Retained Earnings

Mrs. Paz Castro

Overview
 A 2-for-2 share split gives shareholders one
additional share of ordinary shares for each share
they own.
 Share dividends also give shareholders additional
shares based on the value of their holdings, but
have a different effect on the shareholders’ equity
section of the statement of financial position.
 A cash dividend is a distribution of cash based on
the number of shares owned.
 Retained earnings represent the component of the
shareholders’ equity arising from the retention of assets
generated from the profit-directed activities of the
corporation.
 At the end of the accounting period, the Income Summary
account of a corporation is closed to the Retained Earnings
account.
 The Retained Earnings account is credited with the
corporation’s profit or debited with the loss.
 Distributions to shareholders of cash, property or stocks from
unrestricted retained earnings on the basis of all issued and
fully paid shares, and all subscribed par value shares
except treasury shares are called dividends.
 Dividend declarations reduce retained earnings.
 Other less common situations that cause increases and
decreases in retained earnings: debits resulting from
reissuance of treasury stocks below cost and loss on
retirement of treasury stocks and debits or credits for prior
period errors.
 Prior period errors are errors discovered in the
current period that are of such significance that the
financial statements of one or more prior periods
can no longer be considered to have been reliable
at the date of their issue. Credit entries increase the
retained earnings balance and debits decrease it.
 A debit balance in the Retained Earnings account
resulting from accumulated losses is called a deficit.
 Retained earnings may be restricted or
appropriated, and unrestricted or unappropriated.
 Unrestricted retained earnings are free and can be
declares as dividends.
 Retained earnings restrictions may be legal,
contractual or voluntary.
Dividends in General
 An owners’ equity account representing claim on all assets in
general and not on any asset in particular.
 Shareholders are not guaranteed dividends and dividends
do not become a liability of the company until the board of
directors has formally declared a dividend distribution.
 Section 43 of the Corporation Code states that dividends
should only be declared out of the unrestricted retained
earnings.
 Dividends may take the form of cash, property or additional
shares of stock of the corporation.
 Any form of dividend declaration should be based on the
total subscription of a shareholder and not merely on the
shares already paid.
 Subscribers are considered shareholders from the time their
subscriptions are accepted by the corporation and not from
the time they are issued stock certificates.
 DATE OF DECLARATION
 The board of directors will adopt a resolution declaring
that a dividend is to be paid.
 The resolution will specify the amount, type and date of
payment of this dividend. It will also set a date of
record.
 Cash dividends are declared solely by the board of
directors while share dividends will necessitate the
concurrence of at least two-thirds of the outstanding
shareholders.
 Legally, declared dividends are obligations of the firm.
Dividends to be paid in cash or property became a
liability on this date. Shares distributable is also
recognized.
 An entry is made debiting Retained Earnings and
crediting a dividend liability of Shares Distributable
account. Some companies debit a Dividends Declared
account instead of the Retained Earnings account. This
account is nevertheless closed to the Retained Earnings
account at the end of the year.
 Paragraph 10 of IFRIC 17 provides that the liability to
pay a 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 declaration of the dividend, e.g. by management or
the board of directors, is approved by the relevant
authority, e.g. the shareholders, if the jurisdiction requires
such approval, or
 When the dividend is declared, e.g. by management or the
board of directors, if the jurisdiction does not require further
approval.
  IFRIC 17 Distributions of Non-cash Assets to Owners was
developed by the International Financial Reporting Interpretation
Committee and issued by the Internal Accounting Standards
Board in Nov. 2008. Its effectivity date is July 1 2009.
 DATE OF RECORD
 A list of shareholders entitled to the declared dividends is
prepared at the date of record.
 If an investor buys a share of stock after this date, he will not
receive the dividends. This share is said to be traded ex-dividend.
  No entry is required on this date.
 DATE OF PAYMENT
 The corporation settles its liability on this date.
 An entry is made debiting the dividend liability or
shares distributable account and crediting cash,
property distributed or share capital.
Cash Dividends
 Majority of dividends distributed by corporations is paid in
cash.
 A company must have both an appropriate amount of
retained earnings and the necessary amount of cash.
 A corporation, however, may successfully accumulate
earnings and at the same time not be sufficiently liquid to
pay large dividends.
 Dividends on par value shares are stated as a certain
percentage of the par value.
 As to no-par value shares, the dividends are stated at a
certain amount per share.
 When the board of directors declares a cash dividend, an
entry is made debiting Retained Earnings and crediting
Cash Dividends Payable.
 Ex.: A nationally-known business books distribution company
declared a cash dividend of P12 per share of ordinary shares of
July 1. the dividends are payable on August 1 to shareholders of
record on July 21. The company
 has 100,000 ordinary shares issued of which 7,000
shares are held in treasury. The entries to record the
dividend declaration and payment are as follows:
Retained Earning1,116,000
Cash Dividends1,116,000
To record declaration of dividend.
 Theaccount, Cash Dividend, may be used in place of
the debit to Retained Earnings. At the end of the
accounting period, this temporary shareholders’ equity
account will be closed by debiting Retained Earnings
and crediting Cash Dividends Declared.
 Cash Dividends Payable1,116,000
Cash1,116,000
To record payment of dividend.
 Cash dividends payable are reported as current
liabilities in the statement of financial position.
 With the exception of treasury shares, all issued and
fully paid shares, and all subscribed par value shares
are entitled to dividends when declared.
 No-par value shares are considered as legally issued
only when fully paid.
 Unissuedshares, subscribed no-par shares and treasury
shares are not entitled to dividends.
Property Dividends
 Per IFRIC 17, paragraph 11, an entity shall measure a
liability to distribute non-cash assets as dividends to its
owners at the fair value of the assets to be distributed.
 Ex.: Yummy Food Industries has 5,000 shares investment in
another entity accounted for as nonmarketable equity investment.
The carrying amount of this investment is P500,000. On Dec. 1,
2013, the company declared as property dividends this
investment to all its outstanding par value shares to be distributed
on Dec. 15, 2013.
The fair market value of the investment at the
declaration date was P950,000. There was no change
in fair value on settlement date. The entries to record
the dividend declaration and distribution are as follows:
Retained Earnings950,000
Property Dividends Payable950,000
To record declaration of dividend.
Property Dividends Payable950,000
Investment in Equity Securities500,000
Gain on Distribution of Property
Dividends450,000
To record distribution of dividend.
 Because of the use of fair value, a problem will arise at
settlement date if the fair value of the assets to be distributed
has changed. The following offers the pertinent guidance:
 Per IFRIC 17, paragraph 13, at the end of each reporting period and at
the date of settlement, the entity shall review and adjust the carrying
amount of the dividend payable, with any changes in the carrying
amount of the dividends payable recognized in equity as adjustments to
the amount of the distribution.
 Paragraph 14, when an entity settles the dividends payable, it shall
recognize the difference, if any, between the carrying amount of the
assets distributed and the carrying amount of the dividend payable in
profit or loss.
 IFRS 5, paragraph 5A, states that the classification,
presentation and measurement requirements in this IFRS
is applicable to a non-current asset (or disposal group)
that is classified as held for distribution to owners.
 Paragraph 15A provides that an entity shall measure a
non-current asset (or disposal group) classified as held
for distribution to owners at the lower of its carrying
amount and fair value less costs to distribute.
Share Dividends
 A corporation may distribute to shareholders
additional shares of the company’s own share as
share dividends.
 This type of dividend affects only the accounts
within the shareholders’ equity.
 Share dividends increase the total share capital
and decrease the retained earnings account.
 Because both of these are components of
shareholders’ equity, total shareholders’ equity is
unchanged.
 From the shareholders’ point of view, a share dividend does
not change their percentage interests in the corporation
although total outstanding shares have increased.
 SMALL SHARE DIVIDENDS
 Additional shares issued are less than 20% of the previously
outstanding shares.
 Recorded by transferring from retained earnings to share capital
(ordinary shares and share premium accounts) the fair market
value of the additional shares to be issued.
  In cases when the fair market value is lower than the
par or stated value, the par or stated value will be the
basis for recording.
 Ex.: Oishi!, a Japanese fastfood chain, is blessed with years
of profitable operations for its commitment to serve
affordable and healthy Japanese food favorites. The
shareholders’ equity of the company before declaration of
a 10% share dividend is as follows:
Ordinary shares, P50 par, 20,000 shares issued and outstanding P1,000,000

Share Premium 200,000

Total Share Capital P1,200,000

Retained Earnings 650,000

 The declaration of a 10% share dividend will require the
issuance of an additional 2,000 shares. Assume that the
company’s share is being traded at the stock exchange and
that the stock market price per share is P110. The fair
market value of the shares to be distributed is P220,000.
The entries will be:
Retained Earnings220,000
Shares Distributable100,000
Share Premium120,000
To record declaration of 10% share dividends.
Shares Distributable100,000
Ordinary Shares100,000
To record issuance of share dividends.
 Retained Earnings (or the temporary account, Share
Dividends Declared) is debited for the fair market value of
the share dividends. Shares Distributable is credited for the
par value of shares to be distributed and Share Premium for
the balance.
 If a statement of financial position is prepared between the
declaration date and the distribution date of a share
dividend, the Shares Distributable account will be shown in
the shareholders’ equity immediately after the Ordinary
Shares account.
  When the share is distributed, only the components of the
shareholders’ equity changes; retained earnings decreased
by P220,000 and total share capital increased by
P220,000. The total shareholders’ equity did not change.

Before After Increase

Dividends Dividends (Decrease)
Ordinary Shares, P50 par, 20,000 shares P1,000,000 P1,100,000 P100,000
issued and outstanding

Share Premium 200,000 320,000 120,000

Total Share Capital P1,200,000 P1,420,000 P220,000

Retained Earnings 650,000 430,000 (220,000)

Total Shareholders’ Equity P1,850,000 P1,850,000 -
  The receipt of a share dividend does not alter the
relative position of a shareholder. No profit is realized
by the shareholders.
 LARGE SHARE DIVIDEND
 Ifthe share dividend is 20% or more of the previously
outstanding shares such that the effect is to reduce
materially the market value per share, then only the
par or stated value is credited to ordinary shares with
a corresponding debit to retained earnings.
 Ex.: Assume that Oishi! declared a 20% share dividend on
its 20,000 issued and outstanding P50 par value shares. The
company will issue additional 4,000 shares due to the share
dividend. The entries will be:
Retained Earnings200,000
Shares Distributable200,000
To record declaration of 20% share dividends.
Shares Distributable200,000
Ordinary Shares200,000
To record issuance of share dividends.
 The account titles used to record a large share dividends.
The balance in the account Share Premium remained the
same; this is because large share dividends are recorded at
par value.
 Before After Increase
Dividends Dividends (Decrease)
Ordinary Shares, P50 par, 20,000 shares P1,000,000 P1,200,000 P200,000
issued and outstanding

Share Premium 200,000 200,000 -

Total Share Capital P1,200,000 P1,400,000 P200,000

Retained Earnings 650,000 450,000 (200,000)

Total Shareholders’ Equity P1,850,000 P1,850,000 -

Shares Issued and Oustanding 20,000 24,000 4,000

Liquidating Dividends
 Returns of capital to the investing shareholders.
 This type of dividend can be legally paid only
under either of the following circumstances:
 When the corporation is under dissolution and
liquidation, or
 When the corporation is engaged in the exploration of
natural resources.
Share Splits
 Corporations reduce the par or stated value of its
share capital and issues additional shares to its
shareholders through the practice referred to as
share splits.
 The par or stated value per share will decrease
with a corresponding increase in the number of
authorized, issued and outstanding shares. In effect,
there is not change in the balances of the
shareholders’ equity accounts.
 The following are some reasons behind a share split:
 To adjust the market price of the company’s shares to a
level where more individuals can afford to invest in the
stock.
 To spread the shareholder base by increasing the
number of outstanding shares.
 To benefit existing shareholders by allowing them to
take advantage of an imperfect adjustment following
the split.
 When shares are selling below a desired price or
when management wishes to take control of the
company, the corporation may consider a reverse
split that can be accomplished by increasing the
par or stated value of its share and reducing the
shares outstanding. There will be no entry required;
a memo entry is sufficient.
 Ex.: The International School of Business and Sciences,
Inc. has 10,000 P10 par value ordinary shares issued
and outstanding when the board of directors decided
to split the share 5-for-1. this means that a shareholder
would receive 5 shares with a new par value of P20
for each share held. Ordinary shares will remain
unchanged at P1,000,000. the issued and outstanding
shares will now be 50,000 and the par value reduced
to P20 per share.
 Summary of the Effects of Dividends
and Share Splits
Effect on: Declaration of Payment of Declaration and Distribution of
Cash Cash Small Share Large Share Share
Dividends Dividends Dividends Dividends Split

Retained Earnings Decrease - Decrease Decrease -

Ordinary Shares - - Increase Increase -

Share Premium - - Increase - -
Total Shareholders’ Decrease - - - -
Equity

Total Liabilities Increase Decrease - - -

Total Assets - Decrease - - -
Shares Outstanding - - Increase Increase Increase
Dividends on Preference and Ordinary
Shares
 A corporation may issue both preference and
ordinary shares.
 When the board of directors declares cash
dividends, preference shareholders are entitled to
dividends before ordinary shareholders receive any
distribution.
 The dividend is stated as a percentage of the par
value preference shares.
 The corporation is not obliged to declare dividends
annually.
 When the board does not declare dividends, the
dividends for cumulative preference shares
accumulate; these are called dividends in arrears.
 Preference shares may contain one of the following
combinations of features:
 Non-cumulative and non-participating
 Non-cumulative and participating
 Cumulative and non-participating
 Cumulative and participating
 NON-CUMULATIVE PREFERENCE SHARES
 Entitle the holders only to the payment of current dividends, if
and when dividends are declared, to the extent of the
preference rate, before the ordinary shareholders are paid. If
there is no dividend declaration for that year, then the dividend
for that year is forfeited.
 CUMULATIVE PREFERENCE SHARES
 Entitle the holder to payment not only of current dividends but
also of back dividends or dividends in arrears, if and when
dividends are declared, before the ordinary shareholders are
paid.
 NON-PARTICIPATING PREFERENCE SHARES
 Entitle
the holders only to the extent of the stipulated
preference dividend.
 PARTICIPATING PREFERENCE SHARES
 Entitle
the holders to participate with the holders of
ordinary shares pro-rata in the remainder after the
ordinary shareholders have received their initial share
based on the preference rate.
 Ex.:Book Publishers, Inc. has the following selected
accounts in its shareholders’ equity:
12% Preference Shares, P100 par,
authorized 4,000 shares, 2,000 shares
issued and outstandingP200,000
Ordinary Shares, P100 par, authorized
6,000 shares, 3,000 shares issued and
outstanding 300,000
Retained Earnings 260,000
The board failed to declare dividends for the past two
years. The current year’s results of operations gave the
board reasons to declare cash dividends of P200,000.
  Case 1. non-cumulative and non-participating
preference shares
Preference Ordinary Total

Outstanding Share Capital P200,000 P300,000 P500,000

Current Preference Dividends P 24,000 P 24,000

Remainder to Ordinary . P176,000 176,000

 Dividendsper share is obtainedP by dividing the total

Total 24,000 P176,000 P200,000
dividend distribution per class of share by its corresponding
outstanding
Dividends per share shares. P 12.00 P 58.67
  In the absence of an agreement, preference shares are
assumed to be non-cumulative and non-participating. This is
in accordance with the provision that each share shall be
equal in all respects to every other share except as
otherwise provided by the articles of incorporation and
stated in the certificate of stock (Section 6, paragraph 5,
Corporation Code).
 Case 2. non-cumulative and participating preference
shares
Preference Ordinary Total

Outstanding Share Capital P200,000 P300,000 P500,000

Current Preference Dividends P 24,000 P 24,000

Remainder for Participation 140,000

Preference 56,000
Ordinary . 84,000 .

Total P 80,000 P120,000 P200,000

 Case 3. cumulative and non-participating preference
Dividends per Share P 40,00 P 40.00
shares
Preference Ordinary Total

Outstanding Share Capital P200,000 P300,000 P500,000

Preference Dividends in Arrears P 48,000 P 48,000

Current Preference Dividends 24,000 24,000

Remainder to Ordinary . P128,000 128,000
  Case 4. cumulative and participating preference
shares
Preference Ordinary Total

Outstanding Share Capital P200,000 P300,000 P500,000

Preference Dividends in Arrears P 48,000 P 48,000

Current Preference Dividends 24,000 24,000

Current Ordinary Dividends P 36,000 36,000

Remainder for Participation 92,000

Preference 36,000
Ordinary . 55,200 .
Prior Period Errors
 Per IAS No. 8, Accounting Policies, Changes in
Accounting Estimates and Errors, prior period errors
are omissions from and other misstatements of the
entity’s financial statements for one more prior
periods that are discovered in the current period.
 Errors may occur as a result of mathematical
mistakes, mistakes in applying accounting policies,
misinterpretations of facts, fraud or oversights.
 Material prior periods must be restated to report
financial position and results of operations as they
would have been presented had the error never
taken place.
 Reported by adjusting the opening balances of
retained earnings and affected assets and liabilities.
 The correction of a prior period error is excluded
from profit or loss for the period in which the error
is discovered.
 If an error resulted in an understatement of profit in
previous periods, a correcting entry would be
needed to increase retained earnings.
 If an error overstated profit in prior periods, then
retained earnings would have to be decreased.
 Ex.:In 2012, the bookkeeper of Castro Realty, Inc.
debited Advertising Expense and credited Cash to
record the purchase of a small parcel of land to be
used as the company’s sale training
venue. The entry should have been a debit to Land and
a credit to Cash of P250,000. The effect of this prior
period error is to overstate 2012 advertising expense
and ultimately, understate 2012 profit by the same
amount. Land is also understated by P250,000. The
external auditors discovered the prior period error in
2013. The correcting entry will be:
Land250,000
Retained Earnings250,000
 This entry increased assets and shareholders’ equity by
P250,000. Advertising expense, a temporary account,
is closed to income summary and income summary is in
turn closed to retained earnings; therefore, any
corrections to income or expense of the prior periods
should be made directly to the retained earnings
account. The preceding analysis purposely did not
include the income tax effects of the error.
Restrictions on Retained Earnings

 A corporation may be required by law or contractual

arrangements to set aside a portion of the retained
earnings for specified purposes.
 In addition, the board of directors may voluntarily
designate a portion of retained earnings for future
expenses, contingencies or other purposes (SFAS No. 18,
paragraph 31).
 This portion of the retained earnings is referred to as
restricted or appropriated retained earnings.
 Ex.: ABC Technologies, Inc. bought 1,000 of its shares
at P150,000. A portion of the retained earnings is
restricted for the cost of the treasury purchased.
Retained Earnings150,000
Appropriated Retained Earnings150,000
To restrict retained earnings for the cost of treasury shares
purchased.
 Itsimply communicates that the restricted portion is not
available for dividend declarations. Once the purpose
of the restriction has been served, the appropriate
retained earnings should be reversed to
unappropriated retained earnings.
 Ifthe treasury stocks are subsequently reissued, the
restricted balance is reversed as follows:
Appropriate Retained Earnings150,000
Retained Earnings150,000
To remove restriction on retained earnings.
Statement of Retained Earnings
 Not required per revised IAS No. 1.
 Normally divided into 2 major sections:
 Appropriated
 Presents the beginning balance of the retained earnings
appropriated account, any additions or deductions during
the period, and ending balance.
 Unappropriated
 Shows the beginning balance of the retained earnings
unappropriated account, correction of prior period error,
profit or loss for the period, dividends, transfer to and from
the appropriated and unappropriated accounts, and the
ending balance.
 Bookstore Corporation
Statement of Retained Earnings
For the Year Ended Dec. 31, 2013
Appropriated:
Balance, 1/1/13 as reported P 180,000

For Treasury Stocks, 4/8/13 100,000

Retained Earnings Appropriated, 12/31/13 P 280,000

Unappropriated:
Balance, 1/1/13, as previously reported P1,414,500

Correction of Prior period error 100,000

Balance, 1/1/13, as restated P1,514,000

Add: Profit 480,000

Total P1,994,500

Less: Cash Dividends Declared P 65,000

Statement of Changes in
Shareholders’ Equity
 Significant changes in shareholders’ equity should
be reported in the period in which they occur.
 May be prepared in columnar format, where each
column represents a major shareholders’ equity
classification.
 The ending balances of the accounts are presented
at the bottom of the statement. These accounts and
their related balances compose the shareholders’
equity section of the statement of financial position.
 Victory Property Corporation
Statement of Changes in Shareholders’ Equity
For the Year Ended December 31, 2013
Preference Shares Ordinary Shares Share Premium-
P100 par P10 par Ordinary

Balance, Jan. 1 P500,000 P1,000,000 P300,000

Profit
Cash Dividends on
Preference
Cash Dividends on
Ordinary
Issue of Ordinary, 5,000 50,000 5,000
shares
5% Share Dividend on 52,500 26,250
Ordinary, 5,250 shares

Purchase of Treasury
Stock
Approp. For Treasury . . .
Stock
 Victory Property Corporation
Statement of Changes in Shareholders’ Equity
For the Year Ended December 31, 2013
Unapprop. Approp. Treasury Total
Retained Retained Preference
Earnings Earnings Shares

Balance, Jan. 1 P150,000 P1,950,000

Profit 85,000 85,000

Cash Dividends on Preference (25,000) (25,000)

Cash Dividends on Ordinary (40,000) (40,000)

Issue of Ordinary, 5,000 shares 55,000

5% Share Dividend on Ordinary, (78,750)

5,250 shares
Purchase of Treasury Stock (30,000) (30,000)
 Shareholders’ Equity
Share Capital
Preference Shares-P100 par, 10,000 shares authorized, P 500,000
5,000 shares issued and 4,750 shares outstanding

Ordinary Shares-P10 par, 150,000 shares authorized, P1,102,500

110,250 shares issued and outstanding

Share Premium-Ordinary 331,250 1,433,750

Total Share Capital P1,933,750

Retained Earnings
Unappropriated P61,250
Appropriated for Treasury Stock 30,000 91,250
Total Share Capital and Retained Earnings P2,025,000
Book Value per Share
 The amount that would be paid on each share if the
corporation is liquidated.
 The amount available to shareholders is exactly the
amount reported as shareholders’ equity.
 When only a single class of share is outstanding, the
book value per share is computed by dividing the
total shareholders’ equity by the number of shares
outstanding.
  Ex.: Assume that Guns Security Agency has a total
shareholders’ equity of P180,000 and 5,000 shares of
ordinary shares outstanding. The book value per share
is P36 (P180,000/5,000 shares).
 When both preference and ordinary shares are
outstanding, the preference shareholders have
preference over ordinary shareholders as to the
distribution of assets upon corporate liquidation.
 The preference shareholders have the right to
receive assets equal to the par value or a larger
stated liquidation value per share. Liquidation
value is the cash price or other consideration that
can be received in a forced sale of assets such as
that occurring when a firm is in the process of going
out of business.
 Typically, the liquidation value is less than what
could be received from selling assets in the ordinary
course of business.
 The book value per share of the preference shares
is the sum of its liquidation value, if applicable, plus
any current and dividends in arrears divided by the
number of preference shares outstanding.
 Ordinary shareholders’ equity is obtained by
deducting from total shareholders’ equity the
preference shareholders’ equity.
 The book value per share of the ordinary shares is
computed by dividing the ordinary shareholders’
equity by the number of ordinary shares
outstanding.
  Ex.: Hizon Advertising and Marketing, Inc. is one of the
leading firms doing highly creative tri-media product
exposures in Cebu. The shareholders’ equity section of
the company’s statement of financial position is as
follows:
6% Cumulative non-participating Preference Shares, P1,000 par, 5,000 P 400,000
shares authorized, 400 shares issued and outstanding

Ordinary Shares, P100 par, 20,000 shares authorized, 5,500 shares 550,000
issued and outstanding
Share Premium – Preference 40,000
Share Premium – Ordinary 720,000
Retained Earnings 850,000
Total Shareholders’ Equity P2,560,000
 Suppose that the preference shares has a liquidation
value of P1,300 and dividends are in arrears for 3
years. The computation of the preference book value
per share follows:
Preference Shares:
Liquidation Value, P1,300 x 400 shares P520,000

Dividends in Arrears, 6% x P400,000 x 3 yrs. 72,000

Current Dividends, 6% x P400,000 24,000

Preference Shareholders’ Equity P616,000
Book Value per Share, P616,000/400 shares P 1,540
 The ordinary book value per share is obtained as
follows:
Ordinary Shares:
Total Shareholders’ Equity P2,560,000

Less: Preference Shareholders’ Equity 616,000

Ordinary Shareholders’ Equity P1,944,000

 Book value
Book Value per per
Share,share may be used
P1,944,000/5,500 shares as
thePinitial
353.45
bargaining price in negotiating the purchase of a
corporation whose shares are not traded in the stock
exchange.
 On the other hand, investors in the stock market may
utilize book value as one of the basis for evaluating
whether a stock is undervalued or not.
 It is also significant in many contracts and in court cases
where the rights of the individual parties are based on
cost information.
 Homework 7
 Indicate whether the following actions would (+) increase, (-)
decrease, or (0) not affect the corporation’s total assets,
liabilities and shareholders’ equity.
Assets Liabilities Shareholders’
equity
1. Declaring a cash dividend
2. Paying the cash dividend declared in # 1

3. Declaring a share dividend

4. Issuing share certificates for the share
dividend declared in # 3
5. Authorizing and issuing share certificates in a
share split
 Ysmael Corporation’s board of directors declared a
P750,000 cash dividend on Sept. 1, 2011, payable
on Oct. 1, to shareholders of record on Sept. 15.
Prepare all appropriate entries needed on the
declaration, record and payment dates.
 Seatwork 7
 Indicate the effects of each of the following transactions on
Assets, Liabilities, Share Capital and Retained Earnings. Use +
for increase, - for decrease and 0 for no effect.

Assets Liabilities Share Retained

Capital Earnings

1. Declaring of cash dividends

2. Payment of cash dividends
3. Declaration of share dividends
4. Issuance of share dividends
5. A share split
6. Cash purchase of treasury stock
7. Sale of treasury stock below cost
 The dates of importance in connection with a cash
dividend of P35,000 on a corporation’s ordinary
shares are Jan. 2, Jan. 22, and Feb. 1. Journalize
the entries required on each date.