ACCOUNTING FOR

CORPORATIONS
Retained Earnings
OVERVIEW
• Retained earnings represent the component
of the shareholders’ equity arising from the
retention of assets generated from the profit-
directed activities of the corporation.
• At the end of the accounting period, the Income
Summary account of a corporation is closed to
the Retained Earnings account.
• The Retained Earnings account is credited with
the corporation’s profit or debited with the loss.
 OVERVIEW

Distributions 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 are
called dividends.
OVERVIEW
• Dividend declarations reduce retained earnings.
• Other less common situations that cause
increases and decreases in retained earnings:
debits resulting from reissuance of treasury
stocks below cost and loss on retirement of
treasury stocks and debits or credits for prior
period errors.
OVERVIEW
• Prior period errors are errors discovered in
the current period that are of such significance
that the financial statements of one or more
prior periods can no longer be considered to
have been reliable at the date of their issue.
Credit entries increase the retained earnings
balance and debits decrease it.
OVERVIEW
• A debit balance in the Retained Earnings
account resulting from accumulated losses
is called a deficit
OVERVIEW
• Retained earnings may be restricted appropriated,
and unrestricted or unappropriated.
• Unrestricted retained earnings are free and can be
declared as dividends.
• Retained earnings restrictions may be legal,
contractual or voluntary.
 Dividends in General
Dividends are distributions of
earnings or capital to the
shareholders in proportion to
their shareholdings.
 Dividends in General
• Shareholders are not guaranteed
dividends and dividends do not become
a liability of the company until the
board of directors has formally declared
a dividend distribution.
• Section 42 of the Revised Corporation
Code states that dividends should only
be declared out of the unrestricted
retained earnings.
Section 42. Power to declare dividends. - The board of
directors of a stock corporation may declare dividends out of
the unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis
of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued
without the approval of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose.
 Dividends in General
• Dividends may take the form of cash, property or
additional shares of stock of the corporation.
• Any form of dividend declaration should be based
on the total subscription of a shareholder and not
merely on the shares already paid.
• Subscribers are considered shareholders from the
time their subscriptions are accepted by the
corporation and not from the time they are issued
stock certificates.
3 important dates for Dividends:
 DATE OF DECLARATION – the date on which
the directors authorize the payment of dividends
to shareholders.
 The board of directors will adopt a
resolution declaring that a dividend is to be
paid.
 The resolution will specify the amount, type
and date of payment of this dividend. It will
also set a date of record.
 Cash dividends are declared solely by the
board of directors while share dividends
will necessitate the concurrence of at least
two-thirds of the outstanding shareholders.
• Legally, declared dividends are obligations of
the firm. Dividends to be paid in cash or
property became a liability on this date. Shares
distributable is also recognized.
• An entry is made debiting Retained Earnings
and crediting a dividend liability of Shares
Distributable account. Some companies debit a
Dividends Declared account instead of the
Retained Earnings account. This account is
nevertheless closed to the Retained Earnings
account at the end of the year.
Recognition of Dividend
Paragraph 10 of IFRIC 17 provides that the liability
to pay a dividend shall be recognized when the
dividend is appropriately authorized and is no
longer at the discretion of the entity, which is the
date:
a. When declaration of the dividend, e.g. by
management or the board of directors, is approved by
the relevant authority, e.g. the shareholders, if the
jurisdiction requires such approval, or
b. When the dividend is declared, e.g. by management
or the board of directors, if the jurisdiction does not
require further approval.
IFRIC 17 Distributions of Non-cash Assets to
Owners was developed by the International
Financial Reporting Interpretation Committee
and issued by the Internal Accounting
Standards Board in Nov. 2008. Its effectivity
date is July 1, 2009.
 DATE OF RECORD – the date on which the
stock and transfer book of the corporation will
be closed for registration. Only those
shareholders registered as of such date are
entitled to receive dividends.
• A list of shareholders entitled to the
declared dividends is prepared at the date
of record.
• If an investor buys a share of stock after
this date, he will not receive the
dividends. This share is said to be traded
ex-dividend.
• No entry is required on this date.
 DATE OF PAYMENT – the date on which
the dividend liability is to be paid.
• The corporation settles its liability on this
date.
• An entry is made debiting the dividend
liability or shares distributable account
and crediting cash, property distributed
or share capital.
Cash Dividends

Majority of dividends distributed

by corporations is paid in CASH.
A company must have both an
appropriate amount of retained
earnings and the necessary amount
of cash.
 A corporation, however, may successfully
accumulate earnings and at the same time
not be sufficiently liquid to pay large
dividends.
 Dividends on par value shares are stated as
a certain percentage of the par value.

 As to no-par value shares, the

dividends are stated at a certain
amount per share.
 When the board of directors declares a cash
dividend, an entry is made debiting Retained
Earnings and crediting Cash Dividends
Payable.
 Ex.: Made Easy Bookstore, Inc., a
nationally-known business books
distribution company, declared a cash
dividend of P12 per share of ordinary
shares of July 1. The dividends are
payable on August 1 to shareholders of
record on July 21. The company has
100,000 ordinary shares issued of which
7,000 shares are held in treasury.
The entries to record the dividend declaration and
payment are as follows:
July 1 Retained Earning 1,116,000
Cash Dividends Payable 1,116,000
To record declaration of dividend.

• The account, Cash Dividends Declared, may be

used in place of the debit to Retained Earnings.
At the end of the accounting period, this
temporary shareholders’ equity account will be
closed by debiting Retained Earnings and
crediting Cash Dividends Declared.
Aug 1 Cash Dividends Payable 1,116,000
Cash 1,116,000
To record payment of dividend.

• Cash dividends payable are reported as current

liabilities in the statement of financial position.
• With the exception of treasury shares, all issued
and fully paid shares, and all subscribed par
value shares are entitled to dividends when declared.
• No-par value shares are considered as legally issued
only when fully paid.
• Unissued shares, subscribed no-par shares and
treasury shares are not entitled to dividends.
Property Dividends
A distribution to shareholders that is payable in non-cash assets
is generally referred to as property dividends or dividends
in kind.

• Per IFRIC 17, paragraph 11, an entity shall measure a liability

to distribute non-cash assets as dividends to its owners at the
fair value of the assets to be distributed.
 Ex.: 3S Food Industries, Inc. based in
Pulilan, Bulacan has 5,000 shares
investment in another entity accounted for as
nonmarketable equity investment. The
carrying amount of this investment is
P500,000. On Dec. 1, 2016, the company
declared as property dividends this
investment to all its outstanding par value
shares to be distributed on Dec. 15, 2016. The
fair market value of the investment at the
declaration date was P950,000. There was
no change in fair value on settlement date.
The entries to record the dividend declaration
and distribution are as follows:
Dec 1 Retained Earnings 950,000
Property Dividends Payable 950,000
To record declaration of dividend.

Dec 15 Property Dividends Payable 950,000

Investment in Equity Securities 500,000
Gain on Distribution of 450,000
Property Dividends
To record distribution of dividend.
• Because of the use of fair value, a problem will
arise at settlement date if the fair value of the
assets to be distributed has changed. The
following offers the pertinent guidance:
 Per IFRIC 17, paragraph 13, at the end of
each reporting period and at the date of
settlement, the entity shall review and adjust
the carrying amount of the dividend payable,
with any changes in the carrying amount of
the dividends payable recognized in equity as
adjustments to the amount of the
distribution.
 Paragraph 14, when an entity settles the
dividends payable, it shall recognize the
difference, if any, between the carrying
amount of the assets distributed and the
carrying amount of the dividend payable in
profit or loss.
• IFRS 5, paragraph 5A, states that the
classification, presentation and measurement
requirements in this IFRS is applicable to a
noncurrent asset (or disposal group) that is
classified as held for distribution to owners.
• Paragraph 15A provides that an entity shall
measure a non-current asset (or disposal group)
classified as held for distribution to owners at
the lower of its carrying amount and fair value
less costs to distribute.
 Share Dividends
A corporation may distribute to
shareholders additional shares of the
company’s own share as share
dividends.
• This type of dividend affects only the accounts
within the shareholders’ equity.
• Share dividends increase the total share capital
and decrease the retained earnings account.
• Because both of these are components of
shareholders’ equity, total shareholders’ equity
is unchanged.
• From the shareholders’ point of view, a share
dividend does not change their percentage
interests in the corporation although total
outstanding shares have increased.

• SMALL SHARE DIVIDENDS

 Additional shares issued are less than 20% of
the previously outstanding shares.
 Recorded by transferring from retained
earnings to share capital (ordinary shares
and share premium accounts) the fair market
value of the additional shares to be issued.
• In cases when the fair market value is lower than the
par or stated value, the par or stated value will be the
. basis for recording.
 Ex.: Siobe!, Your Japanese Fastfood, Inc. chain, is
blessed with years of profitable operations for its
commitment to serve affordable and healthy
Japanese food favorites. The shareholders’ equity
of the company before declaration of a 10% share
dividend is as follows:
Ordinary shares, P50 par, 20,000 shares
issued and outstanding P1,000,000
Share Premium 200,000
Total Share Capital P1,200,000
Retained Earnings 650,000
Total Shareholders’ Equity P1,850,000
• The declaration of a 10% share dividend will
require the issuance of an additional 2,000
shares. Assume that the company’s share is
being traded at the stock exchange and that the
stock market price per share is P110. The fair
market value of the shares to be distributed is
P220,000. The entries will be:
Retained Earnings 220,000
Shares Distributable 100,000
Share Premium 120,000
To record declaration of 10% share dividends.
Shares Distributable 100,000
Ordinary Shares 100,000
To record issuance of share dividends.
• Retained Earnings (or the temporary account,
Share Dividends Declared) is debited for the fair
market value of the share dividends. Shares
Distributable is credited for the par value of
shares to be distributed and Share Premium for
the balance.
• If a statement of financial position is prepared
between the declaration date and the
distribution date of a share dividend, the Shares
Distributable account will be shown in the
shareholders’ equity immediately after the
Ordinary Shares account.
• When the share is distributed, only the
components of the shareholders’ equity
changes; retained earnings decreased by
P220,000 and total share capital increased by
P220,000. The total shareholders’ equity did
not change.

Shares issued and outstanding 20,000 22,000 2,000

• The receipt of a share dividend does not alter
the relative position of a shareholder. No profit
is realized by the shareholders.

• LARGE SHARE DIVIDEND

 If the share dividend is 20% or more of the
previously outstanding shares such that the
effect is to reduce materially the market
value per share, then only the par or stated
value is credited to ordinary shares with a
corresponding debit to retained earnings.
 Ex.: Assume instead that Siobe! Your Japanese
Fastfood, Inc. chain declared a 20% share dividend on
its 20,000 issued and outstanding P50 par value
shares. The company will issue additional 4,000
shares due to the share dividend. The entries will be:
Retained Earnings 200,000
Shares Distributable 200,000
To record declaration of 20% share dividends.
Shares Distributable 200,000
Ordinary Shares 200,000
To record issuance of share dividends.

• The account titles used to record a large share dividends are

the same as those for small share dividends. The balance in
the account Share Premium remained the same; this is
because large share dividends are recorded at par value.
 Liquidating Dividends
• Returns of capital to the investing shareholders.
• This type of dividend can be legally paid only
under either of the following circumstances:
1. When the corporation is under dissolution
and liquidation, or
2. When the corporation is engaged in the
exploration of natural resources.
Summary of the Effects of Dividends
 Restrictions on Retained Earnings
 A corporation may be required by law or
contractual arrangements to set aside a portion
of the retained earnings for specified purposes.
 In addition, the board of directors may
voluntarily designate a portion of retained
earnings for future expenses, contingencies or
other purposes (SFAS No. 18, paragraph 31).
 This portion of the retained earnings is referred
to as restricted or appropriated retained
earnings.
 Restrictions on Retained Earnings
Ex.: Pinnacle Technologies, Inc. bought 1,000 of
its shares at P150,000. A portion of the retained
earnings is restricted for the cost of the treasury
purchased.
Retained Earnings 150,000
Appropriated Retained Earnings 150,000
To restrict retained earnings for cost of
treasury shares purchased.
 Restrictions on Retained Earnings
• It simply communicates that the restricted
portion is not available for dividend
declarations. Once the purpose restriction has
been served, appropriate retained earnings
should be reversed to unappropriated retained
earnings.
• If the treasury stocks are subsequently reissued,
the restricted balance reversed as follows:
Appropriated Retained Earnings 150,000
Retained Earnings 150,000
To remove restriction on retained earnings.
 Statement of Retained Earnings
 Not required per revised IAS No. 1.
 Normally divided into 2 major sections:
• Appropriated
Presents the beginning balance of the retained
earnings appropriated account, any additions or
deductions during the period, and ending balance.
• Unappropriated
Shows the beginning balance of the retained
earnings unappropriated account, correction of
prior period error, profit or loss for the period,
dividends, transfer to and from the appropriated
and unappropriated accounts, and the ending
balance.
 Statement of Retained Earnings
Dynasty BookSource Asia Corporation
Statement of Retained Earnings
For the Year Ended December 31, 2016

Appropriated:
Balance, 1/1/2016, as reported:
For Plant Expansion 180,000
For Treasury Stocks, 4/8/2016 100,000
Retained Earnings Appropriated, 12/31/2016 280,000

Unappropriated:
Balance, 1/1/2016, as previously reported 1,414,500
Correction of Prior period error 100,000
Balance, 1/1/2016, as restated 1,514,500
Add: Profit 480,000
Total 1,994,500
Less: Cash Dividends Declared 65,000
Share Dividends Declared 60,000
Transfer to Approp. For Treasury Stocks 100,000 225,000
Retained Earnings Unappropriated, 12/31/2016 1,769,500
Total Retained Earnings 2,049,500
Statement of Changes in Shareholders’ Equity
 Significant changes in shareholders’ equity
should be reported in the period in which they
occur.
 May be prepared in columnar format, where
each column represents major shareholders’
equity classification.
 The ending balances of the accounts are
presented at the bottom of the statement. These
accounts and their related balances compose the
shareholders’ equity section of the statement of
financial position.
Statement of Changes in Shareholders’ Equity
SuySan Property Corporation
Statement of Changes in Shareholders' Equity
For the Year Ended December 31, 2016

Preference Ordinary Share Unapprop. Approp. Treasury

Shares Shares P10 Premium - Retained Retained Preference
P100 par par Ordinary Earnings Earnings Shares Total
Balance, Jan. 1 500,000 1,000,000 300,000 150,000 1,950,000
Profit 85,000 85,000
Cash Dividends on Preference (25,000) (25,000)
Cash Dividends on Ordinary (40,000) (40,000)
Issue of Ordinary, -
5,000 shares 50,000 5,000 55,000
5% Share Dividend -
on Ordinary, -
5,250 shares* 52,500 26,250 (78,750) -
Purchased of Treasury Stock (30,000) (30,000)
Appropriation for Treasury Stock (30,000) 30,000 -
Balance, Dec. 31 500,000 1,102,500 331,250 61,250 30,000 (30,000) 1,995,000
* The fair market value of the ordinary shares at the date of declaration is P15 per share.
 Statement of Financial Position
Shareholders' Equity

Share Capital
Preference Shares - P100 par, 10,000 shares
authorized, 5,000 shares issued and 4,750 shares
outstanding 500,000
Ordinary Shares - P10 par, 150,000 shares authorized,
110,250 shares issued and outstanding 1,102,500
Share Premium-Ordinary 331,250 1,433,750
Total Share Capital 1,933,750

Retained Earnings
Unappropriated 61,250
Appropriated for Treasury Stock 30,000 91,250
Total Share Capital and Retained Earnings 2,025,000
Less: Treasury-Preference, P250 shares at cost 30,000
Total Shareholders' Equity 1,995,000
 Book Value per share
 The amount that would be paid on each share if
the corporation is liquidated.
 The amount available to shareholders is exactly
the amount reported as shareholders’ equity.
 When only a single class of share is outstanding,
the book value per share is computed by
dividing the total shareholders’ equity by the
number of shares outstanding.
 Book Value per share
Ex.: Assume that Severino Ramos Security Agency
has a total shareholders’ equity of P180,000 and
5,000 shares of ordinary shares outstanding. The
book value per share is P36 (P180,000/5,000
shares).
• When both preference and ordinary shares are
outstanding, the preference shareholders have
preference over ordinary shareholders as to
the distribution of assets upon corporate
liquidation.