Financial Accounting and Reporting Retained Earnings

ACCOUNTING FOR
CORPORATION
Retained Earnings
Accounting for Corporations
Learning Objectives:
1. Define retained earnings and show how it is affected by some
accounting events.
2. Discuss dividends in general.
3. Identify the important dates in the dividends distribution.
4. Analyze and record transactions involving cash dividends,
property dividends, share dividends and share splits.
5. Summarize the effects of dividends and share splits.
6. Differentiate cumulative from non-cumulative preference shares.
Financial Accounting and Reporting – Retained Earnings
Accounting for Corporations
Learning Objectives:
7. Differentiate participating from non-participating preference
shares.
8. Illustrate dividends when both preference and ordinary shares
are issued.
9. Explain prior period errors and examine its effect on the financial
statements.
10.Prepare a statement of retained earnings.
11.Prepare a statement of changes in shareholders’ equity.
12.Calculate book value per share.
Overview
 Retained earnings account – is credited with the

corporation’s profit and debited with the loss.
 Dividends – are 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.
Other situations that causes increases and
decreases in retained earnings
Debits
resulting from reissuance of Debits or credits
treasury stocks below cost
and loss on retirement of prior periods errors.
treasury stocks

Prior Periods Errors
 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.

Retained Earnings
 Has a normal credit
balance  Deficit
a debit balance in the
retained earnings
account resulting from
accumulated losses

Retained Earnings
 Unrestricted
 free and can be declared as  Restricted
dividends
Legal
Contractual
Voluntary

DIVIDENDS IN GENERAL
Retained Earnings
 Not a cash fund
 Waiting to be distributed as
dividends  Owner’s equity account
 representing claim on all
assets in general and not on
any asset in particular.

Dividends
 May take the form of
cash, property or
additional shares of  Any form of dividend
stock of the corporation declaration should be
based on the total
subscription of a
shareholder and not on
the shares already paid

Declaration of Dividends
Date of Declaration
 Cash Dividends are declared solely by the board of directors while share dividends will
necessitate the concurrence of at least two-thirds of outstanding shareholders
Date of record
 A shareholders entitled to the declared dividends is prepared at the date
of record
Date of Payment
 The corporation settles its liability on this date.

CASH DIVIDENDS
Cash Dividends
PAR-VALUE SHARES
Dividends are stated as a certain NO-PAR VALUE SHARES
percentage of the par value.
Dividends are stated at a certain
amount per share

Cash Dividends
Illustration.
Made Easy Bookstore, Inc., a nationally-known business books
distribution entity, declared a cash dividend of P12 per share of
ordinary shares on July 21. The entity has 100,000 ordinary
shares issued of which 7,000 shares are held in treasury. The
entries to be record the dividend declaration and payment are as
follows:

Cash Dividends
Illustration.
The entries to be record the dividend declaration and payment

are as follows:
Retained Earnings 1,116,000

Cash Dividends Payable 1,116,000
To record declaration of dividend
(P12 per share (100,000 issued shares – 7,000 treasury shares)

Cash Dividends
Illustration.
The entries to be record the dividend declaration and payment

are as follows:
Cash Dividends Payable 1,116,000

Cash 1,116,000
To record payment of dividend

PROPERTY DIVIDENDS
Property Dividends
Payable in non-cash assets
Fair value of the assets

 IFRIC 17, par. 11

Property Dividends
Illustration.
35 Food Industries, Inc. based in Pulilan, Bulacan has 5,000
shares investment in another entity accounted for as non-
marketable equity investment. The carrying amount of this
investment is P500,000. On December 1, 2018, this growing
food corporation declared a property dividends this investment to
all its outstanding par value shares to be distributed on
December 15, 2018. The fair market value of the investment at
the declaration date was P950,000. There was no change in the
fair value on settlement date.

Property Dividends
Illustration.
The entries to record the dividend declaration and distribution are as
follows:
Retained Earnings 950,000

Property Dividends Payable 950,000
To record declaration of dividend
Property Dividends Payable 950,000

Investment in Equity Securities 500,000
Gain on Distribution of Property Dividends 450,000
To record distribution of dividend
SHARE DIVIDENDS
Share Dividends
No transfer of assets
No change in total
Own shares of stock shareholders’ equity
 Increase total share capital
 Decrease in retained earnings

Share Dividends
Small Share Dividend
Less than 20% of previous Large Share Dividend
outstanding shares
Fair market value of shares to be 20% or more of previous
issued outstanding shares
If fair market value is less than par To reduce materially the market
or stated value, the basis for value per share
recording is par or stated value The basis for recording is par or
stated value

Small Share Dividends
Illustration.
Siobe! Your Japanese Fast food, Inc. chain is blessed with years of profitable
operation for its commitment to serve affordable and healthy Japanese food
favorites The shareholders’ equity before declaration of a 10% share dividends is as
follows:
Ordinary shares, P50 par, 20,000 shares

P1,000,000
issued and outstanding
Share premium 200,000
Total share capital P1,200,000
Retained earnings 650,000
Total Shareholders’ Equity P1,850,000

Illustration.
The declaration of a 10% share dividend will require the issuance of an additional
2,000 shares. Assume that the corporation’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:

Shares Distributable 100,000
Share Premium 120,000
To record declaration of 10% share dividends
Share Distributable 100,000

Ordinary Shares 100,000
To record issuance of share dividends
Illustration.
A comparison of the shareholders’ equity and outstanding shares before and after
the share dividend appears below:
Before After Increase

Dividends Dividends (Decrease)
P1,000,000 P1,100,000 P100,000
Share premium 200,000 320,000 120,000
Total share capital P1,200,000 P1,420,000 P220,000
Retained earnings 650,000 430,000 (220,000)
Total Shareholders’ Equity P1,850,000 P1,850,000 P0
Shares Issued and Outstanding 20,000 22,000
Financial Accounting and 2.000
Reporting – Retained Earnings
Large Share Dividends
Illustration.
Assume instead that Siobe! Your Japanese Fast food, Inc. chain declared a 20% share
dividend o its 20,000 issued and outstanding P50 par value shares. The corporation will
issue additional 4,000 shares due to the share dividend. The entries will be:

To record declaration 20% share dividends

Ordinary Shares 200,000
To record issuance of share dividends
Large Share Dividends
Illustration.
A comparison of the shareholders’ equity and outstanding shares before and after
the share dividend appears below:
Before After Increase

Dividends Dividends (Decrease)
P1,000,000 P1,200,000 P200,000
Share premium 200,000 200,000 P0
Total share capital P1,200,000 P1,400,000 P200,000
Retained earnings 650,000 450,000 (200,000)
Total Shareholders’ Equity P1,850,000 P1,850,000 P0
Shares Issued and Outstanding 20,000 24,000
Financial Accounting and 4.000
LIQUIDATING DIVIDENDS
Liquidating Dividends
 When the corporation
is under dissolution
and liquidation  When the corporation is
engaged in the
exploration of natural
resources.

Quiz – 11/28/18

Quiz – 11/28/18

SHARE SPLITS
Share Splits
 Reduce the par value
 Issues additional
shares

Share Splits
 Adjust the market price of the corporations
shares
 Spread the shareholders base
 To benefit existing shareholders

Share Splits
Illustration:
The International School of Business

and Sciences, Inc. has 10,000 P100
par value ordinary shares issued and This means that a shareholder would
outstanding when the board of receive five shares with new par value of
directors decided to split the share 5- P20 for each share held. Ordinary
for-1. shares will remain unchanged at
P1,000,000. The issued and
outstanding share will now be 50,000
and the par value is reduced to P20 per
share.

Summary of the Effects of Dividends and Share Splits
Declaration Payment of Declaration and Distribution of
of Cash Cash Small Large
Effect on Dividends Dividends Share Split
Dividends Dividends
Retained Earnings Decrease - Decrease (a) Decrease (b) -
Ordinary Shares - - Increase (b) Increase (b) -
Share Premium - - Increase (c) - -
Total Shareholders’ Equity Decrease - - - -
Total Liabilities Increase Decrease - - -

Total Assets - Decrease - - -
Shares Outstanding - - Increase Increase Increase

Legend a = fair market value of shares, b = par or stated value, c = in excess of par or stated value
DIVIDENDS ON PREFERENCE AND ORDINARY SHARES
Dividends on Preference and Ordinary Shares
Preference 1 Non-Cumulative and Non-Participating
shares may
2 Non-Cumulative and Participating
contain one
of these 3 Cumulative and Non-Participating
combinations
of features: 4 Cumulative and Participating

Non-Cumulative Preference Shares

 entitle the holders only to the payment of current dividends if
and when dividends are declared
 to the extent of the preference rate
 before the ordinary shareholders are paid
 If there is no dividend declaration for a certain year, then the
dividend for that year is forfeited.

Cumulative Preference Shares

 entitle the holders not only to the payment of current dividends
but also back dividends or dividends in arrear if and when
dividends are declared
 to the extent of the preference rate
 before the ordinary shareholders are paid

Non-Participating Preference Shares

 entitle the holders only to the extent of stipulated preference
dividend

Participating Preference Shares

 entitle the holders to participate with the holders of ordinary shares
 pro-rata in the remainder
 after the ordinary shares received their initial share based on
preference rate

Illustration
Doom Dane Publishers, Inc., the premier publisher of accounting, finance,
economics, math, taxation, entrepreneurship, and other business textbooks, has
the following selected accounts in its shareholders’ equity:
12% Preference shares, P100 par, authorized 4,000 shares,

P200,000
2,000 shares issued and outstanding
Ordinary shares, P100 par, authorized 6,000 shares, 3,000
300,000
The board failed to declare dividends for the past two years. The current year’s
results of operations gave the board reasons to declare cash dividends of P200,000.
Case 1. Non-cumulative and Non-participating Preference Shares

Preference Ordinary Total
Outstanding Share Capital P200,000 P300,000 P500,000
Current Preference Dividends:

P24,000 P24,000
P200,000 x 12%
Remainder to Ordinary:
P176,000 P176,000
P200,000 – P24,000 = P176,000
Total P24,000 P176,000 P200,000
Dividends per Share P12.00 P58.67

Case 2. Non-cumulative and Participating Preference Shares
P24,000 P24,000
P200,000 x 12%
Current Ordinary Dividends at Preference Rate:
P36,000 36,000
P300,000 x 12%
Remainder for Participation:
140,000
P200,000 – P24,000 – P36,000 = P140,000
Preference: 2/5 x P140,000 56,000
Ordinary: 3/5 x P140,000 84,000
Total P80,000 P120,000 P200,000

Case 3. Cumulative and Non-Participating Preference Shares

Preference Dividends in Arrears:
P48,000 P48,000
P200,000 x 12% x 2 years
24,000 24,000
P200,000 x 12%
Remainder to Ordinary:
P128,000 128,000
P200,000 – P48,000 – P24,000 = P128,000
Total P72,000 P128,000 P200,000

Case 4. Cumulative and Participating Preference Shares
Preference Dividends in Arrears:
P48,000 P48,000
P200,000 x 12% x 2 years
24,000 24,000
P200,000 x 12%
Current Ordinary Dividends at Preference Rate:
P36,000 36,000
P300,000 x 12%
Remainder for Participation:
92,000
P200,000 – P48,000 - P24,000 – P36,000 = P92,000
Preference: 2/5 x P92,000 36,800
Ordinary: 3/5 x P92,000 55,200
Total P108,800 P91,200 P200,000
Dividends per Share P54.40
Financial Accounting andP30.40
PRIOR PERIOD ERRORS
Prior Period Errors
Per IAS No. 8, Accounting Policies, Changes in Accounting

Estimates and Errors
 Are omissions from and other misstatements of the entity’s

financial statements for one or more prior periods that are
discovered in the current period.

Prior Period Errors
Illustration
 In 2017, the bookkeeper of Manalili Realty, Inc. debited Advertising Expense
and credited Cash to record the purchase of a small parcel of land to be used
as the entity’s sales training venue. The entry should have been a debit to
Land and a credit to Cash of P250,000. The effect of this prior period error is to
overstate 2017 advertising expense and ultimately, understate 2017 profit by
the same amount. Land is also understated by P250,000. The external
auditors discovered the prior period error in 2018, The correcting entry will be:
Land 250,000

RESTRICTIONS ON
RETAINED EARNINGS
Retained Earnings
 Legal
Required by law
 Contractual
Based on agreement
 Voluntary
 The BOD designate a portion of retained earnings for
future expenses, contingencies or other purposes
Retained Earnings
Illustration
Pinnacle Technologies, Inc. bought 1,000 of its share at 150,000.
A portion of the retained earnings is restricted for the cost of the
treasury purchased.

Appropriated Retained Earnings 150,000
To restrict retained earnings for the cost of
treasury shares purchased

Retained Earnings
Illustration
 If the treasury stocks are subsequently reissued, the restricted
balance is reversed as follows:
Appropriated Retained Earnings 150,000

To remove restriction on retained earnings

STATEMENT OF
RETAINED EARNINGS
59 Dynasty BookSource Asia Corporation
Statement of Retained Earnings
For the year ended December 31, 2018
Appropriated:
Balance, 1/1/2018, as reported:
For plant expansion P180,000
For Treasury Stock, 4/8/2018 100,000
Retained Earnings Appropriated, 12/31/2018 P280,000
Unappropriated:
Balance, 1/1/2018, as previously reported P1,414,500
Correction of prior period error 100,000
Balance, 1/1/2018, as restated P1,514,500
Add: Profit 480,000
Total P1,994,500
Less: Cash dividends declared P65,000
Share dividends declared 60,000
Transferred to appropriated for treasury stock 100,000 225,000
Retained Earnings Unappropriated, 12/31/2018 1,769,500
Total Retained Earnings Financial Accounting and Reporting – Retained
P2,049,500
Earnings
60 Dynasty BookSource Asia Corporation
Statement of Retained Earnings
For the year ended December 31, 2018
Shareholders’ Equity
Share Capital
Preference Shares-P100 par 10,000 shares 500,000

authorized 5,000 shares issued and 4,750 shares
outstanding
Ordinary Shares- P10 par, 150,000 shares authorized,
110,250 shares issued and outstanding P1,102,500
Share Premium- Ordinary 311,250 1,433,750
Total Share Capital P1,933,750
Retained Earnings
Unappropriated P 61,250
Appropriated 30,000 91,250
Total Share Capital and Retained Earnings P2,025,000
Less: Treasury-Preference, 250 shares at cost 30,000
BOOK VALUE PER SHARE
Book Value Per Share
The amount that would be paid on

each share if the company is
liquidated  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.

Illustration
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
shares as to the distribution of assets upon corporate
liquidation.
 The preference shareholders’ have the right to receive assets
equal to the par value or a larger stated liquidation value per
share.
 Liquidation value is the cash price or other consideration that
can be received in a forced sale of assets such as that
occurring when a firm is in the process of going out of
business. Financial Accounting and Reporting – Retained Earnings
When both preference and ordinary shares are outstanding -
 The liquidation value is less than what could be received from
selling assets in the ordinary course of business.
 The book value per share of a preference shares is the sum of its
liquidation value, if applicable, plus any current and dividends in
arrears divided by the number of ordinary shares outstanding.
 Ordinary shareholders’ equity is obtained by deducting from total
shareholders’ equity the preference shareholders’ equity.
 The book value per share of the ordinary shares is computed by
dividing the ordinary shareholders’ equity by the number of ordinary
shares outstanding.
Illustration
Roberto D. Gonzales AdMark, Inc. is one of the leading firms doing highly
creative tri-media product exposures in Metro Manila and Calabarzon. The
shareholders’ equity section of the statement of financial position is as follows:
6% Cumulative Non-participating Preference Shares, P1,000 par,
P 400,000
5,000 shares authorized, 400 shares issued and outstanding
Ordinary Shares, P100 par, 20,000 shares authorized, 5,500 shares
550,000
Share Premium—Preference 40,000
Share Premium—Ordinary 720,000

Illustration
Suppose that the preference shares has a liquidation value of P1,300 and
dividends are in arrears for three years. The computation of the preference
book value per share follows:
Preference Shares:
Liquidation Value, P1,300 x 400 shares P520,000
Dividends in Arrears, 6% x P400,000 x 3 years 72,000
Current Dividends, 6% x P400,000 24,000
Preference Shareholders’ Equity P616,000
Book Value per Share, P616,000 / 400 shares Financial Accounting and Reporting – RetainedP1,540
Earnings
Illustration
The ordinary book value per share is obtained as follows:
Ordinary Shares:
Less: Preference Shareholders’ Equity 616,000
Ordinary Shareholders’ Equity P1,944,000
Book Value per Share, P1,944,000 / 5,500 shares P353.45

Thank You! 
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ACCOUNTING FOR

 Retained earnings account – is credited with the

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

The entries to be record the dividend declaration and payment

Retained Earnings 1,116,000

(P12 per share (100,000 issued shares – 7,000 treasury shares)

The entries to be record the dividend declaration and payment

Cash Dividends Payable 1,116,000

Financial Accounting and Reporting – Retained Earnings

Fair value of the assets

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

Retained Earnings 950,000

Property Dividends Payable 950,000

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

Ordinary shares, P50 par, 20,000 shares

Total share capital P1,200,000

Retained earnings 650,000

Total Shareholders’ Equity P1,850,000

Retained Earnings 220,000

Share Distributable 100,000

Before After Increase

Retained earnings 200,000

Shares Distributable 200,000

Before After Increase

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

Financial Accounting and Reporting – Retained Earnings

 Spread the shareholders base

 To benefit existing shareholders

Financial Accounting and Reporting – Retained Earnings

The International School of Business

Financial Accounting and Reporting – Retained Earnings

Ordinary Shares - - Increase (b) Increase (b) -

Share Premium - - Increase (c) - -

Total Shareholders’ Equity Decrease - - - -

Total Liabilities Increase Decrease - - -

Shares Outstanding - - Increase Increase Increase

Preference 1 Non-Cumulative and Non-Participating

Financial Accounting and Reporting – Retained Earnings

Non-Cumulative Preference Shares

Financial Accounting and Reporting – Retained Earnings

Cumulative Preference Shares

Financial Accounting and Reporting – Retained Earnings

Non-Participating Preference Shares

Financial Accounting and Reporting – Retained Earnings

Participating Preference Shares

Financial Accounting and Reporting – Retained Earnings

12% Preference shares, P100 par, authorized 4,000 shares,

Case 1. Non-cumulative and Non-participating Preference Shares

Outstanding Share Capital P200,000 P300,000 P500,000

Current Preference Dividends:

Total P24,000 P176,000 P200,000

Dividends per Share P12.00 P58.67