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RETAINED EARNINGS
Increase Capitalization or Declare Dividends to Avoid Penalty Under Section 43 of the
Corporation Code of the Philippines
Observation:
We noted that the Companys retained earnings as of December 31, 1997 amounted to
P280,353,120, which is more than the Companys paid up capital of P44,962,600.
The Securities and Exchange Commission (SEC) requires that corporations should not have
retained earnings more than its paid-up capital unless there is a purpose for retaining such
amount like:
1. when justified by definite corporate expansion projects or programs.
2. when the corporation is prohibited under any loan agreement with any financial
institution or creditor whether local or foreign, from declaring dividends without its/his
consents, 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 a need for special
reserve for probable contingencies.
The Company also has an appropriation of retained earnings for business expansion of
P7,500,000, which no one could recall when this was appropriated.
The SEC may impose sanction to Corporation a certain amount of the excess in retained
earnings over paid up capital.
Recommendation:
We suggest that the Company plan to distribute cash dividend in the future or ask for
increase in its authorized capital stock from SEC, so that it could declare stock dividend, in
order to avoid any sanction/penalty for violation of section 43 of the Corporation Code of
the Philippines.

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