Partnership and Corporation Accounting

Shareholder’s Equity Part 2

RETAINED EARNINGS – Accumulated profits and losses that have not been declared
as dividends. Classified into retained earnings that are prohibited from being declared as
dividends due to legal and contractual requirements or upon the decision of the Board of
Directors, “appropriated” and retained earnings available as dividends to shareholders,
“unappropriated”.

Total retained earnings are both appropriated and unappropriated. Once an appropriation
is required, for example treasury shares are acquired or bonds payable are issued with
a contractual provision to appropriate retained earnings is necessary, a transfer from
unappropriated retained earnings to appropriated retained earnings is required. But as
soon as the appropriation has served its purpose, for example the treasury shares have
been issued or the bonds payable have been retired, the appropriation is cancelled by
transferring the appropriated retained earnings to unappropriated retained earnings.

The following transactions also affect retained earnings:

1. Increases – Effect of changes in accounting policy and correction of prior period errors,
Net Income , Quasi re-organization and the realization of OCI items specially “revaluation
surplus”.

2. Decreases - Effect of changes in accounting policy and correction of prior period errors,
Dividends, Losses on share transactions like retirement and reissuance of treasury
shares, conversion of preference shares and recapitalization of par value other than
share splits and the realization of OCI items except revaluation surplus.

DIVIDENDS are the distribution of earnings of an entity. The dividends may be in the form
of cash, property or noncash assets and stocks. Dividends are only deducted from
retained earnings and recognized as a liability (except for stock dividends) at the date of
declaration or when a formal announcement is made by the corporation’s board of
directors. The following measurement of deduction from retained earnings is as follows:

a. Cash dividends is the most common type of dividends, if the cash dividends are to be
paid over a long-term period they are what is known as script dividends and a note
payable or bonds payable will be issued. The amount of dividends to be paid and
deduction from retained earnings is as follow:
• Ordinary shares – Number of outstanding ordinary shares multiplied by dividend
per share.
• Preference share – Outstanding par value multiplied by dividend rate. All
dividends in arrears must be settled in order for ordinary shares to receive any
dividends.

b. Property dividends are now covered by IFRIC 17 (Distributions of Non-Cash Assets to

Owners) where the liability to distribute non-cash assets as a dividend is measured at the
fair value of the non-cash assets to be distributed.
The liability for distributions in which the owner has a choice of taking cash in lieu of a
non-cash asset is estimated by considering both the fair value of each alternative and
the associated probability of selecting the alternative.
In both cases, the liability is remeasured at each reporting date and at settlement to fair
value less cost of distribution with changes recognized directly in equity by adjusting
retained earnings.

When the property dividend declared is a non-current asset (ex. property, plant and
equipment), aside from the remeasurement of the liability with the corresponding
adjustment to retained earnings at balance sheet date. The assets shall also be written
down to fair value less cost to distribute since it is now an asset held for distribution.

c. Stock dividends shall be debited from retained earnings following the guidelines below:
• Small stock dividends (less than 20%) – Fair value of the shares unless the fair value is
below the par or stated value. The transaction is recorded as follows:
Retained Earnings xxx
Share Dividends Distributable (at par value) xxx
Share premium (Excess of FV over PV) xxx

Take note that the account credited is share dividends distributable for the par value which
is also included in shareholders’ equity. The same will be done if the account credited is
stock dividends payable.
• Large stock dividends (20% or more) – Par or stated value of shares declared.
• Treasury shares as stock dividends are recorded at cost.

SHARE SPLITS are applied by an entity in part to recapitalize or change the par value of
each share by recalling all issued shares then cancelling all the corporations’ authorized
shares and issuing either more (split up) or less (split down) shares. The main purpose
of a share split is to either increase (split down) or decrease (split up) the market value
each share because after the share split, each share will now have a higher ownership
interest (split down) or lower ownership interest (split up) in the corporation. No formal
journal entry is needed for a share split because the total par value of the issued shares
will be the same before and after the share split.

OTHER COMPREHENSIVE INCOME - Comprises items of income and expense

(including reclassification adjustments) that are not recognized in profit or loss as
required or permitted by other IFRSs.
1. Unrealized gain or loss on financial assets at fair value through OCI (PFRS 9)
2. Unrealized gain or loss on derivatives as cash flow hedges (PFRS 9)
3. Revaluation surplus on Property, plant and equipment and Intangible Assets under the
Revaluation Model (PAS 16)
4. Remeasurement gains and losses on defined benefit plans (PAS 19)
5. Foreign currency translation gains and losses (PAS 21)
6. Gains and losses arising from credit risk on changes in Fair Value of Financial Liabilities
At FVPL (PFRS 9)
ILLUSTRATIVE EXAMPLES

Illustrative Problem #1 (Outstanding Shares Computation). Google Company was

incorporated on January 1, 2026.

On December 31, 2026, what is the number of shares outstanding? 110,000

Illustrative Problem #2 (Distribution of Cash Dividend). Ninja Company declared

P7,200,000 cash dividends to its preference and ordinary shareholders out of its profit in
2023. No dividends have been declared since 2021. Ninja Company shareholders’ equity
immediately before dividend declaration is as follows:

Answer:
Preference Ordinary
Non-Cumulative, Non-Participating 800,000 6,400,000
Cumulative, Non-Participating 2,400,000 4,800,000
Non-Cumulative, Participating 1,440,000 5,760,000
Cumulative, Participating 2,720,000 4,480,000
Cumulative, Participating up to 16% 2,720,000 4,480,000

Illustrative Problem #3 (Distribution of Property Dividend)

Ana Company, a real estate developer, is owned by five founding shareholders.
On December 1, 2016, the entity declared a property dividend of a “one-bedroom flat” for
each shareholder. The property dividend is payable on January 31, 2017.
On December 1, 2016, the carrying amount of the flat was P1,000,000 and the fair value
is P1,500,000. However, the fair value is P1,800,000 on December 31, 2016, and
P1,900,000 on January 31, 2017.

Dividend payable on December 1, 2016? 7,500,000

Dividend Payable on December 31, 2016? 9,000,000
Amount of gain as a result of settlement on December 31, 2017? 4,500,000

Illustrative Problem #4 (Distribution of Property Dividend)

On November 1, 2016, Good Looking Company declared a property dividend of
equipment payable on March 1, 2017. The carrying amount of the equipment is
P3,000,000 and the fair value is P2,500,000 on November 1, 2016. However, the fair
value less cost to distribute the equipment is P2,200,000 on December 31, 2016, and
P2,000,000 on March 1, 2017.
Dividend payable on December 31, 2016? 2,200,000
Measurement of the equipment on December 31, 2016? 2,200,000
Loss on distribution of property dividend is recognized on December 31, 2017?
Loss of 200,000

Illustrative Problem #5 (Distribution of Share Dividend)

At the beginning of the current year, Edith Company declared a 10% stock dividend. The
market price of the entity’s 30,000 outstanding shares of P20 par value was P90 per
share on that date.

The stock dividend was distributed on July 1, when the market price was P100 per share.
What amount should be credited to share premium for the stock dividend?
210,000

Illustrative Problem #6 (Distribution of Share Dividend)

At the current year end, Nice Company issued 4,000 ordinary shares of P100 par value
in connection with a stock dividend. The market value per share on the date of declaration
was P150. The shareholders’ equity accounts immediately before issuance of the stock
dividend shares were as follows:

What amount should be debited to RE immediately after the stock dividend? 400,000

Illustrative Problem #7 (Distribution of Share Dividend)

Ninja Company declared a 5% stock dividend on 100,000 issued and outstanding shares
of P20 par value, which had a fair value of P50 per share before the stock dividend was
declared. The stock dividend was distributed 60 days after the declaration date.
What is the increase in current liabilities as a result of the stock dividend decalaration? 0.

Illustrative Problem #8 (Share Split)

During the current year, Vin Company declared a 1 for 5 reverse share splits, when the
market value of the share was P100. Prior to the split, the entity had 100,000 shares of
P10 par value issues and outstanding.
After the split, what is the par value of the share? 50

Illustrative Problem #9 (Share Split)

The shareholders of Lil Peace Company approved a 2 for 1 split of the entity’s share
capital and an increase in authorized shares from 100,000 shares with P20 par value to
200,000 shares with P10 par value. The shareholders’ equity accounts immediately
before the split shares were:
What is the balance of the share premium after the share split is effected? 150,000.
What is the balance of the retained earnings after the share split is effected? 1,350,000.

TAKE HOME EXERCISES

1. ABC, Inc. has 1,000 shares of 4%, P100 par value, cumulative preferred stock and
50,000 shares of P1 par value common stock outstanding at December 31, 20x2. What
is the annual dividend on the preferred stock?
a. P40 per share
b. P4,000 in total
c. P400 in total
d. P.40 per share

2. Agler, Inc. has 10,000 shares of 6%, P100 par value, cumulative preferred stock and
100,000 shares of P1 par value common stock outstanding at December 31, 20x2. If the
board of directors declares a P50,000 dividend, the
a. preferred shareholders will receive 1/10th of what the common shareholders will
receive.
b. preferred shareholders will receive the entire P50,000.
c. P50,000 will be held as restricted retained earnings and paid out at some future date.
d. preferred shareholders will receive P25,000 and the common shareholders will receive
P25,000.

3. Manner, Inc. has 5,000 shares of 6%, P100 par value, noncumulative preferred stock
and 20,000 shares of P1 par value common stock outstanding at December 31, 20x2.
There were no dividends declared in 20x1. The board of directors declares and pays a
P55,000 dividend in 20x2. What is the amount of dividends received by the common
stockholders in 20x2?
a. P0
b. P30,000
c. P55,000
d. P25,000

4. Lopez, Inc. has 2,000 shares of 6%, P50 par value, cumulative preferred stock and
50,000 shares of P1 par value common stock outstanding at December 31, 20x1, and
December 31, 20x2. The board of directors declared and paid a P4,000 dividend in 20x1.
In 20x2, P20,000 of dividends are declared and paid. What are the dividends received
by the preferred and common shareholders in 20x2?
Preferred Common
a. P12,000 P8,000
b. P10,000 P10,000
c. P8,000 P12,000
d. P6,000 P14,000
5. The board of directors must assign a per share value to a stock dividend declared that
is
a. greater than the par or stated value.
b. less than the par or stated value.
c. equal to the par or stated value.
d. at least equal to the par or stated value.

6. Corporations generally issue stock dividends in order to

a. increase the market price per share.
b. exceed stockholders' dividend expectations.
c. increase the marketability of the stock.
d. decrease the amount of capital in the corporation.

7. A stockholder who receives a stock dividend would

a. expect the market price per share to increase.
b. own more shares of stock.
c. expect retained earnings to increase.
d. expect the par value of the stock to change.

8. When stock dividends are distributed,

a. Common Stock Dividends Distributable is decreased.
b. Retained Earnings is decreased.
c. Paid-in Capital in Excess of Par Value is debited if it is a small stock dividend.
d. no entry is necessary if it is a large stock dividend.

9. A small stock dividend is defined as

a. less than 30% but greater than 25% of the corporation's issued stock.
b. between 50% and 100% of the corporation's issued stock.
c. more than 30% of the corporation's issued stock.
d. less than 20–25% of the corporation's issued stock.

10. The per share amount normally assigned by the board of directors to a large stock
dividend is
a. the market value of the stock on the date of declaration.
b. the average price paid by stockholders on outstanding shares.
c. the par or stated value of the stock.
d. zero.