FINANCIAL ACCOUNTING AND REPORTING

FAR17 Dividends
17.1. Key Concepts and Definitions ............................................................................... 1

17.2. Types of Dividends .................................................................................................... 1

17.3. Allocating Dividends to Ordinary and Preference Shareholders ........... 3

FAR17 Dividends
17.1. Key Concepts and Definitions
Dividends are periodic distributions by a corporation to its shareholders out of
Definition its profits. Essentially, dividends represent returns on the investment of the
shareholders to the corporation.

In finance and management accounting, dividends form part of the cost of equity
of a company which is included in the computation of its weighted average cost of
capital. In concept, dividends to shareholders are what interest payments are to
creditors.
Concept
In accounting, however, dividends are not recorded as expenses but rather as
a direct deduction to equity. An exception would be dividends for redeemable
preference shares.

May only be declared to the extent of the balance of unrestricted or

unappropriated retained earnings. This is true in both legal and accounting
Limitation on
perspectives. The absence of such rule would allow corporations to bypass the
declaration
prohibition of the return of all or a portion of the legal capital contributed by
shareholders.

Three dates are considered in recording the declaration and subsequent payment
of dividends. These are (in chronological order):

1. Date of declaration – the date the dividend declaration is approved by the

board and the shareholders, if necessary. When dividends are declared, the
journal entry made in the books on the date of declaration is:
Retained earnings xxx
Dividends payable xxx

2. Date of record – all shareholders on record as of this date may receive

dividends. To wit, the date of record represents the “cut-off” for all the eligible
recipients. Thus, the dividends payable account is adjusted if there are
Important dates
subsequent issuance of shares from the date of declaration to the date of
record. Those who became shareholders after the date of record are not
eligible to receive the declared dividends.

3. Date of payment – the date the dividends are settled through payment of
cash or the distribution of property or shares, as the case may be. The entry
made is:
Dividends payable xxx
Cash/Property/Shares xxx

Of course, if the dividends are declared and paid on the same day, the entry made
is a debit to retained earnings and credit to appropriate type of dividend.

17.2. Types of Dividends

Cash dividends are the most common type of dividends. They may be expressed
Cash Dividends as a total amount, on a per share basis (e.g. P5 per share) or a percentage of the
share’s par or stated value (which is the usual case for preference shares).

Noncash assets may also be distributed as dividends to shareholders. The

following rules should be observed when property dividends are declared:
• The property to be distributed is classified under PFRS 5 as assets held for
Property Dividends distribution to owners. Depreciation for the noncash asset shall cease and
such asset should be valued at the lower of its carrying amount or fair
value less cost to distribute on the date of declaration. When the fair value
less cost to distribute is lower than the asset’s carrying amount on such date,
the difference is debited to impairment loss.

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 • Initially, the deduction to retained earnings on the date of declaration is equal
to the fair value of the noncash asset to be distributed as dividends.
Subsequently, changes in the fair value of the property from such date until
the date of payment are accounted for as adjustments to the dividends
payable account with a corresponding debit or credit to retained
earnings.
• The difference between the value of the asset and the dividends payable
account on the date of payment is accounted for as a gain or loss on
distribution, as the case may be.

Shares or stocks may also be declared as dividends. Unlike cash and property
dividends, the effect of stock dividends is a mere transfer within equity (i.e. the
assets of the corporation are not decreased). Stock dividends can either be a small
stock dividend or large stock dividend.
Nature Measurement
Small stock dividend Less than 20% of the Fair value of the shares
Stock Dividends outstanding shares are on the date of declaration
declared as dividends. or par value, whichever
is higher
Large stock dividend 20% or more of the Par value of the shares
outstanding shares are
declared as dividends

When an entity gives its shareholders the option to receive either property or cash
Option between cash
as dividends, the entity shall measure the dividend payable using the following
and property
formula:
dividends
(Cash option x % probability) + (Property at fair value x % probability)

When an entity gives it shareholders the right to receive cash in lieu of stock
Cash dividends in lieu
dividends, the amount to be charged to retained earnings is equal to the amount
of stock dividends
of cash dividends.

Case Study 1
ABC Inc. which was formed on January 1, 2019 had the following share issuance and dividend transactions for 2019
and 2020:

1/1/19 Issued 50,000 ordinary shares (P10 par) at P20 per share.

11/1/19 A cash dividend at P5 per share is declared on for shareholders on record as of December 31, 2019.

11/15/19 A property dividend was declared. The property to be distributed was land, which was carried at
P150,000 but had a fair value of P120,000 and a cost to distribute of P10,000 on the declaration date. The
land had a fair value of P100,000 on December 31, 2019.

12/1/19 Issued 10,000 ordinary shares (P10 par) at par value.

1/31/20 Paid the cash dividends declared on November 1, 2019.

2/1/20 The land which was declared as property dividends was distributed to the shareholder. On this date, the
land had a fair value of P130,000.

2/20/20 Issued 20,000 ordinary shares (P10 par) at par value.

3/31/20 A 10% stock dividend was declared and given. The shares had a fair value of P18 on this date.

4/15/20 A 25% stock dividend was declared and given. The shares had a fair value of P16 on this date.

Required
Journalize the transactions above.

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17.3. Allocating Dividends to Ordinary and Preference Shareholders
• All shareholders as of the date of record are eligible to receive dividends based on their shareholdings.
However, preference shares have the first priority to distribution. Any residual is then allocated to ordinary
sharers.

• Illustration: A cash dividend of P300,000 is declared by ABC Inc. The capital structure of the entity is as
follows:
Ordinary shares, P1 par, 500,000 shares outstanding P500,000
10% Preference shares, P100 par, 10,000 shares outstanding 1,000,000

Thus, the P300,000 dividends will be distributed as follows:

Total dividends declared P300,000
Less: Distribution to preference shares (P1,000,000 x 10%) 100,000
Distribution to ordinary shares (residual) P200,000

• Allocating dividends to ordinary shares and preference shares becomes more complicated if the preference
shares are cumulative and/or participating. When the problem is silent, it is assumed that the preference
shares are non-cumulative and non-participating.

Cumulative preference shares

• When preference shares are cumulative, they are entitled to dividends in arrears (i.e. prior period
dividends that should have been given to them). This means that when dividends are declared for the
current period, payment must first be made to preference shares for the dividends they are to receive this
period and any dividends not given to them in the previous periods based on their dividend rate.

• Illustration: A cash dividend of P300,000 is declared by ABC Inc. The capital structure of the entity is as
follows:
Ordinary shares, P1 par, 500,000 shares outstanding P500,000
10% Preference shares, P100 par, 10,000 shares outstanding 1,000,000

The preference shares are cumulative. Dividends are in arrears for two years at the beginning of the year.

The dividends will be distributed as follows:

Total dividends declared P300,000
Less: Distribution to preference shares
Dividends in arrears (P1,000,000 x 10% x 2) P200,000
Current period (P1,000,000 x 10%) 100,000 300,000
Distribution to ordinary shares (residual) P0

Participating preference shares

• When preference shares participating, they can receive extra dividends aside from their fixed rate. The
step-by-step computation is as follows:
1. Allocate dividends to preference shares for the current period and prior periods (if cumulative), based
on their fixed rate.
2. Allocate dividends to ordinary shares using the following formula:
Aggregate par value of ordinary shares x Fixed rate (%) of preference share
3. Any residual is allocated to both shares in proportion to their aggregate par values.

• Illustration: A cash dividend of P300,000 is declared by ABC Inc. The capital structure of the entity is as
follows:
Ordinary shares, P1 par, 500,000 shares outstanding P500,000
10% Preference shares, P100 par, 10,000 shares outstanding 1,000,000

The preference shares are fully participating.

The dividends will be distributed as follows:

Ordinary shares Preference shares Total
10% x 1,000,000 P- P100,000 P100,000
10% x 500,000 50,000 - 50,000
Residual of 150,000 150,000
OS – 150,000 x 5/15 50,000
PS – 150,000 x 10/15 100,000
Total P100,000 P200,000 P300,000

• When participation is only up to a certain extent, the same procedure shall be followed except in allocating
the residual. The preference shares can only participate up to a certain amount. Assuming the participation
is only up to 16%, the maximum amount of the residual that may be allocated to the preference shares is
only P60,000 (1,000,000 x (16%-10%)). Allocation will be as follows.

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 Ordinary shares Preference shares Total
10% x 1,000,000 P- P100,000 P100,000
10% x 500,000 50,000 - 50,000
Residual of 150,000 150,000
PS – 1,000,000 x 6% 60,000
OS – residual 90,000
Total P140,000 P160,000 P300,000

• Note that when allocating the residual using the par value ratios results to an amount lower than P60,000,
then the computed amount will be used.

Case Study 2
ABC Inc. was incorporated at the beginning of 2019 and has the following capital structure for the first three years of
operations:
Ordinary share capital (P5 par) P700,000
15% Preference share capital (P50 par) 300,000

Dividends declarations per year are as follows: 2023 – P100,000; 2024 – P250,000; 2025 – P350,000. Dividends are in
arrears for two years at the beginning of 2023.

Required
a. Compute for the dividends distributed to ordinary and preference shareholders each year if the preference
shares are cumulative and fully participating.
b. Compute for the dividends distributed to ordinary and preference shareholders each year if the preference
shares are cumulative and participating up to an additional 10%.

Quizzer – Problem 1
1. Efficient Company had 200,000 ordinary shares outstanding on January 1, 2012. On March 15, 2012, the entity
declared a 2 for 1 share split when the fair value of a share was P80. On December 15, 2012, the entity declared a
P5 per share cash dividend. In the statement of changes in equity, what amount should be reported as dividends?
A. P2,000,000
B. P1,000,000
C. P500,000
D. None

2. On January 1, 2012, Genial Company had ordinary and preference shares outstanding. The incorporators own ten
ordinary shares but no preference shares. On December 31, 2012, the entity declared dividends on the ordinary
shares. The entity decided to give the ordinary shareholders a choice between receiving a cash dividend of
P500,000 per share or in the form of a noncash asset. The noncash asset is a standard model from the entity's car
fleet. Each car has a fair value of P600,000 and carrying amount of P450,000. The entity estimated that 80% of the
ordinary shareholders will take the option of the cash dividend and 20% will elect for the noncash asset. What
amount should be recognized as dividend payable on December 31, 2012?
A. P5,500,000
B. P5,200,000
C. P4,000,000
D. P6,000,000

3. On August 1, 2019, Mystery Company declared one of its property as dividend with fair value of P2,200,000 and a
carrying value of P2,500,000. Actual distribution of the property is expected to be on May 1, 2020. On December
31, 2019, the property has a fair value of P2,000,000.

Question 1: What amount should be charged to the retained earnings at the time the dividend was declared?
A. None
B. P2,000,000
C. P2,200,000
D. P2,500,000

Question 2: What amount should the company recognize as a liability in its December 31, 2019 statement of
financial position related to the dividends?
A. None
B. P2,000,000
C. P2,200,000
D. P2,500,000

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 Question 3: What amount of asset held for distribution should the company disclose separately in its December 31,
2019 statement of financial position related to the dividends?
A. None
B. P2,000,000
C. P2,200,000
D. P2,500,000

4. On September 30, 2019, Bitter Company issued 3,000 shares of its P100 par ordinary share in connection with a
stock dividend. No entry was made on the stock dividend declaration date. The market value per share immediately
after issuance was P120. Bitter’s stockholders’ equity accounts immediately before issuance of the stock dividend
shares were as follows:
Ordinary share capital, P100 par, 50,000 shares authorized, 20,000 shares outstanding P2,000,000
Share premium reserve 3,000,000
Accumulated profits 3,500,000

What should be the total shareholders’ equity immediately after the share dividend?
A. P8,500,000
B. P8,800,000
C. P8,860,000
D. P9,600,000

5. Amusement Corporation declared share dividends of 1 share for every 5 shares owned on its 200,000 issued and
outstanding ordinary shares with a par value of P50 per share. At the time of declaration, the market value of
ordinary share was P60 per share and P70 per share at the time the shares were issued. What amount should be
charged to the accumulated profits account and credit liability accounts, respectively?
A. P2,400,000 and P2,400,000
B. P2,000,000 and P0
C. P4,000,000 and P4,000,000
D. P4,000,000 and P0

6. Purple Company had sufficient accumulated profits in 2019 as a basis for dividends but was temporarily short of
cash. Purple declared a P200,000 dividend on May 1, 2019 and issued promissory notes to its shareholders in lieu
of cash. The notes which are dated May 1, 2019 had a maturity date of April 30, 2020 and a 12% interest rate. How
should Purple account for the scrip dividend and related interest?
A. Debit accumulated profits for P224,000 on December 31, 2019.
B. Debit accumulated profits for P224,000 on April 30, 2020.
C. Debit accumulated profits for P200,000 on May 1, 2019 and debit interest expense for P16,000 on December
31, 2019.
D. Debit accumulated profits for P200,000 on April 30, 2020 and debit interest expense for P16,000 on December
31, 2019.

Quizzer – Theory 1
1. When shareholders may elect to receive cash in lieu of a stock dividend, the amount to be charged to retained
earnings is equal to
A. Optional cash dividend
B. Fair value of the stock dividend
C. Par value of the stock dividend
D. Either fair value or par value of the stock dividend depending on the percentage of stock dividend

2. Which statement is incorrect concerning stock dividends?

A. Stock dividends are recorded on the date of declaration.
B. Stock dividend of 20% or more shall be capitalized at par or stated value.
C. Stock dividends declared by closely held entities shall be capitalized at par or stated value.
D. A stock dividend gives rise to a change in either the entity's assets or its shareholders' proportionate interest
therein.

3. In a closely held entity, if stock dividends are declared, retained earnings shall be capitalized at
A. Par or stated value C. Fair value on date of declaration
B. Book value D. Fair value on date of record

4. When a portion of shareholders' investment is returned in the form of a dividend, it is called

A. Compensating dividend C. Property dividend
B. Liquidating dividend D. Equity dividend

5. An entity shall measure a liability to distribute noncash asset as dividend to its owners at the
A. Carrying amount of the asset distributed
B. Fair value of the asset distributed
C. Either the carrying amount or fair value of the asset distributed
D. Neither the carrying amount nor fair value of the asset distributed

FAR17 DIVIDENDS 5
6. Which statement is incorrect in relation to appropriations of retained earnings?
A. Appropriations do not reduce total retained earnings.
B. The only proper way to eliminate an appropriation of retained earnings after it has served its purpose is to
credit the unappropriated retained earnings account.
C. An appropriation of retained earnings does not mean that assets are segregated for a specific purpose.
D. When treasury stock is purchased, retained earnings must be appropriated equal to the par or stated value of
such stock.

7. The liability to pay a dividend shall be recognized when the dividend is appropriately authorized and is no longer
at the discretion at the entity, which is the date
I. When declaration of the dividend by management or board of directors is approved by the relevant authority,
for example, the shareholders, if the jurisdiction requires such approval.
II. When the dividend is declared by management or the board of directors if the jurisdiction does not require
further approval.
A. I only C. Either I or II
B. II only D. Neither I nor II

8. An entity shall review and adjust the carrying amount of the dividend payable at the end of each reporting period
and at the date of settlement with any changes in the carrying amount of the dividend payable recognized
A. In equity as adjustment to the amount of distribution
B. In profit or loss
C. As adjustment of general reserve
D. As component of other comprehensive income

9. When an entity settles the dividend payable, it shall recognize the difference between the carrying amount of the
asset distributed and the carrying amount of the dividend payable in
A. Profit or loss C. Equity
B. Other comprehensive income D. Retained earnings

10. An entity shall measure a noncurrent asset classified as held for distribution to owners at
A. Carrying amount
B. Fair value less cost to distribute
C. Lower of carrying amount and fair value less cost to distribute
D. Higher of carrying amount and fair value less cost to distribute

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