Audit of Shareholders' Equity - July 22, 2021

Property Dividends
• Property dividends or dividends in kind are distribution of

earnings of the entity to the shareholders in the form of
noncash assets.
Accounting issues with respect to property
dividends
1. Measurement of the property dividend payable - Fair value of the asset to be

distributed. Initially recognized at the fair value of the noncash asset on date of
declaration and is increased or decreased as a result of the change in fair value of
the asset at year-end and date of settlement.
2. Measurement of the noncash asset to be distributed as property dividend.
- the lower of carrying amount and fair value less cost to distribute
Case Problem:
On November 1, 2015, Grande company declared a property dividend of

equipment payable on March 1, 2016. The carrying amount of the equipment
is P3,000,000 and the fair value is P2,500,000 on November 1, 2015. However,
fair value less cost to distribute of the equipment is P2,200,000 on December
31, 2015 and 2,000,000 on March 1, 2016.
1. What is the dividend payable on December 31, 2015?
a. 2,500,000
b. 2,200,000
c. 3,000,000
2. What is the measurement of the equipment on December 31, 2015?
a. 2, 500,000
b. 2,200,000
c. 3,000,000
d. 2,000,000
3. What amount of loss on distribution of property dividend is recognized on
March 1, 2016?
a. 300,000
b. 200,000
c. 500,000
d. --0--
Case Problem 2:
Global Company, a real estate developer, is owned by five founding

shareholders. On December 1, 2015, the entity declared a property dividend of
a “one bedroom flat “ for each shareholder. The property dividend is payable
on January 31, 2016.
On December 1, 2015, the carrying amount of a one-bedroom flat is
P1,000,000 and the fair value is P1,500,000.
However, the fair value is P1,800,000 on December 31, 2015 and P1,900,000 on
January 31, 2016.
a. 5,000,000
b. 7,500,000
c. 9,000,000
d. ---0---
a. 5,000,000
b. 7,500,000
c. 9,000,000
d. --0--
Choice of either Cash or NonCash
• If an entity gives its owners a choice of either a noncash asset or a cash

alternative, the entity shall estimate the dividend payable by considering
both the fair value of each alternative and associated probabilities of owners
selecting each alternative.
Illustrative Problem:
On January 1, 2015, Easy Company had ordinary and preference shares

outstanding. The incorporators or original shareholders own ten ordinary
shares but no preference shares. On December 31, 2015, the entity declared
dividends on the ordinary shares. The entity decided to give the ordinary
shareholders a choice between receiving a cash dividend of P500,000 per
share or a property dividend in the form of a noncash asset. The noncash asset
is a standard model from the entity’s car fleet. Each car has a fair value of
P600,000. The entity estimated taht 80% of the ordinary shareholders will
take the option of the cash dividend and 20% will elect for the noncash asset.
What is the dividend payable that should be recognized on December 31, 2015?
a. 5,500,000
b. 5,200,000
c. 4,000,000
d. 6,000,000
Cash Alternative (500,000 *10*80%) 4,000,000
Non cash alternative (600,000 *10*20%) 1,200,000
Dividend payable 5,200,000 b.
The entry to record the declaration on December 31, 2015:

Retained earnings 5,200,000
Dividends payable 5,200,000
Stock dividend or share dividend
• Distribution of the earnings of the entity in the form of the entity’s own
shares.
• When the stock dividends are declared, the retained earnings of the entity
are in effect capitalized, meaning transferred to capital.
• Effect: The stock dividends create only a change in the components of the
shareholders’ equity - decrease in retained earnings but increase in share
capital.
Accounting for Stock Dividends
1. If the stock dividend is less than 20%, the amount charged to retained
earnings is equal to the fair value on the date of declaration. Conceived as a
small stock dividend.
2. If the stock dividend is 20% or more, the par or stated value is capitalized
because this is conceived to materially effect a reduction in the share of
market value. This is considered as large stock dividend.
Application:
Solace Company declared and distributed 10% stock dividend with fair value
of P1,500,000 and par value of P1,000,000 and 25% stock dividend with fair
value of P4,000,000 and par value of P3,500,000.
What amount should be debited to retained earnings for the stock dividend?
10% stock dividend at fair value 1,500,000
25% stock dividend at par value 3,500,000
Total amount debited to RE 5,000,000
Quasi- reorganization
• Also called corporate readjustment and maybe accomplished thru:

1. Recapitalization
2. Revaluation of property, plant and equipment
Circumstances that may justify quasi-
reorganization
a. When a large deficit exists.

b. When approved by shareholders and creditors
Yemen Corporation has incurred losses from operations for many years. At the
recommendation of the newly hired president, the board of directors voted to
implement a quasi- reorganization, subject to shareholders’ and
creditors’approval. Immediately, prior to the quasi-reorganization, on June 30,
2018, Yemen’s statement of financial position
Circumstances that justify quasi-
reorganization
1. When a large deficit exists.
2. When approved by shareholders and creditors
3. When the cost basis of the accounting for property, plant and equipment becomes
unrealistic.
4. When a fresh start appears to be desirable or advantageous to all parties concerned.
** Quasi - reorganizatin must be approved by SEC

Yemen Corporation has incurred losses from operations for many years. At the
recommendation of the newly hired president, the board of directors voted to
implement a quasi- reorganization, subject to shareholders’and creditors’
approval. Immediately, prior to the quasi- reorganization, on June 30, 2018,
Yemen’s statement of the financial position is as follows.
The share holde rs and c re dit ors a ppr ove d t he qu a si-
reorganizatuin effective July 1, 2018 to be accomplished by a
reduction un property, plant and equipment (net) of P875,000,
a reduction in other noncurrent assets of P375,000 and a
reduction in par value from P10 to P5.
Required:
1. Yemen’s July 1, 2018 statement of financial position after the quasi-

reorganization should show total assets of
a. P4,000,000
b. P2,500,000
c. P4,375,000
d. P3,875,000
2. The balance in the share premium account after the quasi-reorganization on
July 1, 2018 should be:
a. P750,000
b. P2,000,000
c. P500,000
d. --0---
3. Yemen’s deficit after the quasi-reorganization on July 1, 2018 should be:
a. 1,000,000
b. P250,000
c. P500,000
d. --0--
Illustration - thru recapitalization
An entity provided the following

statement of financial poistion on
December 31, 2015 prior to quasi-
reorganization:
On December 31, 2015, the shareholders and creditors agreed to a quasi-
reorganization. Accordingly, the following restatements should be made:
a. The property, plant and equipment shall be recorded at the fair value f
P6,000,000.
b. The inventory is overvalued to the extent of P250,000 and shall be
revalued accordingly.
c. The share capital is reduced to P2,000,000, 20,000 shares,P100 par value.
d. The resulting deficit is charged is charged to the share premium arising
from the reorganization.
Adjustments
a. Accumulated depreciation 1,000,000

Retained Earnings 500,000
Property, plant and equipment 1,500,000
b. Retained earnings 250,000
Inventory 250,000
c. Share capital 3,000,000
Share premium 3,000,000
d. Share premium 2,750,000
Retained Earnings 2,750,000
After the quasi- reorganization, the
statement of financial position of the
entity would appear as follows:
Illustration - thru revaluation
An entity has sustained heavy losses over a period

of time and conditions warrant that the entity
undergo a quasi- reorganization on December 31,
2015. The statement of financial position on
December 31, 2015 prior to the reorganization is:
The Securities and Exchange Commission approved the quasi-reorganization on the basis of unrealistic
valuation of property, plant and equipment.
Accordingly, the SEC recommended that the property, plant and equipment be revalued by an
independent expert.
1. The property, plant and equipment are determined to have a replacement cost of P9,000,000.
2. The inventory is to be written down by P400,000.
3. The goodwill is to written off.
4. Unrecorded accounts payable amounted to P200,000.
5. Any resulting deficit is charged against the revaluation surplus.

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Property Dividends

• Property dividends or dividends in kind are distribution of

1. Measurement of the property dividend payable - Fair value of the asset to be

On November 1, 2015, Grande company declared a property dividend of

Global Company, a real estate developer, is owned by five founding

• If an entity gives its owners a choice of either a noncash asset or a cash

On January 1, 2015, Easy Company had ordinary and preference shares

The entry to record the declaration on December 31, 2015:

• Also called corporate readjustment and maybe accomplished thru:

a. When a large deficit exists.

** Quasi - reorganizatin must be approved by SEC

1. Yemen’s July 1, 2018 statement of financial position after the quasi-

An entity provided the following

a. Accumulated depreciation 1,000,000

An entity has sustained heavy losses over a period

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