Republic of the Philippines

CENTRAL LUZON STATE UNIVERSITY

Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
Fair value – March 31, 2021 ………………………………………………………………….............Php 3,000,000
Dividend payable – December 31, 2020 ………………………………………………………………….2,300,000
Increase in dividend payable ………………………………………………………………………..Php 700,000

GENERAL JOURNAL
Date Descriptions Page Number 01
(2021) PR Debit Credit
Mar 31 Dividend Payable 3,000,000
Inventory 2,500,000
Retained Earnings 500,000
To record payment of dividends.

4. If the shareholders have chosen the noncash alternative and the fair value of the inventory is Php 3,300,000
on March 31, 2021, the distribution of the noncash asset is recognized as follows:
GENERAL JOURNAL
Date Descriptions Page Number 01
(2021) PR Debit Credit
Mar 31 Retained Earnings 1,000,000
Dividends Payable 1,000,000
To record the increase of dividends payable on
settlement date.
Fair value – March 31, 2021 ………………………………………………………………….............Php 3,300,000
Dividend payable – December 31, 2020 ………………………………………………………………….2,300,000
Increase in dividend payable ……………………………………………………………………….Php 1,000,000

GENERAL JOURNAL
Date Descriptions Page Number 01
(2021) PR Debit Credit
Mar 31 Dividend Payable 3,300,000
Inventory 2,500,000
Retained Earnings 800,000
To record payment of dividends.

c. Liability dividends (in the form of bond and scrip)

1. Scrip Dividends
*Scrip – a note which is a formal evidence of indebtedness to pay a sum of money at some future time.
Illustrative Example
Scrip dividends are declared in the amount of Php 200,000 payable in six months at 12% interest. The journal entry
on the date of declaration is:
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Retained Earnings 200,000
Scrip Dividends Payable 200,000
To record declaration of dividends payable.

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
When scrip dividends are redeemed, the journal entry is:
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Scrip Dividends Payable 200,000
Interest Expense (Php 200,000 x 12% x ½) 12,000
Cash 212,000
To record payment of dividends payable.

2. Bond Dividends
Illustrative Example
Dividends are declared in the amount of Php 1,000,000 payable in entity’s own bonds. 12%, Php 1,000,000 face
value. The bonds mature in 5 years.
➢ Declaration
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Retained Earnings 1,000,000
Bond Dividends Payable 1,000,000
To record declaration of dividends payable.

➢ Issuance of bonds in payment of bonds payable

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Bond Dividends Payable 1,000,000
Bonds Payable 1,000,000
To record the issuance of the bonds in payment
for the dividends.

➢ Payment of semiannual interest

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Interest expense 60,000
Cash (Php 1,000,000 x 12% x ½) 60,000
To record declaration of dividends payable.

➢ Redemption of the bonds on maturity date

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Bonds payable 1,000,000
Cash 1,000,000
To record declaration of dividends payable.

d. Share dividends/Stock Dividends/Bonus Issue (IFRS)

- Distributions of the earnings of the entity in the form of the entity’s own shares.

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
- At the time of declaration, the retained earnings of the entity are in effect capitalized to share capital.
*The assets of the entity remain the same before and after the issuance of the share capital; only the components of the
shareholders’ equity are changed – decrease in retained earnings but increase in share capital.
- May be referred to as: ordinary share dividends or special share dividends.
*Ordinary share dividends – dividends in terms of ordinary share given to ordinary shareholders or preference share
given to preference shareholders.
*Special share dividends – dividends in terms of ordinary share given to preference shareholders or preference share
given to ordinary shareholders.

How much of the Retained Earnings is to be capitalized? (GAAP)

➢ Share is less than 20% (Small Share) – does not result in a reduced market price for the outstanding shares.
▪ Fair value on the date of declaration
▪ It the fair value is lower than the par or stated value, the amount capitalized is equal to the par or stated
value
➢ Share is 20% or more (Large Share) – conceived to have a material effect in the reduction of the share market
value.
▪ Par or stated value is capitalized
Illustration 1
Share capital, Php 100 par, 20,000 shares authorized 10,000 shares issued and outstanding Php 1,000,000
Share premium 500,000
Retained earnings 500,000

The entity declared a 20% share dividend or 2 shares for every 10 shares held or a total of 2,000 shares as share
dividend (20% x 10,000 shares issued and outstanding).

Related Journal Entries:

• Declaration
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Retained Earnings (2,000 shares x Php 100) 200,000
Share Dividends Payable 200,000
To record declaration of dividends payable.
Note: The amount capitalized is equal to the par value of the shares.

When the statement of financial position is prepared prior to the issuance of the share dividend payable account is
an addition to the share capital.

The share dividend payable cannot be classified as liability because a share dividend never reduces assets.

• Issuance
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Share Dividends Payable 200,000
Share Capital 200,000
To record issuance of shares for dividends.

Illustration 2
Share capital, Php 100 par, 20,000 shares authorized 10,000 shares issued and outstanding Php 1,000,000
Share premium 500,000
Retained earnings 750,000

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
If a 10% share dividend is declared and the market value of the share is Php 150, the journal entries for the declaration
and issuance are as follows:
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Retained earnings (1,000 shares x Php 150) 150,000
Share Dividends Payable (1,000 shares x Php 100) 100,000
Share Premium 50,000
To record declaration of share dividends.

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Share Dividends Payable 100,000
Share capital 100,000
To record issuance of shares for dividends.
Note: Share dividends payable account shall be recorded only to the extend of par value.

If 50% share dividend is declared and the market value of the share is Php 150, the journal entries are:
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Retained Earnings (5,000 shares x Php 100) 500,000
Share Dividends Payable 500,000
To record declaration of dividends payable.

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Share Dividends Payable 500,000
Share Capital 500,000
To record issuance of shares for dividends.

If the share dividends are declared and immediately issued, the simple journal entry for the declaration and issuance
is:
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Retained Earnings 500,000
Share Capital 500,000
To record issuance of shares for dividends.

Fractional share dividends

➢ The following steps may be taken by the entity with respect to the fractional share dividends:
1. The entity may issue warrants for the fractional shares and give the holders thereof enough time to accumulate
sufficient warrants for a full share.
2. The entity may pay in cash in lieu of fractional share.
- This is possible only if the source of share dividends is retained earnings.

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
- If the source of share dividends is share premium, the cash payment is illegal.
Illustration
Share capital, Php 100 par, 10,000 shares issued Php 1,000,000
Share dividends declared 50%
Full shares issued 4,000 shares
Fractional shares issued 1,000 shares

Related Journal Entries:

a. Declaration
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Retained Earnings (5,000 shares x Php 100) 500,000
Share Dividends Payable 500,000
To record declaration of shares for dividends.

b. Issuance of full and fractional share dividends

GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Share Dividends Payable 500,000
Share Capital (4,000 shares x Php 100) 400,000
Fractional warrants outstanding (1,000 shares x 100,000
Php 100)
To record issuance of shares for dividends.
Note: The fractional warrants outstanding account is part of the share premium.

c. When only 600 full shares are issued through the surrender of the required fractional warrants and the
remaining warrants expired:
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Fractional warrants outstanding 100,000
Share Capital (600 shares x Php 100) 60,000
Share premium 40,000
To record exercise of 60% warrants and
retirement of 40% warrants.

Treasury shares as share dividend

The declaration of treasury shares as dividend is property dividend (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 noncash asset bit to reissue its own share capital, and therefore no accounting liability
arises. Note: Treasury shares are a component of shareholder’s equity and not a financial asset (PAS 32).

Illustration
An entity distributed as share dividend 1,000 treasury shares with cost of Php 100,000 and market value of Php
120,000.
Note: The cost of treasury shares is charged to retained earnings.

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 Republic of the Philippines
CENTRAL LUZON STATE UNIVERSITY
Science City of Muñoz, Nueva Ecija
Accounting 2200 – Intermediate Accounting 2
Related Journal Entries:
a. Declaration
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Retained Earnings 100,000
Share Dividends Payable 100,000
To record declaration of shares for dividends.

b. Payment
GENERAL JOURNAL
Date Descriptions Page Number 01
PR Debit Credit
Share Dividends Payable 100,000
Treasury Shares 100,000
To record payment of shares for dividends.

Special cases on share dividends

1. When shareholders may elect to receive cash in lieu of share dividend, the amount to be charged to retained
earnings should be equivalent to the optional cash dividend.
2. In certain cases, share dividends are declared on the basis of a proposed increased in authorized share capital,
the application for which has been filed but not yet approved by SEC at the end of the reporting period.

The proposed increase and such dividend declaration generally shall not be reflected in the statement of financial
position prior to SEC approval.

However, these matters should be disclosed in the notes to financial statements.

If the proposed increase in authorized share capital is approved by SEC after the end of the reporting period and
the share dividends are subsequently effected before release of statements, the new authorized share capital may
be represented.

The share dividend may be shown as part of issued share capital.

However, disclosure is necessary in such a case.

3. In closely held entities, if share dividends are declared, retained earning shall be capitalized only to the extent
of par value or stated value of the shares.

DIVIDENDS OUT OF CAPITAL (LIQUIDATING DIVIDEND)

- Capital is returned to shareholders; paid to the shareholders when the entity is dissolved and liquidated.
But in conformance with the trust fund doctrine, this is illegal if it is done during the lifetime of the entity.
- Exclusion to the rule: wasting asset corporations; in conformity with wasting asset doctrine – a wasting
asset entity can declare dividends only to the extent of the retained earnings balance but also to the extent
of the accumulated depletion balance.
- Wasting Asset Entity: an entity engaged solely or substantially in the exploitation of natural resources.

Illustration
The following accounts appear in the statement of financial position of a wasting asset entity at the year-end:
Resource property Php 10,000,000
Accumulated depletion 2,000,000
Retained earnings 3,000,000

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