DIVIDENDS, RETAINED

EARNINGS, AND INCOME

REPORTING
Learning Objectives
 Define retained earnings and explain how it is
affected by some accounting events. (CO1)
 Analyze and record transactions on dividends.
(CO2)
 Compute for earnings per share and book value of
ordinary and preference shares. (CO3)
 Analyze and solve problems on share split. (CO2,
CO3)
 Prepare statement of changes in shareholders’
equity. (CO4)
 RETAINED EARNINGS
Represent the component of the shareholders’
equity arising from the retention of assets
generated from the profit-directed activities of
the corporation.
Basic source – income/profit
Earnings distributed to shareholders are called
DIVIDENDS.
Debit balance - deficit
Affected by: reissuance of treasury shares below
cost, loss on retirement of treasury shares,
correction from prior period errors
 RETAINED EARNINGS
Unrestricted/
Restricted/Appropriated
Unappropriated
 amount of net assets that
are legally or Free and can be
contractually cannot be
declared as
issued as dividends and
must stay within the dividends.
company.
 In other words, restricted
retained earnings is the
amount of equity that
must stay in the
company.
 DIVIDENDS
A dividend is a distribution by a corporation to its
shareholders on a pro rata (equal) basis.
Dividends may be in the form of
Cash
Property
Corporation’s own shares of stock
General rule: any form of dividend declaration
should be based on the total subscription of a
shareholder and NOT merely on the shares
already paid.
 Three dates are important in connection
with dividends:
Date of declaration
Date of Record
Date of Payment

Ex-dividend or ex-date is one business day before the record date. It is the date
on or after which a security is traded without a previously declared dividend or
distribution
 CASH DIVIDENDS
A cash dividend is a pro rata distribution of cash
to shareholders.
Declared solely by the BODs.
For a cash dividend to occur, a corporation
must have:
1. retained earnings,
2. adequate cash, and
3. declared dividends
Illustrative Problem

MCL Corporation declared a cash dividend of

5% per share on its ordinary shares with par
value of P100. Records show that 100,000 shares
were issued, 10,000 of which are in the treasury
and there are 30,000 subscribed shares.
Entry on date of declaration:
Retained Earnings 600,000
Cash Dividends Payable 600,000
(120,000 sh. x P100 x 5%)
Note: subscribed shares must be par value shares; Unissued
shares, subscribed no-par shares and treasury shares are not
entitled to dividends.
 ALLOCATING CASH DIVIDENDS BETWEEN
PREFERENCE AND ORDINARY SHARES
Cash dividends must first be paid to preference
shareholders before any ordinary shareholders are
paid.
When preference shares are cumulative, any
dividends in arrears must be paid to preference
shareholders before allocating any dividends to
ordinary shareholders.
When preference shares are non-cumulative, only
the current year’s dividend must be paid to them
before paying any dividends to ordinary
shareholders.
Reminders:

Amount of cash dividend declared

SHOULD NOT exceed the amount of cash
reported in the balance sheet.
If dividends are unpaid as of balance
sheet date, Dividends Payable is reported
as a current liability.
PROPERTY DIVIDENDS
An alternative to cash or stock dividends.
A property dividend can either include
shares of a subsidiary company or
physical assets such as inventories that the
company holds.
The dividend is recorded at the fair market
value of the asset provided or distributed.
 ILLUSTRATIVE PROBLEM
More Power Corporation acquired 50,000 of
Meralco shares at a cost of P750,000 or P15
each. The Board of Directors of More Power
Corporation declared on Nov. 15 a dividend of
one share of Meralco stock for every 10 shares
of More Power stocks owned. On this date, the
Meralco shares are selling at P20 per share.
More Power has 100,000 ordinary shares issued
and outstanding, P100 par value. The Meralco
shares were distributed on Dec. 15.
Date of declaration (Nov. 15):
Retained Earnings 200,000
Property Dividends Payable 200,000
[(100,000 sh./10) xP20]

Date of Payment (Dec. 15):

Property Dividends Payable 200,000
Investment in Equity Securities 150,000
Gain on distribution of Property
Dividends 50,000
 SHARE DIVIDENDS
 A share dividend is a pro rata distribution of the
corporation’s own shares to its shareholders.
 A share dividend results in a decrease in retained
earnings and an increase in share capital since a
portion of retained earnings is transferred to legal
capital.
 In most cases, the fair market value is assigned to
the dividend shares.
 Total shareholders’ equity and the legal capital
per share remain the same.
 Share dividend does not change the percentage
interest of the stockholder.
PURPOSES AND BENEFITS OF SHARE
DIVIDENDS
For company
To satisfy shareholders' dividend
expectations without spending cash;
To increase marketability of its shares by
increasing number of shares; and
decreasing market price per share
To reinvest and restrict a portion of
shareholders' equity.
PURPOSES AND BENEFITS OF STOCK
DIVIDENDS
For shareholder
More shares with which to earn
additional dividend income;
More shares for future profitable resale,
as share price climbs again.
Share Dividend
Small share
 Additional shares issued
are < 20% of the
previously outstanding
shares
 FMV – basis of valuation
 Entry upon declaration:
Retained Earnings xxx
Shares Distributable xxx
Share Premium xxx
Large share
 20% or more is declared
as dividend
 Par value – basis of
valuation
 Entry:
Retained Earnings xxx
Shares Distributable xxx
In case FMV is lower than PV, use
PV or SV to record share dividend
 ILLUSTRATIVE PROBLEM
 Rock Corporation has the following accounts:
Share Capital, par P100, 20,000 shares authorized,
10,000 issued and outstanding P1,000,000
Share Premium 100,000
Retained Earnings 450,000

1. A 15% share dividend was declared when the market

value of the stock was P150 per share.
2. A 20% share dividend was declared when the market
value of the share was P150 per share.
Small Stock
 Upon declaration:
Retained Earnings 225,000
Shares Distributable (at par) 150,000
Share Premium 75,000
(.15 x 10,000 sh. X P150)

Upon distribution:
Shares Distributable 150,000
Ordinary Shares 150,000
 Learning Activity 1

The Board of Directors of Reyes Corporation

declared a P800,000 cash dividend on April
1, 2019, payable on June 15 to shareholders
of record on May 2.
Required:
Prepare all the necessary entries on the
above-mentioned dates.
Learning Activity 2

 A corporation had stockholders' equity on January 1 as

follows: Ordinary Shares, P10 par value, 1,500,000 shares
authorized, 600,000 shares issued; Share Premium - Ordinary,
P3,100,000; Retained Earnings, P2,300,000. Prepare journal
entries to record the following transactions:
The board of directors declared a 10% stock dividend to
stockholders of record on
Feb. 15 March 1, to be issued on April 15. The stock was trading at P18
per share prior to the dividend.

Mar. 31 Sold 100,000 shares of ordinary shares for P20 per share.

Apr. 15 Issued the stock dividend.

Dividends on Preference and Ordinary
Shares

Preference shares may contain one of the

following:
1. Non-cumulative and non-participating
2. Non-cumulative and participating
3. Cumulative and non-participating
4. Cumulative and participating
Preference Shares

Non-Cumulative Cumulative

 These shares entitle the These shares entitle

holders only to the payment
of current dividends, if and
the holders to
when declared, to the payment not only of
extent of the preference current dividends but
rate before the ordinary also of back
shareholders are paid.
dividends or
 If no dividend is declared
dividends in arrears.
for a certain year, dividend
is forfeited in that year.
Preference Shares
Non-participating Participating

These shares entitle  These shares entitle the

holders to participate
the holders only to
with the holders of
the extent of the ordinary shares pro-rata
stipulated in the remainder after the
preference ordinary shareholders
have received their initial
dividend.
share based on the
preference rate.
 Illustrative Problem
JPIA Inc. has the following selected accounts in its shareholders’
equity:
8% Preference shares, P100 par, authorized 15,000
shares, 5,000 shares issued and outstanding P 500,000
Ordinary shares, P50 par, authorized 50,000 shares
20,000 shares issued and outstanding 1,000,000
Retained Earnings 750,000

The board failed to declare dividends for the past two years. This
year, the BOD declared P300,000 cash dividend.
 Required:
Calculate the total dividends and the dividend per
share paid to each class of stock assuming:
1. Preference shares are non-cumulative and non-
participating
2. Preference shares are non-cumulative and
participating
3. Preference shares are cumulative and non-
participating
4. Preference shares are cumulative and participating
 1
Preference shares are non-cumulative and non-participating
Preference Ordinary Total
Outstanding Share
Capital 500,000 1,000,000 1,500,000
Shares entitled to
dividends 5,000 20,000 25,000
Current Dividends

500,000 x 8% 40,000 40,000

Remainder to Ordinary

300,000 - 40,000 260,000 260,000

Total 40,000 260,000 300,000

Dividend per share 8 13

 2 Preference shares are non-cumulative and participating
Preference Ordinary Total
Outstanding Share Capital 500,000 1,000,000 1,500,000
Shares entitled to
dividends 5,000 20,000 25,000

Current Dividends
500,000 x 8% 40,000 40,000

1,000,000 x 8% 80,000 80,000

Remainder for
Participation
PS 5/15 x 180,000 60,000 60,000

OS 10/15 x 180,000 120,000 120,000

Total 100,000 200,000 300,000

Dividend per share 20 10

 3 Preference shares are cumulative and non-participating
Preference Ordinary Total

Outstanding Share Capital 500,000 1,000,000 1,500,000

Shares entitled to dividends 5,000 20,000 25,000

Dividend in arrears

500,000 x 8% x 2 years 80,000 80,000

Current dividend 40,000 80,000 120,000

Remainder 100,000 100,000

Total 120,000 180,000 300,000

Dividend per share 24 9

 4 Preference shares are cumulative and participating
Preference Ordinary Total

Outstanding Share Capital 500,000 1,000,000 1,500,000

Shares entitled to dividends 5,000 20,000 25,000

Dividend in arrears

500,000 x 8% x 2 years 80,000 80,000

Current dividend 40,000 80,000 120,000

Remainder for Participation

PS 5/15 x 100,000 33,333 33,333

OS 10/15 x 100,000 66,667 66,667

Total 153,333 146,667 300,000

Dividend per share 30.67 7.33

Learning Activity

 ..\..\Learning Task\SW on dividends.xlsx

Share Splits

A distribution of additional shares of stock to

stockholders according to their percent ownership.

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
 SHARE SPLITS
A share split involves the issue of additional
shares to shareholders according to their
percentage of ownership.
In a share split, the number of shares is
increased in the same proportion that legal
capital per share is decreased.
A share split has no effect on total share
(contributed) capital, retained earnings, or
shareholders’ equity.
It is not necessary to formally journalize a share
split just a memorandum entry.
 Share Split
May be in the form of
a. Split up or share split proper – original shares
are called in for cancelation and replaced
by a larger number accompanied by a
reduction in the par value or stated value.
Example: An entity has 10,000 shares issued and
outstanding with P100 par value. If the shares
are split up 5 to 1, the new capitalization would
be 50,000 shares with P20 par value.
 Share Split

 b. Split down or reverse share split - original

shares are canceled and replaced by a
smaller number accompanied by an
increase in the par value or stated value.
Example: An entity has 10,000 shares issued and
outstanding with P100 par value. If the shares
are split down 5 to 1, the new capitalization
would be 2,000 shares with P500 par value.
ILLUSTRATION ON SHARE SPLIT EFFECTS

A stock split does not affect total share capital, retained earnings, or
shareholders’ equity. However, the number of shares increases and
book value per share decreases.

Before After
Stock Split Stock Split
Shareholders’ equity
Ordinary shares P500,000 P500,000
Retained earnings 300,000 300,000
Total shareholders’ equity 800,000 800,000
Issued shares 50,000 100,000
Book value per share P 16.00 P 8.00
 RETAINED EARNINGS
Retained earnings is the cumulative balance of
the following: net income or loss for the period,
dividend declaration, prior period errors,
changes in accounting policy, reclassifications
of some components of OCI, and other capital
adjustments.
IFRS term: accumulated profits
IAS 1 and IAS 8 still maintain the title “retained
earnings”
Kinds of Retained Earnings

Unappropriated Appropriated

Represent that Represent that

portion which is free portion which has
and can be declared been restricted and
as dividends to therefore is NOT
shareholders. available for any
dividend declaration.
RETAINED EARNINGS

To compute (basic):
Retained earnings, opening balance
+ Net earnings (or - net loss)
- Dividends
+ (-) prior period error/s
= Retained earnings, ending balance
DEFICIT (accumulated losses)

Shareholders’ equity
Share capital
Common shares
Retained earnings (deficit) $800,000
Total shareholders’ equity (50,000)
$750,000

A debit balance in retained earnings is identified

as a DEFICIT and is reported as a deduction in
the shareholders’ equity section
 Learning Activity
On Jan. 2, 20XX, JOY Corporation had the following shareholders’ equity
balances:
Ordinary Shares, P10 P 200,000
Share Premium – Ordinary 1,650,000
Retained Earnings 985,000

On Jan. 15, 20XX, the BOD declared a 4% share dividend for distribution on
Mar. 31 when the stock’s market price was P110. On Sept. 5, 20XX, the BODs
declared a 3 for 1 share split; the stock’s market price was P150 per share.

Required:
1. How many shares were outstanding on Jan. 2, Mar. 31, and Dec. 31?
2. Prepare all the necessary journal entries.