CHAPTER 8

OPERATIONS OF A CORPORATION

This chapter deals with the steps in the accounting cycle of a corporation, description
of the components of a shareholders’ equity, dividends, earnings per share and book value per
share.

LEARNING OBJECTIVES
At the end of this chapter, each student is expected to:
1. Prepare a work sheet for a corporation.
2. Prepare financial statements for a corporation.
3. Describe the components of a shareholders’ equity.
4. Prepare adjusting and closing entries for a corporation.
5. Identify the different types of dividends, compute and distribute dividends declared
by the Board of Directors.
7. Record properly dividend transactions.
8. Calculate earnings per share and book value per share.
9. Record the appropriation of retained earnings.

ACCOUNTING CYCLE OF A CORPORATION

The accounting cycle of a corporation is basically the same as that of a single
proprietorship and a partnership. Recording of business transactions such as purchase and sale
of merchandise, payment of expenses and liabilities, etc., is the same as that employed in the
two business organizations mentioned.
At the end of the accounting period, the following activities are performed:
1. Preparation of a work sheet.
2. Preparation of financial statements.
a. Statement of Comprehensive Income (Income Statement)
b. Statement of Changes in Equity
c. Statement of Financial Position (Balance Sheet)
d. Statement of Cash Flows
3. Journalizing and posting of adjusting entries.
4. Journalizing and posting of closing entries.
5. Preparation of post-closing trial balance.

PREPARATION OF A WORK SHEET

For a corporation, the procedures involved in the preparation of a work sheet are the
same as those employed in a single proprietorship.

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PREPARATION OF FINANCIAL STATEMENTS
Based on the completed work sheet, the following financial statements are prepared:
the statement of financial position (balance sheet), the statement of comprehensive income
(income statement), the statement of changes in equity, and the statement of cash flows.

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

The statement of financial position reports the financial condition of a corporation for
a particular date. The presentation of the assets and liabilities is similar to that of a single
proprietorship and the partnership. The equity section of the statement of financial position of
a corporation is known as the shareholders’ equity.
Components of a shareholders’ equity:
a. Share Capital (Capital Stock)
b. Subscribed Share Capital (Subscribed Capital Stock)
c. Subscriptions Receivable
d. Share Premium (APIC)
e. Retained Earnings
f. Revaluation Surplus
g. Treasury Share

Share Capital – is part of the paid-in capital which represents the total par or stated
value of shares of stocks issued.
Subscribed Share Capital – is that part of the authorized share capital that has been
subscribed but not yet fully paid, therefore, it is still unissued.
Subscriptions Receivable – represents unpaid subscriptions. It is preferably reflected as a
deduction from the related subscribed share capital. However, subscriptions
receivable collectible within one year may be classified as current asset.
Share Premium – is the capital contributed by the shareholder in excess of par or stated
value of the share subscribed and issued.
Retained Earnings – represents accumulated balance of periodic earnings, including
prior period adjustments, dividend payments or distributions, and other amounts
transferred to the contributed capital accounts. It is generally divided into two:

1. Appropriated retained earnings – retained earnings set aside for a specific purpose
and therefore not available for any dividend distribution.
2. Unappropriated retained earnings – is free retained earnings. It can be declared as
dividends to shareholders.

In the absence of any qualification, retained earnings reported is unappropriated

retained earnings. Retained earnings account has a normal credit balance. A debit balance is
called a deficit and is presented as a deduction from shareholders’ equity.

Revaluation Surplus – is the excess of revalued amount over the net book value.

Treasury shares – are corporation’s own stock that has been issued and then reacquired but
not cancelled. It is shown as a deduction from the shareholders’ equity.

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STATEMENT OF COMPREHENSIVE INCOME (INCOME STATEMENT)
The statement of comprehensive income shows the results of operations of a
corporation. The presentation of the accounts in the statement of comprehensive income is
similar to that of the two business organizations. However, an additional information is
presented.
Earnings per share is shown below the net income figure. Earnings per share will be
discussed later.

STATEMENT OF CHANGES IN EQUITY

The statement of changes in equity reports transactions or items that cause changes in
shareholders’ equity account balances. The statement shows the following:
 The net income or loss for the period.
 Capital transactions with owners and distributions to owners (dividends).
 The balance of retained earnings at the beginning and end of the period and the
movement for the period.
 Gains and losses that are reported directly in equity.
 Cumulative effect of changes in accounting policy.
 Correction of fundamental errors.

STATEMENT OF CASH FLOWS

The statement of cash flows shows the sources and uses of cash. This will be discussed
in detail in higher accounting subjects.

JOURNALIZING AND POSTING OF ADJUSTING ENTRIES

The procedures involved in the journalizing and posting of adjusting entries are the
same as in the two business organizations.

JOURNALIZING AND POSTING OF CLOSING ENTRIES

Closing entries consist of the following:
a. Nominal accounts with credit balances are debited, and Income Summary account is
credited for the total.
b. Nominal accounts with debit balances are credited, and Income Summary account is
debited for the total.
c. Income Summary account is closed to Retained Earnings account.

1) Net income (Income Summary shows a credit balance) –

Income Summary xx
Retained Earnings xx
2) Net loss (Income Summary shows a debit balance) –
Retained Earnings xx
Income Summary xx

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ILLUSTRATIVE PROBLEM

Bright Light Corporation

Trial Balance
December 31, 2020

Cash 257,600
Notes Receivable 100,000
Accounts Receivable 360,000
Allowance for Doubtful Accounts 4,000
Merchandise Inventory 60,000
Office Supplies Unused 15,000
Prepaid Insurance 7,200
Office Equipment 250,000
Accum. Depreciation-Office Equipment 25,000
Store Equipment 380,000
Accum. Depreciation-Store Equipment 38,000
Notes Payable 50,000
Accounts Payable 65,000
10% Preference Share, P100 par, 20,000 shares
authorized, 5,000 shares issued and outstanding 500,000
Ordinary Share, P10 par, 100,000 shares authorized,
40,000 shares issued and outstanding 400,000
Share Premium - Preference 50,000
Share Premium - Ordinary 120,000
Retained Earnings 85,000
Sales 940,000
Sales Returns & Allowances 20,000
Purchases 500,000
Purchase Returns & Allowances 10,000
Sales Salaries 120,000
Delivery Expense 24,000
Miscellaneous Selling Expense 14,000
Office Salaries 90,000
Rent Expense 50,000
Utilities Expense 30,000
Miscellaneous Administrative Expense 10,600
Interest Revenue 2,400
Interest Expense 1,000 ________
2,289,400 2,289,400

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Additional data:
a) Inventories, Dec. 31: Merchandise, P100,000; Office Supplies, P6,000.
b) Unexpired insurance, P4,800.
c) Accrued interest on notes receivable amounted P500.
d) Accrued interest on notes payable amounted to P250.
e) Accrued sales salaries, P6,000; office salaries, P4,200.
f) Doubtful accounts expense is 2% of net sales.
g) Office and store equipment are depreciated at the rate of 5% per year.
h) Income tax rate – 35%
i) One half of the total shares were issued at the same issuance price during the year.

Required: Prepare the following –

1. Eight-column work sheet;

2. Income Statement;
3. Statement of Changes in Equity;
4. Statement of Financial Position;
5. Adjusting and Closing Entries and
6. Reversing Entries

Bright Light Corporation

Income Statement
For the Year Ended December 31, 2020

Note
Net Sales Revenue (4) P920,000
Cost of Sales (5) ( 450,000)
Gross Income 470,000
Other Operating Income (6) 2,900
Total Income 472,900
Operating Expenses
Selling Expenses (7) (183,000)
Administrative Expenses (8) (227,100)
Operating Income 62,800
Finance Cost (9) ( 1,250)
Income Before Tax 61,550
Income Tax Expense 21,542
Profit for the Period P 40,008
Earnings per share P 1.0002

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 Bright Light Corporation
Statement of Changes in Equity
For the Year Ended December 31, 2020

Share Retained
Capital Reserves Earnings

Balances, January 1 P450,000 P 85,000 P 85,000

Issuance of 2,500 shares of P100 par,
10% preference share at P110 per share 250,000 25,000
Issuance of 20,000 shares of P10 par
ordinary share at P13 per share 200,000 60,000
Net income for the period 40,008
Balance, December 31 P900,000 P170,000 P125,008

Bright Light Corporation

Statement of Financial Position
December 31, 2020

Assets

Note
Current Assets:
Cash P 257,600
Trade & Other Receivables (10) 438,100
Merchandise Inventory 100,000
Prepaid Expenses (11) 10,800
Total Current Assets P 806,500

Non-current Assets:
Fixed Assets (12) 535,500
Total Assets P1,342,000

Liabilities & Equity

Current Liabilities:
Trade & Other Payables (13) P 146,992

Equity:
Share Capital (14) P 900,000
Reserves (15) 170,000
Retained Earnings 125,008
Total Equity 1,195,008
Total Liabilities & Equity P1,342,000

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Notes to the Financial Statements

Note 4 – Net Sales Revenue

Gross Sales P940,000
Sales Returns & Allowances ( 20,000)
Net Sales Revenue P920,000

Note 5 – Cost of Sales

Merchandise Inventory, Jan. 1 P 60,000
Purchases 500,000
Purchase Returns & Allowances ( 10,000)
Merchandise Available for Sale 550,000
Merchandise Inventory, Dec. 31 ( 100,000)
Cost of Sales P450,000

Note 6 – Other Operating Income

Interest Revenue P 2,900

Note 7 – Selling Expenses

Sales Salaries P126,000
Delivery Expense 24,000
Depreciation Expense-Store Equipment 19,000
Miscellaneous Selling Expense 14,000
Total Selling Expense P183,000

Note 8 – Administrative Expenses

Office Salaries P 94,200
Rent Expense 50,000
Utilities Expense 30,000
Office Supplies Expense 9,000
Insurance Expense 2,400
Doubtful Accounts Expense 18,400
Depreciation Expense-Office Equipment 12,500
Miscellaneous Administrative Expense 10,600
Total Administrative Expense P227,100

Note 9 – Finance Cost

Interest Expense P 1,250

Note 10 – Trade & Other Receivables

Notes Receivable P100,000
Accounts Receivable 360,000
Allowance for Doubtful Accounts ( 22,400)
Interest Receivable 500
Total P438,100

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Note 11 – Prepaid Expenses
Office Supplies P 6,000
Prepaid Insurance 4,800
Total P 10,800

Note 12 – Fixed Assets

Office Equipment P250,000
Store Equipment 380,000
Total P630,000
Accumulated Depreciation ( 94,500)
Carrying Value P535,500

Accumulated Depreciation:
Office Equipment P 37,500
Store Equipment 57,000
Total P 94,500

Note 13 – Trade & Other Payables

Notes Payable P 50,000
Accounts Payable 65,000
Income Tax Payable 21,542
Interest Payable 250
Salaries & Wages Payable 10,200
Total P146,992

Note 14 – Share Capital

10% Preference Share, P100 par
5,000 shares issued and outstanding P500,000
Ordinary Share, P10 par
40,000 shares issued and outstanding 400,000
Total P900,000

Note 15 – Reserves
Share Premium – Preference P 50,000
Share Premium – Ordinary 120,000
Total P170,000

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 GENERAL JOURNAL

Date Post
2020 Description Ref. Debit Credit
Adjusting Entries
Dec. 31 Income Summary 60,000
Merchandise Inventory 60,000

31 Merchandise Inventory 100,000

Income Summary 100,000

31 Office Supplies Expense 9,000

Office Supplies Unused 9,000

31 Insurance Expense 2,400

Prepaid Insurance 2,400

31 Interest Receivable 500

Interest Revenue 500

31 Interest Expense 250

Interest Payable 250

31 Sales Salaries 6,000

Office Salaries 4,200
Salaries and Wages Payable 10,200

31 Doubtful Accounts Expense 18,400

Allowance for Doubtful Accounts 18,400

31 Depreciation Expense-Office Equipment 12,500

Accum. Depreciation-Office Equipment 12,500

31 Depreciation Expense-Store Equipment 19,000

Accum. Depreciation-Store Equipment 19,000

31 Income Tax 21,542

Income Tax Payable 21,542

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 GENERAL JOURNAL

Date Post
2020 Description Ref. Debit Credit
Closing Entries
Dec. 31 Sales 940,000
Purchase Returns & Allowances 10,000
Interest Revenue 2,900
Income Summary 952,900

31 Income Summary 952,892

Sales Returns & Allowances 20,000
Purchases 500,000
Sales Salaries 126,000
Delivery Expense 24,000
Miscellaneous Selling Expense 14,000
Office Salaries 94,200
Rent Expense 50,000
Utilities Expense 30,000
Miscellaneous Administrative Expense 10,600
Interest Expense 1,250
Office Supplies Expense 9,000
Insurance Expense 2,400
Doubtful Accounts Expense 18,400
Depreciation Expense-Office Equipment 12,500
Depreciation Expense-Store Equipment 19,000
Income Tax 21,542

31 Income Summary 40,008

Retained Earnings 40,008

Reversing Entries
2020
Jan. 1 Interest Revenue 500
Interest Receivable 500

1 Interest Payable 250

Interest Expense 250

1 Salaries & Wages Payable 10,200

Sales Salaries 6,000
Office Salaries 4,200

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DIVIDENDS

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

number of shares owned.

Two types of dividends:

a) Dividends out of earnings
b) Dividends out of capital

In this section, discussion will be focused on dividends paid out of earnings.

Dividend declaration is vested on the Board of Directors of the corporation. However,

they must observe the legal requirement governing the maintenance of legal or stated capital.

Important dates in the formal declaration of dividends:

1. Date of declaration – the date on which the Board of Directors approve the resolution
to distribute dividends. On this date, reduction in retained earnings is recognized in the
accounts and the liability to shareholders is recorded.

2. Date of record – the date on which the company determines who are entitled to the
receipt of declared dividends. It usually follows the declaration date by a period of two
to three weeks. No entry is required on this date but a list of the shareholders entitled
to receive dividends is made.

3. Date of payment – the date on which the dividend liability is settled or paid. It usually
follows the declaration date by four to six weeks.

Types of dividends out of earnings:

a. Cash dividends
b. Property dividends
c. Liability dividends
d. Stock dividends

CASH DIVIDEND

Cash dividend is the most common type of dividend. It normally implies distribution
of cash.

Cash dividends may be expressed as follows:

a) A certain amount of pesos per share – this is usually true to no-par stock.
Example: Dividend is P1 per share.
b) A certain percent of the par or stated value.
Example: Dividend is 5% of P100 par value share or P5 per share.
Illustration:

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 The Board of Directors of Buena Vista Company, at their meeting on December 15,
2019, declared a dividend of P5 per share, payable on February 15, 2020, to shareholders of
record as of December 31, 2019. The company has 20,000 shares issued and outstanding
with par value of P100.

Pertinent entries are:

2019
Dec. 15 Retained Earnings (P5 x 20,000 shares) 100,000
Cash Dividends Payable 100,000

Dec. 31 No Entry

2020
Feb. 15 Cash Dividends Payable 100,000
Cash 100,000

PROPERTY DIVIDENDS

Property dividends or dividends in kind are distribution of earnings to shareholders in

the form of non-cash assets or properties.

In accordance with IFRIC 17, property dividends are considered as “distribution of

noncash assets to owners.”

Two accounting issues arising from the distribution of property dividends:

1. Measurement of the property dividend payable.
2. Measurement of the noncash asset to be distributed as property dividends.

The accounting for property dividends is now covered by IFRIC 17 as promulgated by

the International Financial Interpretations Committee.

Measurement of Property Dividend Payable

IFRIC 17, paragraph 11, provides that an entity shall measure a liability to distribute
noncash asset as a dividend to its owners at the fair value of the asset to be distributed.

Paragraph 13 further provides that 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.

This means that dividend payable is first recognized at the fair market value of the
noncash asset at date of declaration, then, increased or decreased if there is a change in the

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value of the noncash asset at the end of the accounting period and at settlement date. The
offsetting debit or credit is through equity or directly retained earnings.

Settlement of Property Dividend Payable

When an entity settles dividend payable, IFRIC 17, paragraph 14, provides that the
difference between the carrying amount of the dividend payable and the carrying amount of
the noncash asset to be distributed shall be recognized in profit or loss.

Measurement of Noncash Asset Distributed

PFRS 5, paragraph 5A, as amended, provides that the classification, presentation and
measurement requirements in this PFRS shall also apply to “a noncurrent asset to be distributed
to owners” as property dividend.

Paragraph 15A further provides that an entity shall measure a noncurrent asset
classified for distribution to owners at the lower of carrying amount and fair value less cost
to distribute.

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.

Illustrative Problem 1

Lovely Corporation owned 50,000 shares of Charm Company accounted for as

nonmarketable equity investment. The carrying amount of the investment is P1,000,000. On
December 1, 2020, Lovely Corporation declared these shares as property dividend to be
distributed on January 31, 2021. The investment had the following fair value less cost to
distribute:
December 1, 2020 1,500,000
December 31, 2020 1,600,000
January 31, 2021 1,800,000

1. To recognize the dividend payable on the date of declaration on December 1, 2020:

Retained Earnings 1,500,000

Dividend Payable 1,500,000

2. To recognize the increase in dividend payable at the end of the reporting period on
December 31, 2020:

Retained Earnings 100,000

Dividend Payable 100,000
Fair value – 12/31/20 1,600,000
Fair value – 12/1/20 1,500,000
Increase in dividend payable 100,000

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 3. The carrying amount of the investment of P1,000,000 is not adjusted because this is
lower than the fair value of P1,600,000 on December 31, 2020. The investment is
measured in the statement of financial position on December 31, 2020 at carrying
amount.

4. To recognize the increase in dividend payable on the date of settlement on January 31,
2021:

Retained Earnings 200,000

Dividend Payable 200,000

Fair value – 1/31/2021 1,800,000

Fair value – 12/31/2020 1,600,000
Increase in dividend payable 200,000

5. To record the settlement of the dividend payable on January 31, 2021:

Dividend Payable 1,800,000

Investment in Equity Securities 1,000,000
Gain on Distribution of Property Dividend 800,000

Dividend Payable – 1/31/2021 1,800,000

Carrying amount of investment 1,000,000
Gain on distribution of property dividend 800,000

Illustrative Problem 2

On November 1, 2020, Charm Corporation declared a property dividend of equipment

payable on March 1, 2021. The carrying amount of the equipment is P2,000,000 and the fair
value is P1,500,000 on November 1, 2020. However, the fair value less cost to distribute the
equipment is P1,200,000 on December 31, 2020 and P1,000,000 on March 1, 2021.

1. To recognize the dividend payable on the date of declaration on November 1, 2020:

Retained Earnings 1,500,000

Dividend Payable 1,500,000

2. To recognize the decrease in dividend payable at the end of the reporting period on
December 31, 2020:

Dividend Payable 300,000

Retained Earnings 300,000

Fair value – 12/31/20 1,200,000

Fair value – 11/1/20 1,500,000
Decrease in dividend payable ( 300,000)

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 3. To measure the equipment on December 31, 2020 at the lower of carrying amount and
fair value less cost to distribute:

Impairment Loss 800,000

Equipment 800,000

Carrying amount 2,000,000

Fair value less cost to distribute 1,200,000
Impairment loss 800,000

4. To recognize the decrease in dividend payable on the date of settlement on March 1,

2021:

Dividend Payable 200,000

Retained Earnings 200,000

Fair value – 3/1/21 1,000,000

Fair value – 12/31/20 1,200,000
Decrease in dividend payable ( 200,000)

5. To record the settlement of the dividend payable on March 1, 2021:

Dividend Payable 1,000,000

Loss on Distribution of Property Dividend 200,000
Equipment 1,200,000

Dividend Payable – 3/1/21 1,000,000

Carrying amount of equipment – 12/31/20 1,200,000
Loss on distribution of property dividend ( 200,000)

LIABILITY DIVIDENDS/SCRIP DIVIDENDS

Liability dividends are actually deferred cash dividends. Declaration of this type of
dividend is usually resorted to by the Board of Directors when retained earnings may be
sufficient but cash may be insufficient to cover working capital requirements.
Liability dividends may be in the form of bond or scrip. Both bond and scrip are formal
evidence of indebtedness to pay a sum of money at some future time.

Distinctions between bond and scrip:

1. Bond is usually long term while scrip is short term;
2. Bond usually bears interest while scrip may or may not be interest bearing.

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Scrip Dividend

Raindrops Corporation has 20,000 shares of P50 par value ordinary share outstanding
as of November 15, 2020. On this date, the Board of Directors declared a scrip dividend of P6
per share to shareholders of record as of |November 30, 2020. Promissory notes dated
December 1, 2020 were issued on the same date payable in six months plus interest of 10%
per annum. Payment of said dividends were made on May 31, 2021. Pertinent entries are:
2020
Nov. 15 Retained Earnings 120,000
Scrip Dividends Payable 120,000
20,000 sh @ P6 = P120,000

Adjusting Entry
Dec. 31 Interest Expense 1,000
Interest Payable 1,000
P120,000 x 10% x 1/12 = P1,000

Reversing Entry
2021
Jan. 1 Interest Payable 1,000
Interest Expense 1,000

May 31* Scrip Dividends Payable 120,000

Interest Expense 6,000
Cash 126,000
P120,000 x 10% x 1/2 = P6,000

*If no reversing entry was made:

May 31 Scrip Dividends Payable 120,000

Interest Payable 1,000
Interest Expense (P120,000 x 10% x 5/12) 5,000
Cash 126,000

Bond Dividends

Dividends are declared in the amount of P1,000,000 payable in company’s own bonds,
6%, P1,000,000 face value. The bonds mature in five years. Interest is paid semi-annually.
Pertinent entries are:
a) To record declaration of dividends:

Retained Earnings 1,000,000

Bond Dividends Payable 1,000,000

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 b) To record the issuance of bonds in payment for the dividends:

Bond Dividends Payable 1,000,000

Bonds Payable 1,000,000

c) To record the payment of periodic semi-annual interest on bonds:

Interest Expense (1,000,000 x 6% x ½) 30,000

Cash 30,000

d) To record redemption of bonds on maturity date:

Bonds Payable 1,000,000

Cash 1,000,000

STOCK DIVIDENDS

Stock dividends (termed as capitalization or bonus issue under IAS) are distributions
of company’s earnings in the form of the company’s own shares of stock. When stock
dividends are declared, the retained earnings are in effect capitalized, that is, transferred to
share capital. The assets of the corporation remain the same before and after the declaration
and issuance of the stock dividend. The declaration of the stock dividends does not change the
total of the shareholders’ equity. It only creates a change in its components – a decrease in
retained earnings but increase in share capital or capital stock.

Recording of stock dividends depends on whether the declaration is a small stock

dividend or a large stock dividend. Less than 20% of the outstanding shares is considered a
small stock dividend, while 20% or more of the outstanding shares is considered a large stock
dividend.

For a small stock dividend, retained earnings is debited for the fair market value of the
share on declaration date. On the other hand, for a large stock dividend, retained earnings is
debited using the par value of the share to be distributed.

Illustration

Perfect Corporation has the following balances in its shareholders’ equity:

Ordinary Share Capital, P100 par, 20,000 shares
authorized, 10,000 shares issued 1,000,000
Share Premium 500,000
Retained Earnings 750,000
Pertinent entries for the declaration and distribution of dividends are:

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Case 1 – A 10% stock dividend is declared. Market value of the share is P150.

a) Retained Earnings (10% of 10,000 x P150) 150,000

Stock Dividends Payable (1,000 x P100) 100,000
Share Premium - Stock Dividends 50,000

b) Stock Dividends Payable 100,000

Ordinary Share Capital 100,000

Case 2 – A 50% stock dividend is declared. Market value of the share is P150.

a) Retained Earnings (50% x 10,000 x P100) 500,000

Stock Dividends Payable (5,000 x P100) 500,000

b) Stock Dividends Payable 500,000

Ordinary Share Capital 500,000

FRACTIONAL STOCK DIVIDENDS

When stock dividends are distributed, not all shareholders will receive full shares.

Suppose, a 10% stock dividend is declared. This means that a shareholder shall receive
one (1) share for every ten (10) shares held. Thus, a shareholder owning 55 shares shall be
entitled to receive five (5) full shares and a fractional one-half (1/2) share.

There is no accounting problem with regards to the issuance of the full shares. The
problem is with respect to the fractional shares.

The following alternative steps may be followed in accounting for the fractional shares:
a) The corporation may issue warrants for the fractional shares and give the holders
thereof enough time to accumulate sufficient warrants for a full share.
b) The corporation may pay cash in lieu of the fractional shares. This is possible
only if the source of stock dividends is retained earnings. If the source of the stock
dividends is share premium, the cash payment is illegal.

Illustration

Assume the following information:

Ordinary Share Capital, P100 par, 10,000 shares issued P 1,000,000
Retained Earnings 1,000,000
Stock dividends declared 50%
Full shares issued 4,500 shares
Fractional shares issued 500 shares

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Pertinent entries are:

a) Upon declaration:
Retained Earnings (50% x 10,000 x P100) 500,000
Stock Dividends Payable 500,000

b) Upon issuance of the full shares and fractional shares:

Stock Dividends Payable 500,000
Ordinary Share Capital (4,500 x P100) 450,000
Fractional Warrants Outstanding (500 x P100) 50,000

Note: Fractional warrants outstanding is part of share premium.

c) When only 400 full shares are issued through the surrender of the required fractional
warrants and the remaining warrants expired:
Fractional Warrants Outstanding 50,000
Ordinary Share Capital (400 x P100) 40,000
Share Premium - Expired Fractional Warrants 10,000

DIVIDENDS ON PREFERENCE SHARE

A corporation is obligated to pay dividends to shareholders (whether preference or

ordinary) only when the Board of Directors declares a dividend. It does not mean, therefore,
that preference shareholders have absolute rights to dividends. It simply implies that if
dividends are declared, preference shareholders have the right to receive dividends first before
the ordinary shareholders are paid a dividend.

Illustrative Problem

Honesty Corporation’s condensed statement of financial position on December 31, 2019 is

presented below:

Assets P250,000
=======
Liabilities P 40,000
6% Preference Share Capital, P100 par, 500 shares 50,000
Ordinary Share Capital, P100 par, 1,000 shares 100,000
Retained Earnings 60,000
P250,000
=======
Dividends have been paid on the preference share up to December 31, 2016. All the retained
earnings are declared as dividends.

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Case 1 – Preference share is non-cumulative and nonparticipating.
Total Preference Ordinary
Total Dividends 60,000
Regular (6% x P100x 500) ( 3,000) 3,000
Balance – to Ordinary (57,000) _______ 57,000
Total a) 3,000 57,000
Shares outstanding b) 500 1,000
Dividend per share (a/b) P 6 P 57

Case 2 - Preference share is cumulative and nonparticipating.

Total Preference Ordinary
Total Dividends 60,000
Arrears (6% x P100 x 500) x 2 yrs. ( 6,000) 6,000
Regular ( 3,000) 3,000
Balance – to Ordinary (51,000) _______ 51,000
Total a) 9,000 51,000
Shares outstanding b) 500 1,000
Dividend per share (a/b) P 18 P 51

Case 3 – Preference share is non-cumulative and fully participating.

Total Preference Ordinary
Total Dividends 60,000
Regular (6% x P100 x 500) ( 3,000) 3,000
Equal rate to Ordinary
(6% x P100 x 1,000) ( 6,000) 6,000
Balance for participation 51,000
Preference (1/3 x 51,000) ( 17,000) 17,000
Ordinary (2/3 x 51,000) ( 34,000) 34,000
Total a) 20,000 40,000
Shares outstanding b) 500 1,000
Dividend per share (a/b) P 40 P 40

Case 4 – Preference share is cumulative and fully participating.

Total Preference Ordinary
Total Dividends 60,000
Arrears (6% x P100 x 500) x 2 yrs. ( 6,000) 6,000
Regular ( 3,000) 3,000
Equal rate to Ordinary ( 6,000) 6,000
Balance for participation 45,000
Preference (1/3 x 45,000) ( 15,000) 15,000
Ordinary (2/3 x 45,000) ( 30,000) 30,000
Total a) 24,000 36,000
Shares outstanding b) 500 1,000
Dividend per share (a/b) P 48 P 36

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Case 5 – Preferred stock is cumulative and participating up to 10% only.
Total Preference Ordinary
Total Dividends 60,000
Arrears ( 6,000) 6,000
Regular ( 3,000) 3,000
Equal rate to Ordinary ( 6,000) 6,000
Balance for participation 45,000
Preference (4% x P100 x 500) ( 2,000) 2,000
Ordinary (balance) (43,000) 43,000
Total a) 11,000 49,000
Shares outstanding b) 500 1,000
Dividend per share (a/b) P 22 P 49

EARNINGS PER SHARE

Earnings per share is the amount earned on each ordinary share during a given period.
It pertains only to ordinary share since preference share has a definite rate of return.

The International Accounting Standards Committee and the United States Financial
Accounting Standards Board require two presentations of earnings per share, namely:
1. Basic earnings per share
2. Diluted earnings per share

Only the basic earnings per share will be discussed in this section.

BASIC EARNINGS PER SHARE

1. If the company has only one class of share, the basic formula is:

Basic EPS = Net Income__________

Ordinary Shares Outstanding

2. If there are two classes of share, the computation should be based on net income after
deducting dividends on preference share. The formula is:

Basic EPS = Net Income – Dividend Requirement for Preference Share_

Ordinary Shares Outstanding

The dividend requirement for preference share to be deducted from net income
depends on the nature of preference share.

If the preference share is cumulative, the dividend requirement for the current year
is deducted from net income, whether such dividend is declared or not.

If the preference share is non-cumulative, the dividend requirement for the current
year is deducted only from net income if there is dividend declaration.

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 3. Ordinary shares outstanding should be the weighted average number of ordinary shares
outstanding during the period.

Illustrative Problem

The following data were taken from the books and records of Green Valley Corporation
as of December 31, 2020:

Ordinary share capital, P10 par, 100,000 shares outstanding P1,000,000

6% Preference share capital, P100 par, 4,000 shares outstanding 400,000
Net income for the period 669,000

Case 1 – Preference share is cumulative.

P669,000 – (6% x P100 x 4,000)_
Basic EPS = 100,000 shares = P6.45

Case 2 - Preference share is non-cumulative, dividend has been declared.

P669,000 – (6% x P100 x 4,000)_
Basic EPS = 100,000 shares = P6.45

Case 3 – Preference share is non-cumulative, no dividend declaration.

P669,000 ___
Basic EPS = 100,000 shares = P6.69

AVERAGE SHARES OUTSTANDING

Illustration:

The following data for ordinary share are given for the year 2019:
January 1 Beginning balance 50,000 shares
March 1 Additional issuance 100,000 shares
June 1 Additional issuance 50,000 shares
October 1 Additional issuance 100,000 shares
Total outstanding 300,000 shares

(a) (b) (a x b)
Months Peso
Date Shares Outstanding Months
Jan. 1 50,000 12 600,000
Mar. 1 100,000 10 1,000,000
June 1 50,000 7 350,000
Oct. 1 100,000 3 300,000
2,250,000

Average shares = 2,250,000 = 187,500

12

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BOOK VALUE PER SHARE

Book value per share is the amount that would be paid on each share capital in case of
corporate liquidation and assuming that the amount available to shareholders is exactly the
same as the total shareholders’ equity.

If the company issues only one class of share, the formula to compute book value per
share is as follows:

Book value per share = Total Shareholders’ Equity

No. of shares outstanding

If the company issues two classes of share, the equity identified with preference share
should be determined first. Equity identified with preference share would then be deducted
from the total shareholders’ equity to give the equity identified with ordinary share. Book
value per share should then be computed as follows:

Book value per share-Preference share = Equity Identified with Preference Shares
No. of Preference Shares Outstanding

Book value per share-Ordinary share = Equity Identified with Ordinary Shares
No. of Ordinary Shares Outstanding

When there is a treasury share and a subscribed share capital, the amount of par or
stated value to be assigned to the pertinent share capital is computed as follows:

Shares Amount
Share capital issued xx xxx
Add: Subscribed share capital xx xxx
Total xx xxx
Less: Treasury share at par xx xxx
Share and amount outstanding xx xxx

The cost of the treasury share is deducted in arriving at the total shareholders’ equity.

EQUITY IDENTIFIED WITH PREFERENCE SHARE

Equity identified with preference share generally consists of the liquidation value of
the share and any claim on dividends. Liquidation value of the share refers to the amount
payable to preference shareholders for every share owned in case of corporate liquidation. The
liquidation value may be more than the par value or stated value. In the absence of a liquidation
value, the preference shareholders shall receive an amount equal to the par or stated value,
unless there is a deficit, in which case, the preference shareholders would share on pro-rata
basis with ordinary shareholders.

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 The preference share may have a call price or redemption price but this is ignored for
book value computation.

Preferred as to Assets

When preferred as to assets, the preference shareholders are entitled to payment not
only of the liquidation value but also the dividends in arrears.

Preferred as to Dividends

Preferred as to dividends does not mean that the preference shareholders have an
absolute right to dividends. It simply means that if dividends are declared, preference
shareholders have the right to receive dividends first before the ordinary shareholders are paid
a dividend.

In the absence of any statement to the contrary, the preference share is preferred as to
dividends.

Special notes

a. Dividends in arrears usually include current dividends. It should be specifically

disclosed, otherwise, there are no arrearages.

b. In case there are two classes of preference share with different dividend rates and both
are participating, the lower rate shall be the basis for allocation to the ordinary share.
If only one preference share is participating, the rate of the participating preference
share shall be used as basis for ordinary share dividend.

Illustrative Problems

Problem 1 – The company issues only one class of share.

The shareholders’ equity of Alusiman Corporation is as follows:

Ordinary Share Capital, P10 par, 500,000 shares authorized,

350,000 shares issued and outstanding P3,500,000
Share Premium 160,000
Retained Earnings:
Unappropriated P600,000
Appropriated 400,000 1,000,000
Total- P4,660,000

Required: Determine the book value per share.

Solution: Book value per share = P4,660,000 = P13.31

350,000

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Problem 2 – The company issues two classes of share.

The stockholders’ equity of Marigold Corporation shows the following data:

6% Preference Share, P100 par, 30,000 shares
authorized, 15,000 shares issued and outstanding P1,500,000
Ordinary Share, P10 par, 100,000 shares authorized,
50,000 shares issued and outstanding 500,000
Share Premium - Preference 45,000
Share Premium - Ordinary 50,000
Retained Earnings:
Unappropriated P705,000
Appropriated 200,000 905,000
Total- P3,000,000

Dividends for the current year and the preceding three years are unpaid on the preference
share.

Required: Determine the book value per share for each class of stock under each of the
following situations:
1. Preference share is non-cumulative.
2. Preference share is cumulative.
3. Preference share is cumulative, liquidation value is P105 per share.

Case 1 – Preference share is non-cumulative.

Total shareholders’ equity P3,000,000

Less: Equity identified with preference shares:
Liquidation value (15,000 x P100) 1,500,000
Current dividend (6% x P100 x 15,000) 90,000 1,590,000
Equity for ordinary shares P1,410,000

Book values per share:

Preference share (1,590,000/15,000) = P106.00
Ordinary share (1,410,000/50,000) = P 28.20

Case 2 – Preference share is cumulative.

Total shareholders’ equity P3,000,000

Less: Equity identified with preference shares:
Liquidation value (15,000 x P100) 1,500,000
Dividends [(6% x P100 x 15,000) x 4] 360,000 1,860,000
Equity for ordinary shares P1,140,000

Book values per share:

Preference share (1,860,000/15,000) = P124.00
Ordinary share (1,140,000/50,000) = P 22.80

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Case 3 – Preference share is cumulative, liquidation value is P105 per share.

Total shareholders’ equity P3,000,000

Less: Equity identified with preference shares:
Liquidation value (15,000 x P105) 1,575,000
Dividends [(6% x P100 x 15,000) x 4] 360,000 1,935,000
Equity for ordinary shares P1,065,000

Book values per share:

Preference share (1,935,000/15,000) = P129.00
Ordinary share (1,065,000/50,000) = P 21.30

Problem 3

Assume the following condensed statement of financial position on December 31, 2019:

Assets P271,000

Liabilities P130,000
Shareholders’ Equity:
6% Preference Share, cumulative,
P100 par, 500 shares issued 50,000
Ordinary Share, P100 par, 1,000 shares issued 100,000
Retained Earnings (deficit) ( 9,000)
P271,000

No dividends have been paid on the preference share since 2016.

Case 1 – Preference share is preferred as to assets (dividend in arrears are fully

payable).

Total shareholders’ equity P141,000

Less: Equity identified with preference shares:
Liquidation value (500 x P100) 50,000
Dividends [(6% x P100 x 500) x 4] 12,000 62,000
Equity for ordinary shares P 79,000

Book values per share:

Preference share (62,000/500) = P124.00
Ordinary share (79,000/1,000) = P 79.00

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Case 2 – Preference share is preferred as to dividends.

Total shareholders’ equity P141,000

Less: Equity identified with preference shares:
Liquidation value (500 x P100) 50,000
Share in the deficit (1/3 x P9,000) ( 3,000) 47,000
Equity for ordinary shares P 94,000

Book values per share:

Preference share (47,000/500) = P 94.00
Ordinary share (94,000/1,000) = P 94.00

APPROPRIATION OF RETAINED EARNINGS

To reduce the amount available for dividend distribution to shareholders, the Board of
Directors may appropriate or set aside a portion of the Retained Earnings balance for a special
purpose or purposes.

Classification of Retained Earnings Appropriations:

1. Appropriation to Report Legal Restrictions on Retained Earnings

When a company reacquires its own stock, the law requires that retained earnings
equal to the cost of stocks reacquired be appropriated. This is done to maintain at original or
stated balances the resources of the business and the shareholders’ equity. The appropriated
balance is returned to retained earnings upon the sale of the reacquired shares.

Entry to record appropriation:

Retained Earnings xx
Retained Earnings Appropriated
for the Purchase of Treasury Shares xx

Entry upon sale of the Treasury Shares:

(Cancellation of the appropriated Retained Earnings)
Retained Earnings Appropriated for the
Purchase of Treasury Shares xx
Retained Earnings xx

2. Appropriation to Report Contractual Restriction in Retained Earnings

Agreement with creditors or shareholders may provide for the retention of a portion of
retained earnings within the company. The purpose is to protect the interest of creditors and
shareholders and to assume redemption of the securities they hold.

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Example: Appropriation of Retained Earnings for the Redemption of Bonds Payable

Entry upon appropriation:

Retained Earnings xx
Retained Earnings Appropriated
for the Redemption of Bonds xx

Entry upon payment of the obligation:

Retained Earnings Appropriated for the
for the Redemption of Bonds xx
Retained Earnings xx

3. Appropriation to Report Discretionary Action by the Board of Directors

This is to present the planned use of future resources as authorized by the Board of
Directors.

Example: Appropriation of Retained Earnings for Plant Expansion

Entry to record appropriation:

Retained Earnings xx
Retained Earnings Appropriated
for Plant Expansion xx

Entry upon completion of the project:

Retained Earnings Appropriated
for Plant Expansion xx
Retained Earnings xx

Other examples under this category:

 Retained Earnings Appropriated for Contingencies
 Retained Earnings Appropriated for Possible Decline in Value of Inventory

Appropriations of retained earnings can also be made by reporting the restrictions in a

note accompanying the financial statements or a parenthetical note in shareholders’ equity

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 EXERCISES

Exercise 8-1 (Shareholders’ Equity section of the Statement of Financial Position)

Below is a partial list of account titles and balances for the Diamond Company as of
December 31, 2020:

Cash in bank 105,200

Notes Receivable 15,000
10% Preference Share Capital, P200 par, cumulative,
5,000 shares authorized 600,000
Ordinary Share Capital, P40 par, 100,000 shares authorized 1,600,000
Share Premium - Preference 240,000
Share Premium - Ordinary 300,000
Subscribed Ordinary Share 400,000
Retained Earnings 600,000
Accounts Payable 800,000
Purchases 1,000,000
Subscriptions Receivable - Ordinary 200,000

Required: Prepare the shareholders’ equity section of the statement of financial position.

Exercise 8-2 (Cash Dividends)

On December 31, 2020, Pearl Company showed the following shareholders’ equity
accounts:

Ordinary Share Capital, P200 par, 50,000 shares authorized,

40,000 shares issued and outstanding ……………………….. P8,000,000
Share Premium ………………………………………………… 200,000
Retained Earnings ……………………………………………… 2,000,000

On December 31, 2020, Pearl Company declared a cash dividend of P5 per share to
shareholders of record on January 15, 2021 and payable on February 15, 2021.

Required: Prepare the appropriate entries on the date of declaration, date of record, and
date of payment.

Exercise 8-3 (Cash Dividends)

On December 31, 2020, the shareholders’ equity of Ruby Company showed the
following balances:

Ordinary Share Capital, P100 par, 100,000 shares authorized,

80,000 shares issued ………………………………………… P8,000,000
Share Premium ……………………………………………………….. 800,000
Retained Earnings …………………………………………………… 2,000,000
Treasury Shares, 5,000 shares at cost ………………………………… 550,000

200
 On December 31, 2020, Ruby Company declared a cash dividend of 6%, payable on
February 20, 2021, to shareholders of record on January 15, 2021.

Required: Prepare the appropriate entries on the date of declaration, date of record, and
date of payment.

Exercise 8-4 (Property Dividends)

Sapphire Company owned 10,000 shares of equity securities of Diamond Corporation
with carrying value of P90 per share. On October 31, 2020, Sapphire declared these shares as
property dividend to be paid on March 31, 2021.

The quoted price for Diamond Corporation share is P110 on October 31, 2020, P130
on December 31, 2020 and P100 on March 31, 2021.

Required: Prepare all indicated entries in connection with the property dividend in
accordance with IFRIC 17.

Exercise 8-5 (Scrip Dividends)

On November 15, 2020, the Board of Directors of Emerald Corporation declared scrip
dividends of P5 per share to shareholders of record as of November 30, 2020. On this date,
Emerald Corporation has 50,000 shares of P100 par ordinary shares outstanding. Promissory
notes dated December 1, 2020 were issued on the same date payable in six months plus interest
of 8% per annum.

Required: Prepare entries to record –

a. declaration.
b. adjusting entry on December 31, 2020
c. reversing entry on January 1, 2021
d. when scrip dividends are redeemed on May 31, 2021.

Exercise 8-6 (Bond Dividends)

Dividends are declared in the amount of P500,000, payable in company’s own bonds,
6%, P500,000 face value. The bonds mature in three years. Interest is paid semi-annually.

Required: Prepare journal entries to record –

a. declaration of dividends.
b. issuance of bonds in payment for the dividends.
c. payment of periodic semi-annual interest on bonds.
d. redemption of bonds on maturity date.

Exercise 8-7 (Small and Large Stock Dividends)

Assume the following data:

Ordinary Share Capital, par value P100, 50,000 shares issued …… P5,000,000
Share Premium …………………………………………………….. 200,000
Retained Earnings …………………………………………………. 3,000,000

201
 Market value of ordinary share on declaration date ………………………. 104
Market value of ordinary share on distribution date ………………………. 110

Required: For each of the following, prepare entries on the date of declaration and date
of payment:
1. A 30% stock dividend is declared on ordinary share.
2. A 10% stock dividend is declared on ordinary share.

Exercise 8-8 (Fractional Stock Dividends)

The shareholders’ equity of Jasper Corporation showed the following balances:

Ordinary Share Capital, P50 par, 40,000 shares

issued and outstanding ……………………………… P2,000,000
Retained Earnings …………………………………………… 1,000,000
Stock dividends declared ……………………………………. 30%
Full shares issued ……………………………………………. 10,000 shares
Fractional shares issued ……………………………………… 2,000 shares

Required: Give the journal entries –

a. upon declaration.
b. upon issuance of the full shares and fractional share dividends.
c. assuming that only 1,500 full shares are issued thru the surrender of the required
fractional warrants and the remaining warrants expired.
d. assuming that only 1,200 full shares are issued thru the surrender of the required
fractional warrants and the remaining warrants are exchanged for cash.

Exercise 8-9 (Dividends on Preference Share)

The shareholders’ equity of Crystal Corporation on December 31, 2020, showed the
following items:

6% Preference Share Capital, par P100, 20,000 shares authorized,

16,000 shares issued and outstanding ……………… P1,600,000
Ordinary Share Capital, par P200, 20,000 shares authorized,
16,000 shares issued and outstanding ………………. 3,200,000
Share Premium - Preference…………………………………. 80,000
Share Premium - Ordinary……………………………………. 320,000
Retained Earnings ……………………………………………. 1,300,000

Dividends declared in 2020 was P1,000,000.

No dividends were declared from January 1, 2017.

Required: Determine the dividends paid to preference share and ordinary share in total and
per share in 2019, assuming preference shares are:

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 1. Non-cumulative, nonparticipating.
2. Cumulative, nonparticipating.
3. Non-cumulative, fully participating.
4. Cumulative, fully participating.
5. Cumulative, participating up to 8% only.

Exercise 8-10 (Earnings Per Share)

For the year 2020, Moon River Corporation has earned a net income of P400,000.
Compute for the basic earnings per share under each of the following assumptions:

a. The company has only one class of stock with 100,000 shares outstanding.
b. The company has shares outstanding as follows:

10% Preference share capital, P50 par, 20,000 shares outstanding

Ordinary share capital, P10 par, 100,000 shares outstanding

a) Preference share is cumulative.

b) Preference share is non-cumulative, dividends has been declared by the

Board of Directors.

c) Preference share is non-cumulative, no dividend has been declared by

Board of Directors.

c. Same as letter (b) except for the additional information with regards to the
issuance of ordinary share:

Jan. 1 Beginning balance 50,000 shares

May 1 Additional issuance 30,000 shares
Aug. 1 Additional issuance 25,000 shares
Nov. 1 Additional issuance 40,000 shares

Exercise 8-11 (Book Value Per Share)

The shareholders’ equity of Sampaguita Company on December 31, 2020 follows:

Ordinary Share, P20 par, 100,000 shares issued P2,000,000

10% Preference Share, P50 par, 10,000 shares issued 500,000
Share Premium – Ordinary 200,000
Share Premium – Preference 50,000
Retained Earnings 1,500,000
Total Shareholders’ Equity P4,250,000

Required: Compute the book value per share on preference share and ordinary share
under each of the following assumptions:

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 a. Preference shares have liquidation value of P60 per share; there are no
dividends in arrears.
b. The preference shares are cumulative, with dividends in arrears for 4 years
(including the current year). Upon corporate liquidation, shares are preferred
as to assets up to par, and any dividends in arrears must be paid before
distribution may be made to ordinary shares.

Exercise 8-12 (Book Value Per Share)

The condensed statement of financial position of Sunflower Company on December
31, 2020 shows the following shareholders’ equity:

8% Preference Share Capital, P50 par P 500,000

Ordinary Share Capital, P100 par 1,000,000
Retained Earnings (deficit) ( 300,000)
P1,200,000

No dividends have been paid on the preference shares since 2017.

Required: Compute the book value per share on preference share and ordinary share
under the following conditions with respect to preference shares:
a. Preference shares are preferred as to asset.
b. Preference shares are preferred as to dividends.

Exercise 8-13 (Appropriation of Retained Earnings)

Selected transactions of Narra Corporation are as follows:

1. The company suffered a net loss of P100,000.

2. Established a restriction on retained earnings for contingencies of P30,000 to cover a
lawsuit filed by a customer against the company.
3. The court directed the company to pay the injured customer P25,000. The company
paid the amount (debit Lawsuit Damage Expense).
4. The Board of Directors ordered the restriction for contingencies closed.
5. The Board of Directors approved the appropriation of retained earnings to cover
possible loss of P90,000 from the price decline in inventories.
6. To support the retirement of preference shares, the Board of Directors restricted the
retained earnings equal to the par value of the preference shares, P120,000.
7. The anticipated price decline in inventories did not materialize. Eliminated the
restriction of retained earnings for this.

Required: Prepare journal entries to record the above transactions.

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 PROBLEMS

Problem 8 - 1
Rainbow Corporation
Trial Balance
December 31, 2020

Cash 100,000
Accounts Receivable 100,000
Allowance for Bad Debts 10,000
Merchandise Inventory, Jan. 1 130,000
Store Supplies 13,000
Office Supplies Unused 8,000
Prepaid Insurance 30,000
Land 1,000,000
Office Equipment 150,000
Accum. Depreciation-Office Equipment 30,000
Store Equipment 250,000
Accum. Depreciation-Store Equipment 50,000
Accounts Payable 50,000
Ordinary Share, P20 par 800,000
Share Premium 83,000
Retained Earnings 313,000
Sales 2,200,000
Sales Discounts 25,000
Purchases 1,200,000
Purchases Returns & Allowances 50,000
Sales Salaries 230,000
Advertising Expense 70,000
Delivery Expense 30,000
Miscellaneous Selling Expense 20,000
Office Salaries 180,000
Utilities Expense 35,000
Miscellaneous Administrative Expense 15,000 _________
3,586,000 3,586,000

Additional information:
a. Merchandise inventory, Dec. 31 210,000
b. Inventory of supplies as of Dec. 31
Store Supplies 5,000
Office Supplies 1,000
c. Accrued salaries as of Dec. 31
Sales Salaries 8,000
Office Salaries 4,000
d. Depreciation on equipment 10% per year

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 e. Expired insurance 10,000
f. Income tax is 35% of income before tax.
g. Transactions with shareholders during the year are as follows:
 Issued 1,000 shares of ordinary shares at P25 per share.
 Declared and distributed dividends of P80,000 during the year.

Instructions:
1. Prepare an eight-column work sheet.
2. Prepare income statement, statement of changes in equity and statement of financial
position.
3. Prepare adjusting and closing entries.

Problem 8 - 2
The adjusted trial balance of SUN CORPORATION on December 31, 2020 includes
the following account balances:
Dividends Payable P 85,000
Income Tax Payable 60,000
Ordinary Share Capital (500,000 shares authorized) 1,500,000
Subscribed Ordinary Share (10,000 shares) 50,000
Share Premium - Ordinary 100,000
10% Preference Share Capital (25,000 shares authorized,
12,000 shares outstanding) 600,000
Share Premium - Preference 60,000
Retained Earnings Appropriated for Contingencies 200,000
Retained Earnings Appropriated for Bond Retirement 500,000
Retained Earnings – Unappropriated 300,000
Buildings 700,000
Dividends Distributable – Ordinary Share 175,000
Share Premium - Stock Dividend 65,000

Instructions: From the foregoing information, prepare the shareholders’ equity section as it
would appear on the statement of financial position.

Problem 8 – 3
On October 1, 2020, Gray Company declared a property dividend of machinery payable
on April 1, 2021. The carrying amount of the machinery is P2,000,000 on October 2020. The
machinery had the following fair value:

October 1, 2020 1,800,000

December 31, 2020 1,700,000
April 1, 2021 1,600,000

Required: Prepare all indicated entries for 2020 and 2021 in connection with the property
dividend.

206
Problem 8 - 4
Assume the following data:
Preference Share Capital, par value P50, 100,000 shares authorized,
50,000 shares issued …………………………………………. P2,500,000
Ordinary Share Capital, par value P30, 200,000 shares authorized,
100,000 shares issued ……………………………………….. 3,000,000
Share Premium - Preference ………………………………………… 400,000
Share Premium - Ordinary ………………………………………….. 1,000,000
Retained Earnings …………………………………………………… 4,000,000
Market value of share on declaration date:
Preference Share …………………………………………… P 55
Ordinary Share……………………………………………… P 35

Required: For each case below, prepare entries on the date of declaration and date of
payment or distribution:

Case 1 - A 15% stock dividend is declared on ordinary share.

Case 2 - A 40% stock dividend is declared on ordinary share.
Case 3 - A 8% stock dividend is declared on both ordinary and preference share.
Case 4 - A stock dividend is declared on ordinary share whereby each shareholder
shall receive one share of for every five shares held.

In view of the ratio of new shares to old shares, it is necessary that fractional
share warrants be issued to various shareholders calling for 3,000 shares. Only
80% of the warrants are turned in and the remainder lapsed.

Problem 8 - 5
The following are selected transactions of Lion Company for years 2019-2020.
2019
Sept. 15 Declared a 20% stock dividend on 100,000 ordinary shares, par value P10.
The shares were originally sold at P15 per share.
Oct. 15 Distributed the stock dividend declared on September 15 which included
fractional warrants for 2,000 shares.
Dec. 1 One thousand five hundred shares were issued for fractional warrants. The
remaining warrants expired.
2020
Sept. 15 Declared scrip dividends of P2 per share payable on November 15, 2020 with
interest at 12% to shareholders of record on December 31, 2019.
Nov. 15 Paid the scrip dividends.
Dec. 1 Declared a dividend of 1 share of Eagle Company share capital on every share of
Lion Company owned. Eagle Company shares are carried at a cost of P3 per share
and the market value is P4 per share.
Dec. 31 Distributed the Eagle Company shares to shareholders. The market value of Eagle
Company share is P6.

Required: Prepare journal entries to record the foregoing transactions.

207
Problem 8 - 6
Gold Company has the following outstanding stock:

8% Preference Share Capital, P100 par, 10,000 shares outstanding … P1,000,000

Ordinary Share Capital, P20 par, 25,000 shares outstanding ……….. 500,000

Dividends for the last two years were declared as follows:

2019 – P220,000 2020 – P700,000

Dividends on preference shares were in arrears for two years at the beginning of
2019.

Required: Determine how much dividends are paid in total and per share to preference
share and ordinary share in 2019 and 2020 assuming preference share is:

1. Non-cumulative, nonparticipating.
2. Cumulative, nonparticipating.
3. Non-cumulative, fully participating.
4. Cumulative, fully participating.
5. Cumulative, participating up to 10%.

Problem 8 - 7
The Blue Lagoon Corporation’s capital structure is as follows:

8% Preference Share Capital, P100 par,

10,000 shares outstanding P1,000,000
Ordinary Share Capital, P20 par,
25,000 shares outstanding 500,000

Required: Compute for the basic earnings per share amounts under each of the
following assumptions:
a. Net income is P200,000.
b. Net income is P224,000.
c. Net income is P400,000.

Problem 8 - 8
The shareholders’ equity of Landmark Corporation on December 31, 2020 follows:
10% Preference Share Capital, P100 par P 500,000
Ordinary Share Capital, P60 par 3,000,000
Share Premium – Preference 50,000
Share Premium – Ordinary 250,000
Retained Earnings 300,000
Total Shareholders’ Equity P4,100,000

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 Preference share is cumulative with dividend in arrears for 3 years at the beginning of
2020 and with a liquidation value of P110.

Required: Compute the book value per share of the preference share and ordinary share.

Problem 8 – 9

The Cosmopolitan Corporation was organized on January 2, 2019, with authorized

share capital of 20,000 ordinary shares, par P100. During the first two years, the following
transactions took place:

2019
Jan. 2 - Issued 5,000 shares to incorporators at P105 per share.
4 - Received subscriptions for 5,000 shares at P100 per share with a 30% down-
payment.
8 - Issued 2,000 shares in exchange for land valued at P100,000 and a building valued
at P125,000.
Mar. 31 - Received full payment for the subscription on Jan. 4. Issued stock certificates.
Dec. 31 - The income summary account showed a credit balance of P250,000, which was
transferred to retained earnings.
31 - Declared a cash dividend of P5 per share payable on Jan. 31, 2020 to shareholders
of record as of Dec. 31, 2019.

2020
Jan. 3 - Purchased equipment on account, P60,000.
31 - Paid the dividends declared on Dec. 31, 2019.
Mar. 15 - Issued 600 shares as settlement of the account in Jan. 3.
Apr. 15 - Declared property dividend authorizing the issue of 1 share of Sunlight Corp.
share capital with par value of P10 and originally acquired at P12 per share, for
each ordinary share held of shareholders of record as of March 31, 2020 payable
on April 30, 2020. Fair market value of Sunlight Corp. share on this date was P15
per share.
Apr. 30 - Distributed the Sunlight Corp. shares. Fair market value on this date was P13 per
share.
June 30 - The income summary account showed a credit balance of P200,000, which was
transferred to retained earnings.
July 1 - Declared scrip dividends of P100,000 payable on Dec. 31, 2020, to shareholders
of record as of Nov. 30, 2020, with 8% interest.
Dec. 31 - The income summary account showed a credit balance of P200,000, which was
transferred to retained earnings.
31 - Paid the scrip dividends.
31 - Declared a 20% stock dividend distributable on Jan. 31, 2021 to shareholders of
record as of Dec. 31, 2020. Market value of the share on this date was P103.

Required: Prepare journal entries to record the above transactions.

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 MULTIPLE CHOICE PROBLEMS

Instruction: Encircle the letter of the correct answer.

1. Cattleya Company provided the following data at year-end:

Authorized share capital 5,000,000

Unissued share capital (2,000,000)
Subscribed share capital 1,000,000
Subscription receivable ( 400,000)
Share Premium 500,000
Retained earnings unappropriated 600,000
Retained earnings appropriated 300,000
Revaluation surplus 200,000
Treasury shares, at cost ( 100,000)

What total amount should be reported as shareholders’ equity?

A. P5,100,000 B. P5,500,000 C. P4,900,000 D. P4,800,000

2. Rose Company provided the following information on December 31, 2020:

Preference share capital, P100 par 2,300,000

Share premium-preference share 805,000
Ordinary share capital, P10 par 5,250,000
Share premium-ordinary share 2,750,000
Subscribed ordinary share capital 50,000
Retained earnings 1,900,000
Note payable 4,000,000
Subscription receivable-ordinary share 400,000

What is the amount of legal capital?

A. P7,550,000 B. P7,600,000 C. P13,055,000 D. P11,150,000

3. The Orchids Company was organized on January 2, 2020, and issued the following
shares:

100,000 shares of P10 par ordinary share, at P24 per share

25,000 shares of P20 par, 4% cumulative preference share, at P50 per share

The net income for 2020 was P420,000 and cash dividends of P72,000 were declared
and paid in 2020. What were the dividends paid on the preference share and ordinary
share, respectively?

A. P20,000 and P52,000 C. P46,000 and P26,000

B. P24,000 and P48,000 D. P72,000 and P0

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4. The shareholders’ equity section of the Yellow Bell Company as of December 31,
2020 was as follows:

Ordinary Share, P10 par, 20,000 shares authorized.

10,000 shares issued and outstanding P100,000
Share Premium 30,000
Retained Earnings 90,000
P220,000

On February 1, 2021, the Board of Directors declared a 10% stock dividend. On this
date, the market value of the ordinary share was P15 per share. For the three months
ended March 31, 2021, Yellow Bell sustained a net loss of P20,000.

A. How much is the retained earnings balance on March 31, 2021?

A. P60,000 B. P55,000 C. P70,000 D. P75,000

B. How much is the total shareholders’ equity on March 31, 2021?

A. P220,000 B. P190,000 C. P200,000 D. P185,000

5. Sampaguita Company had 60,000 ordinary shares issued and outstanding on

December 31, 2019. During 2020, no additional ordinary share was issued.

On January 1, 2020, Sampaguita issued 40,000 non-convertible preference shares.

During 2020, Sampaguita declared and paid P210,000 cash dividend on the ordinary
shares and P120,000 on the preference shares. Net income for 2020 was P750,000.

What should be the 2020 earnings per share?

A. P10.50 B. P12.50 C. P7.50 D. P3.50

6. The shareholders’ equity of Ilang-Ilang Company on December 31, 2020 follows:

10% Preference Share Capital, P50 par, 5,000 shares

issued and outstanding P 250,000
Ordinary Share Capital, P30 par, 50,000 shares
issued and outstanding 1,500,000
Share Premium - Preference 25,000
Share Premium - Ordinary 125,000
Retained Earnings 150,000
Total Shareholders’ Equity P2,050,000

Preference share is cumulative with dividend in arrears for 5 years at the beginning of
2020, and with liquidation value of P60 per share.

Book values per share on preference share and ordinary share, respectively are:
A. P60 and P35 C. P90 and P32
B. P50 and P30 D. P85 and P32.50

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7. The shareholders’ equity of Calachuchi, Inc. on December 31, 2020, follows:

12% Preference Share Capital, P100 par, 20,000

shares issued and outstanding P2,000,000
Ordinary Share Capital, P25 par, 200,000 shares
issued and outstanding 5,000,000
Share Premium 500,000
Retained Earnings 750,000
Total Shareholders’ Equity P8,250,000

Preference shares have a liquidation value of P110, cumulative, with dividends in

arrears for three years including the current year and fully payable in the event of
liquidation.

Book values per share on preference share and ordinary share, respectively are:
A. P124 and P28.85 C. P146 and P26.65
B. P134 and P25.35 D. P158 and P22.90

8. Black Company, a calendar year entity, had sufficient retained earnings in 2020 as a
basis for dividends but was temporarily short of cash. Black declared a dividend of
P100,000 on April 1, 2020 and issued promissory notes to its shareholders in lieu of
cash. The notes, which were dated April 1, 2020, had a maturity date of March 31,
2021 and a 10% interest rate.

How should Black account for the scrip dividend and related interest?
A. Debit retained earnings for P110,000 on April 1, 2020.
B. Debit retained earnings for P110,000 on March 31, 2021.
C. Debit retained earnings for P100,000 on April 1, 2020 and debit interest
expense for P10,000 on March 31, 2021.
D. Debit retained earnings for P100,000 on April 1, 2020 and debit interest
expense for P7,500 on December 31, 2020.

9. On May 31, 2019, Star Company’s board of directors declared a 10% stock dividend.
The market price of Star’s 30,000 outstanding shares of P20 par value was P90 per
share on that date. The stock dividend was distributed on July 31, 2019, when the
stock’s market price was P100 per share.

What amount should Star credit to share premium for this stock dividend?
A. P210,000 B. P240,000 C. P270,000 D. P300,000

10. Rain Corporation declared a 5% stock dividend on 100,000 issued and outstanding
shares of P20 par value, which had a fair value of P50 per share before the stock
dividend was declared. This stock dividend was distributed 60 days after the
declaration date. What is the increase in current liabilities as a result of the stock
dividend declaration?
A. P250,000 B. P100,000 C. P150,000 D. P0

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 11. On September 30, 2020, Green Company issued 4,000 shares of its P100 par share
capital in connection with a stock dividend. The market value per share on the date
of declaration was P150. Green’s shareholders’ equity accounts immediately before
the issuance of the stock dividend shares were as follows:

Share Capital, P100 par, 50,000 shares authorized,

20,000 shares outstanding 2,000,000
Share Premium 3,000,000
Retained Earnings 1,500,000

What should be the retained earnings balance immediately after the stock dividend?
A. P1,100,000 B. P1,500,000 C. P2,100,000 D. P900,000

Items 12 - 14 are based on the following:

Profriends, Inc., a real estate developer, is owned by five founding shareholders. On

December 1, 2020, the entity declared a property dividend of a “one-bedroom flat”
for each shareholder. The property dividend is payable on January 31, 2021.

On December 1, 2020, the carrying amount of a one-bedroom flat is P1,000,000 and

the fair value is P1,500,000. However, the fair value is P1,800,000 on December 31,
2020 and P1,900,000 on January 31, 2021.

12. What is the dividend payable on December 1, 2020?

A. P5,000,000 B. P7,500,000 C. P9,000,000 D. P0

13. What is the dividend payable on December 31, 2020?

A. P5,000,000 B. P7,500,000 C. P9,000,000 D. P0

14. What amount of gain is included in profit or loss as a result of the settlement of the
property dividend on January 31, 2021?
A. P2,500,000 B. P4,000,000 C. P2,000,000 D. P4,500,000

15. The directors of Toy Company whose P50 par value share capital is currently selling
at P60 per share have decided to issue a stock dividend. The selling price is not
expected to be affected by the stock dividend. Toy Company, which has an
authorization for 1,000,000 shares, had issued 500,000 shares, of which 100,000
shares are now held as treasury.

In order to capitalize P2,400,000 of the retained earnings balance, what percentage

should be declared as a stock dividend by the directors?
A. 10% B. 8% C. 6% D . 4%

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 TEST MATERIALS

NAME: ______________________________ DATE: __________ SCORE: ________

TEST I. TRUE OR FALSE. Write C if the statement is true and W if it is false.

____ 1. On the date of declaration, the liability to distribute property dividends is
measured at the fair value of the asset to be distributed.
____ 2. The declaration of a stock dividend increase retained earnings and decreases
share capital.
____ 3. In the distribution of property dividends, under IFRIC 17, a gain or loss is
recognized.
____ 4. A debit balance in the retained earnings account is a deficit.
____ 5. The liquidation value of a preference share is always equal to its par value.
____ 6. Earnings per share is the amount earned for each ordinary share during a given
period.
____ 7. Book value per share is the amount that would be paid on each share of stock in
case of corporate liquidation.
____ 8. Unappropriated retained earnings represents amount of cash available for dividend
distribution.
____ 9. Appropriation of retained earnings is required when the corporation reacquire its
own stock.
____ 10. It is the payment of dividends, rather than its declaration, that reduces retained
earnings.
____ 11. The accounting cycle of a corporation is basically the same as that of a single
proprietorship and a partnership.
____ 12. Preference shareholders have absolute right to dividends.
____ 13. Dividends are distribution of earnings and capital to shareholders in proportion to
their shareholdings.
____ 14. Stock dividends of less than 20% is considered large stock dividends.
____ 15. When preferred as to assets, preference shareholders are entitled to payment not
only of the liquidation value but also of the dividends in arrears.

TEST II. IDENTIFICATION. Write the word or group of words that identify each of the
following statements:
_______________ 1. It represents total par or stated value of the shares issued.
_______________ 2. It represents capital contributed in excess of par or stated value.
_______________ 3. It shows the results of operations of a corporation.
_______________ 4. A deferred cash dividend.
_______________ 5. Unpaid dividends of prior years.
_______________ 6. Retained earnings set aside for a specific purpose.
_______________ 7. Dividends in the form of non-cash assets or properties.
_______________ 8. It represents accumulated balance of periodic earnings.
_______________ 9. Dividends in the form of the company’s own shares of stock.
_______________ 10. Preference share that participates in the excess dividends after paying
both preference and ordinary shareholders their regular dividends.

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TEST III. MULTIPLE CHOICE – Theory. Encircle the letter of the best answer.

1. The Retained Earnings account:

A. has a credit balance if earnings have been greater than losses and dividends and is
reported as part of shareholders’ equity on the statement of financial position.
B. is a special fund for paying shareholders’ dividends on the basis of income.
C. has a debit balance if losses have exceeded earnings, and is reported as part of
assets on the statement of financial position.
D. represents the amount of cash available for payment of dividends if there have
been profitable operations.

2. Which of the following will reduce retained earnings?

A. Declaration of a stock dividend.
B. Payment of a cash dividend.
C. Net income for the period.
D. None of these.

3. When a corporation pays dividends, the three relevant dates for dividends occur in this
order:
A. date of record, date of declaration, date of payment.
B. date of payment, date of declaration, date of record.
C. date of declaration, date of payment, date of record.
D. date of declaration, date of record, date of payment.

4. When a small stock dividend is declared, retained earnings is debited for the -
A. fair market value of the stock on the date of record.
B. fair market value of the stock on the date of declaration.
C. fair market value of the stock on the date of distribution.
D. par value of the stock.

5. Cash dividends declared but not paid as of the statement of financial position date are
reported as:
A. current liability.
B. deduction from cash.
C. addition to share capital.
D. addition to additional paid-in capital.

6. The total shareholders’ equity after the declaration of stock dividend

A. is the same as the total shareholders’ equity before the declaration.
B. is greater than the total shareholders’ equity before the declaration.
C. is less than the total shareholders’ equity before the declaration.
D. may be more than or less than the total shareholders’ equity before the declaration
depending on whether the stock dividend declared is small or large.

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 7. When a property dividend is declared and the fair value of the property on the date of
settlement exceeds the carrying amount of the property, the excess is credited to –
A. Gain on distribution of property dividends.
B. Retained earnings.
C. Share premium.
D. The related asset account.

8. During the current year, Moon Company purchased 500,000 shares of Sun Company. At
year-end, Moon distributed 250,000 shares of Sun as a dividend to its shareholders. This
is an example of
A. Liquidating dividend.
B. Investment dividend.
C. Property dividend.
D. Stock dividend.

9. A retained earnings appropriation is used to

A. Absorb a fire loss when an entity is self-insured.
B. Provide for a contingent loss that is probable and measurable.
C. Smooth periodic income.
D. Restrict earnings available for dividends.

10. Which of the following is most likely to be found in corporate laws regarding payment
of dividends?
A. Dividends may be paid from legal capital.
B. Retained earnings are available for dividends unless restricted by contract or by
statute.
C. Unrealized capital is available for any type of dividend.
D. Capital from donated assets is available for dividends.

216