RETAINED EARNINGS

Dividends

by: MCL | CPA | MSA

At the end of the lesson, you should be able to:

• Identify different transactions affecting Retained

Earnings

• Recognize and measure the different forms of

dividends
 Retained Earnings
Represent the cumulative balance of the following:
Reclassifications of some components
Net income or loss for the of other comprehensive income
period
Retirement of preference shares in
excess of the original issue price
Dividend distributions
Loss on sale of treasury shares in excess of
share premium from treasury shares
Prior period errors
Loss on retirement of treasury shares in
Changes in accounting policy excess of share premium from the
original issuance and share premium
from treasury shares
Kinds of Retained Earnings

Appropriated Unappropriated

Free and can be Restricted and can

declared as dividends NOT be declared as
dividends
 DIVIDENDS
Distributions of earnings or capital to the
shareholders in proportion to their
shareholdings

Classification of dividends:

• Dividends out of earnings (return on capital)

• Dividends out of capital (return of capital)
 DIVIDENDS
3 Important Dates:
Retained Earnings xx
• Date of declaration Dividends Payable xx

• Date of record No Journal Entry

Dividends Payable xx
• Date of payment Cash/OAA xx
 Recognition of Dividend
Liability to pay dividends shall be recognized when
the dividend is appropriately authorized and is no
longer the discretion of the entity, which is the date:

• When the dividend is declared by management or BOD

(if further approval is by local jurisdiction is NOT required)

• When the declaration of dividend by management or

BOD is approved by the relevant authority (if further
approval by local jurisdiction is required)
 Forms of Dividends Out of Earnings

Liability
Share
Cash Property Dividends in
dividends or
Dividends Dividends the form of
bonus issue
Bond and Scrip
 Cash Dividends
- Normally implies distribution of cash
- It can be expressed as:
• A certain amount of pesos per share
• A certain percent of the par or stated value
Cash Dividends: Illustration

Proceed to the excel file to answer…

 Property Dividends
• Dividends in kind
• Distributions of earnings to the shareholders in
the form of non-cash assets
• Distributions of non-cash assets to owners
 Property Dividends
Two accounting issues:
* Measurement of the property dividends payable
(Liability)

* Measurement of the noncash asset to be distributed as

property dividend (Asset)
Measurement of Property Dividends Payable
A liability to distribute a non-cash asset as a dividend to its
owners shall be measured at the fair value of the asset to be
distributed. (IFRIC 17)

Such liability shall be reviewed at the end of each reporting

period and at the date of settlement and shall be adjusted to
conform with the prevailing fair value of the asset to be
distributed.

Any changes in the fair value of the non-cash asset to be

distributed shall be recognized in equity as an adjustment to the
amount of distribution thru the Retained Earnings account.
Settlement of Property Dividend Payable
When the entity settles the dividend payable, the difference
between the carrying amount of the dividend payable and
the carrying amount of the asset distributed shall be
recognized in the profit or loss.

Carrying Amount of Dividend Payable xx

Less: Carrying amount of non-cash asset xx
Gain or loss distribution of property dividend xx
To be reported in the Profit or
Loss Statement
Measurement of Non-Cash Asset Distributed
- Non-cash assets for distribution shall be measured at
lower of carrying amount and fair value less cost to
distribute

- If fair value less cost to distribute is lower than the

carrying amount, then recognized Impairment Loss
Property Dividends: Illustration

Proceed to the excel file to answer…

 Choice of Either Noncash or Cash
If the entity gives its owners a choice of either a non-cash
asset or a cash asset alternative, the entity shall estimate
the dividend payable by considering both the fair value of
each alternative and the associated probabilities of owners
selecting each alternative.

Adjust the dividend payable based on the alternative chosen

thru equity or retained earnings at the end of each reporting
period and at the settlement date.
Choice of Either Noncash or Cash: Illustration
Illustration:
On December 31, 2021, an entity declared dividends on ordinary shares payable
on March 31, 2022.

The entity decided to give the shareholders a choice between a total cash
dividend of P2,000,000 or a property dividend in the form of noncash asset from
the inventory with carrying amount of P2,500,000 and a fair value less cost to
distribute of P3,000,000.

The entity estimated that 70% of the shareholders shall take the option of the
cash dividend and 30% shall elect the non cash asset.
Choice of Either Noncash or Cash: Illustration
If there is a choice of cash dividend or a noncash asset as property dividend, the
entity shall estimate the dividend payable by considering all associated
probabilities.

cash alternative (70% x P2M) P1,400,000

non-cash alternative (30% x P3M) 900,000
Dividend payable P2,300,000

The declaration of the dividend is recognized on December 31, 2021.

Retained Earnings 2,300,000

Dividends Payable 2,300,000
Choice of Either Noncash or Cash: Illustration
If the shareholders have chosen the cash alternative, the payment of the
dividend on March 31, 2022 is recognized as:

Dividends Payable 2,300,000

Cash 2,000,000
Retained earnings 300,000
Choice of Either Noncash or Cash: Illustration
Assume the shareholders have chosen the noncash alternative and the fair value
of the inventory remained at P3,000,000 on March 31, 2022:
To record increase in dividends payable: (3M-2.3M)

Retained Earnings 700,000

Dividends Payable 700,000

To record distribution of property dividends:

Dividends Payable 3,000,000
Inventory 2,500,000
Gain on distribution of property dividend 500,000
Choice of Either Noncash or Cash: Illustration
Assume the shareholders have chosen the noncash alternative and the fair value
of the inventory is P3,300,000 on March 31, 2022:
To record increase in dividends payable: (3.3M-2.3M)

Retained Earnings 1,000,000

Dividends Payable 1,000,000

To record distribution of property dividends:

Dividends Payable 3,300,000
Inventory 2,500,000
Gain on distribution of property dividend 800,000
 Scrip Dividend
Illustration:

Scrip dividends are declared in the amount of P200,000 payable in six months at
12% interest. The journal entry on the date of declaration is:
Retained Earnings 200,000
Scrip Dividends Payable 200,000

When scrip dividends are redeemed, the journal entry is:

Scrip Dividends Payable 200,000

Interest expense (200,000 x 12% x 6/12) 12,000
Cash 212,000
 Bond Dividend
Dividends are declared in the amount of P1,000,000 payable in entity’s own bonds, 12% interest
payable annually, P1,000,000 face amount. The bonds mature in five years.

1. To record the declaration of bond dividends.

Retained Earnings 1,000,000
Bond Dividends Payable 1,000,000

2. To record the issuance of the bonds in payment for the dividends.

Bond Dividends Payable 1,000,000
Bonds Payable 1,000,000
3. To record the payment of interest on the bonds.
Interest expense (1M x 12%) 120,000
Cash 120,000
4. To record the redemption of bonds on maturity date.
Bonds payable 1,000,000
Cash 1,000,000
 Share Dividend
- bonus issue
- distribution of earnings of the entity in the form of the entity’s own shares.
- when declared, retained earnings are capitalized which means transferred to
share capital
- no changes on the assets of the entity before and after the issuance of share
dividends.
- its effect is a decrease in Retained Earnings and Increase in Share Capital
- can be ordinary share dividends or special share dividends
 Share Dividend: Small or Large?
Small Share Dividends – if it is less than 20% - RE is charged
at fair value on the date of declaration

Large Share Dividends – if it is 20% or more – RE is charged

at the par or stated value
 Illustration
Share Capital, P100 par, 20,000 shares authorized,
10,000 shares issued and outstanding P1,000,000
Share premium 500,000
Retained earnings 500,000
The entity declared a 20% share dividends or 2 share for every 10 shares held,
or a total of 2,000 shares as share dividend (20% x 10,000 shares issued and
outstanding).
Journal entries:
Retained earnings (2,000 shares x P100) 200,000
Share dividends payable 200,000

Share dividends payable 200,000

Share capital 200,000
 Illustration
Share Capital, P100 par, 10,000 shares issued P1,000,000
Share premium 500,000
Retained earnings 750,000
If a 10% share dividend is declared and the market value of the share is P150,
the journal entries shall be:

Retained earnings (1,000 shares x P150) 150,000

Share dividends payable 100,000
Share premium 50,000

Share dividends payable 100,000

Share capital 100,000
 Fractional Share Dividends
- when share dividends are issued, it is impossible to issue full shares to all of the
shareholders.
- example: if 10% share dividend is declared and the shareholder only owns 45
shares, he/she shall be entitled to receive 4 full shares and a fractional one-half
share.
- no accounting problem for the issuance of the full shares but with respect to
the fractional shares, the following steps may be taken:

1. The entity may issue warrants for the fractional shares and give the holders
enough time to accumulate sufficient warrants for a full share.
2. The entity may pay cash in lieu of fractional shares. (which is only applicable
when the source of the dividends is RE and not share premium)
 Illustration
Share capital, P100 par, 10,000 shares issued P1,000,000
Share dividends declared 50%
Full shares issued 4,000 shares
Fractional shares issued 1,000 shares

a. When the share dividends are declared:

Retained earnings (5,000 x P100) P500,000
Share dividend payable P500,000
b. When the full share dividends and fractional share dividends are issued:
Share dividends payable P500,000
Share capital (4,000 x P100) P400,000
Fractional share warrants outstanding* 100,000

*part of Share Premium

 Treasury shares as share dividends
-treasury shares may be reissued as dividends
-when done the cost of the treasury shares shall be charged to Retained
Earnings
-declaration of treasury shares as dividend is termed as Property Dividend under
the Philippine Corporation Code
-But considering that treasury share is a component of the shareholder’s equity
and not a financial asset, it is believed that it shall be accounted as Share
Dividend rather than a Property Dividend
 Illustration
An entity distributed as share dividend 1,000 treasury shares with cost of
P100,000 and market value of P120,000.

a. To record the declaration.

Retained earnings 100,000

Share dividends payable 100,000

b. To record the issuance of the treasury shares.

Share dividends payable 100,000

Treasury shares 100,000
 Special Case on Share Dividend
1. When shareholders may elect to receive cash in lieu of share dividend, the
amount to be charged to RE is equivalent to the optional cash dividend.

2. In cases where share dividends are declared on the basis of a proposed

increase in authorized share capital, the application for which has been filed
but not yet approved by SEC at the end of the reporting period, the proposed
increase and such dividend declaration shall NOT be reflected in the
statement of financial position prior to SEC approval but can just be
disclosed in the notes to FS.

If the proposed increased was approved by SEC after the end of the reporting period
and share dividends are subsequently affected before the release of the statements,
the new authorized share capital may be presented and the share dividend may be
shown as part of issued share capital. But a disclosure is necessary.
 Special Case on Share Dividend
3. In closely held entities, if share dividends are declared, retained earnings shall
be capitalized only to the extent of par value or stated value of the shares
regardless of the percentage of the share dividends.
 Dividends out of capital
-liquidating dividends
-capital is returned to the shareholders
-only paid when the entity is dissolved and liquidated
-trust fund doctrine
-wasting asset doctrine
 Illustration
The following accounts appear in the statement of financial position of a
wasting asset entity at year-end:

Resource property P10,000,000

Accumulated depletion 2,000,000
Retained earnings 3,000,000

The maximum dividends that may be declared would be P5,000,000. If the

maximum amount is declared, the journal entry is:
Retained earnings 3,000,000
Capital liquidated* 2,000,000
Dividends payable 5,000,000

*deduction from total SHE

 Dividends as Expense
-dividends out of earnings are charged to RE

-but distributions to holders of equity instruments classified as a financial

liability (example: redeemable preference share) are recognized in the same way
as interest expense on a bond (presented in the income statement either with
interest on other liabilities or as a separate line item).
End