UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
A.Y. 2021-2022

ONLINE LEARNING MODULE

ACCT 1013 – Conceptual Framework and Accounting Standards

Week 14: RETAINED EARNINGS/ACCOUNTING FOR DIVIDENDS

Topics: a) Overview of Retained Earnings
b) Dividends in general
c) Important Dates in dividend distribution
d) Recording cash and share dividends
e) Statement of Retained Earnings

Learning Outcomes: At the end of this module, you are expected to:
1. Explain Retained Earnings and identify the factors affecting Retained
Earnings;
2. Identify and discuss Cash and Share dividend;
3. Discuss the important dates related to the date of declaration, date of
record and date of payment of dividends;
4. Journalize properly the declaration, record and payment of dividends;
5. Prepare a statement of retained earnings;
6. Prepare a statement of Shareholders’ Equity

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The last
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course

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Composition of the Retained Earnings

1) Unrestricted – available for future distribution of income to

shareholders

2) Appropriated or restricted – is not available unless the

restriction is reversed.

Note:

Retained Earnings normally has a credit balance. A debit balance in Retained Earnings results from
accumulated losses. Such a situation arise when the total liabilities exceeds total assets and it is called a deficit.

The presentation of the Statement of Retained Earnings is similar to that of the equity section in a Sole
Proprietorship

FORMULA FOR COMPUTING ENDING

BALANCE OF RETAINED EARNINGS

DIVIDENDS IN GENERAL

A dividend is a payment to shareholders out of the earnings of a corporation that is the Unrestricted portion of
the Retained Earnings account.

Types of Dividends:

• Cash dividends – self explanatory

• Property dividends – in the form of noncash assets
• Share dividends – in the form of the corporation’s own shares

Who are entitled to receive dividends?

Only outstanding shares are entitled to receive dividends. Computation of outstanding shares follow:

Shares Issued XXX

Subscribed par value shares** XXX
Total XXX
Less treasury shares (XXX)
Outstanding shares XXX

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** All subscribed par value shares are entitled to dividends when declared because they are considred
shareholders at the time od subscription. No par value shares are not entitled because they are considred legally
issued upon full payment.

Not entitled to dividends:

a) unissued shares
b) Subscribed no par shares
c) treasury shares

Three important dates to remember regarding dividends:

ILLUSTRATIVE EXAMPLE 1
The Board of Directors of Hototay Corporation passed and approved a resolution on January 04, 2020 declaring
a cash dividend of P10 per share to all stockholders of record on February 14, 2020, and payable on March 14,
2020. There were 20,000 qualified ordinary shares.

Journal Entries:

DATE OF
DECLARATION Jan 04 Retained Earnings 200,000
Dividends Payable 200,000

DATE OF RECORD Feb 14 No entry

March
DATE OF PAYMENT 14 Dividends Payable 200,000
Cash 200,000

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CASH DIVIDENDS

Before we proceed with the discussion on CASH Dividends, there are some clarifications
regarding this. Please read and digest below:

According to
the terms of issue of preference shares, cash dividend may be:

1) Non-cumulative, non-participating
2) Cumulative, non-participating
3) Non-cumulative, participating
4) Cumulative, participating

Problem:

XYZ Corporation declared cash dividend of P255,000 on the 4th year to 10,000 outstanding 6% preference
shares, par P50. No dividends were paid in years 1, 2 and 3. Ordinary shares, par P100 outstanding, 20,000
shares.

Required: Compute the amount of cash dividends due to Preference and Ordinary shares following the 4 tterms
of preference issuances above.

Case 1 – 6% Preference, non-cumulative, non-participating

Preference Common Total

6% Preference shares Year 4 (500,000x6%) 30,000 30,000
Balance - Common shares 225,000 225,000
TOTAL 30,000 225,000 255,000

ACCT 1013 – Conceptual Framework and Accounting Standards | 4

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Explanation:
Non-cumulative, non-participating preference shares are entitled only to dividend on the year it is declared. In
any year that there was no dividend declaration, the preference share with this term has lost its right to a dividend
or no dividend in arrears. Balance will go to the Ordinary shares.

Case 2 – 6% Preference Cumulative, non-participating

Preference Common Total

6% Preference shares Year 4 (500,000x6%) 30,000
In arrears : Year 1 30,000
Year 2 30,000
Year 3 30,000 120,000
Balance - Common shares 135,000 135,000
TOTAL 120,000 135,000 255,000

Explanation:

For past years with no dividend declaration, a preference share is entitled to the dividend stated on the certificate
of shares for every year that there was no declared dividend (cumulative). Dividend for the common shares
is the balance remaining after the dividend requirements for preference share is fully satisfied.

Case 3 – 6% Preference, non-cumulative, fully participating

Preference Common Total

6% Preference shares Year 4 (500,000x6%) 30,000 30,000
One year dividends to common (P2,000,000x6%) 120,000 120,000
Balance for participation
Preference (500/2500 x P105,000) 21,000 21,000
Common(2000/2500 x P105,000) 84,000 84,000
TOTAL 51,000 204,000 255,000

Explanation:

Preference share is not entitled to dividends in arrears (years 1,2 and 3). Distribute the same equalizing rate of
6% dividend to the common shares for one year. Divide the balance for participation of P50,000 based on the
ratio of par value of outstanding shares. Thus:

Par value Ratio

Preference shares 500,000 500/2500 or 5/25
Common Shares 2,000,000 2000/2500 or 20/25
Total par value outstanding 2,500,000

ACCT 1013 – Conceptual Framework and Accounting Standards | 5

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Case 4 - 6% Preference, cumulative, fully participating

Preference Common Total

6% Preference shares 4 years (500,000x6%x4) 120,000 120,000
One year dividends to common (P2,000,000x6%) 120,000 120,000
Balance for participation - P15,000
Preference (500/2500 x P15,000) 3,000 3,000
Common(2000/2500 x P15,000) 12,000 12,000
TOTAL 123,000 132,000 255,000

PROPERTY DIVIDENDS or dividends in kind, are distribution to shareholders paid by Noncash Assets.
Property dividends should be charged to Retained Earnings for the Cost or Book Value of the noncash asset
given.

SHARE DIVIDENDS

1) Small share dividends when the shares issued are less than 20% of the outstanding shares. The
basis for recording the transfer of dividend from Retained Earnings to Share Capital is Fair Value. If the
market value is lower than par value or stated value, then par or stated value will be used for recording

2) Large share dividend if the share dividend is 20% or more of the outstanding shares. The basis for
recording the transfer from Retained Earnings to Share Capital account will be the par or stated value.

End of Lesson

References:

1. Cabrera, E, et al. (2018). Conceptual Framework and Accounting Standards. Manila: GIC
Enterprises
2. Valix, C, et al. (2019). Conceptual framework and accounting standards. Manila: GIC Enterprises &
Co., Inc.
3. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
4. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
5. Financial Reporting Standard Council (2017). Philippine Financial Reporting Standards. PICPA
ACCT 1013 – Conceptual Framework and Accounting Standards | 6
This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced
nor transmitted in any form, in whole or in part, without expressed written permission.
 6. Valencia, E. and Roxas, G. (2017), Basic Accounting. Baguio City: Valencia Educational Supply
7. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I. GIC Enterprises & Co., Inc., Manila
8. Empleo, P. and Robles, N. (2019). The Philippine Financial Reporting Reporting (Conceptual
Framework and Accounting Standards). Mandaluyong City: Millennium Books, Inc.

Electronic Resource:
1. Introduction to accounting, https://courses.lumenlearning.com/sac-finaccounting/chapter/chapter-1/
2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research-topics/finance/basic-accounting/the-
accounting-system-and-accounting-basics
4. Basic accounting and bookkeeping lessons, http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html
7. International Financial Reporting Standards. www.ifrs.org
8. International Accounting Standards. www.iasplus.com/en/standards/ias

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This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced
nor transmitted in any form, in whole or in part, without expressed written permission.