tenSAI notes

Retained Earnings must be appropriated to the extent of the cost of the treasury shares.
When these treasury shares are sold or retired, the appropriated retained earnings is
reverted back.

Noncash asset as Dividend (this includes the shares of another company)

Retained Earnings is capitalized (debited) for the fair value of the noncash asset,
and is adjusted for every change in fair value (end of reporting period &
settlement date) until finally distributed.
The corresponding credit is Dividends Payable.
The Noncash asset is to be measured at the lower of FAIR VALUE LESS COST TO SELL
and CARRYING AMOUNT at the end of the reporting period only. (If FVLC is lower,
this shall then become the new carrying amount)
If FVLC is lower than the Carrying Amount, it is accounted for as an impairment loss.
At settlement date, the difference between the carrying amount of the Dividends
Payable and the new carrying amount of the Noncash asset is recognized in
profit/loss.

Stock Dividends (also known as bonus issue)

The Percentage can be computed using (new shares issued out of stock dividend
outstanding shares before stock dividend)
If Stock Dividend is LESS THAN 20% (small stock dividend), the market value of the
share on the date of declaration is debited to Retained Earnings.
o Stock Dividends Payable WILL ALWAYS BE AT PAR
o The excess will be credited to Share Premium
If Stock Dividend is 20% or more (large stock dividend), the PAR Value of the share
is debited to Retained Earnings.
STOCK DIVIDENDS PAYABLE IS NOT A CURRENT LIABILITY BUT AN ADDITION TO
SHARE CAPITAL

Treasury Shares as Stock Dividends

The COST OF TREASURY SHARES is the amount capitalized (debited) to Retained
Earnings
Stock Dividends Payable will still be debited at PAR, with the excess going to
Share Premium

Maximum Dividend for a Wasting Asset Entity

Maximum Dividend = Accumulated Depletion + Retained Earnings - Capital Liquidated
Balance
Accumulated Depletion is really just used as a reference and is not debited or credited
in any way
If the maximum dividend is declared, the amount pertaining to accumulated depletion is
debited to Capital Liquidated
Any excess of Dividends over the Retained Earnings balance is treated as
Liquidating Dividends or a Return of Capital

tenSAI notes

Appropriated Retained Earnings

Cost of Treasury Shares (Appropriated Retained Earnings is reverted if treasury shares
is reissued or retired)
Contingent Liability that is only a possible loss (requires only disclosure which may be
done by appropriation of retained earnings)

Contingent Liability that is a probably loss requires accrual to expense, not an

appropriation.
Cash Restriction and Preference Dividends in arrears do not necessarily require
appropriation of retained earnings

tenSAI notes

[Scrip Dividend] (When Liability dividend is short term, it is a Scrip dividend; otherwise, it
is a bond dividend)
East Company had sufficient retained earnings in 2015 as a basis for dividends but was
temporarily short of cash. The entity declared a dividend of P1,000,000 on April 1, 2015, and
issued promissory notes to the shareholders in lieu of cash. The notes, which were dated
April 1, 2015, had a maturity date of March 31, 2016 and a 10% interest rate. What is the
journal entry to record the transaction?
Retained Earnings
Note Payable (Scrip Dividend
Payable)

1,000,000

Interest Expense
Accrued Interest Payable

75,000

1,000,000
75,000

The directors of Ontario Company whose P50 par value share capital is currently selling at
P60 per share have decided to issue a stock dividend. The selling price is not expected
to be affected by the stock dividend. The entity which has an authorization for 1,000,000
shares, had issued 500,000 shares, of which 100,000 shares are now held as treasury. In
order to capitalize P2,400,000 of retained earnings, what percentage should be
declared as a stock dividend by the directors? 10%
Shares to be issued as stock dividend
(P2,400,000/P60)
Outstanding Shares (500,000 - 100,000)
Percentage
of
(40,000/400,000)

Stock

Dividend

40,000
(300,000 200,000)
10%

Kiara Company provided the following data:

Share Capital (P100

value)
Share Premium
Retained Earnings

par

12/31/20
15
5,000,000

12/31/20
16
5,100,000

2,500,000
5,000,000

2,900,000
?

During 2016, the entity declared and paid cash dividend of P750,000 and also declared and
issued a stock dividend. There were no other changes in shares issued and outstanding
during 2016. The net income for 2016 was P1,500,000. What is the balance of Retained
Earnings on December 31, 2016? 5,250,000
Retained Earnings - December
31, 2015
Net Income - 2016
Cash Dividend

5,000,00
0
1,500,00
0
(750,000

tenSAI notes

Stock Dividend*
Retained
Earnings
December 31, 2016

)
(500,000
)
5,250,0
00

Increase in Share Capital (5,100,000 5,000,000)

Increase in Share Premium (2,900,000 2,500,000)
Stock Dividend*

100,00
0
400,00
0
500,0
00

Zoe Company reported the following shareholders equity at the current year-end:
Share Capital, par P25, authorized 150,000 1,375,00
shares, 55 shares issued of which 5,000
0
shares are in treasury
Retained Earnings
2,000,00
0
Treasury Shares, at cost
150,000
A 100% stock dividend was declared and all of the treasury shares were issued as stock
dividend and the balance from the unissued shares. The share has a market value of P40.
What amount of retained earnings should be capitalized? 1,275,000
Shares Issued
55,000
Treasury Shares
(5,000)
Outstanding
50,000
Stock Dividend Percentage
100%
Stock Dividends
50,000*
*50,000 of which, 5,000 will be coming from treasury shares and the balance from unissued
Treasury shares as stock dividend (5,000
shares at cost)
Unissued shares as stock dividend at PAR
Retained Earnings to be capitalized

150,000
1,125,00
0
1,275,0
00

Multiple Company reported the following balances at year-end:

Share Capital Authorized, P100 par
Share Capital Unissued
Subscribed Share Capital
Treasury Shares, 5,000 at cost

5,000,00
0
2,000,00
0
1,000,00
0
600,000

tenSAI notes
Share Premium
Retained Earnings

500,000
1,500,00
0

At this time, the board of directors declared and issued a dividend from the treasury shares
of one share for each ten shares held. The market value of the share is P150. What is the
decrease in retained earnings as a result of the stock dividend? 420,000
Authorized
50,000
Shares
Unissued Shares (20,000)
Issued Shares
30,000
Subscribed
10,000
Shares
Total
40,000
Treasury Shares
(5,000)
Outstanding
35,000
Shares
Stock Dividends (35,000/10) = 3,500
Cost of Treasury Shares reissued as Stock Dividend [(3,500/5,000) x 600,000] = 420,000
Retained Earnings
420,000
Treasury Shares
420,000

On December 31, 2015, Blake Mining Company declared a cash dividend of P800,000 to
shareholders of record on January 15, 2016 and payable on February 15, 2016. The entity
reported the following information on December 31, 2015:
Accumulated
200,000
depletion
Share Capital
1,000,00
0
Share Premium
300,000
Retained Earnings
600,000
How much is the liquidating dividend? 200,000
Any amount in excess of the retained earnings balance is a liquidating dividend or return
of capital.
In this case, the liquidating dividend is legal under the wasting asset doctrine.
Christelle Company had incurred heavy losses since inception. At the recommendation of
chief execute officer, the board of directors voted to implement a quasi-reorganization,
subject to approval of shareholders. Immediately prior to the quasi-reorganization, the entity
reported the following shareholders equity:
Share
Capital,
P100
par, 50,000,0
500,000 shares
00
Share Premium
5,000,00
0
Retained Earnings (Deficit)
(8,000,0
00)

tenSAI notes
The shareholders approved the quasi-reorganization to be accomplished by a reduction in
inventory of P2,000,000, a reduction in property, plant and equipment of P4,000,000, writeoff of goodwill of P1,000,000 and appropriate adjustment to the capital structure against
share premium first and any remaining deficit against the share capital account. What is
the reduction in share capital account to implement the quasi-reorganization?
10,000,000
Deficit
Reduction in inventory
Reduction in PPE
Write-off of goodwill
Total deficit
Charged against share
premium
Reduction
of
Share
Capital

8,000,00
0
2,000,00
0
4,000,00
0
1,000,00
0
15,000,0
00
(5,000,0
00)
10,000,
000