UNIT 8 ACCUMULATED PROFITS, APPROPRIATIONS AND DIVIDENDS
Exercise 8 -1 Review Questions 1. The accumulated profits/retained earnings account represents the undistributed earnings of the corporation. It represents capital of the corporation arising from its operations. Accumulated profits/Retained earnings is shown as a line item under the shareholders’ equity section of the statement of financial position. 2. Accumulated profits/ Retained earnings is appropriated a. to comply with legal requirements (e.g. treasury shares) b. to comply with contractual requirements (e.g. sinking fund) c. upon discretion of management (e.g. plant expansion) 3. Dividends are distribution to shareholders of corporate earnings in proportion to the number of shares held by them. Dividends may also be paid as a return of shareholders’ invested capital (liquidating dividends). 4. The following are entitled to receive dividends (out of earnings): a. All issued shares which are in the hands of the shareholders b. All subscribed par value shares The following are not entitled to receive dividends a. Unissued shares b. Subscribed no par value shares c. Treasury shares 5.The three dates to consider are: a. Date of declaration – this is the date when the board of directors approved the resolution to distribute the dividends; the liability to the shareholders is recorded on this date. b. Date of record – this is the date when the company determines who are entitled to receive dividends; no entry is prepared on this date. c. Date of payment or distribution – this is the date when dividends are paid or distributed to the shareholders. 6. The kinds of dividends are: a. Cash dividends – dividend that is distributable in the form of cash b. Property dividends – dividend that is distributable in the form of non-cash assets such as merchandise inventory or marketable securities c. Scrip dividends – a deferred cash dividend; notes or other evidence of corporate indebtedness are distributed to the shareholders.
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d. Share dividends – dividend that is distributable in the form of company’s own stock. 7. The two kinds of stock dividends are: a. Small share dividend – represents less than 20% of the outstanding shares. b. Large share dividend – represents 20% or more of the outstanding shares. 8. The accounting methods are: Small share dividend – use fair market value method; retained earnings is debited for the fair market value of the shares to be distributed as dividends. Large share dividend – use par value method; retained earnings is debited for the par value of the shares to be distributed as dividends. 9. a. b. c. d.
The properties of preference shares are Cumulative – entitles the holder to receipt of previous years’ unpaid dividends before any payment can be made to ordinary shareholders. Non-cumulative – entitles the holder to current year’s dividends only; previous years’ unpaid dividends are forfeited. Participating – entitles the holder to the receipt of additional dividend after holders of both preference and ordinary share have been paid up to the current year’s dividends. Non-participating – entitles the holder to the receipt of dividends up to the current period only; all excess dividends are given to the ordinary shareholders.
10. Cash Dividends Payable is shown as a current liability under the liabilities section of the statement of financial position.
Exercise 8 - 2 Multiple Choice 1 2 3 4 5
C J M K N
6 7 8 9 10
E L D O H
2
Journal Entries Exercise 8 - 3 Jan 15
Accumulated profits Cash dividends payable
10,000 10,000
Feb 15
No entry
Mar 15
Cash dividends payable Cash
10,000
Accumulated profits Cash dividends payable
15,000
Jan 15 Feb 15
No entry
Mar 15
Cash dividends payable Cash
10,000
15,000
15,000 15,000
Exercise 8 - 4 DOD
Accumulated profits Share Dividend Distributable-Ordinary Share Premium-Ordinary Share Dividend
DOR
No entry
DOP
Share Dividend Distributable-Ordinary Share Capital – Ordinary
40,000 10,000 30,000
10,000 10,000
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Exercise 8 - 5 DOD
Accumulated profits Share Dividend Distributable-Ordinary
DOR
No entry
DOP
Share Dividend Distributable-Ordinary Share Capital - Ordinary
30,000 30,000
30,000 30,000
Exercise 8 - 6 A DOD
DOP
Accumulated profits Cash Dividends Payable – Preference Cash Dividends Payable –Ordinary
28,000
Cash Dividends Payable – Preference Cash Dividends Payable –Ordinary Cash
5,000 23,000
Preferenc e Preference (10,000x 5% x P10) Ordinary (28,000-5,000) Cash dividends Divided by Outstanding shares
5,000 23,000
28,000
Ordinary
5,000 5,000
23,000 23,000
10,000
40,000
Total 5,000 23,000 28,000
4
0. Dividend per share
B DOD
DOP
50
0.58
Accumulated profits Cash Dividends Payable – Preference Cash Dividends Payable –Ordinary
28,000
Cash Dividends Payable – Preference Cash Dividends Payable –Ordinary Cash
15,000 13,000
Preferenc e Preference (10,000x 5% x P10 x 3 yrs) Ordinary (28,000-5,000) Cash dividends Divided by Outstanding shares Dividend per share C DOD
DOP
15,000 13,000
28,000
Ordinary
15,000 15,000 10,000 1.50
Accumulated profits Cash Dividends Payable – Preference Cash Dividends Payable –Ordinary Cash Dividends Payable – Preference
13,000 13,000 40,000 0.33
Total 15,000 13,000 28,000
28,000 9,333.33 18,666.67 9,333.33
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Cash Dividends Payable –Ordinary Cash Preferenc e Preference (10,000x 5% x P10 ) Ordinary (40,000x5% xP5) Balance (28,000-15,000) Preference (13,000x 100/300 ) Ordinary (13,000 x 200/300)
Divided by Outstanding shares Dividend per share
D DOD
DOP
18,666.67 28,000
Ordinary
5,000 10,000
Total 5,000 10,000
4333.33 9,333. 33
8,667 18,666 .67
10,000 0.93
40,000 0.47
13,000 28,000
Accumulated profits Cash Dividends Payable – Preference Cash Dividends Payable –Ordinary
28,000
Cash Dividends Payable – Preference Cash Dividends Payable –Ordinary Cash
16,000 12,000
Preferenc
Ordinary
16,000 12,000
28,000
Total
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e Preference (10,000x 5% x P10x3 ) Ordinary (40,000x5% xP5) Balance (28,000-25,000) Preference (3,000x 100/300 ) Ordinary (3,000 x 200/300) Cash dividend Divided by Outstanding shares Dividend per share
15,000 10,000
15,000 10,000
16000
2000 12000
3,000 28,000
10,000 1.60
40,000 0.28
1000
Case 8 – 1
Issued shares
40,000
Treasury shares
(5,000)
Shares entitled to dividends
35,00 0
Issued shares Treasury shares Shares entitled to dividends x Cash dividend per share Decrease in accumulated profits
40,000 (5,000) 35,000 P5.00 P175,00 0 7
Decrease on Total Assets
P175,000 ==========
Case 8 – 2
Preference (10,000x 6% x P100 ) Ordinary (150,000-60000) Cash dividend Divided by Outstanding shares Dividend per share
Preference 60,000 60,000 10,000 6.00
Ordinary 90,000 90,000 20,000 4.5
Total 60,000 90,000 150,000
a) P6.00 per share b) P4.50 per share c) Decrease of P150,000
Case 8 – 3
a) Outstanding shares Share dividend rate x Par value
80,000 20% 16,000 P5 8
Debited to Accumulated profits
P80,00 0
b) 16,000 shares c) NO EFFECT on total Assets & Total Shareholders’ Equity d) Outstanding shares 80,000 Cash dividend per share P2.50 Debited to Accumulated P200,00 profits 0 e) P200,000 cash f) DECREASE on Total Assets & Total Shareholders’ Equity g) Cash dividend
Case 8 – 4
a)
Accumulated profits, January 1 Add Net income Sub-total
1,500,0 P 00 800,000 2,300,0 P 00 9
Less: Cash dividends Share dividends Accumulated profits, December 31
b)
P 190,000 170,000 P
360,000 1,940,0 00
Yes, the full amount can be declared as dividends
Case 8 – 5
a)
Accumulated profits, December 31 Less Appropriation for treasury shares Accumulated profits - Free
P 250,000 12,000 P 238,000
b) NO EFFECT C) NO EFFECT d)
d) Purpose of appropriation of accumulated profits 1) to comply with legal requirements 2) to comply with contractual requirements 3) upon discretion of management
e) The corporation was done with the appropriation 10
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