Accounting for

Corporations
Retained Earnings
 Retained earnings
• It represent the component of the shareholders’ equity arising from the retention of assets
generated from the profit-directed activities of the corporation
• At the end of an accounting period, the Income Summary of a corporation is closed to the
Retained Earnings account
• The basic source of it is profit
Dividends
• Retained earnings is not a cash fund waiting to be distributed as dividends
• RE is an owner’s equity account representing claim on all assets in general
• Section 43 of the Corporation Code states that dividends should only be declared out of
the unrestricted retained earnings
• Can be in the form of cash, property or additional shares of stock
 Dividends
Date of Declaration
• The board of directors will adopt a resolution declaring that a dividend is to be paid
Date of Record
• A list of shareholders who will be entitled to the declared dividends is prepared
Date of Payment
• The corporation settles its liability
 Dividends
• Cash Dividends

Illustration: Made Easy Bookstore Inc., an aggressive book distribution company, declared a cash dividend of P12 per share
of ordinary share on July 1. The dividends are payable on August 1 to shareholders of record on July 21. The company has
10,000 ordinary shares issued of which 700 shares are held in treasury. The entries to record the dividend declaration and
payment are as follows:

Date of declaration:

Retained earnings 111,600

Cash dividends payable 111,600

Date of record:

No entry

Date of payment:

Cash dividends payable 111,600

Cash 111,600
 Property dividends
• A distribution that is payable in non-cash assets

Illustration: Three S Ford Industries based in Pulilan, Bulacan has 1,000 souvenir items in inventory
acquired at a cost of P500,000. The fair market value of these items is P600,000. This growing food
company declared as property dividends all of these items to be distributed to its outstanding par value
shares.

Retained earnings 500,000

Property dividends payable 500,000

Property dividends payable 500,000

Investment in stocks 500,000
Share dividends
• Do not transfer assets to the shareholders
• Affects only the accounts within the shareholders’ equity
• Increase the total share capital and decrease retained earnings
 Share dividends
Small share dividends
• Which additional shares issued are less than 20% of the previously outstanding shares
• Recorded by transferring from retained earnings to share capital the fair market value of the additional shares to be
issued

Illustration: Siobe! Your Japanese Fastfood chain is blessed with years of profitable operations for its commitment to
serve affordable and healthy Japanese food favorites. The shareholders’ equity of the company before declaration of a
10% share dividend is as follows:

Ordinary shares, P50 par, 20,000 shares

issued and outstanding P1,000,000
Share Premium 200,000
Retained Earnings 650,000
Total Shareholders’ Equity P1,850,000
 Share dividends
Small share dividends

The declaration of a 10% share dividend will require the issuance of an additional 2,000 shares. Assume that
the company’s share is being traded at the stock exchange and that the stock market price per share is P110.
The fair market value of the shares to be distributed is P220,000

Retained earnings 220,000

Shares distributable 100,000
Share premium 120,000

Share distributable 100,000

Ordinary shares 100,000
 Share dividends
Large Share Dividend

• The dividend is 20% or more of the previously outstanding shares such that the effect is to reduce
materially the market value per share, then only the par or stated value is credited to ordinary shares with a
corresponding debit to retained earnings

Illustration: Assume instead thats Siobe! Your Japanese Fastfood chain declared a 20% share dividend on its
20,000 issued and outstanding P50 par value shares

Retained earnings 200,000

Share distributable 200,000

Share distributable 200,000

Ordinary Shares 200,000
Liquidating dividends

• Are not distributions of earnings but rather returns of capital to the investing shareholders
• Can be legally paid only under either 1. when the corporation is under dissolution and
liquidation; 2. when the corporation is engaged in the exploration of natural resources
Share Splits
• Reduces the par or stated value of its share capital and issues additional shares
to its shareholders
• Reasons:
1. To adjust the market price of the company’s shares to a level where more individuals
can afford to invest in the stock
2. To spread the shareholder base by increasing the number of outstanding shares
3. To benefit existing shareholders by allowing them to take advantage of an imperfect
adjustment following the split
Dividends on Preference and Ordinary Shares
• When BOD declares cash dividends, preference shareholders are entitled to dividends before
ordinary shareholders receive any distribution
• The dividend is stated as a percentage of par value preference shares
• When the BOD does not declare dividends, the dividends for cumulative preference shares
accumulate; these are called dividends in arrears
• Preference may contain one of the following combination:

1. Non-cumulative and non-participating

2. Non-cumulative and participating
3. Cumulative and non-participating
4. Cumulative and participating
 Illustration
DomDane Publishers Inc., the premier publisher of college accounting, taxation and math textbooks
has the following selected accounts in its shareholders’ equity:

12% Preference Shares, P100 par, authorized

4,000 shares, 2,000 shares issued and outstanding P200,000

Ordinary Shares, P100 par, authorized 6,000 shares,

3,000 shares issued and outstanding 300,000

Retained earnings 260,000

The board failed to declare dividends for the past 2 years. The current year’s results of operations
gave the board reasons to declare cash dividends of P200,000
 Non-Cumulative and non-participating Preference Shares
• These shares entitle the holders only to the payment of current dividends, if and when dividends
are declared, to the extent of the preference rate

Illustration:
Preference Ordinary Total
Outstanding Share Capital P200,000 P300,000 P500,000

Current Preference Dividends

P200,000 x 12% P24,000 P24,000
Remainder to Ordinary:
P200,000 – P24,000 P176,000 P176,000
Total P24,000 P176,000 P200,000
Dividends per Share P12.00 P58.67

Problem
Non-cumulative and participating preference shares
Illustration:

Preference Ordinary Total

Outstanding Share Capital P200,000 P300,000 P500,000

Current Preference Dividends:

P200,000 x 12% P24,000 P24,000
Current Ordinary Dividends
at Preference Rate P36,000 36,000
P300,000 x 12%
Remainder for Participation
(P200,000 – P24,000 –
P36,000 = P140,000) 140,000
Preference: 2/5 x P140,000 56,000
Ordinary: 3/5 x P140,000 84,000
Total P80,000 P120,000 P200,000

Dividends per Share P 40.00 P 40.00

 Cumulative and non-participating Preference Shares

Illustration:
Preference Ordinary Total
Outstanding Share Capital P200,000 P300,000 P500,000

Preference Dividends in Arrears:

P200,000 x 12% x 2 yrs 48,000 P 48,0000
Current Preference Dividends
P200,000 x 12% 24,000 24,000
Remainder to Ordinary:
P200,000 – P72,000 P128,000 128,000
Total P72,000 P128,000 P 200,000

Dividends per Share P36.00 P42.67

Problem
Cumulative and Participating Preference Shares
Illustration:

Preference Ordinary Total

Outstanding Share Capital P200,000 P300,000 P500,000

Preference Dividends in Arrears

P200,000 x 12% x 2 years P 48,000 P 48,000
Current Preference Dividends:
P200,000 x 12% 24,000 24,000
Current Ordinary Dividends:
at Preference Rate:
P300,000 x 12% P 36,000 36,000
Remainder for Participation
[P200,000 – P48,000 – P24,000 – P36,000] 92,000

Preference: 2/5 x P92,000 36,800

Ordinary: 3/5 x P92,000 55,200

Total P108,800 P91,200 P200,000

Dividends per share P 54.40 P 30.40

 Prior Period Errors
• Omissions from and other misstatements of the entity’s financial statements for one or more prior periods
that are discovered in the current period
• Errors occur as a result of mathematical mistakes in applying accounting policies, misinterpretation of
facts, fraud or oversights

Illustration: In 2008, the bookkeeper of Manalili Realty Inc. debited Advertising Expense and credited
Cash to record the purchase of small parcel of land to be used as the company’s sales training venue. The
entry should have been a debit to Land and a credit to Cash of P250,000. The effect of this prior period
error is to overstate 2008 advertising expense and ultimately, understate 2008 profit by the same amount.
Land is also understated by P250,000. The external auditors discovered the prior period error in 2009. The
correcting entry will be:

Land 250,000
Retained earnings 250,000
Restrictions on Retained earnings
• A corporation may be required by law or contractual agreement to set aside a portion of the retained
earnings for specified purposes.
• In addition, the board of directors may voluntarily designate a portion of retained earnings for
future expenses, contingencies and other purposes

Illustration: Pinnacle Technologies, Inc. bought 1,000 of its shares at P150,000. A portion of the
retained earnings is restricted for the cost of the treasury purchased.

Retained earnings 150,000

Appropriated retained earnings 150,000
Statement of Retained Earnings
Statement of Changes in Shareholders’ Equity
Shareholders’ Equity
 Book Value per Share
• The amount that would be paid on each share if the corporation is liquidated
• When both preference and ordinary shares are outstanding, the preference shareholders have
preference over ordinary shareholders as to distribution of assets upon corporate liquidation

Illustration: Assume that Severino Ramos Security Agency has a total shareholders’ equity of
P180,000 and 5,000 shares of ordinary shares outstanding. The book value per share is P36
 Book Value per Share
• The preference shareholders have the right to receive assets equal to the par value or a larger
stated liquidation value per share
• The book value per share of the preference shares is the sum of its liquidation value, if
applicable, plus any current and dividends in arrears divided by the number of preference shares
outstanding
• Ordinary shareholders’ equity is obtained by deducting from total shareholders’ equity the
preference shareholders’ equity
 Book Value per Share
• Illustration: VL Diago Advertising and Marketing Inc. is one of the leading firms doing highly
creative tri-media product exposures in Cebu. The shareholders’ equity section of the company’s
statement of financial position is as follows:

6% Cumulative, Non-participating Preference Shares,

P1,000 par, 5,000 shares authorized, 400 shares
issued and outstanding P 400,000
Ordinary Shares, P100 par, 20,000 shares authorized,
5,500 shares issued and outstanding 550,000
Share Premium –Preference 40,000
Share Premium –Ordinary 720,000
Retained earnings 850,000
Total Shareholders’ Equity P2,560,000
 Book Value per Share
Suppose that the preference shares has a liquidation value of P1,300 and dividends are in arrear for
three years. The computation of the preference book value per share follows:
Preference Shares:
Liquidation value, P1,300 x 400 shares P 520,000
Dividends in Arrears, 6% x P400,000 x 3 yrs 72,000
Current Dividends, 6% x P400,000 24,000
Preference Shareholders’ Equity P 616,000

Book value per share, P616,000/400 shares P 1,540

The illustration above showed a cumulative, non-participating preference shares. The liquidation
value of P1,300 was used instead of the 1,000 par value. Also note that the P40,000 Share Premium –
Preference, is not assigned to the preference shares equity.
 Book Value per Share
The ordinary book value per share is obtained as follows:

Ordinary Shares
Total Shareholders’ Equity P 2,560,000
Less: Preference Shareholders’ Equity 616,000
Ordinary Shareholders’ Equity P 1,944,000

Book Value per share, P1,944,000/5,500 shares P 353.45