ACCOUNTING FOR

CORPORATION –
RETAINED EARNINGS
Source: Partnership and Corporation, Ballada
Prepared by Greg O. Saclot
for BSBA 1st Year Students
RETAINED EARNINGS

This represents the component of the shareholders’

equity arising from the retention of assets generated
from the profit-directed activities of the organization.
At the end of the accounting period, the Income
Summary account is closed to the Retained Earnings
account. The retained earnings account is credited
with the corporation’s profit or debited with the
loss.
PRIOR PERIOD ERRORS

These are errors discovered in the current period that

are of such significance that the financial statements
of one or more prior periods can no longer be
considered to have been reliable at the date of their
issue. Note that credit entries increase the retained
earnings balance and debits decrease it.
DIVIDENDS

Retained Earnings is not a cash fund waiting to be

distributed as dividends. Instead, it is an owners’ equity
account representing claim on all assets in general and
not on any asset in particular. In fact, the corporation
may have a sizeable balance in their account but may not
have cash to pay a cash dividend. Shareholders are not
guaranteed dividends and dividends do not become a
liability of the corporation until the board of directors
has formally declared a dividend distribution.
 THREE (3) IMPORTANT DATES
IN THE DECLARATION AND PAYMENT OF
DIVIDENDS

1. Date of Declaration
2. Date of Record
3. Date of Payment
 DATE OF DECLARATION

On the date of declaration, the board of directors will

adopt a resolution declaring that a dividend is to be
paid. The resolution will specify the amount, type
and date of payment of this dividend. It will also set
a date of record. Cash dividends are declared solely
by the board of directors while share dividends will
necessitate the concurrence of at least two-thirds of
the outstanding shareholders.
 DATE OF DECLARATION

Legally, declared dividends are obligations of the firm.

Dividends to be paid in cash or property become a
liability on this date. Share Distributable is also
recognized. An entry is made as follows:
Ex. Retained Earnings
Cash Dividends Payable, or
Property Dividends Payable, or
Share Distributable
 DATE OF RECORD

A list of shareholders entitled to the declared

dividends is prepared at the date of record. If an
investor buys a share of stock after this date, he
will not receive the dividend. The share is said to be
traded ex-dividend. No entry is required on this date.
 DATE OF PAYMENT

The corporation settles its liability on this date. An entry

is made as follows:
Ex. Cash Dividends Payable
Cash
Property Dividends Payable
Noncash assets
Share Distributable
Share Capital
 CASH DIVIDENDS

Majority of dividends distributed by corporations is

paid in cash. In declaring cash dividends, a
corporation must have both an appropriate
amount of retained earnings and the necessary
amount of cash. Some investors view that a large
retained earnings balance automatically permits
generous dividend distributions.
 CASH DIVIDENDS

Dividends on par value shares are stated as a certain

percentage of the par value. As to no-par value
shares, the dividends are stated at a certain amount per
share. When the board of directors declares a cash
dividend, an entry is made as follows:
Retained Earnings xxx
Cash Dividends Payable xxx
 CASH DIVIDENDS

Illustration. Made Easy Bookstore, Inc., a nationally-known business books

distribution entity, declared a cash dividend of P12 per share of ordinary shares on July
1. The dividends are payable on August 1 to shareholders of record on July 21. The
entity has 100,000 ordinary shares issued of which 7,000 shares are held in treasury.
Retained Earnings [(100,000 shares – 7,000 treasury)xP12] 1,116,000
Cash Dividends Payable 1,116,000
To record declaration of dividends on July 1.

Cash Dividends Payable 1,116,000

Cash 1,116,000
To record payment of dividends on August 1.
 PROPERTY DIVIDENDS

A distribution to shareholders that is payable in non-

cash assets is generally referred to as property
dividends or dividends in kind. Per IFRIC 17,
paragraph 11, an entity shall measure a liability to
distribute non-cash assets as a dividend to its
owners at the fair value of the assets to be
distributed.
 PROPERTY DIVIDENDS

Illustration. 3S Food Industries based in Pulilan, Bulacan has 5,000

shares investment in another entity accounted for as nonmarketable equity
investment. The carrying amount of this investment is P500,000. On Dec.
1, 2019, this growing food corporation declared as property dividends this
investment to all its outstanding par value shares to be distributed on Dec.
15, 2019. The fair market value of the investment at the declaration date
was P950,000. There was no change in fair value on settlement date. See
the entries in the next slide.
 PROPERTY DIVIDENDS

The entries are as follows:

Retained Earnings 950,000
Property Dividends Payable 950,000
To record declaration of dividend on Dec. 1, 2019

Property Dividends Payable 950,000

Investment in Equity Securities 500,000
Gain on Distribution of Property Dividend 450,000
To record distribution of dividend on Dec. 15, 2019.
 SHARE DIVIDENDS

A corporation may distribute to shareholders additional shares of the

entity’s own share as share dividends. Share dividends or bonus issues
are fundamentally different from cash or property dividends because share
dividends do not transfer assets to the shareholders. This type of
dividend affects only the accounts within the shareholders’ equity. Share
dividends increase the total share capital and decreases the retained
earnings account. Because both of these are components of shareholders’
equity, total shareholders’ equity is unchanged.
 SHARE DIVIDENDS

From the shareholders’ point of view, a share dividend does

not change their percentage of interest in the
corporation, although total outstanding shares have
increased. The accounting entries depend upon the size of
the share dividend as follows:
1. Small Share Dividends
2. Large Shares Dividends
 SMALL SHARE DIVIDENDS

These are dividends in which the additional shares issued are less than
20% of the previously outstanding shares. These share dividends are
recorded by transferring from retained earnings to share capital (ordinary
share and share premium accounts) the fair market value of the additional
shares to be issued. In cases when the fair market value is lower than the
par or stated value, the par or stated value will be the basis for recording.
The entry:
Retained Earnings xxx
Ordinary Shares (at par or stated value) xxx
Share Premium (excess FMV over par or SV)xxx
 SMALL SHARE DIVIDENDS

Illustration. Siobe! Your Japanese Fastfood, Inc. chain is blessed with

years of profitable operations for its commitment to serve affordable and
healthy Japanese food favorites. The shareholders’ equity before
declaration of a 10% share dividend is as follows:
Ordinary Shares, P50 par, 20,000 shares
issued and outstanding P1,000,000
Share Premium 200,000
Total Share Capital P1,200,000
Retained Earnings 650,000
Total Shareholders’ Equity P1,850,000
 SMALL SHARE DIVIDENDS

The declaration of a 10% share dividend will require the issuance of an additional
2,000 shares. Assume that the corporation’s share is being traded at the stock
exchange and that the stock market price per share is P110. The fair market value
of the shares to be distributed is P220,000. The entries will be:
Retained Earnings (2.000 shares x P110 FMV) 220,000
Shares Distributable (2,000 shares x P50 par) 100,000
Share Premium 120,000
To record declaration of 10% share dividend.
Shares Distributable 100,000
Ordinary Shares 100,000
To record issuance of share dividends.
 COMPARISON OF SHAREHOLDERS’ EQUITY AND OUTSTANDING
SHARES BEFORE AND AFTER THE SMALL SHARE DIVIDENDS
Before Dividends After Dividends Increase
(Decrease)
Ordinary Shares, P50 par P1,000,000 P1,100,000 P100,000

Share Premium 200,000 320,000 120,000

Total Share Capital P1,200,000 P1,420,000 P220,000

Retained Earnings 650,000 430,000 (220,000)

Total Shareholders’ Equity P1,850,000 P1,850,000 -

Shares issued and outstanding 20,000 22,000 2,000

(P1,000,000/P50) (P1,100,000/P50)
 LARGE SHARE DIVIDENDS

If the share dividend is 20% or more of the previously

outstanding shares, such that the effect is to reduce
materially the market value per share, then only the par or
stated value is credited to ordinary shares with a
corresponding debit to retained earnings.
Retained Earnings xxx
Ordinary Shares (at par or stated value) xxx
 LARGE SHARE DIVIDENDS

Illustration. Assumed instead that Siobe! Japanese Fastfood, Inc. chain declared
a 20% share dividend on its 20,000 issued and outstanding P50 par value shares.
The corporation will issue additional 4,000 shares due to the share dividend. The
entries will be
Retained Earnings (4.000 shares x P50 par) 200,000
Shares Distributable 200,000
To record declaration of 20% share dividend.
Shares Distributable 200,000
Ordinary Shares 200,000

To record issuance of share dividends.

 COMPARISON OF SHAREHOLDERS’ EQUITY AND OUTSTANDING
SHARES BEFORE AND AFTER THE LARGE SHARE DIVIDENDS
Before Dividends After Dividends Increase
(Decrease)
Ordinary Shares, P50 par P1,000,000 P1,200,000 P200,000

Share Premium 200,000 200,000 -

Total Share Capital P1,200,000 P1,400,000 P200,000

Retained Earnings 650,000 450,000 (200,000)

Total Shareholders’ Equity P1,850,000 P1,850,000 -

Shares issued and outstanding 20,000 24,000 4,000

(P1,000,000/P50) (P1,200,000/P50)
 LIQUIDATING DIVIDENDS

Liquidating dividends are not distribution of earnings

but rather returns of capital to the investing
shareholders. This type of dividend can be legally paid
only under either of the following circumstances:
(1) when the corporation is under dissolution and liquidation,
or
(2) when the corporation is engaged in the exploration of
natural resources.
 SHARE SPLITS

Corporations reduce the par or stated value of its share

capital and issues additional shares to its shareholders
through the practice referred to as share splits. The par or
stated value per share will decrease with a corresponding
increase in the number of authorized, issued and
outstanding shares. In effect, there is no change in the
balances of the shareholders’ equity accounts.
 SHARE SPLITS

When shares are selling below a desired price when

management wishes to take control of the entity, the
corporation may consider a reverse split that can be
accomplished by increase the par or stated value of its
shares and reducing the shares outstanding. There will no
journal entry required; a memo entry is sufficient.
 SHARE SPLITS

Illustration. The International School of Business and

Sciences, Inc. has 10,000 P100 par value ordinary shares
issued and outstanding when the board of directors decided
to split the share 5-for-1. This means that a shareholder
would receive five shares with new par value of P20 for each
share held. Ordinary shares will remain unchanged at
P1,000,000. The issued and outstanding shares will now
be 50,000 and the par value reduced to P20 per share.
 SUMMARY OF THE EFFECTS OF
DIVIDENDS AND SHARE SPLIT
Declaration Payment of Declaration and Distribution of
of Cash Cash
Dividends Dividends Small Share Large Share
Effect on: Dividends Dividends Share Split

Total Assets - Decrease - - -

Total Liabilities Increase Decrease - - -

Ordinary Shares - - Increase Increase -

Share Premium - - Increase - -

Retained Earnings Decrease - Decrease Decrease -

Total Shareholders’ Equity Decrease - - - -

Shares Outstanding - - Increase Increase Increase

 FEATURES OF PREFERENCE SHARES

1. Non-cumulative and Non-participating

2. Non-cumulative and Participating
3. Cumulative and Non-participating
4. Cumulative and Participating
 NON-CUMULATIVE PREFERENCE SHARES

These shares entitle the holders only to the payment of

current dividends, if and when dividends are declared to the
extend of the preference rate, before the ordinary
shareholders are paid. If there is no dividend declaration for
a certain year, then the dividend for that year is forfeited.
 CUMULATIVE PREFERENCE SHARES

These shares entitle the holder to payment not only of the

current dividends but also back dividends or dividends in
arrears, if and when dividends are declared, before the
ordinary shareholders are paid.
 NON-PARTICIPATING PREFERENCE SHARES

These shares entitle the holders only to the extend of the

stipulated preference dividend (expressed as percentage of
par value).
 PARTICIPATING PREFERENCE SHARES

These shares entitle the holders to participate with the

holders of ordinary shares pro-rata in the remainder after the
ordinary shareholders have received their initial share based
on the preference rate.
 DIVIDENDS
ON PREFERENCE AND ORDINARY SHARES

A corporation may issue both preference and ordinary

shares. Preference shares enjoy preference as to dividends.
When the board of directors declares cash dividends,
preference shareholders are entitled to dividends before
ordinary shareholders receive any distribution.
 DIVIDENDS
ON PREFERENCE AND ORDINARY SHARES

The dividend is stated as a percentage of the par value

preference shares. Thus, holders of 7% Preference Shares,
P100 par value, are entitled to an annual dividend of P7 per
share before any distribution is made to the ordinary
shareholders.
 DIVIDENDS
ON PREFERENCE AND ORDINARY SHARES

Illustration. DomDane Publishers, Inc., the premier publisher of accounting, finance,

economics, math, taxation, entrepreneurship and other business textbooks, has the
following selected accounts in its shareholders’ equity:
12% Preference Shares, P100 par, authorized
4,000 shares; 2,000 shares issued and outstanding P200,000
Ordinary Shares, P100 par, authorized 6,000 shares;
3,000 shares issued and outstanding 300,000
Retained Earnings 260,000
The board failed to declare dividends for the past two (2) years. The current year’s result
of operation gave the board reasons to declare cash dividends of P200,000.
 DISTRIBUTION OF DIVIDENDS
ON PREFERENCE AND ORDINARY SHARES
Case 1. Non-cumulative and Non-participating Preference Shares
Preference Ordinary Total
Outstanding Share Capital P200,000 P300,000 P500,000

Dividends in Arrears (2 years) -

Current Preference Dividends P24,000 P 24,000

P200,000 x 12% = P24,000
Remainder to Ordinary P176,000 176,000

Total P24,000 P176,000 P200,000

Dividend per share P12.00 P58.67

(P24,000/2,000 shares) (P176,000/3,000 shares)
 DISTRIBUTION OF DIVIDENDS
ON PREFERENCE AND ORDINARY SHARES
Case 2. Cumulative and Non-participating Preference Shares
Preference Ordinary Total
Outstanding Share Capital P200,000 P300,000 P500,000

Dividends in Arrears (2 years) P48,000 P 48,000

P200,000 x 12% x 2 years =
Current Preference Dividends 24,000 24,000
P200,000 x 12% = P24,000
Remainder to Ordinary P128,000 128,000

Total P72,000 P128,000 P200,000

Dividend per share P36.00 P42.67

(P72,000/2,000 shares) (P128,000/3,000 shares)
 DISTRIBUTION OF DIVIDENDS
ON PREFERENCE AND ORDINARY SHARES
Case 3. Non-cumulative and Participating Preference Shares
Preference Ordinary Total
Outstanding Share Capital P200,000 P300,000 P500,000
Dividends in Arrears (2 years) -
Current Preference Dividends P24,000 P 24,000
P200,000 x 12% = P24,000
Current Ordinary Dividends P36,000 36,000
P300,000 x 12% = P36,000
Remainder for Participation:
P200,000 – 24,000 – 36,000
= P140,000
Preference P140,000 x 2/5 = 56,000
Ordinary P140,000 x 3/5 = 84,000 140,000
Dividend per share P41.00 P40.00
(P80,000/2,000 shares) (P120,000/3,000 shares)
 DISTRIBUTION OF DIVIDENDS
ON PREFERENCE AND ORDINARY SHARES
Case 4. Cumulative and Participating Preference Shares
Preference Ordinary Total
Outstanding Share Capital P200,000 P300,000 P500,000
Dividends in Arrears (2 years) P48,000 P 48,000
P200,000 x 12% x 2 years =
Current Preference Dividends 24,000 24,000
P200,000 x 12% = P24,000

Current Ordinary Dividends P36,000 36,000

P300,000 x 12% = P36,000

Remainder for Participation:

P200,000 – 48,000 - 24,000 – 36,000 =
P92,000
Preference P92,000 x 2/5 = 36,800
Ordinary P92,000 x 3/5 = 55,200 92,000

Dividend per share P54.40 P30.40

(P108,800/2,000 shares) (P91,200/3,000 shares)
 COMPARISON OF DISTRIBUTION OF DIVIDENDS
ON PREFERENCE AND ORDINARY SHARES

Preference Ordinary

Case 1. Non-cumulative and Non- P12.00 P58.67

Participating Preference Shares

Case 2. Cumulative and Non-Participating 36.00 42.67

Preference Shares

Case 3. Non-cumulative and Participating 41.00 40.00

Preference Shares

Case 4. Cumulative and Participating 54.40 30.40

Preference Shares
 BOOK VALUE PER SHARE

Book value per share is the amount that would be paid on

each share if the corporation is liquidated. The amount
available to shareholders is exactly the amount reported as
shareholders’ equity.
 BOOK VALUE PER SHARE

The preference shareholders have the right to receive assets

equal to the par value or a larger stated liquidated value per
share.

The book value per share of the preference shares is the

sum of its liquidation value, if applicable, plus any
current and dividends in arrears divided by the number
of preference shares outstanding.
 BOOK VALUE PER SHARE

Ordinary shareholders’ equity is obtained by deducting

from total shareholders’ equity the preference
shareholders’ equity. The book value per share of the
ordinary shares is computed by dividing the ordinary
shareholders’ equity by the number of ordinary shares
outstanding.
 BOOK VALUE PER SHARE

Illustration. Roberto D. Gonzales Admark, Inc. is one of the leading firms doing highly creative tri-media
product exposures in Metro Manila and Calabarzon. The shareholders’ equity section of the statement of
financial position is as follows:
6% Cumulative Non-participating Preference Shares,
P1,000 par, 5,000 shares authorized, 400 shares
issued and outstanding P 400,000
Ordinary Shares, P100 par, 20,000 shares authorized,
5,500 shares issued and outstanding 550,000
Share Premium – Preference 40,000
Share Premium – Ordinary 720,000
Retained Earnings 850,000
Total Shareholders’ Equity P2,560,000
 BOOK VALUE PER PREFERENCE SHARE

Suppose that the preference shares has a liquidation value of P1,300 and
dividends are in arrears for three years. The computation of the preference
book value per share follows:
Liquidation value: 400 shares x P1,300 = P520,000
Dividends in arrears: P400,000 x 6% x 3 years = 72,000
Current year dividend: P400,000 x 6% = 24,000
Preference Shareholders’ Equity P616,000
Book value per share: P616,000 / 400 shares = P 1,540
 BOOK VALUE PER ORDINARY SHARE

Total Shareholders’ Equity P2,560,000

Less Preference Shareholders’ Equity 616,000
Preference Shareholders’ Equity P1,944,000
Book value per share: P1,944,000 / 5,500 shares = P353.45
 BOOK VALUE PER SHARE

Book value per share may be used as the initial bargaining

price in negotiating the purchase of a corporation whose
shares are not traded in the stock exchange. On one hand,
investors in the stock market may utilize book value as
one of the bases for evaluating whether a stock is
undervalued or not. It is also significant in many contracts
and in court cases where the rights of the individual parties
are based on cost information.
Thank you!