RETAINED EARNINGS

Dividends

Retained earnings represent the cumulative balance of periodic net income or loss,
dividend distributions, prior period errors, changes in accounting policy, and other
capital adjustments.

Retained earnings Account

Dr Cr
Deficit (normal balance)

IFRS terms:
Accumulated Losses Accumulated Profits

 Kinds of RE
Unappropriated retained earnings
represent that portion which is free and
can be declared as dividends to
shareholders.
Appropriated retained earnings
represent that portion which has been
restricted and therefore is not available for
any dividend declaration.

 Legal appropriation This arises from the fact that the legal capital cannot be
returned to the shareholders until the entity is dissolved and liquidated.
 Contractual appropriation This arises from the fact that the terms of the bond
issue and preference share issue may impose restriction on the payment of
dividends. This is to ensure the eventual payment of the bonds and redemption of
the preference share.
 Voluntary appropriation This is a matter of discretion on the part of the
management. It may arise from the fact that management wishes to preserve the
funds for expansion purposes or for covering possible losses or contingencies.

Dividends are distributions of earnings or capital to the shareholder in proportion to

their shareholdings.

DIVIDENDS OUT OF EARNINGS

 Date of declaration is the date in which the directors authorize the payment of
dividends to shareholders.
 Date of record is the date on which the stock and transfer book of corporation will
be closed for registration. Only those shareholders registered as of such date are
entitled to receive dividends.
 Date of payment is the date on which the dividend liability is to be paid.
Note: The liability for dividend must be recognized on the date of declaration.

Types of Dividends:
Cash Dividends Property Dividends Liability Dividends Stock Dividends
Distribution of Distribution of These are actually Distributions of
earnings of the earnings of the entity deferred cash earnings of the
entity to the to the shareholders in dividends. It may be entity in the form of
shareholders in the the form of noncash in the form of bond the entity’s own
form of cash. assets. and scrip. shares. (IFRS term
“bonus issue”)

Cash Dividends
Date of Declaration Date of Settlement
Retained Earnings xx Dividends Payable xx
Dividends Payable xx Cash xx
Property Dividends
Measurement
 At the fair value of the asset to be
distributed.
 At the end of each reporting period and
at the date of settlement, the entity shall
review and adjust the carrying amount
of the dividend payable with any
change recognized in equity as
adjustment to the amount of
distribution.
Settlement
 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.
If the fair value less cost to distribute is lower
than the carrying amount of the asset at the end
of the reporting period, the difference is
accounted for as impairment loss.

Illustration: Property Dividend (taken from the book of Asuncion, Ngina, Escala)
On November 1, 20x1, Unno Company declared Inventory as property dividend payable on
February 15, 20x2. The carrying amount of the inventory is Php700,00.

Date Fair Values (Php)

November 1, 20x1 600,000
December 31, 20x1 800,000
February 15, 20x2 780,000

Journal Entries
November 1, 20x1 Retained Earnings(@Fair Value) 600,000
Dividends Payable 600,000
December 31, 20x1 Retained Earnings(Increase in Fair Value) 200,000
Dividends Payable 200,000
February 15, 20x2 Dividends Payable(Decrease in Fair Value) 20,000
Retained Earnings 20,000
# #
Dividends Payable(@Fair Value) 780,000
Inventory(@Carrying Amount) 700,000
Gain on distribution(Balancing Figure) 80,000

 Choice of Either Noncash or Cash

Measurement
 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.
Settlement
 The entity shall adjust the dividend
payable based on the alternative chosen
through equity or retained earnings.

Illustration: Noncash or Cash Alternative (taken from the book of Asuncion, Ngina, Escala)
On January 1, 20x1, Ddos Company had five outstanding ordinary shares. On December 31,
20x1, Ddos declared dividends on the ordinary shares. The corporation decided to give the
ordinary shareholders a choice between receiving a cash dividend of Php10,000 per share or a
property dividend in the form of a noncash asset. Each noncash asset has a fair value of
Php12,000. The corporation estimated that 60% of the ordinary shareholders will take the option
of the cash dividend and 40% will elect for the noncash asset.

Date of Declaration:
Retained Earnings 54,000
Dividend Payable 54,000

Cash(5 x 10,000 x 60%) 30,000

Noncash(5 x 12,000 x 40%) 24,000
Total Dividends 54,000
Date of Payment:
*If shareholders opted to receive cash
Dividend Payable 54,000
Cash (5 x 10,000) 50,000
Retained Earnings(balancing figure) 4,000

**If shareholers opted to receive noncash

Dividend payable 54,000
Loss on distribution(balancing figure) 6,000
Noncash (5 x 12,000) 60,000

Share or Stock Dividend

 When share dividends are declared, the retained earnings are in effect
capitalized, meaning, transferred to share capital.

 RE , Share Capital

% Declared Small Dividend Large Dividend

<20% of Outstanding shares 20% or more
Amount to be declared Fair Value or par value, whichever Par value of Shares
to RE is HIGHER
Date of Declaration RE(@Fair Value) xx RE(@par) xx
Share Div. Payable(@par) xx Share Div. Payable xx
Share Premium(balance) xx
Date of Redemption Share Div. Payable xx Share Div. Payable xx
Share Capital xx Share Capital xx
Share Dividend Payable is not a liability.