The RE Formula Is As Follows:: Profits

SIGLAAB: ACCOUNTING TUTORIAL AND BRIDGING PROGRAM
SESSION 6: CORPORATION III – Accounting for Dividends and Retained Earnings

OCTOBER 14, 2021
Retained earnings – cumulative profits (net of losses, distribution to owners, and other adjustment) which are retained
in the business and not yet distributed to the shareholders (when has a debit balance, it is called deficit)
KINDS OF RETAINED EARNINGS

1. Unappropriated retained earnings– available for future distribution to the shareholders
2. Appropriated retained earnings – not available for distribution unless the restriction is subsequently reversed.
The RE formula is as follows:

RE, end = RE, beg +/(-) Net Income/(Loss) – dividends
Dividends – distribution of earnings or capital to the shareholders in proportion to their shareholdings

How a dividend works
A dividend’s value is determined on a per-share basis and is to be paid equally to all shareholders of the
same class (common, preferred, etc.). The payment must be approved by the Board of Directors. When a
dividend is declared, it will then be paid on a certain date, known as the payable date.
Steps of how it works:
1. The company generates profits and retained earnings
2. The management team decides some excess profits should be paid out to shareholders (instead of being
reinvested)
3. The board approves the planned dividend
4. The company announces the dividend (the value per share, the date when it will be paid, the record date, etc.)
5. The dividend is paid to shareholders
Dividends may be in the form of:

Share dividends Small Large
1. Cash Dividends
Percentage <20% 20% and more
2. Property Dividends (Higher
Amount Fair value or Par, Par Value
Accounting)
whichever is higher
3. Share Dividends
Share Premium Excess None
**In small share dividends, FV must not be lower than par/stated value. Otherwise, use the par/stated value
**In small share dividends, Dividends payable shall be credited only at par, any excess is credited to Share Premium
Important dates in accounting for dividends

1. Date of declaration
2. Date of record
3. Date of distribution
Preference over dividends (Preference shares)

1. Noncumulative
2. Cumulative
3. Nonparticipating
4. Participating
a. Fully participating
b. Partially participating
OCTOBER 14, 2021
1. On December 1 of the current year, ATBP Company declared a P2 per share dividends on the outstanding
ordinary shares to the shareholders of record on December 15, payable on December 31. ATBP Co. has 10,000
issued ordinary shares with par value of P100. These shares were issued on January 1 of the current year. On
February 1 of the current year, the company acquired 1,000 ordinary shares at cost of P110 per share which
were held in treasury.
Requirements:
a. Compute for the outstanding shares and dividends payable
b. Provide the necessary entries 18K
2. During February, X Company had the following common stock transactions:

i. Issued 5,000 shares of $100 par common stock at par
ii. Issued 5,000 shares of $100 par common stock at a market price of $110 per share.
iii. Issued 5,000 shares of no par common stock with $100 stated value at a market price of $115 per share
iv. Issued 5,000 shares of no par common stock at a market price of $120 per share
On March 1, X Company declared a dividend of $.50 per share to be paid on March 31 to shareholders of record
on March 15.
Requirement:
b. Journalize the transactions for the cash dividend.
3. On April 1. 2020, the board of directors of ABC Co. declared a P50 dividend per share to shareholders of record
as of April 15, 2020, for distribution on May 1, 2020. The shareholders’ equity of ABC Co. on April 1, 2020 is as
follows:
Share capital, P100 par value 800,000
Subscribed share capital 220,000
Share Premium 100,000
Retained earnings 524,000
Treasury shares (at cost of P120 per share) (144,000)
TOTAL SHE 1,500,000
Requirements:
a. Compute for the outstanding shares
b. How much is the cash dividend payable to shareholders?
c. Record the pertinent transaction using the important dates in accounting for dividends.
d. Assuming that ABC Co. reported a profit of P265,000, what would be the balance of the retained earnings?
4. On June 30, 2007, when Vietti Co.’s share was selling at 65 per share, its capital accounts were as follows:
Share Capital (par value 50; 60,000 shares issued) 3,000,000
Share premium 600,000
Retained earnings 4,200,000
If a 100% stock dividend were declared and distributed, total share dividends & Share Capital would be
OCTOBER 14, 2021
5. The stockholders’ equity section of Lawton Corporation as of December 31, 2006, was as follows:
Share Capital, par value 2; authorized 20,000 shares;
issued and outstanding 10,000 shares 20,000
Share Premium 30,000
Retained earnings 75,000
Total Shareholders’ equity 125,000
On March 1, 2007, the board of directors declared a 15% stock dividend, and accordingly 1,500 additional shares
were issued. On March 1, 2007, the fair market value of the stock was $6 per share. For the two months ended
February 28, 2007, Lawton sustained a net loss of 10,000.
How much is the total share dividends? What amount should Lawton report as retained earnings as of March 1,
2007?
6. Sunshine Company declared P1,800,000 cash dividends to its preference and ordinary shareholders in 20x3.
No dividends have been declared since 20x1. Sunshine’s shareholders’ equity immediately before the dividend
declaration is as follows:
10% Preference share capital, P200 par 2,000,000
Ordinary share capital, P100 par 8,000,000
Retained earnings 5,000,000
Total shareholders’ equity 15,000,000
Compute for the dividends received by the preference shareholders and ordinary shareholders under each of
the independent cases:
a. The preference shares are noncumulative and nonparticipating.
b. The preference shares are cumulative and nonparticipating.
c. The preference shares are noncumulative and fully participating.
d. The preference shares are cumulative and fully participating.
e. The preference shares are cumulative and participating up to 16%.
7. Arp Corp.’s outstanding capital stock at December 15, 20x1, consisted of the following:
a. 30,000, 5% cumulative preference shares, par value P10 per share, fully participating as to dividends. No
dividends were in arrears.
b. 200,000 ordinary shares, par value P1 per share.
On December 15, 20x1, Arp declared dividends of P100,000. What was the amount of dividends payable to Arp’s
Preference shareholders and ordinary shareholders?
8. The following stock dividends were declared and distributed by Sol Corp.:
Percentage of ordinary shares
outstanding at declaration date Fair value Par value
10 15,000 10,000
28 40,000 30,800
What aggregate amount should be debited to retained earnings for these stock dividends?
OCTOBER 14, 2021
9. On January 1 2019, Kompanya Co. provided the following information

Share capital, 250,000 authorized share, P30 par value 3,000,000
Share Premium 4,000,000
Retained Earnings 8,000,000
The entity declared a 10% share dividends on April 1, 2019 when the market value of the share was P70.
The share dividend was issued on July 1, 2019 when the market value of the share was P100.
The entity sustained a net loss of P1,200,000 for 2019
Requirements:
b. Provide the necessary journal entries
c. Compute for the balance of Retained Earnings

The RE Formula Is As Follows:: Profits

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SIGLAAB: ACCOUNTING TUTORIAL AND BRIDGING PROGRAM

SESSION 6: CORPORATION III – Accounting for Dividends and Retained Earnings

KINDS OF RETAINED EARNINGS

The RE formula is as follows:

Dividends – distribution of earnings or capital to the shareholders in proportion to their shareholdings

Dividends may be in the form of:

Important dates in accounting for dividends

Preference over dividends (Preference shares)

2. During February, X Company had the following common stock transactions:

9. On January 1 2019, Kompanya Co. provided the following information

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