CORPORATION

RETAINED EARNINGS

Challenges are what make life interesting. Overcoming them is

what makes life meaningful. – Joshua J. Marine
 Learning Objectives:

❖ To be able to define what is retained earnings as a

component of the shareholder’s equity
❖ To be able to identify the different classes of
dividends
❖ To be able to record each class of dividends in the
books of the corporation.
 Overview
❖ Retained earnings represent the component of the shareholder’s
equity arising from the retention of assets generated from the
profit directed activities of the corporation
❖ At the end of the accounting period, Income Summary is closed
to Retained Earnings Account.
⮚ If the operations of a corporation resulted to a profit, Income
Summary is debited and Retained Earnings is credited.
⮚ If the operations of a corporation resulted to a loss, Retained
Earnings is debited and Income Summary is credited.
❖ The basic source of Retained Earnings is profit.
❖ Distribution of accumulated profits to shareholders from
unrestricted Retained Earnings are called dividends.
Retained earnings consist of:

⮚ Unappropriated retained earnings (Unrestricted)-

represents the portion of retained earnings that is
available for future distribution of dividends to
shareholders.
⮚ Appropriated retained earnings (Restricted)-
represents the portion of retained earnings that is
not available for distribution unless the restriction
is subsequently reversed.
What are appropriated retained earnings?

Appropriated retained earnings maybe a result of

• Legal requirement – like retained earnings

appropriated for treasury shares.

• Contractual requirement – like retained earnings

appropriated in compliance with loan agreements

or bond indentures for the protection of creditors.
• Voluntary - such as retained earnings appropriated

for probable contingencies, business expansion

and the like.
• Pro forma entry to record the appropriation:
Retained Earnings Unrestricted xxx
Retained Earnings Appropriated xxx

Note:
• When restrictions no longer exists, the entry above is
simply reversed.
• Appropriations of retained earnings do not mean that a
corresponding cash fund has been set aside, it only
indicate the amounts that are not available for
distribution to the shareholders.
Negative balances - equity

❖ When the retained earnings account has a

debit balance (negative balance), it is
described as deficit. It is a deduction from
shareholder’s equity.

❖ When total shareholder’s equity has a

negative balance (such as when liabilities
exceed assets), it is described as capital
deficiency.
Dividends

Dividends are distributions of earnings to the

shareholders.

Dividends may be declared :

a. out of unrestricted retained earnings (return on

capital) or

b. out of capital (return of capital)

Dividends are distributions of earnings to the
shareholders.
Legal limitation in the declaration of dividend:

• Legally dividends can be declared only from retained

earnings (unrestricted) in accordance with the trust fund
doctrine.
• It is illegal for the entity to declare dividends if it has a
deficit or it is in excess of the retained earnings balance,
the excess is a return of capital and therefore violates the
trust fund doctrine.

• SEC ruled that stock or share dividend can be declared

only from premium on par value share. Technically share
premium in excess of par is not part of legal capital.
For accounting purposes, the following are the
relevant dates when dividends are formally declared
by the board of directors:

Date of declaration – the date on which the directors

formally announce the distribution of the dividends.
Date of record – the date on which the stock and
transfer book of the corporation is closed for
registration. Only shareholders listed on this date are
entitled to receive dividends. No entry is required on
this date.
Date of payment - the date of the distribution of the
dividend and the dividend liability is settled.
.

Recognition of dividends
• Liability for dividend must be recognized on the
date of declaration. (IFRIC 17)

• A liability is recognized only for cash dividends

or property dividends.

• No liability is recognized for share dividends.

Share (Stock) dividends payable is presented as
an addition to share capital.
Forms of dividends:

Dividends out of earnings are usually in the form

of the following:
1. Cash dividend
2. Property dividend
3. Liability dividend in the form of bond and
scrip
4. Share dividends or bonus issue
Accounting for cash dividends

⮚ The most common type of dividends are

cash dividends.

⮚ Cash dividends can be expressed as follows:

1. A certain amount of peso per share

2. A certain percentage of the par or

stated value
Accounting for cash dividends

⮚ Only outstanding shares are entitled to dividends.

⮚ Outstanding shares are shares issued and

subscribed less treasury shares.

⮚ Cash dividends on delinquent share are first

applied to the unpaid balance on the subscription
plus costs and expenses, while share dividends are
withheld from the delinquent subscriber until his
unpaid subscription is fully paid. (Corporation
Code)
Illustrative problem:
The shareholder’s equity of XYZ Corp. shows the
following information:

Share capital, authorized capital

100,000 shares at P100 par P4,000,000
Subscribed share capital 1,600,000
Share premium 840,000
Retained earnings 1,500,000
Treasury shares ( cost P80 per share) 320,000
 On March 1, 2023, the board of directors declared P5
dividend per share to shareholders of record as of
March 15, 2023 for distribution on April 1, 2023.

Required:
1. Compute for the outstanding shares and the cash
dividend.
2. Prepare the necessary journal entries to record the
transaction.
Answers:
1. Computation for outstanding shares and cash
dividends:

Shares issued (P4,000,000÷P100) 40,000

Shares subscribed( P1,600,000÷P100) 16,000
Treasury shares ( P320,000÷P80) ( 4,000)
Outstanding shares 52,000
Multiply by: Dividend per share P 5
Total cash dividends P260,000
Answers:
2. Journal entries:
Date of declaration:
March 1 Retained Earnings 260,000
Cash dividends Payable 260,000

Date of payment:
April 1 Cash dividends Payable 260,000
Cash 260,000

Note:
 No entry is required on March 15, 2023, the date of record.
Accounting for liability dividends

O Liability dividends can be in the form of scrip

or bond.
O A scrip is like a note which is a formal
evidence of indebtedness to pay a sum of
money at some future time.
Illustrative problem:
The shareholder’s equity of XYZ Corp. shows the
following information:

Share capital, authorized capital

100,000 shares at P100 par P4,000,000
Subscribed share capital 1,600,000
Share premium 840,000
Retained earnings 1,500,000
Treasury shares ( cost P80 per share) 320,000
Case 1: Scrip dividend
On March 1, 2023, the board of directors
declared 20% scrip dividends to shareholders of
record as of March 15, 2023 for distribution on
April 1, 2023. The scrip dividends bear 12%
interest per annum.
Required:
1. Compute for the outstanding shares and the
cash dividend.
2. Prepare the necessary journal entries to
record the transaction.
Answers:
1. Computation for outstanding shares and cash dividends:
Shares issued (P4,000,000÷P100) 40,000
Shares subscribed( P1,600,000÷P100) 16,000
Treasury shares ( P320,000÷P80) ( 4,000)
Outstanding shares 52,000
Multiply by: par value per share P 100
Aggregate par value of outstanding shares P5,200,000
Multiply by: Dividends as percentage of par value 20%
Total scrip dividends declared P1,040,000
2. Journal entries:
Date of declaration:
March 1 Retained Earnings 1,040,000
Scrip dividends Payable 1,040,000

Date of payment:
April 1 Scrip dividends Payable 1,040,000
Interest Expense 10,400
Cash 1,050,400

Note:
No entry is required on March 15, 2020, the date of record.
Accounting for property dividends

• Property dividends or dividends in kind are

distribution of earnings of the entity to the
shareholders in the form of non cash assets.
• IFRIC 17 covered the accounting for property
dividend.
• There are two issues in accounting for property
dividend:
1. measurement for property dividend payable
2. measurement of the non cash asset to be
distributed as property dividend
 Measurement of property dividend payable
(IFRIC 17)
a. Property dividend payable is initially
recognized at the fair value of the non cash
asset on date of declaration
b. Property dividend payable is adjusted at year
end and on date of settlement for changes in
fair value. The changes are recognized as
gain or loss, directly in retained earnings.
c. On settlement date, any difference between the
carrying amount of the dividend payable and
the asset distributed is recognized in profit or
loss and should disclose it separately.
Accounting for property dividends
Property dividends or dividends in kind are distribution
of earnings of the entity to the shareholders in the form of
non cash assets.

IFRIC 17 covered the accounting for property dividend.

There are two issues in accounting for property dividend:

1. measurement for property dividend payable
2. measurement of the non cash asset to be
distributed as property dividend
Accounting for property dividends
Measurement of property dividend payable (IFRIC 17)
a. Property dividend payable is initially recognized at the
fair value of the non cash asset on date of declaration.
b. Property dividend payable is adjusted at year end and
on date of settlement for changes in fair value. The
changes are recognized as gain or loss, directly in
retained earnings.
c. On settlement date, any difference between the carrying
amount of the dividend payable and the asset distributed
is recognized in profit or loss and should disclose it
separately.
Measurement of non cash asset distributed
• PFRS 5, p 5A, provides that the classification,
presentation, and measurement requirements in
this PFRS apply also to non current asset to be
distributed to owners as property dividend.
• According to the provisions of PFRS 5, non
current assets declared as property dividends are
reclassified as “ Non current asset held for
distribution to owners” and reclassified as
current assets and measured following PFRS 5
Measurement of non cash asset distributed
• Under PFRS 5, a non current asset held for
distribution to owners is initially and
subsequently measured at the lower of its
carrying amount and fair value less cost to
distribute. [IFRS 5.15-15A]
• 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. Any
impairment loss that arises by using the
measurement principles in IFRS 5 must be
recognized in profit or loss [[IFRS 5.20]
 Accounting for Share Dividends
⮚ Share dividends are distributions of the earnings
of the entity in the form of the entity’s own shares.

⮚ Share dividends are accounted for as follows:1.

If the share dividends declared are less than
20%(small) of the outstanding shares, the
share dividends are accounted for at fair
value.
⮚ Retained earnings is debited for the fair
value of the share dividends on declaration
date. The difference between the fair value
and the par value is credited to share
premium.
 Accounting for Share Dividends

2. If the share dividends declared are 20%

or more (large) of the outstanding shares,
the share dividends are accounted for at par
value.
Retained earnings is debited for the par
value of the share dividends on declaration
date.
Illustrative problem:
The shareholder’s equity of XYZ Corp. shows the
following information:

Share capital, authorized capital 100,000

shares at P100 par P4,000,000
Subscribed share capital 1,600,000
Share premium 840,000
Retained earnings 1,500,000
Treasury shares ( cost P80 per share) 320,000
Illustrative problem 1:

On March 1, 2023, the board of directors declared

share dividend of “1 share for every 10 shares
held” to shareholders of record as of March 15,
2023 for distribution on April 1, 2023.
The fair value per share on declaration date is P120.
Required:
1. Compute for the outstanding shares and the
share dividends.
2. Prepare the necessary journal entries to record
the transaction.
Answers:
1. Analysis of the share dividend declared:

Declared share dividend = 1 share for every 10

shares held

Ratio = 1/10 , Percentage = 10%

Conclusion: The share dividends are considered

small

Accounting = at fair value, any excess of fair

value over par value is credited to share
premium
Answers:
1. Computation for outstanding shares and share
dividends:

Shares issued (P4,000,000÷P100) 40,000

Shares subscribed( P1,600,000÷P100) 16,000
Treasury shares ( P320,000÷P80) ( 4,000)
Outstanding shares 52,000
Multiply by: Dividend declared .10
Number of shares declared as dividends 5,200
Multiplied by: Fair value per share P 120
Total amount of share dividends P624,000
2. Journal entries:
Date of declaration:
March 1 Retained Earnings 624,000
2023 Share dividends Distributable 520,000
Share Premium 104,000

Date of distribution:
April 1 Share dividends Distributable 520,000
2023 Share Capital 520,000

Note:
 No entry is required on March 15, 2023, the date of record.
Illustrative problem:
The shareholder’s equity of XYZ Corp. shows the
following information:

Share capital, authorized capital 100,000

shares at P100 par P4,000,000
Subscribed share capital 1,600,000
Share premium 840,000
Retained earnings 1,500,000
Treasury shares ( cost P80 per share) 320,000
Illustrative problem 2:

On March 1, 2023, the board of directors declared

share dividend of “1 share for every 4 shares held” to
shareholders of record as of March 15, 2023 for
distribution on April 1, 2023.
The fair value per share on declaration date is P120.
Required:
1. Compute for the outstanding shares and the share
dividends.
2. Prepare the necessary journal entries to record the
transaction.
Answers:
1. Analysis of the share dividend declared:

Declared share dividend = 1 share for every 4 shares

held

Ratio = 1/4 , Percentage = 25%

Conclusion: The share dividends are considered

large

Accounting = at par value

Answers:

1. Computation for outstanding shares and cash

dividends:
Shares issued (P4,000,000÷P100) 40,000
Shares subscribed( P1,600,000÷P100) 16,000
Treasury shares ( P320,000÷P80) ( 4,000)
Outstanding shares 52,000
Multiply by: Dividend declared .25
Number of shares declared as dividends 13,000
Multiplied by: Par value per share P 100
Total share dividends P1,300,000
2. Journal entries:
Date of declaration:
March 1 Retained Earnings 1,300,000
2023 Share dividends Distributable 1,300,000

Date of distribution:
April 1 Share dividends Distributable 1,300,000
2023 Share Capital 1,300,000

Note:
 No entry is required on March 15, 2023, the date of record.
 God Bless!
Stay Safe and Healthy!

Sources:
Ballada, Win (2023) Basic Financial Accounting and Reporting/ Domdane Publishers (prescribed textbook)
Manuel, Zenaida Vera Cruz, 21st Century Partnership and Corporation Accounting/ Zenaida Vera Cruz manuel
Milan, Zeus Vernon B., Intermediate Accounting 2(2019) (reference textbook)