MODULE 5 PART 4

O V E RV I E W O F TH E S TO C K M A R K E T ,
U N D E R S TA N D I N G T H E C O M P O N E N T O F
S H A R E H O L D E R ’ S E Q U I T Y W H I C H I S R E TA I N E D
EARNINGS, DIVIDENDS IN GENERAL & OTHER
R E L AT E D A C C O U N T I N G E V E N T S
 UNDERSTANDING THE STOCK & THE STOCK
MARKET
SHARES OF STOCK-represents ownership equity in the firm, which gives
shareholders residual claim on corporate earnings (RE) in the form of capital gains
and dividends.
It is a financial instrument that represents ownership interest in a firm and
proportionate claim on its assets.
It is one of the most commonly traded securities in the financial market known
as the Stock Market.

In reality, investing in the stock market always carries risk , but sometimes it could
be the most efficient way to build up one’s Net Worth.
THE STOCK MARKET
HOW STOCK TRADING WORKS?
 Trading means buying and selling and stocks are being traded by the volume using financial intermediaries
like banks , brokers and many others.
HOW IS THE GLOBAL MARKET TODAY?
 The problem now is the COVID 19 pandemic which every nation is frantically addressing...and lockdown
is a major course of action to many.
 The economy comprises of businesses or corporations which trade on stocks in terms of capitalization.
HEADLINES:
 “GLOBAL MARKETS FALL or GLOBAL MARKET POSTING SIGNIFICANT LOSSES OR CORONA
VIRUS IMPACTING THE GLOBAL ECONOMY ,ETC..
 Experts created a market-wide circuit breakers to prevent a repeat market crash which happens in October
1987 due to declining economic activity and volatility.
The following agencies involve in stock trading:
PHIL. STOCK EXCHANGE – a corporation that governs the local stock market. The local trading of
stocks is being done in their trading floor. As of 2019 , there are 328 companies listed here.
 CONTINUED...
NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATION(NASDAQ)**
 an electronic exchanges where stocks are traded through a network of computers instead of a trading floor.
 world’s second largest stock exchange based on market capitalization
 a single most trusted ground for any economy to list its shares

Data supplied by NASDAQ signals what actions the CENTRAL BANK of a country should take in terms of monetary policy.
2019 STOCK EXCHANGE RANKING
1. New York Stock Exchange (NYSE)
2. NASDAQ
3. Japan Exchange Group-Tokyo Stock Exchange
4. London Stock Exchange
When people talk about investing , stock indexes and stock exchange may sound the same thing but they are different as:
STOCK EXCHANGE-where you buy and sell stocks, bonds and other securities listed in various indexes.
STOCK INDEX-a gauge to measure or read the whole stock market or sector of a market. EX: Standard & Poor’s 500 (S & P
500) or Dow Jones Industrial Average (DJIA), etc..

**3,000 companies conglomerates listed example Apple, Amazons, Netflix, Biogen...based on market value
WHAT ARE RETAINED EARNINGS?
DEFINITION
RETAINED EARNINGS (RE)- is a Shareholders’Equity account which refers to the amount of
cumulative total earnings generated by the business through its successful operations.
 It represent income saved by the company overtime for future use.
 The Income Summary account is closed to Retained Earnings account.
 Its normal balance is credit which means increase in such means the business posted a PROFIT
whereas a debit is a decrease such as when the company incur a LOSS.

WHAT TRANSACTIONS AFFECT RETAINED EARNINGS?

1. Payment of dividends to Shareholders.
 Dividends refers to distributions to shareholders of cash, property or share of stocks from unrestricted
retained earnings on the basis of all issued and fully paid shares and all subscribed par value shares except
Treasury Shares.
WHAT TRANSACTIONS AFFECT...
2. Revenue through sales and investments which boosts profits or net income.
 Revenue or Gross Sales is the total amount of income generated by sale of goods or services related to company’s
primary operations before expenses are taken out.
3. Debits from the reissuance of treasury stocks below cost.
4. Loss on retirement of treasury stocks.
5. Debits or credits for prior period errors.
 Prior period errors are errors of prior years , discovered in the current period such that omission or ignoring it
would mean the financial statements reported could no longer be considered reliable on the date it was presented.
DEFICIT is a debit balance in RE account resulting from accumulated losses of the business.

NOTE:
Since net income is in direct connection to RE , any transaction that drive net income higher or push it lower will
ultimately affect RE
 DIVIDENDS IN GENERAL
 A dividend is distribution of profits by a corporation to the shareholders.
 It came from Latin word “dividendum” (thing to be divided).
 Shareholders are not guaranteed of dividends and dividends do not become a liability of the
corporation until the BOD officially announces and declare dividend distribution out of its
unrestricted retained earnings.
 A corporation is prohibited from paying dividend out of the legal capital. Companies with both
ordinary and preferred shares must consider the characteristics of each class.
DIVIDEND MAY BE IN THE FORM OF:
 Cash dividend -It is possible that a company may have a sizeable amount in its RE account but not
enough amount of cash to pay its shareholders Cash Dividend.
 Stock dividend - distribution of additional shares of stocks of the company
 Property dividends – payment is payable in non-cash assets.
 DIVIDEND...
As general rule, any form of dividend declaration should be based on the total subscription of a shareholder and
not merely on the shares already paid.

IMPORTANT DATES TO REMEMBER:

1.Date of Declaration-this is the date when the BOD will adopt a resolution declaring that a dividend is to be
paid.
The resolution will specify the amount, type and date of payment of the dividend.
A date of record will also be set.
Cash dividend are declared solely by the BOD while share dividend will require the concurrence of at least
2/3 of the outstanding shareholders. Once declared, it will become an obligation of the firm so the account
used will be a debit to RE and a credit to a liability account on this date.

NOTE:
Subscribers are considered Shareholders from the time their subscriptions are accepted by the corporation and
NOT from the time they are issued stock certificates, so for clarification UNISSUED SHARES, TREASURY
SHARES and SUBCRIBED NO-PAR VALUE SHARES (unless fully paid) are not entitled to dividends.
DIVIDEND...
2. Date of Record – refers to the date wherein the list of shareholders entitled to receive dividends are
recorded. Any shareholder who buys shares after this date will not be included in the dividend thus
the share is treated to be traded ex-dividend. No entry required for this.
3. Date of Payment – this is the settlement date and an entry to record the payment of the amount is
made by debiting the liability account used (Shares Distributable or Dividend Payable) and crediting
cash or property distributed or share capital whichever is applicable.
FORM OF DIVIDEND PAYMENTS
CASH DIVIDENDS- the most common form of dividend payment is CASH usually made via
electronic transfer or printed paper CHECK. It is not enough for a corporation to have appropriate
balance in RE account BUT it should have sufficient cash for this form of dividend payment.
 To shareholders, this is a form of investment income, usually treated in the year they are paid (and
not necessarily in the year a dividend is declared).
 JOURNAL ENTRY FOR CASH DIVIDEND
ILLUSTRATION
Assume that BSA Co.’s BOD declares a P7 per share dividend on ordinary shares on December 16, 2019.
As of the date of declaration, the company has 20,000 ordinary shares issued and holds 1,600 shares in its
treasury. Dividend payment must be based on the outstanding shares of the company to be computed as
follows:
Outstanding shares = 20,000 ordinary shares
Less: Treasury shares 1,600
O/S shares ordinary 18,400
Multiplied by DPS x P7
Dividend declared P128,800
Dec. 16 Retained Earnings or Cash Dividends Declared...............................................P128,800
Cash Dividends Payable .................................................................................P128,800 To record
declaration of dividend.
NOTE: IF Cash Dividend Declared account is used, it should be closed to RE account at the end of
accounting period.
 PROPERTY DIVIDENDS
PROPERTY DIVIDENDS or dividends in specie (Latin for “in kind”), are those paid out in the form
of assets, not cash, from the issuing corporation or shares of another corporation such as a subsidiary
company.
 It may also include physical assets owned by the company such as inventories, equipment or real estate.
EX: A company may decide to send products to its investors as a dividend.

HOW DO WE MEASURE PROPERTY DIVIDENDS?

 The issuing company calculates the dividend at the fair market value of the asset provided.
 Though dividend in kind , it has monetary value and can be advantageous to investors in terms of
tax obligation for the reason that the holder can defer their taxes for a period of time without
liquidating the asset.
PROPERTY ...
ILLUSTRATION 1:
Suppose BSA co. declared property dividend in bonds held as an investment to ordinary
shareholders. The property had a carrying value of P850,000 and the fair market value of the
bonds on the date of declaration is P900,000.

JOURNAL ENTRIES:
Date of Declaration-Retained Earnings ..............................................................P900,000
Property Dividends Payable...................................................P900,000
Date of Record - No Entry (only memo entry)
Date of Payment - Property Dividends Payable .............................................. 900,000
Investment in Bonds.................................................................. 850,000
Gain on investment in Bonds.................................................. 50,000
To record distribution of property dividends.
 PROPERTY ...
ILLUSTRATION 2:
Assume BSA Inc. has 30,000 shares of P10 par value ordinary stocks outstanding as of record date of
November 30. Based on this record, the company’s BOD declares property dividend consisting of
package of soft drinks that it produces to each of its ordinary shareholder on December 14 to be
distributed on January 14 next year. The retail value of each case is P175. The amount of dividend is
calculated at:
Outstanding shares of = 30,000 ordinary shares
Market value x P175 per case
Amount of Dividend =P5,250,000
December 14Retained Earnings ........................................P5,250,000
Property Dividends Payable..................................P5,250,000
January 14 (next year)Property Dividends Payable........................ 5,250,000
Inventory . ................................................................ 5,250,000
To record distribution of property dividend.
PROPERTY...
NOTE :
 Because of the use of Fair Market Value, a problem will arise at settlement date if the FMV of the asset to be distributed has changed in which the amount of dividend
to be distributed and recorded at the date of declaration might be different from Dividend Payable in the actual settlement date, it might increase or decrease.
For example, on the date of declaration the FMV of the property is P200,000 and then on the date of payment the FMV decreased to P180,000. How should the
company account for the difference? Will they ignore it and
just debit the liability account as it was credited?
 In this case, one of the guidance given is that of the International Financial Reporting Interpretation Committee (IFRIC) 17 paragraph 13, which requires adjustments to
the Dividend Payable account at the end of accounting period.
 Also mentioned was that of IFRS 5 paragraph 5A which states that classification, presentation and measurement as applied to non-current assets be classified as held
for distribution to owners and shall be recognized at the lower of its carrying amount and Fair Value less distribution costs.
 Whereas, IFRIC 17 paragraph 14 provides that;
“When an entity settles the dividend
payable, it shall recognize the difference , if any, between the carrying amount of the assets distributed and the carrying amount of dividend payable in
Profit or Loss account.”

A property dividend may be declared when the company wants to reward its investors but doesn’t have the necessary cash to distribute or the company wanted to hold
onto their cash for other plans that may entail cash resources.
SHARE DIVIDENDS
SHARE DIVIDENDS-a dividend paid to Shareholders in the form of additional shares in the
company instead of cash.
 Distribution of company’s own shares as dividend do not affect the market capitalization of the
firm.
 A corporation may choose to distribute small share dividend, a large share dividend and share splits
but unlike cash and property dividends, share dividends do not affect the assets of the entity
because there is NO transfer of assets to shareholders.
 Retained Earnings is reduced by the declaration and Share Capital is increased upon distribution,
BOTH accounts only impact the Shareholders’ Equity which means the total shareholders’ equity is
not affected.
 A share dividend gives additional shares of stock to existing shareholders.
 In terms of income taxes, the shareholders do not pay taxes on share dividends when they receive
them, instead, the investors are taxed when they sell them in the future.
IMPACT OF SHARE DIVIDEND
Mr. X is a shareholder of BSA Inc. and owns 1,000 ordinary shares. The board of directors
announced a 10% stock dividend. Assuming the current stock price is P10 and there are 100,000
total shares outstanding , what is the effect of 10% share dividend on Mr. X’s 1,000 shares?
1. Determine the market capitalization of BSA Inc. computed :
Market Cap = P10 par value x 100,000 shares = P1,000,000
2. Determine the increase in shares outstanding (O/S) due to a 10% share dividend:
Increase in O/S shares = 100,000 shares x 10% = 10,000 shares
3. Determine the new total shares outstanding :
New total O/S = 10,000 + 100,000 shares = 110,000
4. Determine the number of shares now owned by Mr. X:

 Before share dividend, Mr. X owned 1% ( 1000/100,000) of the total O/S shares. Since dividend
is given to ALL shareholders, Mr. X’s ownership interest in BSA Inc . remains the same.
IMPACT...
Therefore Mr. X would own 1% of the new total shares outstanding or 1% x 110,000 or 1,100
shares. In effect, Mr. X shares increased by 100 shares (1000 x 10%) equivalent to 10% share
dividend.
5). Determine the price per share of BSA Inc:
Since market capitalization remains the same, with 110,000 shares O/S the share price now of
BSA Inc. is P9.09 (P1,000,000 / 110,000 shares).
A number of advantages that share dividend issuance provides such as:
 Maintaining cash position
 Tax considerations
 Maintaining an “investable “ share price range.
 As noted in our example , the share dividend lowers the share price to P9.09 per share from the par
value of P10.
 This is considered a good sign for the company , they have satisfied their shareholders and at the
same time they also made their shares more “affordable “ to the public or other investors.
SMALL SHARE DIVIDEND
 The receipt of share dividend does not alter the relative position of a shareholder. Shareholders might be able to
increase their proportionate holdings with the distribution of a 10% share dividends But the same goes to the
outstanding shares. It will also increase by 10% so, their ownership position did not change.
 After distribution of share dividend , all stockholders have the exact same percentage of ownership interest that
they have prior to distribution even if the outstanding shares have increased.
 Share dividend can be issued by corporation in small share or large and entries vary depending on size of share
dividend.
 The accounting entries depend on the size of share dividend: SMALL SHARE DIVIDEND and LARGE SHARE
DIVIDEND.
SMALL SHARE DIVIDENDS are dividends in which the additional shares issued are less than 20% of the total
shares outstanding previously accounted. The entry to record small share dividends is to transfer from RE
account to Share Capital (Ordinary share and Share premium) the fair market value of the additional shares to be
issued . If the fair value is lower than the par value or stated value, the basis for recording is the par or stated value :
Retained Earnings...........................................................xxx
Ordinary Shares .............................................................xxx
Share Premium-Ordinary...............................................xxx
SMALL...
ILLUSTRATION
Suppose BSA Co. is a health clinic that caters to elite members of society. For just a period of
two years, the business had been continuously posting positive earnings. As a reward to its
investors, the BOD decides to declare a 15% share dividends in the form of shares of stock. The
company’s SHE section is as follows :
Share Capital – Ordinary, authorized 55,000shares
P20 par value, 35,000 issued and outstanding.....................................................P700,000
Share premium – ordinary....................................................................................... 175,000
Total Share Capital....................................................................................................P 875,000
Retained earnings...................................................................................................... 483,000
Total Shareholders’ Equity.....................................................................................P1,358,000
The company’s shares are trading in the market at P50/share.
 JOURNAL ENTRIES
Based on the illustration, 15% of 35,000 outstanding shares is 5,250 with fair value of P50. 1). 1).
Retained Earnings (P50 x 5,250sh).................................P262,500
Share Distributable-Ordinary....(5,250 x P20)................................................ P105,000
Share Premium –ordinary................................................................................... 157,500
To record declaration of 15% dividend
2). Share distributable ........................................................................... 105,000
Ordinary Shares......................................................................................................105,000
To record issuance of share dividend

RE or Share dividend declared ( a temporary account) is debited for FMV of the share dividends while
Share distributable is credited for the par value of the shares to be distributed and the balance goes to Share
Premium account. The total outstanding shares will now be 40,250 shares (35,000 old + 5250 new) with a
new share price of P17.39 (P700,000/40,250 shares)
COMPARISON OF SHE BEFORE & AFTER DIVIDEND
BEFORE AFTER INCREASE
DIVIDENDS DIVIDENDS (DECREASE)
Ordinary shares, authorized 55,000
P20 par value, 35,000 issued and
Outstanding P700,000 P 805,000 P105,000

Share Premium 175,000 332,500 157,500

Total Share Capital P875,000 P1,137,500 262,500

Retained Earnings 483,000 220,500 (262,500)

Total Shareholders’ Equity P1,358,000 1,358,000 -
Shares Issued and Outstanding 35,000 40,250 5,250

As presented, the Total Share holders’ Equity did not change, only the Retained Earnings and component of
Share Capital changes by the same amount.
LARGE SHARE DIVIDEND
LARGE SHARE DIVIDENDS
 A share dividend is considered large if the number of shares being issued is 20% or more of the
previously outstanding shares such that the effect is to reduce materially the market value per share .
 The entry is to debit Retained Earnings and credit to the liability account and then to ordinary
shares upon issuance at par value or stated value.

 SAMPLE ENTRY : 1) Retained Earnings ...................................................xxx

Share Distributable............................................................xxx
To record declaration of dividends

2) Share Distributable ............................................... xxx

Ordinary Shares.................................................................xxx
 ILLUSTRATION
BSA has 10,000 ordinary shares, P10 par value, issued and outstanding. The board approves a 25%
share dividend to each of its outstanding shareholder as of record date. The corporation will now issue
2,500 ordinary shares as a result of the 25% share dividend declaration. The journal entry would be:

1) Retained Earnings ...............................................................P25,000

Share Distributable....................................................................P 25,000
To record declaration of 25% share dividends.

2) Share Distributable.............................................................. 25,000

Ordinary Shares.............................................................................25,000
To record issuance of share dividends.
Comparing the SHE section to small share dividend, the share premium will be the same because the
entries are recorded at par value but the outstanding shares will increase by 25% or 2,500 shares.
SHARE SPLITS
SHARE SPLITS – is a decision of the company’s BOD to increase the number of shares that are
outstanding by issuing more shares to current shareholders.
HOW IT IS DONE? The company divides its existing shares into multiple shares to boost liquidity.
 After a split, the share price will be reduced since the number of shares outstanding increased. It
happens when the company decides to exchange more shares at a lower price for the shareholder’s
existing shares.
 The new price of shares correlate to the new number of shares , such that the value of
shareholder’s shares doesn’t change and neither does the company’s market capitalization.
WHY COMPANIES SPLIT THEIR STOCKS?
1. To lower share price and make the company shares more attractive to a broad range of investors.
2. To spread the shareholder base by increasing the number of outstanding shares.
3. To benefit shareholders by allowing them to take advantage of an imperfect adjustment
following the split.
SHARE SPLIT...
 Share splits can take many forms. The most common are 2-for-1; 3-for-2; and 3-for-1.
ILLUSTRATION:
( in millions) Pre-Split (before) Post- Split (after)
2-FOR- 1 share split
No. of Shares 10M shares 20M shares
Share Price P10 P5
Market Capitalization P100M P100M
3-FOR-1 share split
No. of Shares 10M shares 30M shares
Share Price P10 P3.33
Market Cap P100M P100M
3-FOR-2 share split
No. of Shares 10M shares 15M shares
Share Price P10 P6.66
Market Cap P100M P100M
SPLIT...
REVERSE SPLIT
In reverse split, the company divides the number of shares that shareholders own, raising the
market price accordingly.
 Reverse split are usually implemented because a company’s share price loses significant value.
 It happens when shares are selling below a desired price.
 Also, when management wishes to take control of the entity.
 No journal entry is required for the share split only memo entry.
EX: A company implement a reverse split of 1-FOR-10 which means that for every 10 shares
shareholders own , they get one (1) share.
REVERSE SPLIT Before After
1-FOR-10
No. of Shares 10M shares 1M shares
Share price P1 P10
Market cap P10M P10M
Thank You Very
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