Retained Earnings

Chapter 7

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Definition
Represent the component of shareholders
equity arising from the retention of assets
generated from the profit directed activities
of the corporation
Normally has a Credit balance
A debit balance results from accumulated
losses and is called Deficit.

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Changes in Retained Earnings

Profit / Loss
Dividends
Reissuance of Treasury Shares
Retirement of Treasury Shares
Prior Period Errors
* Only Unrestricted Retained Earnings can
be declared as dividends.
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Restrictions on Retained Earnings

Legal
Contractual
Voluntary

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Dividends
These are return on investments to the
shareholders.
Can only be distributed if declared by the Board of
Directors.
As a general rule, any form of dividend declaration
should be based on the total subscription and not
merely on the shares already paid.
Important dates to remember include Date of
Declaration, Date of Record and Date of Payment.
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Date of Declaration
Date of declaration the date on which the
board of director will adopt a resolution declaring
that a dividend is to be paid, specifying the
amount, type and payment date. Cash dividends
are declared solely by the BOD while Share
Dividends will require the concurrence of at least
2/3of the outstanding shareholders.
This is the time in which, liability of the
corporation to its shareholders is said to arise.
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Date of Record
This serves as a cut off date for
those shareholders who will be
entitled to dividends.
A person who becomes a
shareholder on or before the date
of record is entitled to dividends.

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Date of Payment
The date on which the
corporation settles the
liability to the shareholders.

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Types of Dividends

Cash Dividends
Property dividends
Share Dividends
Liquidating Dividends

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Cash Dividends
Cash is paid to shareholders.
The amount my be expressed as a
percentage of the par value or an arbitrary
value per share.
The pro-forma entry upon declaration is:
Retained Earnings xxx
Cash dividends Payable xxx
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Property Dividends
Also known as Dividends in Kind
Share holders are given assets other than
cash as their dividends.
The entity shall measure a liability at Fair
Value of the assets to be distributed.
Pro forma entry upon declaration
Retained Earnings xxx
Property Dividends Payable xxx
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Share Dividends
Additional shares issued to shareholders.
Differs from cash and property dividends in
such a way that there is no transfer of assets
from the corporation to the shareholder.
Affects only the shareholder equity section
and increases the total share capital and
decreases the retained earnings account.
Thus, total shareholders equity section
remains unchanged.
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Share Dividends, continued

Small Share Dividends- are dividends in which
additional shares issued are less than 20% of
the previously outstanding shares. Shares to
be issued are valued at their fair market value.
Large Share Dividends if the additional
shares to be issued are more than 20% of the
previously outstanding shares. Shares to be
issued are recorded at par or stated value.

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Share Dividends, continued

Pro forma entry upon declaration
Retained Earnings xxx
Share Dividends Distributable xxx

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Liquidating Dividends
Are not distributions of earnings but rather
returns of capital to the investing
shareholders.
Can be paid only in the following
circumstances:
When the corporation is under dissolution and
liquidation.
When the corporation is engaged in the
exploration of natural resources.
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Share Splits
Increase the number of shares and
consequently, decrease the par or stated
value of the shares.
Reverse Split decreases the number of
shares and consequently increases the
par or stated value of the shares.

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The End

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