Review of Closing Entries
a) Sales
Inventory, ending
Purchases Discounts
Purchases Returns and Allowances
Other income
Income Summary
xx
xx
xx
xx
xx
b) Income Summary
70,000
Sales Discounts
Sales Returns and Allowances
Inventory , Beginning
Purchases
Freight-in
Expenses
100,000
If credits > debits = Net income
xx
xx
xx
xx
xx
xx
Closing Entries
c) Income Summary
A, Capital
30,000
30,000
d) A, Capital
A, Drawing
Closing Entry 30,000
Retained Earnings
Dividends Payable
5,000
5,000
Income Summary
b) 70,000
Income Summary
Retained Earnings
a) 100,000
30,000
A, Capital
d) 5,000
c)
30,000
Retained Earnings
This the portion of the accumulated net income
that remains after the distribution of dividends to
shareholders. Thus, dividend is the portion of the
net income distributed to shareholders.
Retained Earnings
Net loss
Dividends
Prior period adjustments for
overstatement of net income
Sale of TS below cost
Retirement above issuance price
PSC Conversion when PSC < OSC
Beginning Retained Earnings
Net income
Prior period adjustments for
understatement of net income
Retained Earnings
❑ Unappropriated (Free)
❑ Appropriated (Restricted/Reserved )
❑
❑
❑
❑
❑
Retained earnings is profit that is retained in the
company
They’re essentially the income leftover (or net profit)
after a business has paid shareholders’ dividends.
A net loss for a period is recorded in Retained Earnings
by a closing entry in which Retained Earnings is debited
and Income Summary is credited.
A net loss may cause a debit balance in the Retained
Earnings. This condition is called “Deficit” and is
reported as a negative amount in the shareholders’
equity.
The balance in retained earnings is part of the
shareholders’ claim on the total assets of the company.
Deficit (Debit balance of Retained Earnings)
Statement of Financial Position (partial)
Shareholders’ equity
Share capital
Reserves
Retained earnings (deficit)
Total shareholders’ equity
P800 000
0
(50 000)
P750 000
Retained Earnings Appropriation/Restriction/Reserved
• Appropriation does not decrease the Retained
Earnings. Retained earnings appropriations simply
make such restricted portion of the RE balance
currently unavailable for dividends. Restrictions have
three causes:
1. Legal Restriction - appropriation for
treasury shares is required by law/SEC
2. Contractual - Long term debt contracts
may restrict retained earnings as condition
for loan
3. Voluntary or Discretionary - Board of
Directors may voluntarily restrict retained
earnings for specific purposes such as future
plant expansion or for contingencies
▪ Retained Earnings
RE Appropriated for TS
▪ Retained Earnings
RE Appropriated for Bonds and Share
Redemption
▪
Retained Earnings
RE Appropriated for Contingencies
▪
Retained Earnings
RE Appropriated for Plant Expansion
Cancellation/Reversal of appropriation:
Appropriated
Retained
Earnings
Retained Earnings Appropriated for……
Retained Earnings
xx
xx
Types of Dividend
All dividends, except for
Share dividend or Bonus Issue
share dividends, reduce the
total equity in the corporation.
Only outstanding shares are
entitled to dividend; therefore,
companies do not declare or pay
dividends on treasury shares
Dividend Dates
Board declares dividends.
Record a Liability
Shareholders holding shares on
this date will receive the
dividend. (No entry)
Record the dividend
payment to shareholders.
No entry is required since on the date of record , it merely determines which shareholders will receive the dividend.
What shares are NOT entitled to dividends?
Shares
Issued shares
Entitled
Not All
Subscribed Shares
Yes
Delinquent shares
Yes
Share Dividends Distributable
Yes
Treasury Shares
No
OUTSTANDING
TREASURY SHARES X
Cash Dividends
A cash distribution of earnings by a corporation to its
shareholders is called a cash dividend. There are usually
three conditions that a corporation must meet to pay a cash
dividend.
1. Sufficient retained earnings
2. Sufficient cash
3. Formal action by the Board of Directors
Cash Dividend
If peso cash dividend :
No. of outstanding shares x Peso Dividend per share (in peso)
100,000 shares x P2 dividend per share = P200,000
If percentage cash dividend:
[(No. of outstanding shares x par value per share) x percentage]
[ Total par value x percentage ]
[(100,000 shares x P10 par) x 8%] = P80,000
Cash Dividend
◆
◆
Peso dividend or percentage dividend
A declared cash dividend is a liability.
Illustration:
On June 1 ABC Corp. declared a cash
dividend of P5 per share on 100,000 shares, par P10
payable July 31 to all shareholders of record June 24.
At date of declaration (June 1)
Retained Earnings
Cash Dividends Payable
At date of record (June 24)
At date of payment (July 31)
Cash Dividends Payable
Cash
P500,000
P500,000
No entry
P500,000
P500,000
Liability/Scrip Dividend
It also known as “deferred cash dividend”. It is declared when the
corporation has sufficient Retained Earnings balance but not sufficient
funds at time for a cash dividend. The payment normally includes the
principal amount and an interest at a specified date.
At date of declaration (June 1)
Retained Earnings
Scrip Dividends Payable
P500,000
At date of record (June 24)
No entry
P500,000
At date of payment (July 31) * Assume 3% interest per year
Scrip Dividends Payable
P500,000
Interest Expense (500,000 x .03 x 2/12)*
2,500
Cash
P502,500
Property Dividends



A company may issue a non-monetary dividend or noncash assets dividend to investors/shareholders, rather
than making a cash or share payment.
Record the distribution at the fair value of non-cash
asset distributed .
Since the fair market value is likely to vary from the book
value, the company must recognize gain or loss for
difference between book value and fair value.
Property Dividends
Illustration: ABC Company transferred to shareholders some of its investments (held-fortrading securities at SM Holdings) costing P1,250,000 by declaring a property dividend on
December 28, 2020, to be distributed on January 30, 2021, to shareholders of record on
January 15, 2021. At the date of declaration, the securities have a fair value of
P2,000,000. ABC makes the following entries.
At date of declaration (December 28, 2020)
Investment in SM Holdings (2,000,000-1,250,000) 750,000
Unrealized Holding Gain or Loss
Retained Earnings
Property Dividends Payable
750,000
2,000,000
2,000,000
At date of distribution (January 30, 2021)
Property Dividends Payable
Investments in SM Holdings
2,000,000
2,000,000
F
M
V
I
N
C
R
E
A
S
E
Illustration: ABC Company transferred to shareholders some of its investments (held-fortrading securities at SM Holdings) costing P1,250,000 by declaring a property dividend on
December 28, 2020, to be distributed on January 30, 2021, to shareholders of record on
January 15, 2021. After the date of declaration, the securities have a fair value to
P2,000,000. ABC makes the following entries.
At date of declaration (December 28, 2020)
Retained Earnings
1,250,000
Property Dividends Payable
1,250,000
At date of distribution (January 30, 2021)
Investment in SM Holdings (2,000,000-1,250,000) 750,000
Unrealized Holding Gain or Loss
Retained Earnings
750,000
Property Dividends Payable
1,250,000
Investments in SM Holdings(1250,000+ 750,000)
750,000
2,000,000
F
M
V
I
N
C
R
E
A
S
E
Illustration: ABC Company transferred to shareholders some of its investments (held-fortrading securities at SM Holdings) costing P1,250,000 by declaring a property dividend on
December 28, 2020, to be distributed on January 30, 2021, to shareholders of record on
January 15, 2021. After the date of declaration, the securities have a fair value to
P1,000,000. ABC makes the following entries.
At date of declaration (December 28, 2020)
Retained Earnings
1,250,000
Property Dividends Payable
1,250,000
At date of distribution (January 30, 2021)
Unrealized Holding Gain or Loss
250,000
Investment in SM Holdings (1,250,000- 1,000,000)
Property Dividends Payable
1,250,000
Retained Earnings
Investments in SM Holdings(1250,000+ 750,000)
250,000
250,000
1,000,000
F
M
V
D
E
C
R
E
A
S
E
Liquidating Dividend
Liquidating Dividends
It is a return to shareholders of a portion of contributed capital.
Any dividend not based on earnings reduces amounts paid-in
by shareholders. Therefore, if the dividend declared is in excess of
retained earnings, the implication is that there is a return of capital
which is NOT legal or binding as per Corporation Code of the
Philippines unless the corporation is in the terminating stage.
ABC Corporation declared and paid a cash dividend ( P10 cash
dividend ) totaling P100,000 and partial liquidating dividend for
P50,000.
Liquidating
Dividends
Retained Earnings
Share Dividend/Stock Dividend /Bonus Issue
It is an issuance by a company of its own shares to shareholders on a pro
rata basis, without receiving any consideration.
◆
Share Dividend does not decrease Shareholders’ Equity. It is simply a
transfer of Retained Earnings to Share Capital.
◆
Share Dividend is NOT considered a liability
◆
When share dividend is less than 20 percent (small share dividend)
of the ordinary shares outstanding, company transfers fair market
value from retained earnings.
◆
When share dividend is 20 percent or more(large share dividend) of
the ordinary shares outstanding, company transfers par value from
retained earnings.
Share Dividend/ Stock Dividend / Bonus Issue
Distribution of additional shares to owners.
No change in total
shareholders’ equity.
No change in
par values.
All shareholders retain same
percentage ownership.
Small
Large
Share dividend – less than
20%
Record at current fair
value of share.
Share dividend 20% or more
Record at par
value of share.
Small Share Dividend (Less than 20%)
Illustration: ABC Corporation has outstanding 100,000 shares of P100 par
value ordinary shares and retained earnings of P5,000,000. If ABC declares
a 10 percent share dividend, it issues 10,000 additional shares to
current shareholders. If the fair value of the shares at the time of the share
dividend is P130 per share, the entry is:
Debit Retained Earnings for the
MARKET value of the shares.
Date of declaration
Retained Earnings (100,000 x.10 x P130 FMV)
1,300,000
Ordinary Share Dividend Distributable (100,000 X .10 x P100par)
1000,000
Ordinary Share Premium
300,000
Date of distribution
Ordinary Share Dividend Distributable
Ordinary Share Capital (10,000 shares x P100 par)
1000,000
1000,000
Large Share Dividend (20% or more)
Illustration: ABC Corporation has outstanding 100,000 shares of P100 par
value ordinary shares and retained earnings of P5,000,000. If ABC declares
a 30 percent share dividend, it issues 30,000 additional shares to
current shareholders. If the fair value of the shares at the time of the share
dividend is P130 per share, the entry is:
Date of declaration
Retained Earnings (100,000 x.30 x P100 par)
Debit Retained Earnings for
the PAR value of the shares.
3,000,000
Ordinary Share Dividend Distributable (100,000 X .30 x P100par)
3,000,000
Date of distribution
Ordinary Share Dividend Distributable
Ordinary Share Capital (30,000 x P100par)
3000,000
3000,000
Share Dividend Does Not Affect SHE
Small Share Dividend
Before Declaration
Ordinary Share Capital(100,000 x P100)
Retained Earnings
Total SHE
P10,000,000
5,000,000
P15,000,000
In the case of Undistributed share
dividend, these are also added to
OSC outstanding
After Distribution
OSC [(100,000+10,000)xP100]
OS Premium
Retained Earnings (5000,000-1300,000)
Total SHE
P11,000,000
300,000
3,700,000
15,000,000
Large Share Dividend
Before Declaration
Ordinary Share Capital(100,000 x P100) P10,000,000
Retained Earnings
5,000,000
Total SHE
P15,000,000
After Distribution
OSC [(100,000+30,000)xP100]
P13,000,000
Retained Earnings (5000,000- 3,000,000)
2,000,000
Total SHE
15,000,000
November 2021
IFRS/PFRS
Shareholders’ Equity
U.S. GAAP
Stockholders’ Equity
• The sources of capital found in the
Shareholders’ Equity section of a
Statement of Financial Position are:
• The sources of capital found in the
Stockholders’ Equity section of a Balance
Sheet are :
• Share capital (Issued Preference share
• Contributed capital
capital, Subscribed PSC, Ordinary Share
Capital,
Share
Dividend
Distributable,
Subscribed OSC)
• Reserves
Share premium,
Appropriated/Reserved
Accumulated Comprehensive
Income (e.g. Revaluation surplus)
▪ Retained earnings
Free/Unappropriated (available for
dividends)
Less: Treasury Shares
SHE
Paid-in capital ( Preferred Stock,
Subscribed Preferred stock, Common Stock
Stock Dividend Distributable, Subscribed
Common Stock)
Additional paid –in capital (to the
corporation by stockholders and others)
Retained earnings
Unappropriated /Free (available for dividends)
Appropriated (Restricted/Reserved)
Less: Treasury Stocks
SHE
Share Capital
Sample
Presentation of
Shareholders ‘
Equity Section
(Memorandum
Entry Method)
Preference Share Capital, P100 par, 5% cumulative, 100,000 shares P3,000,000
authorized, 30,000 shares issued and outstanding
Ordinary Share Capital, no par with stated value P10, 500,000
shares authorized, 400,000 issued, 381,000 shares outstanding,
19,000 shares in treasury
Ordinary share dividend distributable
Ordinary share capital subscribed
Less: OSC Subscription Receivable(non-current)
4,000,000
100,000
P110,000
10,000
100,000
P7,200,000
Reserves
Preference share premium
P150,000
Ordinary share premium
840,000
Accumulated other comprehensive income (loss)
(360,000)
Retained Earnings
Total
Treasury shares (19,000 @P8 cost)
Shareholders’ Equity
630,000
4,360,000
12,190,000
(152,000)
P12,038,000
Journal Entry Method
Unissued OSC (500,000 x P10)
P5,000,000
Authorized OSC
Cash (300,000 x P12)
P5,000,00
3,600,000
Unissued OSC(300,000 x P10)
3,000,000
Ordinary Share Premium
Cash (100,000 P10)
600,000
1,000,000
Unissued OSC
1,000,000
------------------------------------------------------------------------------------------------Unissued OSC
Shareholders’ Equity
Authorized OSC
Less: Unissued OSC
Issued (400,000 x P100)
P5,000,000
P5,000,000
1,000,000
1,000,000
P4,000,000
P3,000,000
P 5,000,000
P1000,000 UNISSUED
P4,000,000 ISSUED
Share Capital
Shareholders ‘
Equity Section
(Journal Entry
Method)
Authorized Preference Share Capital, 5% cumulative,
100,000 shares P100 par, 30,000 shares issued and
outstanding
Unissued (70,000 shares)
Issued ( 30,000 shares)
Authorized Ordinary Share Capital, 500,000 shares
authorized ,no par with stated value P10
Unissued (100,000 shares)
Issued (400,000shares)
Ordinary share dividend distributable
Ordinary share capital subscribed
Reserves
Preference share premium
Ordinary share premium
Accumulated other comprehensive income(loss)
Retained Earnings
Total
Treasury shares, at cost (19,000 x P8)
Shareholders’ Equity
P10,000,000
7,000,000
P3,000,000
5,000,000
1,000,000
4,000,000
100,000
100,000 P7,200,000
P 150,000
840,000
(360,000)
630,000
4,360,000
12,190,000
(152,000)
P12,038,000
Features of Preference Shares
• Preference in dividend payments preferencePreference Shares are entitled to receive their
full cash dividend before any cash dividends are
paid to Ordinary Shares.
• Preference as to assets in the event of
liquidation - In the event of bankruptcy,
preference shares are entitled to have their
investments repaid before Ordinary Shares.
• No Voting Rights
◆
Cumulative & Non-cumulative
◆
Participating & Non-Participating
◆
Convertible & Non-convertible
◆
Redeemable & Irredeemable
A corporation may attach whatever preferences
or restrictions, as long as it does not violate its
country’s incorporation law.
Types of Preference Shares
NonCumulative
Cumulative
When preference shares are not
entitled to dividends in arrears but to
the current periods’ dividends only
When preference shares are entitled
to both the current and all prior
periods’ unpaid dividends before any
dividends are paid to ordinary
shareholders.
Dividends on cumulative preference shares that are
passed are referred to as dividends in arrears. These are
not liabilities but they must be disclosed.
Types of Preference Shares
Non-Participating
Participating
Preference shares are not
entitled to any excess dividends
after receiving the regular
preference dividends.
Preference shares are entitled to
share equally with ordinary
shares in the profit distribution
after
receiving
the
regular
preference dividends.
Types of Preference Shares
Convertible
Redeemable/
Callable
Preference
shares
can
be
exchanged or
converted to
Ordinary share at the option of the
shareholder.
Preference shares can be called or
redeemed at a specified future dates
and at stipulated price at the option of
the issuing company.
DIVIDEND OF PREFERENCE SHARES
Illustration: In 2021, XYZ Company is to distribute P50,000 as
cash dividends, its outstanding 80,000 ordinary shares with a par
value of P5, and its 6 percent 10,000 preference shares with a
par value of P10 per share.
1. Preference shares are non-cumulative and nonparticipating
P 100,000
P6,000
P6,000
44,000
P6,000
Dividend per share
P0.60 per share
44,000
P44,000 P50,000
P0.55 per share
DIVIDEND of PREFERENCE SHARES
Illustration: In 2021, XYZ Company is to distribute P50,000 as cash
dividends, its outstanding 80,000 ordinary shares with a par value
of P5, and its 6 percent 10,000 preference shares with a par value
of P10 per share.
2. Preference shares are cumulative and non-participating,
and the company did not pay dividends on the preference
shares in the preceding two years
P100,000 for 2 years
P100,000
P12,000
6,000
P18,000
Dividend per share
P1.80 per share
P12,000
6,000
P32,000
32,000
P32,000
P50,000
P.40 per share
Illustration:
In 2021, XYZ Company is to distribute P50,000 as cash dividends, its
outstanding 80,000 ordinary shares with a par value of P5(P400,000), and its 6 percent
10,000 preference shares with a par value of P10 per share(P100,000).
3.
Preference shares is noncumulative and is fully participating
P6,000
4,000
P24,000
16,000
P40,000
P10,000
P1.00/share
P30,000
20,000
P 50,000
P.50/share
6% of P100,000 = P6000
6% x P400,000 = P24,000
(P50,000 - P30,000) =P20,000
P100,000(10k shares x P10) + P400,000(80kshares x P5) =P500000
P20,000 Remaining ÷ P500,000 total par = 4%
4% of total par PSC P100,000 = P4000
4% of total par OSC P400,000 = P16000
Excess Dividend
Full participation rate = Total Par of PSC & OSC
Other
Method of
Computing
Full
Participation
Illustration:
In 2021, XYZ Company is to distribute P50,000 as cash dividends, its
outstanding 80,000 ordinary shares with a par value of P5(P400,000), and its 6 percent
10,000 preference shares with a par value of P10 per share(P100,000).
3.
Preference shares is noncumulative and is fully participating
P6,000
4,000
P10,000
P1.00/share
P24,000
16,000
P40,000
P30,000
20,000
P 50,000
P.50/share
6% of P100,000 = P6000
6% x P400,000 = P24,000
(P50,000 - P30,000) =P20,000
P100,000(10k shares x P10) + P400,000(80kshares x P5) =P500,000
Preference = P100,000/P500,000 X P20,000 = 20% * P20,000 = P4000
Ordinary = P400,000/500000 X P20,000 = 80% * P20,000 = P16000
P20,000 =
P500,000
4% x Total Par
4% x Total Parr
Dividend of Cumulative and Fully Participating PSC
Illustration: In 2021, XYZ Company is to distribute P50,000 as cash dividends, its
outstanding 80,000 ordinary shares with a par value of P5(P400,000), and its 6
percent 10,000 preference shares with a par value of P10 per share(P100,000).
4. If the preference shares are cumulative and fully participating, and the Company did
not pay dividends on the preference shares in the preceding two years.
P
P
P
P
P
P
.016 * P100,000 =P1600
.016 * P400,000=P6400
P
P1.96/share
P
P.38/share
P
Dividend of Cumulative and Partially Participating PSC
Illustration: In 2021, XYZ Company is to distribute P50,000 as cash dividends, its
outstanding 80,000 ordinary shares with a par value of P5(P400,000), and its 6
percent 10,000 preference shares with a par value of P10 per share(P100,000).
Assume that the 6 percent preference shares are cumulative, participating up to
additional 3 percent, and that dividends for two years before the current year are
in arrears.
P
P
P
P
1.6% (P8000 ÷P500,000)
Lower Between the :
Maximum : 1.6% x P100,000 = P1600
Additional: 3% x P100,000 = P3000
8,000
P30,000
P
Full Participating & Partially Participating
▪ Preference shares may also participate in dividends beyond the
stated amount.
▪ Fully participating receive a pro rata share(allocated
proportionately) to the ordinary and preference shares
outstanding based on their total par value.
▪ Partially participating preference shares have a limit on the
amount of additional dividends. Dividend on preference share is
the lower of the maximum allowed participation and the
amount based on full participation amounts.
▪ Maximum allowed participation or full participation rate =
Excess Dividend
Total Par of PSC & OSC
Book Value Per Share
(for both PSC AND OSC)
If the corporation issues only Ordinary Shares
Book Value = Total shareholders’ Equity
per share
# of Outstanding ordinary shares
Amount each share would receive if the company was
liquidated based on the amounts reported on the statement of
financial position.
Book Value Per Share
Equity
P1
P1 par value, 5000,000 shares authorized
P11,500,000
P11,500,000
Book Value per share of OSC
=
P11,500,000 ÷ 500,000 shares = P23
If the corporation issues BOTH PSC & OSC
Book Value Per
Share
Both PSC and OSC)
If the PSC is cumulative, declared or
not , dividends are part of equity ,
If it is non-cumulative or the problem
is silent, dividends is included only if
declared.
Total SHE
Less: Equity Identified to PSC
Preference Share Capital
Preference Share Premium
Preference Share Dividends
Equity Identified to OSC
Pxxxxx
Px
x
x
xxx
P xx
Book Value per share for PSC = Equity identified to PSC
Outstanding Preference Shares
Book Value per share for OSC = Equity identified to OSC
Outstanding Ordinary Shares
Book Value Per Share
(For both PSC and OSC)
P
P
P
P
-Ordinary
P
Preference
Book Value
Per share
(Both PSC
& OSC)
Preference Share Capital, 10%, cumulative
Ordinary
P2,500,000
Total
P2,500,000
Ordinary Share Capital
P500,000
500,000
Ordinary Share Premium
2,000,000
2,000,000
Retained Earnings
PSC Dividend, (P2,500,000 * .10)
250,000
Remainder - OSC
Total
P
-Ordinary
P
P2,750,000
P
Divided by the No. of shares outstanding
Book value per share
8,750,000
8,750,000
P11,250,000
P14,000,000
25,000 shares 500,000 shares
P110.00
per share
P
250,000
P22.50
per share
Basic Earnings Per Share
(for OSC only)
It is the amount earned during a given period on each
ordinary share outstanding. Companies report
earnings per share only for ordinary
shares.
If the corporation issues Ordinary Shares ONLY
Basic EPS =
Net Income
# of Outstanding Ordinary shares
Basic Earnings Per Share
(for OSC only)
If the corporation issues two kinds of shares:
Subtracts the preference share dividends from net income to arrive at
income available to ordinary shareholders.
Basic EPS = Net Income- Preference Shares Dividends
# of Outstanding Ordinary shares
Net income/Profit
Less:
Dividends in arrears
Current period’s preference share dividends (cumulative whether declared or not)
OR
Preference share dividends (non-cumulative whether declared or not)
___________________________________________________________
Net income available to ordinary shareholders (for computation of EPS)
Statement of Changes in Equity
Partnership
Sole Proprietorship
A, Capital, January 1, 2021
Add: Net income
Total
A
P
B
C
Capital, January 1, 2021
Add: Share in net income
Total
Less: A, Drawing
Less: Drawing
A, Capital, December 31, 2021
Capital, December 31, 2021
November 2021
Total
Name of the Company
Statement of Changes in Equity (Corporation)
For the Year Ended December 31, 2021
Particulars
PSC
OSC
Preference
Share
Premium
Ordinary
Share
Premium
Retained
Earnings
Treasury
Shares
Balance-1/1/21
Total
xxxx
Issuance of OSC
Issuance of PSC
Net income for the year
xxx
xxx
Dividends
(xx)
(xx)
Reacquisition of TS
Reissuance of TS above
cost
Balance, 12/31/21
(xxx)
x
x
(xx)
(xxx)
x
(Dividends)