Dividends

• Retained earnings


  Represent the cumulative balance of: net income or loss for the period, dividend distributions, prior period errors, changes in accounting policy, reclassifications of some components of other comprehensive income, other capital adjustments
• Kinds of retained earnings

  • Unappropriated retained earnings
  • Appropriated retained earnings
• Total retained earnings balance is Php5,000,000
• Paid up capital is Php2,000,000
• The board approved appropriation of 3,500,000 balance of retained earnings for purposes of Building construction after 3 years
• Unappropriated retained earnings


  That portion which is free and can be declared as dividends to shareholders
• Appropriated retained earnings


  That portion which has been restricted and therefore is not available for any dividend declaration
• Deficit


  When the retained earnings account has a debit balance, it is called a deficit. A deficit is not an asset but a deduction from shareholders' equity
• Dividends are broadly classified into

  • Dividends out of earnings
  • Dividends out of capital
• Dividends out of earnings

  Legally, dividends can be declared only from unappropriated retained earnings (free retained earnings)
• If the entity has a deficit, it is illegal to pay dividends or if the entity declares dividend in excess of the retained earnings balance, the excess is a return of capital and therefore violates the trust fund doctrine
• The Securities and Exchange Commission has ruled that stock dividends may be declared from premium on par value share
• Dividend declaration is reposed on the board of directors of the corporation
• Dates essential for accounting purposes when dividends are formally declared

  • Date of Declaration
  • Date of Record
  • Date of Payment or Distribution
• Date of Declaration


  The date on which the directors authorize the payment of dividends to shareholders
• Date of Record


  The date on which the stock and transfer book of the corporation will be closed for registration. Only those shareholders registered as of such date are entitled to receive dividends
• Date of Payment or Distribution

  The date on which the dividend liability is to be paid or distributed
• Accounting entries for cash dividends

  1. Retained Earnings debited, Cash Dividends Payable or Dividends Payable credited

  2. Cash Dividends Payable debited, Cash credited
• Accounting entries for property dividends

  1. Retained Earnings debited, Property Dividends Payable or Dividends Payable credited

  2. Property Dividends Payable debited, Non-cash assets credited (if BV of non-cash asset = dividends payable)

  3. Property Dividends Payable debited, Non-cash assets credited, Loss on Distribution of Property Dividends credited (if BV of non-cash asset > dividends payable)

  4. Property Dividends Payable debited, Non-cash assets credited, Gain on distribution of property distribution credited (if BV of non-cash asset < dividends payable)
• Accounting entries for scrip dividends

  1. Scrip Dividends Payable debited, Cash credited

  2. Interest Expense debited, Cash credited
• Accounting entries for liability dividends

  1. Bonds Dividends Payable debited, Bonds Payable credited

  2. Interest Expense debited, Cash credited
• Accounting entries for small stock dividends (less than 20%)


  Retained Earnings debited, Stock Dividends Distributable credited, Share Premium - SD credited
• Accounting entries for large stock dividends (20% or more)

  Retained Earnings debited, Stock Dividends Distribution credited
• Under IFRIC 17, the liability to pay dividend shall be recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity, which is the date when the dividend is declared by management or the board of directors if the local jurisdiction does not require further approval
• Under Philippine jurisdiction, the declaration by the board of directors does not require further approval
• The liability for dividend must be recognized on the date of declaration
• Dividends out of earnings are usually in the form of

  • Cash dividends
  • Property dividends
  • Liability dividends in the form of bonds, and scrip
  • Share dividends or bonus issue
• Cash dividends


  The most common type of dividend, may be expressed as a certain amount of pesos per share or a certain percent of the par or stated value
• When cash dividends are declared, a current liability is recognized on the date of declaration by debiting retained earnings or 'dividends' and crediting dividends payable
• When the dividends declared are paid, the entry is debit dividends payable and credit cash
• Property dividends


  Distribution of earnings of the entity to the shareholders in the form of noncash assets
• Measurement of property dividend payable

  IFRIC 17 provides that an entity shall measure liability to distribute noncash asset as a dividend to its owners at the fair value of the asset to be distributed, and the entity shall review and adjust the carrying amount of the dividend payable with any change recognized in equity as adjustment to the amount of distribution
• Settlement of property dividend payable

  IFRIC 17 provides that when an entity settles the dividend payable, the difference between the carrying amount of the dividend payable and the carrying amount of the asset distributed shall be recognized in profit or loss
• Measurement of noncash asset distributed

  PFRS 5 provides that an entity shall measure a noncurrent asset classified for distribution to owners at the lower of carrying amount and fair value less cost to distribute, and if the fair value less cost to distribute is lower than the carrying amount, the difference is accounted for as impairment loss
• Noncash asset distributed


  Property dividend
• Measurement of noncash asset distributed

  1. Classify, present, and measure noncurrent asset as property dividend

  2. Measure noncurrent asset at lower of carrying amount and fair value less cost to distribute

  3. If fair value less cost to distribute is lower than carrying amount, account for as impairment loss
• Journal entries for noncash asset distributed as property dividend

  1. Recognize dividend payable on date of declaration

  2. Recognize increase in dividend payable at end of reporting period

  3. Measure investment at carrying amount as it is lower than fair value

  4. Recognize increase in dividend payable on date of settlement

  5. Record settlement of dividend payable
• Journal entries for noncash asset distributed as property dividend

  1. Recognize dividend payable on date of declaration

  2. Recognize decrease in dividend payable at end of reporting period

  3. Measure equipment at lower of carrying amount and fair value less cost to distribute

  4. Recognize decrease in dividend payable on date of settlement

  5. Record settlement of dividend payable
• Choice of cash or noncash dividend

  • If entity gives owners choice of noncash asset or cash, entity shall estimate dividend payable considering fair value of each alternative and associated probabilities
  • Adjust dividend payable based on alternative chosen through equity or retained earnings
• Journal entries for choice of cash or noncash dividend

  1. Recognize dividend payable on date of declaration

  2. If shareholders choose cash, record payment of dividend

  3. If shareholders choose noncash, record distribution of noncash asset