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B-ACTG112 BSA11 1st Sem ( 2023-2024 )

2324S1 M7 Retained Earnings and Dividends

Dividends
Immersive Reader

DIVIDENDS - distribution of corporate profits to eligible shareholders

Ordinary dividends - dividends out of earnings
Cash
Property
Liability/ Scrip
Stock
Liquidating dividends - dividend out of capital investment

Who are entitled to dividends?

Corporation Code of the Philippines (CCP) Section 72 states that all outstanding capital stock are entitled to dividends. CCP Section
137 defines "outstanding stock" as "the total shares of stock issued to subscribers or shareholders, whether fully or partially paid (as
long as there is binding subscription agreement), except treasury shares". Section 72 further states that "holders of subscribed shares
which are not delinquent shall have all the rights of a shareholder". Subscribed shares may be given cash dividends but the
dividends paid in cash shall be applied first to the unpaid balance.

3 important dates for Dividend Distribution:

1. Date of Declaration - This is the date when dividends are formally declared by the Board. On this date, a liability to distribute
dividends should be recognized in the corporate books as follows: Retained Earnings XXX

Dividends Payable. XXX

2. Date of Record - This is the date when, based on the stock and transfer book, the corporation determines the shareholders who
will be entitled to the dividends.

No journal entry is required on this date.

3. Date of Payment - This is the date when the dividends are actually distributed to the shareholders. An entry is prepared to
record the distribution as follows:

Dividends Payable XXX

Cash/ Property/ Share Capital XXX

CASH DIVIDENDS
This is the most common type of dividend. The use of the term dividend without a qualification would mean a cash dividend. It is
usually expressed at a certain amount of peso per share, for example P5 per share or P10 per share. Or it is expressed at a certain
percentage of the par value or stated value, for example 18% is declared as dividend on a P100 par value share will mean a
dividend of P18 per share.

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To illustrate, assume that the Board of Directors declared a cash dividend of 5% per share on June 1, 2015, payable on August 31,
2015.

Entries in the corporate book will appear as follows:

June 1 Retained Earnings 500,000.

Cash Dividends Payable 500,000.

To record 5% cash dividends declared on 100,000 shares at a par value of P100 (Computation: 100,000 shares X P100
par value X 5% cash dividend)

Aug 31 Cash Dividends Payable 500,000.

Cash 500,000.

To record distribution of cash dividends

Cash dividends must be declared 1.) when there is sufficient unrestricted profits and also 2.) when there is sufficient cash. Suppose
retained earnings is P1,000,000 but the available cash is only P500,000, then how much can be distributed as dividends? Only a
maximum of P500,000 can be distributed as cash dividends.

Assume that in the above illustration, corporate records show that there are 100,000 issued shares (10,000 of which are in the
treasury) and there are also 30,000 subscribed shares which are not delinquent. What will be the amount of dividends? Recall that
CCP provides that outstanding shares and subscribed shares are entitled to dividends therefore the computation should be based on
(100,000 issued shares minus 10,000 treasury shares add 30,000 subscribed shares) 120,000 shares X 5% X P100 par value.

Dividends declared during the year may be debited to a temporary title called, Dividends, instead of retained earnings. However, at
the end of the year, this account must still be closed to the Retained Earnings account.

PROPERTY DIVIDENDS
Where there is no available cash, other assets such as merchandise or shares of stocks acquired from other corporations such as
Investment in Stocks of San Miguel may be distributed as dividends.

To illustrate, assume that on July 1, More Power Corporation acquired 50,000 of Meralco shares at a cost of P750,000 or P15 each.
The Board of Directors of More Power Corporation declared on November 15 a dividend of one share of Meralco stock for every ten
shares of More Power stocks owned. On this date, the Meralco shares are selling at P20 per share. More Power has 100,000 common
shares issued and outstanding, P100 par value. The Meralco shares were distributed on December 15.

Entries in the books of More Power:

Nov 15 Retained Earnings 200,000

Property Dividends Payable (10,000 X P20*) 200,000

Dec 15 Property Dividends Payable 200,000

Investment in Meralco Stocks* 200,000

*Meralco shares must be adjusted to its fair market value by debiting to increase it by P250,000 (P20-P15= P5 X 50,000 shares) and
crediting the title Unrealized Gain on Stock Investment (if Meralco shares are available for sale securities). This is an example of
other comprehensive income account. Once disposed, (on Dec 15) the unrealized gain must be adjusted to realized gain thereby
increasing retained earnings.

LIABILITY DIVIDENDS
This is actually a deferred cash dividend payable in some future time because at the time of the dividend declaration, cash is is
unavailable. A "scrip" or a written promise to pay at a certain future date is given to a shareholder. Usually, additional interest is
paid by the corporation for the waiting period from date of declaration to date of payment.

To illustrate, assume that Z Corporation declared a scrip dividend of P10 on Jan 30, 2015 to shareholders of record as of Feb 15,
2015 payable at 10% interst on Mar 31, 2015. The stock and transfer book shows 10,000 shares issued and outstanding on date of
record.

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Entries in the books of the corporation:

Jan 30 Retained Earnings (P10 X 10,000) 100,000

Scrip Dividends Payable 100,000

To record dividends declaration

Mar 31 Scrip Dividends Payable 100,000

Interest Expense ( 10% X 100,000 X 60/360 ) 1,667

Cash 101,667

To record payment of dividends plus interest from Jan 30 to Mar 31

A bond is another form of liability dividend. The only difference between a scrip and a bond is that the later is usually payable for a
longer period of time, say five years.

STOCK DIVIDENDS
A stock dividend is a distribution of the corporation's own stock coming from the unissued shares. Unlike cash or property dividend,
the corporation retains its assets. There is simply a capitalization of retained earnings ( transfer from earned capital to contributed
capital), with total shareholders' equity remaining the same. This is done by decreasing retained earnings and increasing paid in
capital. SEC ruling permits the distribution of stock dividend also from additional paid in capital such as the Share Premium. This
kind of dividend is usually expressed at a certain percentage of the shares issued and subscribed.

For instance, assume that Marvelous Corporation has 100,00 issued and outstanding shares. The Board declared a 10% stock
dividend. This means that a total of 10,000 additional shares will be issued to the shareholders. Or it may be expressed in a ratio
such as 1:10 which means 1 new share will be distributed for every 10 shares held.

A problem posed in stock dividend is the amount at which the shares should be capitalized. Should it be at par value or the fair
market value? SFAS Bulletin No. 18 paragraph 10 states that when the number of additional shares issued as a stock dividend is so
great that it has, or may be reasonably expected to have, the effect of materially reducing the share's market value, the transaction
partakes of the nature of a stock split. An issuance of additional shares of less than 20% is considered a small stock dividend and
can be charged to retained earnings at the fair market value creating an additional paid in capital. An issuance of 20% or more is
considered a large stock dividend and should be capitalized to retained earnings at the par value.

To illustrate, assume that Rock Corporation has the following accounts:

Share Capital, par P100, 20,000 shares authorized, 10,000 issued and outstanding P1,000,000

Share Premium 100,000

Retained Earnings 450,000

Total Shareholders' Equity P1,550,000

Small Stock Dividend

A 15% stock dividend was declared when the market value of the stock was P150 per share

Entries: Retained Earnings ( 15% X 10,00 X P150 ) 225,000

Stock Dividends for Distribution ( 15% X 10,000 X P100) 150,000

Share Premium 75,000

Stock Dividends for Distribution 150,000

Share Capital 150,000

After the first entry, presentation will be as follows:

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Share Capital, par P100, 20,000 shares authorized, 10,000 issued and outstanding P1,000,000

Stock Dividends for Distribution 150,000

Share Premium ( P100,000 + P P75,000 ) 175,000

Total Contributed Capital P1,325,000

Retained Earnings ( 450,000 - 225,000 ) 225,000

Total Shareholders' Equity P1,550,000

Stock dividends for distribution is not a liability account unlike cash dividends payable, property dividends payable and scrip
dividends payable. It is presented as part of paid in capital after subscribed share capital. As such, it should be at the par value.

To show the effect on the balance sheet, the shareholders' equity before and after the stock distribution will be as follows:

Large Stock Dividend

A 20% stock dividend was declared when the market value of the stock was P150 per share

Entries: Retained Earnings ( 20% X 10,00 X P100 ) 200,000

Stock Dividends for Distribution ( 20% X 10,000 X P100 ) 200,000

Stock Dividends for Distribution 200,000

Share Capital 200,000

Note that the retained earnings was debited only at the par value. No additional paid in capital (share premium) was credited .
Again, shareholder's equity remains the same before and after the declaration and distribution.

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