Retained earnings

Retained earnings
Composed of the following:
a. Profit/Loss
b. Dividends
c. Prior period error
d. Changes in accounting policy
e. Retirement of preference shares in excess of original issue price
f. Loss on sale of treasury shares in excess of share premium from
treasury shares
g. Loss on retirement of treasury shares in excess of share premium
from original issuance and share premium from treasury shares
Kinds of retained earnings
a. Unappropriated retained earnings – portion which is free and can
be declared as dividends to shareholders

b. Appropriated retained earnings – portion which has been restricted

and therefore not available for any dividend declaration.
Dividends
-are distributions of earnings or capital to the shareholders in
proportion to their shareholdings. Dividends are broadly classified into:

a. Dividends out of earnings

b. Dividends out of capital
Dividends out of earnings
- these are dividends declared only from retained earnings.

3 essential dates for accounting purposes:

a. Date of declaration – date on which the directors authorize the

payment of dividends to shareholders
b. Date of record – only shareholders registered on such date are
entitled to receive dividends
c. Date of payment – date on which the dividend liability is to be paid
Example:

The Board of Directors at their meeting on December 2021 declared a

dividend of P5 per share, payable March 31, 2022, to shareholders of
record on January 31, 2022.

Date of declaration December 31, 2021

Date of record January 31, 2022
Date of payment March 31, 2022
Dividends out of earnings
Usual dividends out of earnings:

a. Cash dividends
b. Property dividends
c. Liability dividends in the form of bond and scrip
d. Share dividends or bonus issue
Cash dividends
-are the most common type of dividends
-it may be expressed as a certain amount of pesos per share, or certain
precent of the par or stated value
Exercise 1
On Sept 8, 2022, the Board of Directors of Nikon Co. declared a
dividend of P5 per share, payable on December 8, 2022, to
shareholders of record on November 8, 2022. The Company had 50,000
shares issued and outstanding with par value of P100.

Prepare the journal entries

Exercise 1
Answer:
9/8/2022 Retained earnings 250,000
Dividends payable 250,000

11/8/2022 No entry

12/8/2022 Dividends payable 250,000

Cash 250,000
Property dividends
-are distribution of earnings in form of noncash assets

Measurement
-dividend payable should be measured at fair value of the asset
to be distribution
-increased or decreased as a result of fair value changes of the
asset shall be recognized in equity as an adjustment to the
retained earnings
Property dividends

Settlement
-when an 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 profit or loss

Measurement of noncash asset distributed

-an entity shall measure a noncurrent asset classified for
distribution at the lower of carrying amount and fair value less cost to
distribute.
Exercise 2
TDS Co. owned 10,000 shares of another entity accounted for under the cost
method. The carrying amount of the investment is P500,000.

On December 8, 2022, the entity declared these shares as property dividend to be

distributed on January 8, 2022.

The investment had the following fair value less cost to distribute:

December 8, 2022 600,000

December 31, 2022 750,000
January 8, 2023 830,000

Prepare the journal entries.

Exercise 2
12/8/2022 Retained earnings 600,000
Dividends payable 600,000

12/31/2022 Retained earnings 150,000

Dividends payable 150,000

No impairment on investment amount as fair value is higher than cost.

01/8/2022 Retained earnings 80,000

Dividends payable 80,000

Dividends payable 830,000

Investment in equity shares 500,000
Gain on distribution of property div 330,000
Exercise 3
On October 8, 2022, VPA Co. an entity declared a property dividend of
transportation equipment payable on February 8, 2023.

The carrying amount of the equipment is P1,000,000 and the fair value is P800,000
on October 8, 2022

However, the fair value less cost to distribute the equipment is P700,000 on
December 31, 2022, and P650,000 on February 8, 2023.

Prepare the journal entries.

Exercise 3
Answer:
10/8/2022 Retained earnings 800,000
Dividend payable 800,000

12/31/2022 Dividend payable 100,000

R/E 100,000

Impairment loss 300,000

Equipment 300,000

2/8/2022 Dividend payable 50,000

R/E 50,000

Dividend payable 650,000

Loss on distribution of property div 50,000
Equipment 700,000
Choice of either noncash or cash
• If an entity gives its owners a choice of either a noncash asset or a
cash 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.
Exercise 4
On December 31, 2022, TBA co 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 fair value less
cost to distribute of P3,000,000. On March 31, 2022, the fair value of the inventory amounted to P3,300,000

The entity estimated that 70% of the shareholders shall take option of the cash dividend and 30% shall elect the
noncash assets.

Requirement:
1. How much will you recognize as dividend payable?
2. If the shareholders chose the cash alternative, how much will be the dividend payment?
3. If the shareholders chose the noncash alternative, how much will be the dividend payment?
4. Prepare the journal entries.
Exercise 4
a.
Cash alternative (70% * 2,000,000) 1,400,000
Noncash alternative (30% * 3,000,000) 900,000
Dividend payable 2,300,000

Entries:
12/31 Retained earnings 2,300,000
Dividends payable 2,300,000

b.
Dividends payable 2,300,000
Cash 2,000,000
R/E 300,000
Exercise 4
c.

Retained earnings 1,000,000

Dividends payable 1,000,000
(to adj the fair value of the inventory)

Dividends payable 3,300,000

Inventory 2,500,000
Gain on distribution of prop div 800,000
Scrip dividends and Bond dividends

• Scrip dividends – is like a note which is a formal evidence of the

indebtedness to pay a sum of money at some future time.
• Bond dividend – the company will issue bonds in payment of the
dividends
Exercise 5
Red Co. declared the following dividends:

June 1, 2022 – Scrip dividends in the amount of 300,000 payable in

December 31, 2022, at 10% interest

July 1, 2022 – Bond dividends amounting to P1,000,000 payable in

entity’s own bonds, 10% interest payable annually. The bonds mature in
three years.

Prepare the journal entries.

Exercise 5
6/1/2022 Retained earnings 300,000
Scrip dividends payable 300,000

7/1/2022 Retained earnings 1,000,000

Bond dividends payable 1,000,000

12/31/2022 Scrip dividends payable 300,000

Interest expense (300,000 * 10% * 7/12) 17,500 Cash 317,500
(redemption of scrip dividends)

Interest expense (1M * 10% * 6/12) 50,000

Cash 50,000
(bonds periodic interest)

07/1/2025 Bonds payable 1,000,000

Cash 1,000,000
(redemption of bonds on maturity)
Share dividend
• These are distributions of the earnings of the entity in the form of the
entity’s own shares.
• When share dividends are declared, the retained earnings of the
entity are in effect capitalized, meaning transferred to capital.
• In short, it increases the share capital, and decreases the retained
earnings.
How much of the retained earnings
should be capitalized?
Guidance from local GAAP:

• If the share dividend is less than 20%, it is the fair value of shares on the
date of declaration. However, the FV must not be lower than par or stated
value, otherwise, the amount debited to retained earnings is equal to par
or stated value.
• If the share dividend is 20% or more, the par or stated value is capitalized
is because this is conceived to materially effect a reduction in the share
market value.
Exercise 6
On June 1, 2022, PJ Co. has the following equity information:

Share capital, P100 par, 20,000 shares authorized,

10,000 shares issued and outstanding 1,000,000
Share premium 500,000
Retained earnings 500,000

On November 8, 2022, the Company declared share dividend to be issued on December 8,

2022. The market value of the shares on November 8 is P150.

Prepare the following entries:

a. The Company declared a 20% share dividend
b. The Company declared a 10% share dividend
Exercise 6
a.
11/8/2022 Retained earnings 200,000
Share dividend payable 200,000

12/8/2022 Share dividend payable 200,000

Share capital 200,000

b.
11/8/2022 Retained earnings 150,000
Share dividends payable 100,000
Share premium 50,000

12/8/2022 Share dividends payable 100,000

Share capital 100,000
Exercise 7
On June 1, 2022, Tim Co. has the following equity information:

Share capital, P100 par, 10,000 shares issued 1,000,000

Full shares issued 4,000 shares
Fractional shares issued 1,000 shares

On November 8, 2022, the Company declared a 50% share dividends, to be issued on

December 8, 2022.

Prepare the journal entries.

Exercise 7
11/8/2022 Retained earnings (5,000 * 100) 500,000
Share dividends payable 500,000

12/8/2022 Share dividends payable 500,000

Share capital (4,000 * 100) 400,000
Fractional warrants outstanding 100,000

Note:
• Share dividends payable is not a liability account, it is an addition to share capital
• Fractional warrants outstanding is part of share premium. If unexercised, shall be transferred to share
premium
Exercise 8
BAZ Co. distributed as share dividend 5,000 treasury shares with cost of P500,000 and market
value of P600,000.

How much is the amount to be declared as dividends?

Answer:
P500,000
Treasury shares declared as dividends shall always be measured at cost of the treasury shares
Dividends out of Capital
-this happens when the capital is returned to shareholders
-also known as liquidating dividends
-this is paid to shareholders when the company is dissolved and liquidated
-during the lifetime of the entity, it is illegal to return capital to the
shareholders in conformance with the trust fund doctrine
-exceptions: wasting asset corporations