SHAREHOLDER’S EQUITY PART 4

Dividends
- These are the distribution of earnings or capital (when liquidation) to the shareholders.
- It is illegal to declare dividends when there is deficit.
- Deficit – negative balance or debit balance on Retained Earnings account.
- Maximum amount of dividends that we can declare to the shareholders – equal to the
Retained Earnings – Unappropriated balance.
- 3 Important dates:
1. Date of Declaration
- Date wherein BOD declared dividends.
- “Once declared”, it is automatic that the corporation will have a liability,
unless what we issued is a liquidating dividend or share dividends.
- “Once declared”, you have to reduce the Retained Earnings account.
2. Date of Record
- No accounting problem.
- “Just the cut off date”, to receive dividend you have to be a shareholder as
of the date of record.
3. Date of Payment/ Settlement
- 5 Classes of dividends:
1. Cash Dividend
2. Property Dividend
3. Share Dividend
4. Script Dividend
5. Liquidating Dividend

SCRIPT DIVIDEND
- Like cash dividend, but on the date of payment we are issuing debt instrument, in the
form of bonds or notes.
LIQUIDATING DIVIDENDS
- Dividends in the event of liquidation.
- A “Return of Capital”
CASH DIVIDEND
- Most common
- Certain amount of peso per share or percentage of par.
- Date of Declaration Journal Entry:
JOURNAL ENTRY DEBIT CREDIT
Retained Earnings xxx
Cash Dividend Payable xxx

- Declared at Ordinary and Preference – need to allocate the amount of dividends.

Under Preference:
1. Cumulative/ Noncumulative
2. Participating/ Nonparticipating
 • Cumulative
- Not only entitled to current year dividends, also to prior, if there is declaration
happened in the prior years.
- “Dividend in arrears”, the current year dividends are included.
• Noncumulative
- Current year dividends.
• Participating
- Remaining dividends will be allocated to ordinary and to preference, we allocate
based on their outstanding capital.
- Outstanding Capital – equal to their outstanding shares multiplied by the par
value.
• Nonparticipating
- The remaining dividends will only be allocated to the ordinary shares.

WHO IS ENTITLED TO DIVIDENDS?

- Outstanding shares are entitled for dividends.
- Outstanding Shares = Issued + Subscribed – Treasury

PROBLEM 1:

Solutions:
Outstanding Shares:
60,000 shares – issued
(5,000 shares) – treasury
55,000 shares
* 2 – since there is a split up
110,000 shares
PROBLEM 2:

Solutions:
Dividend in arrears = 3 years
Preference Outstanding Shares = 10,000 shares (₱8,000,000/ ₱800)
Ordinary Outstanding Shares = 80,000 shares (₱32,000,000/ ₱400)

Requirement1: Ordinary Preference Total

Noncumulative
Basic 3,200,000 800,000 4,000,000
(₱32,000,000* 10%) (₱8,000,000*10%*1)
Remaining 3,200,000 0 3,200,000
Total 6,400,000 800,000 7,200,000

Requirement2: Ordinary Preference Total

Cumulative
Basic 3,200,000 2,400,000 5,600,000
(₱3,200,000*10%) (₱8,000,000*10%*3)
Remaining 1,600,000 0 1,600,000
Total 4,800,000 2,400,000 7,200,000

Requirement3: Ordinary Preference Total

Noncum. & Fully
Part.
Basic 3,200,000 800,000 4,000,000
(₱32M*10%) (₱8M*10%*1)
Remaining 2,560,000 640,000 3,200,000
 [3.2M*(32M/40M)] [3.2M*(8M/40M)]
Total 5,760,000 1,440,000 7,200,000

Requirement4: Ordinary Preference Total

Cum. & Fully Part.
Basic 3,200,000 2,400,000 5,600,000
(₱32M*10%) (₱8M*10%*3)
Remaining 1,280,000 320,000 1,600,000
[1.6M* (32M/40M)] [1.6M* (8M/40M)]
Total 4,480,000 2,720,000 7,200,000

Requirement5: Ordinary Preference Total

Cum. & 16% Part.
Basic 3,200,000 2,400,000 5,600,000
(₱32M*10%) (₱8M*10%*3)
Remaining 1,280,000 320,000 1,600,000
(1.6M – 320K) (8M*4%)
Total 4,480,000 2,720,000 7,200,000

Solutions:
“Compute first for the full participation rate, whichever is lower, yun lang ang ibibigay.”
Full Participation Rate = Remaining Dividends/ Total Outstanding Capital of Ord. or Pref.
= 1.6M/ ₱40M
= 4%
Given is 16%, out of 16% basic na yung 10%, the remaining will be 6%.
6% vs. 4% - use the lower.

PROPERTY DIVIDEND
- Dividend in kind, we still give assets but the assets that we give is not cash, it is Noncash
Assets.
- Journal Entry:
JOURNAL ENTRY DEBIT CREDIT
Retained Earnings xxx
Property Dividends Payable xxx

- Measurement of Property Dividends Payable:

✓ Always equal to Fair Value of the asset to be distributed.
 ✓ We remeasure twice: 1st date – Balance Sheet Date
2nd date – Date of Settlement
- Measurement of the Noncash Assets to be distributed:
✓ Always equal to the carrying amount or fair value less cost to sell, whichever
is lower.
✓ If FVLCTS is lower, we must recognize an impairment loss.
✓ Remeasurement: Only on the Balance Sheet Date.
- Settlement of Property Dividend Payable:
✓ Measurement of Property Dividend Payable vs. the Latest Measurement of NCA
held for distribution.
✓ If PDP > NCA, you paid less than your liability, “gain on distribution”
✓ If NCA > PDP, you paid more than your liability, “loss on distribution”
✓ Gain and Loss on distribution is recognized in Profit and Loss.

PROBLEM 1:

Date PDP NCA

(Fair Value) (FV vs. CA: lower)
12-01-2016 ₱1,500,000 ₱1,000,000
12-31-2016 ₱1,800,000 ₱1,000,000
01-31-2017 ₱1,900,000 ₱1,000,000
(no remeasurement)

1) ₱1,500,000* 5 = ₱7,500,000
2) ₱1,800,000*5 = ₱9,000,000
3) ₱900,000* 5 = ₱4,500,000
PROBLEM 2:

Date PDP NCA

(Fair Value) (FV vs. CA: lower)
11-01-2016 ₱2,500,000 ₱2,500,000
(Impairment loss: ₱500k)
12-31-2016 ₱2,200,000 ₱2,200,000
(Impairment Loss: ₱300k)
03-01-2017 ₱2,000,000 ₱2,200,000
(no remeasurement)

1) ₱2,200,000
2) ₱2,200,000
3) ₱2,200,000 - ₱2,000,000 = ₱200,000

SHARE DIVIDEND
- No effect to total Shareholder’s Equity.
- Journal Entry:
JOURNAL ENTRY DEBIT CREDIT
Retained Earnings xxx
Share Dividends Payable xxx
*SDP is an increase in RE, an adjunct account – added to total SHE.
- Therefore: The declaration of Share Dividend will have no effect on the Total
Shareholder’s Equity.
- “No liability arises”
- 2 Types of Share Dividend:
1. Small
- Declaration less than 20%
- Fair Value or Par, whichever is higher.
FV > Par: JOURNAL ENTRY DEBIT CREDIT
Retained Earnings xxx
SDP @Par xxx
SP (wala if Par >) xxx
 2. Large
- A declaration of 20% or more of outstanding shares.
- Measurement of the shares issued: @Par
JOURNAL ENTRY DEBIT CREDIT
Retained Earnings xxx
SDP @Par xxx
- Issuance:
JOURNAL ENTRY DEBIT CREDIT
SDP xxx
Share Capital xxx

PROBLEM 1:

Solutions:
10% = small
₱20 par < ₱90 – chose higher
30,000*10% = 3,000

JOURNAL ENTRY DEBIT CREDIT

Retained Earnings (3,000* ₱90) ₱270,000
Share Dividends Payable (3,000*₱20) ₱60,000
Share Premium ₱210,000

PROBLEM 2:

Solutions:
Issued 4,000 shares / 20,000 outstanding shares = 20% - Large
₱100 par < ₱150 – since it is large, choose Par.

Retained Earnings = 4000 issued * ₱100 = ₱400,000

PROBLEM 3:

Solutions:
5% = small
₱20 par < ₱50
“Stock Dividend is not a liability; therefore, the answer is zero.”