PARTNERSHI

P AND
CORPORATIO
N
ACCOUNTIN
Retained Earnings
G
MODULE VII
TIMOLEON S. LIANZA
 Retained Earnings
LEARNING OUTCOMES:
Explain the purpose of
retained earnings;
Account dividend
declaration and payment
;
Prepare the Statement of
Retained Earnings;

Compute the book value

per share

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 Represents the
component of the
shareholders’ equity
arising from the
retention of assets
Retained generated from the
Earnings profit-directed activities
of the corporation.

Cumulative balance of
profits and losses after

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deducting dividends.
 It is not a cash fund
waiting to be distributed
as dividends.
Retained
Earnings Its purpose is to serve as a
claim on all assets in
general and not on any
asset in particular.

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 Shareholders’ Prior period
Equity errors

Effects in changes
Net in accounting policy
Share Income/Net
Capital Loss
Reclassification of
certain OCI items

Retained Other Capital

Earnings

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Adjustments
 Categories of
Retained Earnings
Unrestricted Retained
Earnings. Can be a
Unappropriated
source for dividends
Retained
distribution
Earnings

Restricted Retained
Appropriated Earnings. Cannot be
Retained distributed as

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earnings dividends.
 Categories of
Unappropriated RE 168K
Appropriations
Appropriated RE 168k

- Appropriation for
Legal Appropriation Treasury

- Appropriation to
Contractual
Appropriation extinguish long-term
debts
Voluntary/ - Appropriation to
Discretionary

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Appropriation construct a building

 Dividend Types of Dividend

- is a share of profits that - Cash Dividends

the company pays out to - Property Dividends
its shareholders. - Share dividends
- cannot be declared out - Liquidating dividends
of the legal capital of the
corporation for the
security of its creditors.

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 Important Dates:
Dividends
The date when the BOD will
Date of Declaration adopt a resolution declaring
that a dividend is to be paid.

A list of shareholders entitled

Date of Record to the declared dividends is
prepared. No entry is required.

The date when the corporation

Date of Payment

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settles its liability.

 Illustrative Problem: Important Dates
Illustrative Problem 1: in Recording Dividends
Recording of dividends
Date of Declaration:

RE 550,000
Santi Corporation’s board Cash Div Payable 550,000
of directors declared a P
550,000 cash dividend on Date of Record:
August 1, 2022, payable on
September 1, 2022, to Date of Payment:

shareholders of record on Cash Div Payable 550,000

August 15, 2022. Cash 550,000

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 Small share dividend
Illustrative Problem 2: share
dividend Date of declaration:
Retained Earnings 750,000
Assume the following data: Share Distributable 500,000
Share Premium 250,000
Ordinary shares, P 100 par,
50,000 shares issued P 5,000,000
Date of payment/distribution:
Share Premium 200,000
Shares Distributable 500,000
Retained Earnings 2,000,000
Ordinary shares 500,000
Market value – declaration date 150
Market value- distribution date 170
Large share dividend
Required:
Date of declaration:
For each of the following assumptions, Retained Earnings 1,000,000
prepare the entries on the date of declaration Share Distributable 1,000,000
and date of payment:
1. A 10% share dividends is declared Date of payment/distribution:

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2. A 20% share dividends is declared Shares Distributable 1,000,000

Ordinary shares 1,000,000
 Illustrative Problem 3: cash dividend, share dividend, and property dividend

Assume the following data on December 31, 2021:

6% P/S, P50 par, 100,000 shares, 40,000 shares issued and outstandin 2,000,000
Ordinary shares, P 1 par, 1,000,000 shares authorized, 300,000
shares issued 300,000
Share Premium - ordinary 4,700,000
Retained Earnings 35,200,000
Treasury Stock – ordinary, 10,000 shares at cost (320,000)
Total Shareholders’ Equity 41,880,000
=========
During 2022 the following events occurred related to shareholders’ equity:
a. Sold 3,000 shares of the treasury stock for P 20 per share.
b. Declared and distributed as property dividend the investment in equity securities held by the
corporation to ordinary shareholders. The securities had a carrying value of P 400,000. Its
market value was P 750,000 on the date of declaration, P 760,000 on the date of record, and P
756,000 on the date of distribution
c. Declared a 5% ordinary share dividend. Market value was P 40 per share.

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d. Declared and paid the annual cash dividend to preference shareholders.

Required: Prepare the journal entries
 cash dividend, share dividend, and property cash dividend, share dividend, and property
dividend dividend

a. Cash 60,000 d. RE (2,000,000x6%) 120,000

RE 36,000 Cash Div Payable 120,000
T/S (3,000 x 32) 96,000
Cash Div Payable 120,000
b. RE 750,000 Cash 120,000
Property Div Payable 750,000

RE 6,000
PDP 6,000

PDP 756,000
Inv in shares 400,000
Gain on dist of PD 356,000

c. RE(14,650 shares x P40) 586,000

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Shares Distributable 14,650

S/P – Ordinary 571,350
 Dividend on Preference Holders are entitled only to the
payment of current dividend and only
and Ordinary Shares
to the extent of the stipulated
preference dividend
Non-cumulative and Holders are entitled to the extent of the
Non-participating stipulated preference dividend but participate
with the holders of ordinary shares pro-rata in
the remainder after ordinary shareholders have
received their initial share based on preference
Non – cumulative rate
and participating Holders are entitled to receive not only of
current dividends but also of back dividends but
to the extent of the stipulated preference
Cumulative and dividend.
non-participating Holders are entitled to receive not only of
current dividends but also of back dividends and
participate with the holders of ordinary shares
Cumulative and

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pro-rata in the remainder after ordinary

participating shareholders have received their initial share
based on preference rate
 Illustrative Problem 4: Dividend on Preference Shares and
Ordinary shares:
The preference and ordinary shares outstanding of Kangkong Corporation on December 31, 2022
follows:

8%, P/S, P10 par, cumulative, participating, 40,000 shares

authorized, 10,000 shares issued and outstanding P100,000
Ordinary shares, P 2 par, 10,000,000 shares authorized,
200,000 shares issued and outstanding 400,000
Total Preference and Ordinary shares P500,000
========
Required: Calculate the amount of dividends received by preference and ordinary shareholders,
respectively, under each of the following assumptions:
1. Preference dividends for 2021 are in arrears. On December 31, 2022 Kangkong declared a
total dividend of P 56,000
2. No dividends are in arrears. On December 31, 2022, Kangkong Corporation declared a total of
P 66,000

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3. Preference dividends for 2020 and 2021 are in arrears. On December 31, 2022, Kangkong
corporation declared a total dividend of P 88,000.
 Dividend on Preference Shares and Computation of dividends to be given to
Ordinary shares: each type of shareholders:
NO. 1
1. RE 56,000 P/S O/S
Cash Div. Payable 56,000 Div in arrear 8k
Cur Div 8k
Cur div – O/S 32k
2. RE 66,000 Remainder
Cash Div Payable 66,000 8,000
P/S 1/5x 8k 1.6 6.4
3. RE 88,000 Total P 17,600 P 38,400
Cash Div Payable 88,000 /Oustanding
Shares 10k shares 200k
Per share div P 1.76 P 0.19
==== =====
Example: A preference shareholder wants to
know the amount of dividend to be received
considering he/she owns 2,000shares.

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2,000 preference x 1.76 = 3,520

 Dividend on Preference Shares and Computation of dividends to be given to
Ordinary shares: each type of shareholders:
No. 2
1. RE 56,000 P/S O/S
Cash Div. Payable 56,000 Cur Div 8k
Cur div – O/S 32k
Remainder
2. RE 66,000 66-8-32 = 26k
Cash Div Payable 66,000 P/S 1/5x 26k 5.2 20.8
Total P 13,200 P 52,800
3. RE 88,000 /Oustanding
Cash Div Payable 88,000 Shares 10k shares 200k
Per share div P 1.32 P 0.264
==== =====

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 Dividend on Preference Shares and Computation of dividends to be given to
Ordinary shares: each type of shareholders:
No. 3
1. RE 56,000 P/S O/S
Cash Div. Payable 56,000 Div in arrear 16k
Cur Div 8k
Cur div – O/S 32k
2. RE 66,000 Remainder
Cash Div Payable 66,000 88-24-32=32
P/S 1/5x 32k 6.4 25.6
3. RE 88,000 Total P 30,400 P 57,600
Cash Div Payable 88,000 Outstanding
Shares 10k shares 200k
Per share div P 3.04 P 0.288
==== =====

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 Book Value per Share When both preference and ordinary
shares are outstanding, Book Value per
share is computed as follows:
It is the amount that 1. The BOOK VALUE per share of
would be paid on each the preference is the sum of its
liquidation value plus any current
share if corporation is dividends in arrears / number of
liquidated preference shares outstanding
2. For the ordinary: deduct the
preference shareholders’ equity
When only a single class from the total SHE the difference is
of share is outstanding, the ordinary Shareholders equity.
the BOOK VALUE per Then divide it by the number of
share = total SHE / ordinary shares outstanding to get
the BOOK VALUE per share of
number of shares ordinary.

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outstanding
 Illustrative Problem 5: Book Book Value per share:
Value per share Liquidation value (105 x 500) P 52,500
Assume the following data:
Div in arrears 4,000
Total P56,500
8% Preference shares, P100 par,
Divide by 500 shares
cumulative, 10,000 shares
P 113
authorized, 500 shares issued
and outstanding 50,000
Ordinary shares P 10 par,
Total SHE 1,214,000
100,000 shares authorized,
Less Preference SHE 56,500
40,000 shares issued and
Ordinary SHE 1,157,500
outstanding 400,000
Divide by 40,000shares
Share Premium – ordinary 516,000
Book value per share – Ordinary 28.94
Retained Earnings 275,000
Total SHE 1,214,000
=======
Required: Compute the book value per share
assuming liquidation value was P 105 per

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share and current year’s dividend is in

arrear.
THANK YOU