CORPORATION ACCOUNTING

Dividends
Two Kinds of Dividends
1. 1.
Dividends out of earnings distribution to shareholders of corporate earnings
in proportion to the number of shares held by them; also known as return on
investment.
1. 2.
Dividends out of capital a return of shareholders invested capital
(liquidating dividends); also known as return of investment.

Special Notes
1. 1.

The power to declare dividends is vested upon the board of directors.

1. 2.

Dividends shall be paid out of unrestricted or free retained earnings.

1. 3.

The following shares are entitled to receive dividends:

a. a.
all issued and outstanding shares
b. b.
all subscribed par value shares

a. 4.

The following shares are not entitled to receive dividends:

b. a.
unissued shares
c. b.
subscribed no par shares
d. c.
treasury shares

a. 5.

Dividends may be in the form of

a. a.
Cash distributable in the form of cash. This is the most common
type of dividend.
a. b.
Property payable in assets other than cash such as investment in
trading securities and merchandise inventory.
a. c.
Scrip consists of a written promise to pay certain amounts at a future
date. The payment normally includes the principal amount and an interest
at a specified rate.
a. d.

a. 6.

Stock distributable in the form of corporations own shares.

There are three dates to consider

a. a.
Date of declaration this is the date when the board of directors
approved the resolution to distribute dividends. The commitment to
shareholders is recorded on this date.

a. b.
Date of record this is the date when the company determines who
are entitled to receive dividends. No entry is required on this date. Stocks
are selling dividends-on prior to this date and are selling ex-dividends the
day following this date.
a. c.
Date of distribution this is the date when the dividends are
distributed to the shareholders.
ABC CORPORATION
Notice of Cash Dividends
Notice is hereby given that in a special meeting of the Board of Directors of ABC
Corporation held on February 25, 200x, a cash dividend of P3.00 per share was approved
by the Board of Directors payable on March 31, 200x to shareholders of record as of
March 7, 200x.
Signature

Stock Dividends/Bonus Issue

a. 1.
The corporation declares stock dividends when it wishes to declare dividends
but at the same time retain the net assets of the business.
a. 2.

For a corporation to declare stock dividends, there should be

b. a.
unrestricted retained earnings;
c. b.
available original and unissued shares which may be issued as stock
dividends.

a. 3.
This type of dividend does not affect total assets and total shareholders
equity.
a. 4.
It only involves transfer of amount from retained earnings to contributed
capital.
a. 5.

It does not change the percentage interest of a shareholder in the business.

a. 6.

There are two kinds of stock dividends

b. a.
Small stock dividend a stock dividend representing less than 20% of
the outstanding shares. Retained earnings is debited for the fair market
value of the stock on the date of declaration.
a. b.
Large stock dividend a stock dividend representing 20% or more of
the outstanding shares. Retained earnings is debited for the par or stated
value of the stock.

a. 7.
The account Stock Dividends Distributable or Stock Dividends
Payable is credited for the par or stated value of the shares to be distributed
regardless of whether the stock dividend is small or large.
a. a.
This account is not a current liability because it will not be settled
through the use of current assets.
b. b.
It is shown as an addition to share capital outstanding.
Pro-forma Entries Small Stock Dividend (less than 20%)
Date of
declaration

Retained
earnings
Stock
dividends
distributable
Share
premium stock dividends

xxx
xxx
xxx

Note: The
share premium
account is
credited for the
excess of the
fair market
value over its
par or stated
value.
Date of record

No entry

Date of

Stock dividends
distributable
Share capital

distribution

xxx
xxx

Pro-forma Entries Large Stock Dividend ( 20% or more)

Date of
declaration

Retained
earnings
Stock
dividends
distributable

Date of record

No entry

xxx
xxx

Date of

Stock dividends
distributable
Share capital

distribution

xxx
xxx

Classroom Exercise
Share Capital Authorized to
issue 20,000 shares at P100 par;
10,000 shares issued and
outstanding
Share premium
Retained earnings
Assume
a. a.
b. b.

P 1,000,000

500,000
750,000

10% stock dividend was declared and market value is P150 per share.
50% stock dividend and market value is P150 per share.

Required: Prepare all the necessary journal entries.

Cash Dividends
a. 1.
a. 2.

a. 3.
a. 4.

Cash dividends is dividends that is distributable in the form of cash.

For a corporation to declare cash dividends, there should be
b. a.
free or unrestricted retained earnings
c. b.
sufficient cash
Cash dividends decrease corporate assets and total shareholders equity.
Cash
b. a.
c. b.
d. c.

dividends may be expressed as follows

% of par value
an amount per share
arbitrary amount

a. 5.
The account Cash Dividends Payable is classified as a current
liability.
a. 6.
Dividends for preference shares shall depend on the type of preference share
issued by the corporation. Preference shares may be
a. a.
Cumulative entitles the holder to the receipt of previous years
unpaid dividends (dividends in arrears/passed dividends/back dividends)
before any payment can be made to ordinary shareholders.
a. b.
Non-cumulative entitles the holder to the receipt of current
dividends but not on the previous years unpaid dividends.

a. c.
Participating entitles the holder to the receipt of additional
dividends after holders of both preference and ordinary shares have been
paid up to the current years dividends.
a. d.
Non- participating entitles the holder to the receipt of dividends up
to the current period only. All excess dividends are given to holders of
ordinary shares.

Pro-forma Entries
Date of
declaration

Retained
earnings
Cash
dividends
payable
preference
Cash
dividends
payable
ordinary

xxx
xxx

xxx

Date of
record

No entry

Date of

Cash dividends
payable
preference
Cash dividends
payable
ordinary
Cash

distribution

xxx
xxx
xxx

Classroom Exercises
a. 1.
The board of directors of XYZ Corporation declared on March 1, 200x a 10%
cash dividend payable on May 30, 200x to shareholders of record on April 30,
200x. Issued and outstanding shares are 20,000 shares with a par value of P30 per
share.
a. 2.
Assume the same given information in No. 1 but the cash dividend declared
is P10 per share.
a. 3.

ABC Corporation has the following shares issued and outstanding

10% Preference Share Capital

1,000 shares with a P200 par

value
3,000 shares with a P100 par
value

Ordinary Share Capital

The board of directors declared a cash dividend of P80,000 this year. No dividend
was declared last year. Assume
a.
b.
c.
d.

a.
b.
c.
d.

Preference
Preference
Preference
Preference

is
is
is
is

non-cumulative and non-participating

cumulative and non-participating
non-cumulative and participating
cumulative and participating.

Required: Journalize the above transactions.

Example:
ABC Corporation has the following shares issued and outstanding
10% Preference Share Capital
1,000 shares with a P200 par
value
Ordinary Share Capital
3,000 shares with a P100 par
value
The board of directors declared a cash dividend of P80,000 this year. No dividend
was declared last year. Assume
a.
b.
c.
d.

a.
b.
c.
d.

Preference
Preference
Preference
Preference

is
is
is
is

non-cumulative
cumulative
non- participating
participating.

1. Preference is non-cumulative Compute only for the current dividend ( I

year) to preference, remainder to Ordinary
Preference
(1,000 shares x
10% x P200)*
Balance to
Ordinary
(80,000-20,000)
Cash
dividends

Preference
P20,000

P20,000

Ordinary

Total
P20000

P60,000

60,000

P60,000

P80,000

*No. of shares outstanding x Dividend rate x Par value

2. Preference is cumulative Compute for the current dividend plus

dividends in arrears to preference, remainder to Ordinary
Preference
(1,000 shares x
10% x P200x 2
years)*
Balance to
Ordinary
(80,000-20,000)
Cash
dividends

Preference
P40,000

P40,000

Ordinary

Total
P40000

P40,000

40,000

P40,000

P80,000

*No. of shares outstanding x Dividend rate x Par value x 2 years(1 current plus
dividend in arrears)

3. Preference is non-participating Compute only for the current dividend

to preference, remainder to Ordinary
Preference
P20,000

Ordinary

Total
P20000

Preference
(1,000 shares x
10% x P200)*
Balance to
P60,000
60,000
Ordinary
(80,000-20,000)
Cash
P20,000
P60,000
P80,000
dividends
*No. of shares outstanding x Dividend rate x Par value

4. Preference is participating Compute only for the current dividend to

preference, current dividend to ordinary and remainder to be shared by
preference and ordinary
Preference
(1,000 shares x
10% x P200)
Ordinary (3,000
shares x 10%
xP100)

Preference
P20,000

Ordinary

Total
P20000

P30,000

50,000

Balance (80,0050,000=20,000)
Preference:
P20,000 x 2/5=
P8,000
Ordinary:
P20,000 x 3/5 =
P12,000
*

Cash
dividends

8,000

P28000

12,000

20,000

P42,000

P80,000

REVIEW EXERCISES
Exercise 14 3. JOURNALIZATION
Journalize the following selected transactions of Summer Corporation for the
month of May 2011. As of April 30, 2011 the end of Summers fiscal year, the
ledger balances revealed the following:
8% Non-participating Preference
share capital, P100 par; 50,000
shares authorized; 10,000 shares
issued
Ordinary share capital, with a par
value of P50; 100,000 shares
authorized; 40,000 shares issued
Share Premium Preference
Share Premium Ordinary
Accumulated Profits

P1,000,000

2,000,000
150,000
220,000
2,500,000

Transactions for the month of May:

May 1

Issued for cash 8,000 preference

shares at P105 per share
2 5,000 ordinary shares were issued
for P260,000
3 Mr. Santos subscribed to 2,000

ordinary shares at P55,

received 30% down payment

and

4 1,000 ordinary
shares were
reacquired at P45 per share.
5

Received subscriptions to 4,000

preference shares at P102 per
share.

6 Mr. Santos failed to settle his

subscription balance. The stock
was declared delinquent and
advertised for public auction and
incurred selling expenses of P850.
7 Stock certificate for 500 ordinary
shares was issued to the lawyers
of the corporation in payment of a
bill for P30,000 covering legal
services
in
organizing
the
corporation.
8 The Board of Directors transferred
P1,200,000 of accumulated profits
to an appropriations for plant
expansion.
10

The highest bidder accepted 1,100

ordinary shares and paid the
corresponding amount due.
11 The BOD declared P500,000 cash
dividend to all shareholders on
record as of May 12, payable on
August 1, 2011.
12 Received full payment of May 5
subscribers
and
issued
the
corresponding certificates.
13 Sold 500
P30,000.

treasury

shares

for

14 Re-issued 200 treasury shares at

P30 per share.
20 The BOD declared a 10% share
dividend.
Market value of the
stocks at the date of declaration
was P122.50 for preference shares
and P52.00 for ordinary shares.
22 Completed the plant expansion
project.
24 Received 50 ordinary shares of
corporations
own
shares
as
donations.
The donated shares

were subsequently sold at P53 per

share
25

Sold 200 treasury shares at P20

per share.

30 Net loss for the month of May

amounted to P220,000.
31 Appropriated for the cost of the
remaining treasury shares.

Identify each item referred to in Group B.

Group A. Write letters only.
Group A
A
B
C
D
E
F
G
H
I
J

Choose answers from

Articles of
Incorporation
Contributed
Capital
Ordinary Shares

Cash Dividends

Legal Capital

Accumulated
Profits
Treasurers
Affidavit
Incorporators
Participating
Preference
shares
25% of
Subscribed Share
Capital
Pre-Operating
Expenses
Par Value Share

Delinquent
Subscriptions
Shareholders
Equity
Corporate byLaws
Scrip Dividends
25% of Total
Authorized
Share Capital
Dividends in
arrears

O
P
Q
R
S

Certificate of
Incorporation
Share Capital

Group B
___1. The document issued by the Securities and Exchange Commission signifying the
corporations right to do business.
___2. Contains provision for the internal administrative organization of the
corporation.
___3. The residual interest of owners in the net assets of a corporation measured by
the excess of assets over liabilities.
___4. Portion of contributed capital arising from issuance of share capital which
cannot be returned to the shareholders in any form during the lifetime of the

corporation.
___5. Persons who have agreed to organize a corporation.
___6. A document attesting that the corporation has subscribed to at least 25% of the
authorized share capital and that 25% thereof has been paid-up.
___7.

These are unpaid subscriptions against which legal proceedings may be

initiated by the corporation.

___8.

Shares that provide for additional dividends to preference shareholders

after a specified amount is paid to ordinary shareholders.

___9. A deferred cash dividend evidenced by a promissory note.

__10. The portion of shareholders equity that represents the net accumulated
earnings of a corporation.
__ 11 .Shares that possess the basic rights of ownership including the right to
vote.
__12.

A dividend that reduces both the assets and the shareholders equity of a
corporation.

___13. Dividends on preference shares that are not declared in any one year.
___14. Expenses such as attorneys fees, cost of printing stock certificates,
incorporation fees, and promotional expenses incurred in the process of
organization of a corporation.
__ 15. Minimum required subscription.

Write the word TRUE if the statement is correct.

underlined words to make it correct.

Otherwise, replace the

__________1. A certificate of stock is a document evidencing subscription.

__________2. Under the par value method, the purchase of treasury shares is
recorded by debiting the treasury shares account for the cost of
the purchase and by crediting cash.
__________3. Issued shares plus subscribed shares equal authorized shares.
__________4. Share premium is recorded at date of subscription.
__________5.

A stock certificate is issued to the subscriber upon receipt of

down payment for his subscription.

__________6.

Appropriations of accumulated profits do not change the total

amount of shareholders equity.

__________7.

An issuance of additional shares of 20% or more as share

dividend would require capitalization of accumulated profits at fair
market value.

__________8. Treasury shares should be reported as a deduction, at cost, from

the total contributed capital.

__________9. Loss from sale of treasury shares should be charged to share

premium from original issuance, and then to accumulated profits.
__________10.If shares are issued for non-cash consideration, the proceeds
should be measured by the fair value of the non-cash
consideration received.

PROBLEM SOLVING
Solve the following problems. Write your solutions in good accounting form and
double rule your final answer.
1. Ruby Company issued 1,000 ordinary shares with P5 par value to Atty. Joey as
compensation for 1,000 hours of legal services performed. Atty. Joey usually
bills P160 per hour for legal services. On the date of issuance, the share was
trading in the stock market at P140 per share.
By what amount should share premium increase as a result of this
transaction?
2. Gerald Company has 30,000 authorized ordinary shares with P10 par value.
On January 1, 20111, 20,000 shares were already issued, 60% of which were
issued at P12 per share while 40% were issued at par.
On August 15, 2011, Gerald purchased 1,000 treasury shares at P13 per share.
Gerald uses the cost method. On September 14, 2011, Gerald sold 500 treasury
shares for P14 per share. During October, Gerald declared and distributed 10%
share dividend from unissued shares when the market value of the ordinary
shares was P16 per share.
On December 20, 2011, Gerald declared a P1 cash dividend payable on January
10, 2012 to shareholders of record on December 31, 2011. Net income during
the year amounted to P350,000.
How much is total shareholders equity at December 31, 2011?
3. On June 1, 2011, Roselle Company declared a 20% share dividend on its P20
par ordinary shares to all shareholders on record as of June 15, 2011 to be
distributed on June 30, 20Y9. On June 15, 2011, Roselle Companys capital
structure is composed of the following:
Authorized shares
Issued shares
Subscribed shares
Treasury shares

100,000
80,000
10,000
1,000

The accountant of Roselle Company recorded the share dividend as a small

share dividend capitalizing accumulated profits at fair market value of P30 per
share.
What is the effect of this error on accumulated profits? What is the
effect of this error on total shareholders equity?
Angelo Company has 1,000 7% preference shares with a P100 par value and
40,000 ordinary shares with P5 par value which are outstanding for the last
three years. During that period, dividends paid totaled P6,000, P28,000 and
P30,000 for each year, respectively.

Required: Compute the amount of dividends that Angelo Company must

pay to preference and ordinary shareholders for each of the following
independent assumptions. Compute also dividend per share.
a. Preference share capital is non-participating and non-cumulative
b.

Preference share capital is non-participating and cumulative

c.
participating and cumulative
d.
fully participating and non-cumulative

Preference share capital is fully

Preference share capital is