Corporation - Part 3

• Retained Earnings


  represents the firm’s accumulated profit or loss, including prior-period adjustments less the dividends declared and other amounts transferred to the contributed capital accounts.
• Accumulated profits - IFRS term for RE
• A debit balance in retained earnings account is referred to as a deficit.
• Accumulated losses – IFRS term for deficit.
• Unappropriated RE - portion of RE which is free and canbe declared as dividends to shareholders
• Appropriated RE - portion which has been restrictedand is not available for any dividend declaration.
• At the end of each accounting period, closing entries are made toseparate the effects of transactions of the currents period with theensuing period.
• The final closing entry in a corporation’s books transfers the profit(credit balance in Profit or Loss Summary account) or loss (debit balance in Profit or Loss Summary account) to the Retained Earnings Account.
• A dividend is a distribution of corporate income to the shareholderson a pro rata basis.
• They are distributed out of accumulated earnings of the corporation, except for a liquidating dividend which represents a return of the shareholder’s investment
• Section 42. Power to declare dividends. - The board ofdirectors of a stock corporation may declare dividends out ofthe unrestricted retained earnings which shall be payablein cash, in property, or in stock to all stockholders on thebasis of outstanding stock held by them.
• cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses
• stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid
• Section 42. Power to declare dividends. – no stock dividend shall beissued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or specialmeeting duly called for the purpose.
• Stock corporations


  Prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock
• Exceptions to the 100% limit on retaining surplus profits

  1. When justified by definite corporate expansion projects or programs approved by the board of directors

  2. When the corporation is prohibited under any loan agreement from declaring dividends without creditor consent, and such consent has not yet been secured

  3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies
• Date of Declaration - the date when the BOD formally approves and announces the dividend. This is date that the reduction in retained earnings is recognized or recorded in the accounts.
• Date of Record - a list of current shareholders who will be entitled to thedividend is prepared and the dividend payment is based on this list. No journal entry is made on this date.
• Date of Payment/Distribution - on this date, an entry is made to record the settlement of the dividend either by payment of cash or distribution of noncash assets or the company’s own shares.
• A dividend is a distribution of corporate income to the shareholders on a pro rata basis. They are distributed out of accumulated earnings of the corporation, except for a liquidating dividend which represents a return of the shareholder’s investment.
• All dividends, except for share dividends, reduce the total equity in the corporation.
• Cash Dividends – this is the most common type of dividend.For a cash dividend to occur, a corporation must have retainedearnings and adequate cash to pay the dividend
• Property Dividends –dividend that is payable in assets rather than cash. Property dividend may also be in the form of equity or debt securities held in other companies.
• Distribution of Treasury shares as dividends is also considered as a property dividend and not as a share dividend.
• Share Dividends or Bonus Issue –is a pro rata distribution of a corporation’s own shares to its shareholders. Unlike cash and property dividends, a bonus issue does not affect total assets and total shareholder’s equity because it simply represents a transfer of capital from retained earnings to contributed capital.
• Small Share Dividend –when the number of shares represents LESSTHAN 20% of the shares previously outstanding, the basis of themeasurement would be the current market value of the additionalshares to be issued.
• Large Share Dividend –when the proportion of the additionalshares issued is 20% OR MORE, the amount capitalized is equal tothe par or stated value of the share capital.
• 1. Cash Dividends◆ Board of directors vote on the declaration of cash dividends.◆ A declared cash dividend is a liability.◆ Companies do not declare or pay cash dividends on treasury shares.
• Property Dividends - Dividends payable in assets other than cash.
• Issues:

  1. Measurement of the property dividend payable.2. Measurement of the noncash asset to be distributed asproperty dividend. Restate at fair value the property itwill distribute, recognizing any gain or loss.
• IFRIC 17, PAR 11 - measure a liability to distribute noncash asset as adividend to its owners at the fair value of the asset to be distributed.
• Par. 17 – at the end of each reporting period, and at the end of settlement, review and adjust the carrying amount of the dividend payable with any change recognized in equity as adjustment to the amount of distribution
• Date of declaration – the dividend payable is initially recognized at fairvalue of the noncash asset.
• ear-end and date of settlement – increase or decrease dividend payable as a result of the change in FV of the asset at year-end and date of settlement.
• IFRIC 17, PAR 14 – when an entity settles the dividend payable, thedifference between the carrying amount of the dividend payable antthe carrying amount of the asset distributed shall be recognized inprofit or loss.
• Note: An entity shall measure a noncurrent asset classified for distribution to owners at the lower of carrying amount and FV less cost to distribute. Accordingly, if the FV less cost to distribute is lower than the carrying amount of the asset at the end of the reporting period, the difference is accounted for as impairment loss.
• Scrip Dividend- a dividend in the form of note payable which is a formal evidence of indebtedness to pay a sum of money at some future time.
• Bond dividend- dividends payable in the form of bonds.
• A corporation may attach whatever preferences or restrictions, as long as it does not violate its country’s incorporation law.
• The accounting for preference shares at issuance is similar to that for ordinary shares.