RETAINED

EARNINGS
  RETAINED EARNINGS
 Represents the component of the shareholders’ equity arising from the retention of assets
generated from the profit-directed activities of the corporation.

RETAINED EARNINGS Income summary xxx

Beg. Balance Retained earnings xxx
Retained earnings xxx
Dividend payable xxx Net losses Net income
Dividends +/- Prior period errors
+/- Change in
accounting policy
Ending balance
  DIVIDENDS
 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 are called dividends.
Dividend declarations reduce retained earnings.

Date of Date of Date of

declaration recording payment

BOD declares and Date where recording of Actual payment or

authorizes who distribution
payment of dividends are entitled of dividends

OUTSTANDING SHARES = Issued shares + subscribed shares – treasury shares

 4 TYPES OF DIVIDENDS

1.) Cash Dividends

 Most common
 Usually express on per share basis

o Journal entry.
DECLARATION: Retained Earnings xxx
Cash dividend payable (current liab)
xxx

PAYMENT: Cash dividend payable xxx

Cash
xxx
Illustrative example. (Cash dividend)
On April 1, 2025, the board of directors of Jenna Corp. declared P50 dividends per share to shareholders of
record as of April 15, 2025 for distribution on May 1, 2025 The shareholders’ equity of Pinnacle as of April 1,
2025 is as follows:

Share capital, authorized capital 100,000 shares, P100 par P800,000

Subscribed share capital
220,000
Share premium
100,000
Retained earnings 454,000
Treasury shares (at cost of P120 per share) (144,000)
Other components of equity 70,000
Total shareholders’ equity P1,500,000
Declaration:
Solutions:
April 1 Retained Earnings 450,000
Requirement: Prepare the journal entries to record the above transactions.
Issued shares(800k/100)
Cash dividend payable 450,000
8,000
Subscribed (220k/100)
2,200 Record date:
Apr. 15 no entry
Treasury(144,000/120)
(1,200)
Date shares
Outstanding of payment:
May 1 Cash dividend payable 450,000
9,000
Dividend per share cash 450,000
50
Dividends
450,000
 2.) Property Dividends
 Distributes non-cash asset Mark to market at:
o Journal entry Declaration
Retained earnings xxx
Property dividend payable Year-end xxx
@Fair value

Payment

Note: Net effect to Retained earning under property dividends is equal to CA of property
 Illustrative example. (property dividend)
On July 1, 2025, Avatar Corp. declared as property dividends 10,000 shares held as
investment in associate with carrying amount of P1,000,000. Information on fair
values is shown below:

Date Fair value

July 1, 2025 P800,000
Dec. 31, 2025 1,100,000
Feb. 1, 2026 950,000

The property dividends are distributed on February 1, 2026.

Journal entries:
Requirement: Prepare the journal entries to record the above transactions.
Date of declaration: July 1. Retained Earnings
800,000
Property dividend payable
800,000

Year-end: Dec. 31 Retained earnings

300,000
Property dividend payable
300,000

Payment: Feb 1. Retained Earnings

150,000
Property dividend payable
150,000
3.) Share Dividends

 Small dividends
 less than 20% of Outstanding shares
 @FV

 Large dividends
 At least 20% of outstanding shares
 @PAR Value
Illustrative example. (large and small share dividend)
CPA Corp. showed the following data:
Share capital, par value P100, 50,000 shares issued P5,000,000
Share premium 200,000
Retained earnings 2,000,000
Market value of share on declaration date 150
Market value of share on distribution date 170

Requirement: For each of the following, prepare journal entries on the date of declaration and date of payment:
1. A 20% share dividend is declared.
2. 2. A 10% share dividend is declared.

Outstanding shares: 50,000 shares

Small share dividend:
Large share dividend:
SDP : (50,000)(10%)x P150 par value = P750,000
SDP : (50,000)(20%)x P100 par value =
Journal entry:
P1,000,000
Declaration: Retained earnings P750,000
Journal entry:
Share dividend payable
Declaration: Retained earnings
P500,000
P1,000,000
Share premium
Share dividend payable
P250,000
P1,000,000
Payment: Share dividend payable
Payment: Share dividend payable
P500,000
P1,000,000
Share capital
Share capital
4.) Liquidating Dividends
 Basically In liquidating phase or bankruptcy of a corporation
o Liquidation priority payment
a. Creditors
b. Shareholders

Note: Capital liquidated is a contra equity account.

Illustrative example. (large and small share

dividend) Journal entry:
On December 31, 2025, BSA Corp. declared Date of declaration
P1,000,000 cash dividends to shareholders of Dec.31 Retained Earnings
record as of January 15, 2026 for distribution on 200,000
January 31, 2026. Since BSA is undergoing Capital liquidated
liquidation, 80% of the dividends declared are 800,000
liquidating dividends. Cash dividends payable
1,000,000
Requirement: Prepare the journal entries to record
the above transactions. Date of payment
Jan. 31 Cash dividends payable
1,000,000
cash
1,000,000
 TYPES OF RETAINED EARNINGS

Dividends (declare)

1.) Unappropriated /Unrestricted

yes

2.) Appropriated/ Restricted no

 Reasons
 Legal appropriation – (treasury shares)
 Contractual – (e.g. bonds)
• Protection of bondholders
 Voluntary
Examples
o business expansion
o Working capital (for everyday expenses of business)
o Contingencies
BOOK VALUE PER SHARE
 BOOK VALUE PER SHARE
 The amount to be recovered by shareholders per share during liquidation.

BASIC FORMULA :
BV PER SHARE = TOTAL SHAREHOLDER’S EQUITY
No. Of Ordinary shares

LIQUIDATION PROCESS (STEPS)

1.) Sell all NCA (Convert all to cash)
2.) Pay due to creditors
3.) Return Capital to Preference shares
o Liquidation value (if problem is silent @Par value)
o Unpaid dividends (Dividend in arrears)
4.) Return capital to ordinary shares
FEATURES OF PREFERENCE SHARES

1. Cumulative preference shares – Entitled to dividends in arrears

2. Non-cumulative – Entitled only to current year dividends.

3. Participating – Entitled to fixed rate dividends plus excess

 Pay Ordinary shares same as the rate in Preference shares.

4. Non-participating - Fixed rate dividends only

Note: If the problem is silent then the preferred shares is non-cumulative and non-

participating
Illustrative examples:
1) (One class of shares) Tiyanak Company’s year-end shareholders’ equity consists of the following:
Share capital, P10 par, 100,000 shares issued P1,000,000
Subscribed share capital 500,000
Share premium 370,000
Retained earnings
660,000
Revaluation surplus 140,000
Cumulative translation loss (100,000)
Treasury shares, at cost, 10,000 shares (70,000)
Total
P2,500,000

Requirement: Compute for the book value per share.

2.) (Two classes of shares) CPA Company’s year-end shareholders’ equity consists of the following:
Preference shares, 10% cumulative, P100 par, 20,000 shares P2,000,000
Ordinary share, P10 par, 100,000 shares issued 1,000,000
Retained earnings
820,000
Total
P3,820,000

Dividends are in arrears for three years.

Requirement: Compute for the book value per share for each class of shares.
3.) [Liquidation value] BSA Company reported the following capital balances on December 31,
2025:

Preference share capital, 12% 40,000 shares P50 par P2,000,000

Ordinary share capital, 100,000 shares P50 par 5,000,000
Share premium
2,000,000
Retained earnings
2,000,000

Assume that preference share has a liquidation price of 53 and dividends are in arrears for 3 years

Requirement: Calculate the book value per preference share and per ordinary share
EARNINGS PER SHARE
 EARNINGS PER SHARE
 Amount of income that each share earns
 Required for publicly listed entities
 Only applies to Ordinary shares
 It is used to measure performance Always current year
(Worth one year only)

 BASIC Income available to OS If cumulative

 Deduct whether declared or not
EPS
BEPS = Net income – Preferred dividends
# of outstanding shares If non cumulative
 Deduct only when declared
 Issued +subscribed – treasury shares
 If there are significant changes in number of years
o Use weighted average
 Stock dividends, stock splits
• Has retroactive effects
• It increases shares without consideration
 DILUTED EPS
 when there are dilutive securities
 Its goal is to show lowest possible EPS
 Apply AS IF APPROACH
 Should always be lower than BEPS

1) CONVERTIBLE PREFERENCE SHARES

o Assume that PS are converted to OS at start of the year
• Effect: Preferred dividends will be P0 since PS are assumed to be converted a the
start of the year

2) CONVERTIBLE BONDS
o As if bonds is converted to OS at the start of the year
• Effect: Add back interest expense net of tax

3) OPTIONS AND WARRANTS

o Shareholders has rights to buy at exercise or subscription price
o Uses Treasury share method (buy back)
• Goal: compute for shares that are issued for no consideration (free shares)
Illustrative example

1.) Marilyn, Inc. had 20,000 shares of common stock outstanding on January 1, 2021. On May 1, 2021, it issued
10,500 shares of common stock. Outstanding all year were 10,000 shares of nonconvertible preferred stock on
which a dividend of P40 per share was paid in December 2021. Net income for 2021 was P967,000. The
earnings per share for 2021 is:
a. P18.60 c. P28.40
b. P21.00 d. P35.80
Answer: B

2.) An entity reported the following capital structure:

2021
2022
Outstanding shares: Ordinary shares 110,000 110,000
Convertible preference shares 10,000 10,000

During 2021, the entity paid preference dividends of P3 per share. The preference shares are convertible into
20,000 ordinary shares. Net income for 2021 was P850,000. The income tax rate is 30%. What amount should
be reported as diluted earnings per share for 2021?
a. P6.31 c. P7.08
b. P6.54 d. P7.45
Answer: B
MCQS (THEORY)
1.) Which of the following should be reported for capital stock?
a. The shares authorized c. The shares outstanding
b. The shares issued d. All of these
Answer: D

2.) Contributed capital consists of the following major components

a. Legal and stated capital
b. Retained earnings and legal capital
c. Additional paid in capital and retained earnings
d. Legal capital and additional paid in capital
Answer: D

3.) It is an equity instrument that is subordinate to all other classes of equity instrument, yet
carries the most rights
a. Options c. Potential ordinary share
b. Ordinary share d. Warrants
Answer: B
MCQS (THEORY)

4.) Cash dividends are paid on the basis of the number of shares
a. Authorized c. Outstanding
b. Issued d. Outstanding less the number of
treasury shares
Answer: C

5.) Which feature makes a preference share more like debt than an equity instrument?
a. Noncumulative c. Redeemable
b. Participating d. Voting
Answer: C

6.) At what amount per share should retained earnings be reduced for a 20% stock dividend?
a. Zero c. Market value at the date of issuance
b. Par value d. Market value at the date of
declaration
Answer: B
7.) How should a corporation reflect treasury stock on its balance sheet?
a. As part of its assets
b. As a deduction in the stockholders’ equity section
c. As additional paid in capital
d. As additional shares of capital stock
Answer: B

8.) After a quasi-reorganization where a deficit is removed, the balance of retained earnings will
a. Increase c. Remain the same
b. Decrease d. Either increase or decrease
Answer: A

9.) Where the recapitalization involves a reduction in the legal capital of the corporation for the
purpose of eliminating an existing deficit, or of writing down the inflated book values, the
recapitalization is referred to as
a. Reorganization c. Incorporation
b. Quasi-reorganization d. Answer not given
Answer: B