditors agreed to a quasi-reorganization. Accordingly, the following restatements should be
made:
a. The property, plant and equipment shall be recorded at the fair value of Php 6,000,000.
b. The inventory is overvalued to the extent of Php 250,000 and shall be revalued accordingly.
c. The share capital is reduced to Php 2,000,000, 20,000 shares, Php 100 par value.
d. The resulting deficit is charged to the share premium arising from the reorganization.
Adjustments:
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
(a) Accumulated depreciation 1,000,000
Retained earnings 500,000
Property, plant and equipment 1,500,000

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
(b) Retained Earnings 250,000
Inventory 250,000

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
(c) Share capital 3,000,000
Share premium 3,000,000

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
(d) Share premium 2,750,000
Retained earnings 2,750,000

After the quasi-reorganization, the statement of financial position of the entity would appear as follows:
Statement of Financial Position
Assets
Current Assets Php 750,000
Property, plant and equipment 6,000,000
Php 6,750,000
Liabilities and Shareholders’ Equity
Liabilities Php 4,500,000
Share capital, Php 100 par, 20,000 shares 2,000,000
Share premium 250,000
Php 6,750,000

Illustration 2 – (Revaluation)
An entity has sustained heavy losses over a period of time and conditions warrant that the entity should undergo a
quasi-reorganization at year-end.

The statement of financial position at year-end prior to the reorganization is:

Current assets Php 1,000,000
Property, plant and equipment Php 5,000,000
Accumulated depreciation (1,500,000) 3,500,000
Goodwill 100,000
TOTAL ASSETS Php 4,600,000

Current Liabilities Php 1,100,000

Share capital, Php 100 par 5,000,000
Share premium 500,000
Retained earnings (Deficit) (2,000,000)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Php 4,600,000

The Securities and Exchange Commission approved the quasi-reorganization on the basis of the unrealistic valuation
of property, plant and equipment.
Accordingly, the SEC recommended that the property, plant and equipment be revalued by an independent expert.
1. The property, plant and equipment are determined to have replacement cost of Php 9,000,000.
2. The inventory is to be written down to Php 400,000.
3. The goodwill is to be written off.
4. Unrecorded accounts payable amounted to Php 200,000.
5. Any resulting deficit is charged against the revaluation surplus.

Adjustments:
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
(1) Property, plant and equipment 4,000,000
Retained earnings 1,200,000
Revaluation surplus 2,800,000

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2

Cost Replacement Increase

Cost
Property, plant and equipment Php 5,000,000 Php 9,000,000 Php 4,000,000
Accumulated depreciation (30%) 1,500,000 2,700,000 1,200,000
Php 3,500,000 Php 6,300,000 2,800,000

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
(2) Retained Earnings 400,000
Inventory 400,000

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
(3) Retained Earnings 100,000
Goodwill 100,000

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
(4) Retained Earnings 200,000
Accounts Payable 200,000

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
(5) Revaluation surplus 2,700,000
Retained earnings 2,700,000

The statement of financial position of the entity after the quasi-reorganization is as follows:
Statement of Financial Position
Assets
Current Assets Php 600,000
Property, plant and equipment 9,000,000
Accumulated Depreciation (2,700,000)
TOTAL ASSETS Php 6,900,000
Liabilities and Shareholders’ Equity
Current Liabilities Php 1,300,000
Share capital, Php 100 par, 20,000 shares 5,000,000
Share premium 500,000
Revaluation Surplus 100,000
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Php 6,900,000

SEC Requirements:
1. If the quasi-reorganization is the result of revaluation or property, plant and equipment, the appraisal myst be
made by an independent expert or specialist.
2. The increase in value of the property, plant and equipment is credited to “revaluation surplus”.

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CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
3. The adjustments concerning “other” assets, such as inventory, investment and intangible asset are made through
retained earnings.
4. The resulting deficit from the reorganization is offset against the revaluation surplus.
5. Retained earnings subsequent to the quasi-reorganization shall be restricted to the extent of the deficit wiped
out during the reorganization and therefore cannot be declared dividends.

Thus, in the given illustration, retained earnings of Php 2,700,000 subsequent to the reorganization cannot be
declared as dividend.
6. Losses subsequent to quasi-reorganization cannot be charged to the remaining revaluation surplus.
7. The quasi-reorganization shall be disclosed for at least 3 years – the date, mechanics, purpose and effect of the
quasi-reorganization on the entity’s statements.

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