Chapter 22

RETAINED EARNINGS
DIVIDENDS
RETAINED EARNINGS
 Retained earnings represents the cumulative
balance of the following:

A. Net income or loss for the period

B. Dividend distributions
C. Prior period errors
D. Changes in accounting policy
E. Reclassifications of some components of
other comprehensive income
F. Other capital adjustments
Kinds of retained earnings

A. Unappropriated retained earnings – represents that

portion which is free and can be declared as dividends to
shareholders.

B. Appropriated retained earnings - represents that

portion which has been restricted and therefore is not
available for any dividend declaration.
Dividends
 are distributions of earnings or capital to the shareholders in
proportion to their shareholdings. Dividends are broadly
classified into two namely:

A. Dividends out of earnings - legally, dividends can be

declared only from retained earnings.

B. Dividends out of capital - also known as liquidating

dividends. Liquidating dividends are paid to the
shareholders when the entity is dissolved and liquidated.
When dividends are formally declared by the board of directors,
three dates are essential for accounting purposes, namely:

a. Date of declaration – is the date on which the directors

authorize the payment of dividends to shareholders.

b. Date of record – is the date on which the stock and

transfer book of the corporation will be closed for
registration.

c. Date of payment – is the date on which the dividend

liability is to be paid.
Dividends out of earning

a. Cash Dividends

b. Property Dividends

c. Liability Dividends in the form of bond and

scrip

d. Share Dividends or bonus issue

Cash Dividends
 are the most common type of dividend. The term
dividend standing alone normally implies the
distribution of cash. Dividends may be expressed as
follows:

a. A certain amount of pesos per share - for example,

dividend is P5 per share.

b. A certain percent of the par value or stated value –

thus, if 7% dividend id declared, a P200 par value share
will received P14 as dividend.
ILLUSTRATION
The board of directors at their meeting on November 30, 2020 declared a
dividend of P20 per share, payable April 30, 2021, to shareholders of
record on December 31, 2020. The entity had 20,000 shares issued and
outstanding with par value of P100.

2020

Nov. 30 Retained earnings(20,000 x P20) 400,000

Dividends payable 400,000

Dec. 31 No Entry

2021
April 30 Dividends payable 400,000
Cash 400,000
PROPERTY DIVIDENDS
 are distributions of earnings of the entity to the shareholders in the
form of noncash assets.
There are two accounting issues with respect to property dividends,
namely:

a. Measurement of the property dividend payable - dividend

payable is initially recognized at the fair value of the noncash asset on
the date of declaration and is increased or decreased as a result of the
change in fair value of the asset at year-end and date of settlement

b. Measurement of the noncash asset to be distributed as

property dividend – entity shall measure a noncurrent asset classified
for distribution to owners at lower of carrying amount and fair value
less cost to distribute
ILLUSTRATION

An entity owned 50,000 unquoted shares of another entity accounted for

under the cost method. The carrying amount of the investment is
P1,000,000

On December 1, 2020 the entity 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 1,800,000
January 31, 2021 1,900,000
Journal Entries

1. To recognized the dividend payable on the date of declaration on December

1, 2020:

Retained Earnings 1,500,000

Dividend Payable 1,500,000

2. To recognized the increase in dividend payable at the end of the reporting

periods on December 31,2020:

Retained Earnings ( 1,800,000 – 1,500,000) 300,000

Dividend Payable 300,000

3. The Carrying amount of the investment of P1,000,000 is not adjusted because

this is lower than the fair value of 1,800,000 on December 31,2020
4. To recognized the increase in dividend payable on the date of settlement on
January 31, 2021:

Retained Earnings( 1,900,000-1,800,000) 100,000

Dividend payable 100,000

5. To record the settlement of the dividend payable on the date of settlement on

January 31,2021:

Dividend payable( 1,500,000+ 300,000+ 100,000) 1,900,000

Investment in equity securities 1,000,000
Gain on distribution of property dividend 900,000
 SCRIP DIVIDEND

Scrip dividends are declared in the amount of P200,000 payable in

six months at 12% interest. The journal entry on the date of
declaration is:

Retained earnings 200,000

Scrip dividends payable 200,000

When scrip dividends are redeemed, the journal entry is;

Scrip dividends payable 200,000

Interest expense (200,000x12%x1/2) 12,000
Cash 212,000
 BOND DIVIDEND
Dividends are declared in the amount of P1,000,000 payable in
entity’s own bonds, 12%, P1,000,000 face value. The bonds
mature in five years.

a. To record the declaration of the dividends:

Retained earnings 1,000,000
Bonds payable 1,000,000

b. To record the issuance of the bonds in payment for the

dividends:
Bond dividend payable 1,000,000
Bonds payable 1,000,000
c. To record the payment of periodic semiannual interest on the
bonds:
Interest expense 60,000
Cash (1,000,000x12%x1/2) 60,000

d. To record the redemption of the bonds on maturity date:

Bonds payable 1,000,000
Cash 1,000,000
SHARE DIVIDEND OR STOCK
DIVIDEND
• The IFRS term for share dividend is bonus issue.
• Share dividends are distributions of the earnings of the
entity in the form of the entity’s own shares.
• If the share dividend is less than 20%, it is conceived as a
small share dividend because based on empirical
evidence the small share dividend does not result in a
reduced market price for the outstanding shares.
• If the share dividend is 20% or more, the par or stated
value is capitalized because this is conceived to materially
effect a reduction in the share market value. Share
dividend of 20% or more is considered as large share
dividend.
ILLUSTRATION
Share capital, P100 par, 20,000 shares authorized,
10,000 shares issued 1,000,000
Share Premium 500,000
Retained earnings 750,000

If a 10% share dividend is declared and the market value of the share is P150, the journal
entries for the declaration and issuance are as follows:

A. Retained earnings (1,000 shares x 150) 150,000

Share dividends payable (1,000 x 100) 100,000
Share premium 50,000

B. Share dividends payable 100,000

Share capital 100,000

Note that the share dividends payable account shall be recorded only to the extent of the par
value.
If a 50% share dividend is declared and the market value of the share is P150,
the journal entries are:

A. Retained earnings ( 5,000 shares x 100) 500,000

Share dividends 500,000

B. Share dividends payable 500,000

Share capital 500,000

If the share dividends are declared and immediately issued, the simple entry for
the declaration and issuance is:

Retained earnings 500,000

Share capital 500,000
 FRACTIONAL SHARE DIVIDENDS
When share dividends are issued, it is usually impossible to issue full
shares to all of the stockholders.

For example, if 10% share dividend is declared, it means that a

shareholder shall receive one share for every ten shares held.

Thus, a shareholder owning 45 shares shall be entitled to receive four

full shares and a fractional one half-share.
 ILLUSTRATION

Share capital, P100 par,

10,000 shares issued 1,000,000
Share dividends declared 50%
Full shares issued 4,000 shares
Fractional shares issued 1,000 shares
a. When the share dividends are declared:
Retained earnings (5,000 shares x 100) 500,000
Share dividends payable 500,000

b. When the full share dividends and fractional stock dividends are
issued:
Share dividends payable 500,000
Share capital (4,000 shares x 100) 400,000
Fractional warrants outstanding
(1,000 shares x 100) 100,000

The fractional warrants outstanding account is part of share

premium.
c. When only 600 full shares are issued through the
surrender of the required fractional warrants and the
remaining warrants expired:

Fractional warrants outstanding 100,000

Share capital (600 shares x 100) 60,000
Share premium 40,000
 TREASURY SHARES AS SHARE DIVIDEND
• Treasury shares may be reissued by dividends in which case
the cost of the shares shall be charge to retained earnings.

• The declaration of treasury shares as dividend is termed as

property dividend under the Philippine Corporation Code.

• However, the authors believe that such declaration shall be

accounted for as share dividend because the entity’s obligation
is not to convey non cash asset but to reissue its own share
capital, and therefore no accounting liability arises.

• Under PAS 32, treasury shares are a component of

shareholder’s equity and not a financial asset.
ILLUSTRATION:
An entity distributed as share dividend 1,000 treasury shares with
cost of P100,000 and market value of P120,000.

Note that the cost of the treasury shares is charge to retained

earnings.

a. To record the declaration:

Retained Earnings 100,000
Share dividend 100,000

b. To record the payment:

Share dividend payable 100,000
Treasury shares 100,000
 SPECIAL CASES ON SHARE DIVIDEND

1.With shareholders may elect to receive cash in lieu of share

dividend, the amount to be charged to retained earnings should be
equivalent to be optional cash dividend.

2.In certain cases, share dividends are declared on the basis of a

proposed increase in authorized share capital, the application for
which has been filed but not yet approved by SEC at the end of the
reporting period.

3.In closely held entities, if share dividends are declared, retained

earnings shall be capitalized only to the extent of par value or
stated value of the shares.
 DIVIDENDS OUT OF CAPITAL
When capital is returned to shareholders, it is
known as dividend out of capital or
liquidating dividend.

As a rule, liquidating dividend are paid to the

shareholders when the entity is dissolved and
liquidated.
ILLUSTRATION:

The following accounts appear in the statement of financial position

of a wasting asset entity at year end:

Resource property 10,000,000

Accumulated Depletion 2,000,000
Retained Earnings 3,000,000

The maximum dividends that may be declared would be P5,000,000.

If the maximum amount is declared, the journal entry is;
Retained Earnings 3,000,000
Capital liquidated 2,000,000
Dividends payable 5,000,000

• Note that any amount declared in excess of the

retained earnings balance is treated as liquidating
dividends and charged to the capital liquidated
account which is a deduction from the total
shareholder’s equity.
 DIVIDEND AS EXPENSE

PAS 32, paragraph 35, provides that distribution to

holders of an entity instrument shall be debited by the entity
directly to equity.

However, Paragraph 36 provides that distributions to

holders of an equity instrument classified as financial
liability are recognized in the same way as interest expense
on a bond.