UNIT 8

ACCUMULATED PROFITS, APPROPRIATIONS AND DIVIDENDS

Exercise 8 -1 Review Questions

1. The accumulated profits/retained earnings account represents the undistributed earnings of the corporation. It represents capital of the corporation arising from its operations. Accumulated
profits/Retained earnings is shown as a line item under the shareholders equity section of the statement of financial position.

2. Accumulated profits/ Retained earnings is appropriated

a. to comply with legal requirements (e.g. treasury shares)
b. to comply with contractual requirements (e.g. sinking fund)
c. upon discretion of management (e.g. plant expansion)

3. Dividends are distribution to shareholders of corporate earnings in proportion to the number of shares held by them. Dividends may also be paid as a return of shareholders invested capital
(liquidating dividends).

4. The following are entitled to receive dividends (out of earnings):

a. All issued shares which are in the hands of the shareholders
b. All subscribed par value shares

The following are not entitled to receive dividends

a. Unissued shares
b. Subscribed no par value shares
c. Treasury shares

5.The three dates to consider are:

a. Date of declaration this is the date when the board of directors approved the resolution to distribute the dividends; the liability to the shareholders is recorded on this
date.
b. Date of record this is the date when the company determines who are entitled to receive dividends; no entry is prepared on this date.
c. Date of payment or distribution this is the date when dividends are paid or distributed to the shareholders.

6. The kinds of dividends are:

a. Cash dividends dividend that is distributable in the form of cash
b. Property dividends dividend that is distributable in the form of non-cash assets such as merchandise inventory or marketable securities
c. Scrip dividends a deferred cash dividend; notes or other evidence of corporate indebtedness are distributed to the shareholders.

1
 d. Share dividends dividend that is distributable in the form of companys own stock.

7. The two kinds of stock dividends are:

a. Small share dividend represents less than 20% of the outstanding shares.
b. Large share dividend represents 20% or more of the outstanding shares.

8. The accounting methods are:

Small share dividend use fair market value method; retained earnings is debited for the fair market value of the shares to be distributed as dividends.
Large share dividend use par value method; retained earnings is debited for the par value of the shares to be distributed as dividends.

9. The properties of preference shares are

a. Cumulative entitles the holder to receipt of previous years unpaid dividends before any payment can be made to ordinary shareholders.
b. Non-cumulative entitles the holder to current years dividends only; previous years unpaid dividends are forfeited.
c. Participating entitles the holder to the receipt of additional dividend after holders of both preference and ordinary share have been paid up to the current years dividends.
d. Non-participating entitles the holder to the receipt of dividends up to the current period only; all excess dividends are given to the ordinary shareholders.

10. Cash Dividends Payable is shown as a current liability under the liabilities section of the statement of financial position.

Exercise 8 - 2 Multiple Choice

1 C 6 E
2 J 7 L
3 M 8 D
4 K 9 O
5 N 10 H

2
Journal Entries

Exercise 8 - 3
Jan 15 Accumulated profits 10,000
Cash dividends payable 10,000

Feb 15 No entry

Mar 15 Cash dividends payable 10,000

Cash 10,000

Jan 15 Accumulated profits 15,000

Cash dividends payable 15,000

Feb 15 No entry

Mar 15 Cash dividends payable 15,000

Cash 15,000

Exercise 8 - 4
DOD Accumulated profits 40,000
Share Dividend Distributable-Ordinary 10,000
Share Premium-Ordinary Share Dividend 30,000

DOR No entry

DOP Share Dividend Distributable-Ordinary 10,000

Share Capital Ordinary 10,000

3
Exercise 8 - 5
DOD Accumulated profits 30,000
Share Dividend Distributable-Ordinary 30,000

DOR No entry

DOP Share Dividend Distributable-Ordinary 30,000

Share Capital - Ordinary 30,000

Exercise 8 - 6
A
DOD Accumulated profits 28,000
Cash Dividends Payable Preference 5,000
Cash Dividends Payable Ordinary 23,000

DOP Cash Dividends Payable Preference 5,000

Cash Dividends Payable Ordinary 23,000
Cash 28,000

Preferenc
e Ordinary Total
Preference (10,000x 5%
x P10) 5,000 5,000
Ordinary (28,000-5,000) 23,000 23,000
Cash dividends 5,000 23,000 28,000
Divided by Outstanding
shares 10,000 40,000

4
 0.
Dividend per share 50 0.58

B
DOD Accumulated profits 28,000
Cash Dividends Payable Preference 15,000
Cash Dividends Payable Ordinary 13,000

DOP Cash Dividends Payable Preference 15,000

Cash Dividends Payable Ordinary 13,000
Cash 28,000

Preferenc
e Ordinary Total
Preference (10,000x 5% x P10
x 3 yrs) 15,000 15,000
Ordinary (28,000-5,000) 13,000 13,000
Cash dividends 15,000 13,000 28,000
Divided by Outstanding shares 10,000 40,000
Dividend per share 1.50 0.33

C
DOD Accumulated profits 28,000
Cash Dividends Payable Preference 9,333.33
Cash Dividends Payable Ordinary 18,666.67

DOP Cash Dividends Payable Preference 9,333.33

5
 Cash Dividends Payable Ordinary 18,666.67
Cash 28,000

Preferenc
e Ordinary Total
Preference (10,000x 5% x
P10 ) 5,000 5,000
Ordinary (40,000x5% xP5) 10,000 10,000
Balance (28,000-15,000)
Preference (13,000x
100/300 ) 4333.33
Ordinary (13,000 x
200/300) 8,667 13,000
9,333. 18,666
33 .67 28,000
Divided by Outstanding
shares 10,000 40,000
Dividend per share 0.93 0.47

D
DOD Accumulated profits 28,000
Cash Dividends Payable Preference 16,000
Cash Dividends Payable Ordinary 12,000

DOP Cash Dividends Payable Preference 16,000

Cash Dividends Payable Ordinary 12,000
Cash 28,000

Preferenc Ordinary Total

6
 e
Preference (10,000x 5% x
P10x3 ) 15,000 15,000
Ordinary (40,000x5% xP5) 10,000 10,000
Balance (28,000-25,000)
Preference (3,000x
100/300 ) 1000
Ordinary (3,000 x 200/300) 2000 3,000
Cash dividend 16000 12000 28,000
Divided by Outstanding
shares 10,000 40,000
Dividend per share 1.60 0.28

Case 8 1
Issued shares 40,000

Treasury shares (5,000)

Shares entitled to 35,00

dividends 0

Issued shares 40,000

Treasury shares (5,000)
Shares entitled to dividends 35,000
x Cash dividend per share P5.00
Decrease in accumulated P175,00
profits 0

7
Decrease on Total Assets P175,000
==========

Case 8 2

Preference Ordinary Total

Preference (10,000x 6% x P100 ) 60,000 60,000
Ordinary (150,000-60000) 90,000 90,000
Cash dividend 60,000 90,000 150,000
Divided by Outstanding shares 10,000 20,000
Dividend per share 6.00 4.5

a) P6.00 per share

b) P4.50 per share

c) Decrease of P150,000

Case 8 3

a) Outstanding shares 80,000

Share dividend rate 20%
16,000
x Par value P5

8
 Debited to Accumulated P80,00
profits 0

b) 16,000 shares

c) NO EFFECT on total Assets & Total Shareholders Equity

d) Outstanding shares 80,000
Cash dividend per share P2.50
Debited to Accumulated P200,00
profits 0

e) P200,000 cash

f) DECREASE on Total Assets & Total Shareholders Equity

g) Cash dividend

Case 8 4

1,500,0
a) Accumulated profits, January 1 P 00

Add Net income 800,000

2,300,0
Sub-total P 00

9
 Less: Cash dividends P 190,000

Share dividends 170,000 360,000

Accumulated profits, 1,940,0
December 31 P 00

Yes, the full amount can be declared as

b) dividends

Case 8 5

Accumulated profits, December

a) 31 P 250,000
Less Appropriation for treasury
shares 12,000
Accumulated profits - Free P 238,000

b) NO EFFECT

C) NO EFFECT
d)
d) Purpose of appropriation of accumulated profits
1) to comply with legal
requirements
2) to comply with contractual
requirements
3) upon discretion of
management
e) The corporation was done with the appropriation

10
11