RETAINED EARNINGS
ACCOUNTING FOR CORPORATION
RETAINED EARNINGS
In T – Account form, posting
to Retained Earnings will show the following:
NET INCOME OR NET LOSS
When the result of the operation is Net income, the remaining balance of Income/Expense
summary account will be at the credit side. So for it to be close, an entry using Retained
earnings account will appear as follows:
Income/Expense Summary XXX
Retained earnings XXX
If the result is Net loss:
Retained earnings XXX
Income/Expense Summary XXX
ORDINARY DIVIDENDS
THE MOST COMMON FORMS OF DIVIDENDS DISTRIBUTION ARE THE
FOLLOWING:
*Cash dividends
*Property dividends
*Stock dividends.
Before declaration upto distribution of dividends must be made, the balance of retained
earnings must be check first.
ORDINARY DIVIDENDS
Sec. 43 of the Corporation Code provides that “no corporation shall make or declare any
dividend except from the surplus profits arising from its business.” Surplus profit here is
contemplated to mean unrestricted or unappropriated earnings of the corporation.
It further states that “stock corporations are prohibited from retaining surplus profits in
excess of 100% of their paid in capital except when justified by the circumstances.” if the
paid in capital is P1,000,000 and the R.E. is P1,500,000, the BoD is required by the law to
declare P500,000 dividends. The exception to this rule: when there is a reason for
restricting its distribution such as a contemplated project for plant expansion wherein a
large sum of money will be needed.
ORDINARY DIVIDENDS
Who are entitled to dividends? CCP section 72 states that all outstanding capital stock are
entitled to dividends. CCP section 137 defines “outstanding capital stock” as “the total
shares of stock issued to subscribers or shareholders, whether fully or partially paid”
(AS LONG AS THERE IS A BINDING SUBSCRIPTION AGREEMENT), except
Treasury shares.
ORDINARY DIVIDENDS
Section 72 further states that “holders of subscribed shares which are not delinquent shall
have all the rights of a shareholder. Based on the above provisions, all issued, outstanding
and subscribed shares are entitled to dividends except the TS. Subscribed shares may be
given cash dividends but the dividends paid in cash shall be applied first to the unpaid
balance. When there are delinquent shares, and a cash dividend is declared, the dividend
should also be applied first against the unpaid balance of the subscription including
incidental costs and expenses. IF THE DIVIDEND DECLARED IS IN THE FORM OF
STOCKS, IT SHOULD BE WITHHELD UNTIL THE SUBSCRIPTION IS PAID IN
FULL.
ORDINARY DIVIDENDS
There are 3 significant dates in relation to dividends:
DATE OF DECLARATION – This is the date when dividends are formally declared by
the Board. On this date, a liability to distribute dividends should be recognized in the
corporate books as follows:
Retained earnings XXX
Dividends payable XXX
ORDINARY DIVIDENDS
DATE OF RECORD – This is the date when, based on the stock and transfer book, the
corporation determines the shareholders who will be entitled to dividends. NO JOURNAL
ENTRY is required on this date. Note that stocks are easily transferable, thus, there must
be a fixed date used as basis for determining who gets dividends.
DATE OF DISTRIBUTION – This is the date that dividends are actually distributed to
the share holders. An entry is prepared to record the distribution as follows:
Dividends payable XXX
Cash/Other assets/Share capital XXX
CASH DIVIDENDS
The most common type of dividend. The use of the term dividend without identification
would mean a cash dividend. It is usually express at a certain amount of peso per share,
for example P5 or P10 per share. Or it is expressed at a certain percentage of the par value
or stated value, for example 18% is declared as dividend on a P100 par value share will
mean a dividend of P18 per share.
CASH DIVIDENDS
To illustrate, assume that the BoD declared a cash dividend of 5% per share on June 1,
2021 to shareholders of record as of July 15, 2021, payable on August 31, 2021. Shares
are 100,000 and the par value is P100.
June 1: Retained earnings P500,000
Cash dividend payable P500,000
(100,000 x P100 x 5%)
Aug. 31: Cash dividend payable P500,000
Cash P500,000
CASH DIVIDENDS
Cash dividend must be declared :
1.) When there is sufficient unrestricted profits
2.) When there is sufficient cash
Supposed retained earnings is P1,000,000 but the available cash is only P500,000, then
how much can be distributed as dividend? Only up to the extent of P500,000 can be
distributed.
Assume that on the previous example, corporate record shows that there are 100,000
issued shares (10,000 of which are in treasury) and there are also 30,000 shares subscribe
which are not delinquent. Therefore, the computation for dividends will be as follows:
120,000 sh. X P100 par X 5%
CASH DIVIDENDS
Dividends declared during the year may be debited to a temporary title called, Dividends,
instead of Retained earnings. However, at the end of the year, this account must still be
disclosed to the Retained earnings.
PROPERTY DIVIDENDS
It might be whatever type of assets of the company. Assumed that on July 1, More Power
Corporation acquired 50,000 of Meralco shares at a cost of P750,000 or P15 each. The
BoD of More Power declared on Nov. 15 a dividend of one share of Meralco stock for
every 10 shares of More Power stocks owned. On this date, Meralco shares are selling at
P20 per share. More Power has 100,000 common shares issued and outstanding, P100 par
value. The Meralco shares were distributed on Dec. 15.
PROPERTY DIVIDENDS
Entries in the books of More Power:
Nov. 15 Retained earnings P200,000
Prop. div. Payable (10k x P20*) P200,000
Dec. 15 Prop. div. Payable P200,000
Investment in Meralco stocks P200,000
PROPERTY DIVIDENDS
*Meralco shares must be adjusted to its fair market value by debiting to increase it by
P250,000 (P20 – P15 = P5 x 50,000 sh) and crediting to Unrealized gain on stock
investment (with a presumption that Meralco shares are available for sale securities). This
is an example of other comprehensive income account. Once disposed, the unrealized
gain must be adjusted to realized gain thereby increasing RE.
LIABILITY DIVIDENDS – DEFERRED CASH
DIVIDEND
Assume that Z Corporation declared a scrip dividend of P10 on January 30, 2021to
shareholders of record as of February 15, 2021 payable at 10% interest on March 31,
2021. The stock and transfer book shows 10,000 shares issued and outstanding on date of
record.
Entries in the books of the corporation:
Jan. 30: Retained earnings (10,000 x P10)P100,000
Scrip div. payable P100,000
Mar. 31: Scrip div. payable P100,000
Int. Exp. (100,000x10%x60/360) P1,667
Cash P101,667
STOCK DIVIDENDS
Stock dividends’ primary effect is to increase the number of shares of the shareholders
For instance, assume that Marvelous Corp. has 100,000 issued and outstanding shares.
The Board declares a 10% stock dividend. This means that there will be additional 10,000
shares to be issued to the shareholders.
STOCK DIVIDENDS
Illustration: Rock Corporation has the following accounts:
Share capital, par P100, 20,000 shares authorized,
10,000 issued and outstanding P1,000,000
Share premium P100,000
Retained earnings P450,000__
Total P1,550,000
STOCK DIVIDENDS
1. A 15% stock dividend was declared when the market value of stock was P150 per
share.
Retained earnings (10,000 x P150 x 15%) P225,000
Stock Div. for dis. (10,000 x P100 x 15%) P150,000
Share premium P75,000
Stock div. for dis. P150,000
Share capital P150,000
After the first entry, presentation will be as follows:
STOCK DIVIDENDS
After the first entry, presentation will be as follows:
Share capital, par P100, 20,000 shares authorized,
10,000 issued and outstanding P1,000,000
Stock div. for distribution P150,000
Share premium P175,000___
Total Contributed Capital P1,325,000
Retained earnings P225,000__
Total P1,550,000
STOCK DIVIDENDS
Stock dividends for distribution is NOT LIABILITY ACCOUNT unlike cash, scrip or
prop. div. Payable. It is presented as part of the paid-in capital after subscribed share
capital. As such, it should be part of the par value.
Base on the 2nd entry, SHE will be presented as follows:
Share capital, par P100, 20,000 shares authorized,
11,500 issued and outstanding P1,150,000
Share premium P175,000___
Total Contributed Capital P1,325,000
Retained earnings P225,000__
Total P1,550,000
STOCK DIVIDENDS
2.) 20% stock dividends was declared and the market value of the stock was P150 per
share.
Retained earnings (10,000 x P100 x 20%) P200,000
Stock div. for dis. (10,000 x P100 x 20%) P200,000
Note that the retained earnings was debited only at the par value. No additional paid in
capital was credited. Again, shareholders equity remains the same before and after the
declaration and distribution.
EFFECT OF STOCKS DIVIDENDS TO THE
SHAREHOLDERS
It is important to note that from the viewpoint of the shareholders, when they receive the stock dividends,
only a memorandum entry is prepared in their books. A stock dividend, although it increases the number of
shares, does not increase the interest or right of a stockholder over the corporation.
To illustrate, assume that Allen is a shareholder of Sure Corporation who own 5,000 shares when the
corporation declared a 10% stock dividends:
Shares of
Sure Corp. Shares of A A’s Equity
Share capital before declaration 100,000 5,000 5,000/100,000 or 5%
10% stock dividend distribution 10,000 500
Share capital after the distribution 110,000 5,500 5,500/110,000 or 5%
DIVIDENDS PAID TO PREFFERED AND COMMON SHAREHOLDERS
When dividends are declared, the preferred shares will have a preferential treatment based
on the priorities enjoyed by their stocks. If the stock is cumulative, previous dividends not
declared will automatically be included as soon as there is a declaration. It means that
dividends in arrears including current dividends (on year of declaration) will be
distributed to them. If the share is participating, aside from the dividends computed based
on the dividend rate, they will also receive a pro-rata distribution on the remaining
dividends together with the common shareholders. Cumulative and participating rights are
not implied, these must be specifically stated.
DIVIDENDS PAID TO PREFFERED AND COMMON SHAREHOLDERS
To illustrate, assume that Western Corporation has the following stocks issued and
outstanding:
18% preference shares, par value of P100,
10,000 shares issued and outstanding P1,000,000
Ordinary shares, par value of P50;
5,000 shares issued and outstanding P250,000
Retained earnings P1,850,000
No dividends were declared for the past two years
The Board declared cash dividends of P600,000 in 2022.
DIVIDENDS PAID TO PREFFERED AND COMMON SHAREHOLDERS
Case A Preference share is non-cumulative and non-participating
Preference Ordinary Total
18% x P100 x 10,000 x 1 year P180,000 P180,000
Remainder to Ordinary P420,000 420,000
Total P180,000 P420,000 P600,000
Dividend per share P 18.00 P 84.00
Case B Preference share is cumulative but non-participating
Preference Ordinary Total
18% x P100 x 10,000 x 3 years P540,000 P540,000
Remainder to Ordinary P60,000 60,000
Total P540,000 P60,000 P600,000
Dividend per share P 54.00 P 12.00
Note: In Cases A and B since the preference share is non-participating, after computing
dividends for the preference shares, the remainder goes to the ordinary shares. In case B, since
preferred is cumulative, preference shares should be given dividends for three years.
DIVIDENDS PAID TO PREFFERED AND COMMON SHAREHOLDERS
Case C Preference share is cumulative and fully participating.
Preference Ordinary Total
18% x P100 x 10,000 x 3 years P540,000 P540,000
18% x P250,000 X 1 year P45,000 45,000
Remainder 15,000 (600,000-540,000-45,000)
Preference (1,000,000/1,250,00) x 15,000 12,000 12,000
Ordinary (250,000/1,250,000) x P15,000 3,000 3,000
Total P552,000 P48,000 P600,000
1. Distribute
Dividend per share dividends to the preference
P 55.20 P shares
9.60 good for three years.
2. Use the same dividend rate to distribute dividends to the ordinary shares.
3. Remaining dividends is distributed to both preferred and ordinary using the capital
ratio.
DIVIDENDS PAID TO PREFFERED AND COMMON SHAREHOLDERS
Case
D The preference share is non-cumulative
Preference Ordinary
butTotalfully participating.
18% x P100 x 10,000 x 1 year P180,000 P180,000
18% x P250,000 X 1 year P45,000 45,000
Remainder P375,000 (600,000-180,000-45,000)
Preference (1,000,000/1,250,00) x 375,000 300,000 300,000
Ordinary (250,000/1,250,000) x P375,000 75,000 75,000
Total P480,000 P120,000 P600,000
Dividend per share P 48.00 P 24.00
Compute the dividends for both preferred and ordinary using the preferred's dividend rate.
Since preference share is participating, it is entitled to share proportionately in the
remainder together with the ordinary share based on capital ratio.
DIVIDENDS PAID TO PREFFERED AND COMMON SHAREHOLDERS
Case E The preference share is non-cumulative but participating up to 20%.
Preference Ordinary Total
18% x P100 x 10,000 x 1 year P180,000 P180,000
18% x P250,000 X 1 year P45,000 45,000
2% x P1,000,000 20,000 20,000
Remainder to Ordinary _________ 355,000 355,000
Total P200,000 P400,000 P600,000
Dividend per share P 20.00 P 80.00
Compute the dividends for both preferred and ordinary using the preferred's dividend rate.
Since preference share is 20% add two 2% more dividends for the preferred shares.
Since preferred is participating, allocate remaining dividends to both based on capital
ratio.
DIVIDENDS PAID TO PREFFERED AND COMMON SHAREHOLDERS
In all cases, the pro-forma entries are:
Retained Earnings 600,000
Cash Dividends Payable-Preferred xxx
Case Dividends Payable-Common xxx
To record dividend declaration.
Case Dividends Payable-Preferred xxx
Cash Dividends Payable-Common xxx
Cash 600,000
To record payment of dividends.
LIQUIDATING DIVIDENDS
When the dividend declared is in excess of retained earnings, the implication is that there
is a return of capital which is not legal or binding as per CCP, unless the corporation is in
its liquidating or terminating stage. However, it is permitted that a distribution or return of
capital be made during the life of a wasting assets corporation. These are corporations
exploiting and extracting natural resources such as the mining corporations. Thus, instead
of debiting the retained earnings account, the debit is to Share Capital and Share Premium
with a corresponding credit to cash.
EARNINGS PER SHARE
Earnings per share or EPS is the amount of income earned for each share held by the
shareholders. It is a relevant information used in evaluating business performance and
estimating the earnings potential of a corporation. It is also an important factor in
determining the attractiveness of the common stock and in deciding the stock's market
value.
EARNINGS PER SHARE
Market Value is the price at which a share of stock is bought or sold in the open market
such as the Philippine Stock Exchange. Aside from earnings per share, market value is
influenced by a variety of factors such as the rate of return on equity, as well as the
political and economic situation prevailing in the country. Frequently traded stocks are
reported in the newspaper and are also traded on line in the Internet. The price is shown in
four columns: Open, High, Low and Close. "Open" is the starting price for the day
against "Close" which is the ending price for the day. "High" and "Low” represent the
peak price and the lowest price of the stock.
EARNINGS PER SHARE
If the corporation is issuing only one kind of stock, earnings per share or EPS is simply
computed by dividing net income by the number of outstanding ordinary shares, say:
Issued and outstanding shares 10,000
Net Income P500,000
Earnings per share (P500,000/10,000 shares) P50
If the corporation is issuing two classes of stock, deduct first the right of the preference
shares in the net income before computing for the EPS of the ordinary shares:
EARNINGS PER SHARE
To illustrate, assume the following information:
Net Income P500,000
5,000 of 10% Preference shares, par value of P50 P250,000
10,000 of Ordinary shares par value of P10 (December 31, 2015) P100,000
12,000 of Ordinary shares par value of P10 (January 1, 2015) P120,000
Earnings per Share = Net Income - Dividends for Preferred
Average Outstanding Common Shares
= P500,000 - P25,000 ( 10% of P250,000) 12,000+10,000/2=11,000
average common shares
= P43.18
EARNINGS PER SHARE
Take note that the preference share has only a fixed dividend rate of 10% of the net
income. It has no earnings per share. Remember that the number of outstanding ordinary
shares may also include subscribed shares for as long as these are not delinquent. If the
beginning outstanding shares are given, use average outstanding shares to compute for
EPS. Again, exclude treasury shares.
ASSESSING ATTRACTIVENESS OF STOCK
It is important when buying shares of stocks that an investor must know how to assess or
evaluate the corporation's financial performance as this will show how attractive the
shares are. Aside from earnings per share, other relevant information to be considered are
the following: market value, dividend pay-out, return on equity and price-earnings ratio.
To illustrate, assume that the shareholders' equity at the end of the year shows the
following:
5% Preference Shares, P100 par, 50,000 issued P5,000,000
Ordinary Shares, P50 par, 60,000 issued 3,000,000
Subscribed Ordinary Shares, 20,000 1,000,000
Retained Earnings, Unrestricted 4,000,000
You were provided with two information at the end of the year:
ASSESSING ATTRACTIVENESS OF STOCK
1) Net income was P1,600,000.
2) Market value of ordinary share is P90 per share.
The aforementioned information will show Retained Earnings as P5,600,000 (P4,000,000
+ P1,600,000) as at the end of the year. The following computations will show whether
corporate stock is attractive:
a) Earnings per share: Net Income/common shares (1,350,000*/80,000 shares)
P16.875
b) Price-Earnings Ratio: Market value/Earnings per share (P90.00/P16.875) 5.33
c)Return on Equity: Net Income Ordinary Shareholders' Equity (1,350,000/9,350,000**)
14.44%
ASSESSING ATTRACTIVENESS OF STOCK
*Dividend share of the preferred should be deducted from net income before computing
for EPS: dividends for preferred (5% x P100 x 50,000 shares) = P250,000
Total ordinary shares (60,000 issued and 20,000 subscribed) = 80,000
** Net income share of ordinary shareholders: P1,600,000-P250,000 = P1,350,000
*** shareholders' equity for ordinary shares includes issued and subscribed shares plus
retained earnings = 3,000,000 + 1,000,000 + 5,600,000-250,000 = P9,350,000
ASSESSING ATTRACTIVENESS OF STOCK
Earnings per share shows that P16.875 is the net income earned by each ordinary share of
stock. Compare this against the market value of P90. It means that you buy a share for
P90 which earns P16.875. Stated differently, a P16.875 earnings will cost you P90. The
price earnings ratio shows that the cost is 5.33 times more than the income it earns. An
investor may be willing to pay a higher price if he or she believes that the corporation has
higher than average potential earnings growth.
The earnings per share may also be compared against the dividend per share. The
dividend payout ratio is a measure of the portion of earnings being paid out as dividends.
The ratio showed that out of a P16.875 earnings per share 29.63% is distributed as
dividends. Stated another way dividends of P.296 is distributed for every peso of earnings
of a shareholder.
ASSESSING ATTRACTIVENESS OF STOCK
The return on owner's equity shows that the ordinary share earns a rate of 15.08% on their
investment (represented by the ordinary shareholders' equity). Compare this against the
bank prime rate such as a short term investment which currently is from 2.5% to 3%. This
is indeed a more attractive investment.
BOOK VALUE PER SHARE
This represents the equity or right of a shareholder (expressed in peso share) in the net
assets of the corporation. Stated otherwise, if the business is to be liquidated, this will
represent the amount of assets to be paid on each share held by a shareholder. If the
corporation has only one class of stock, the computation is:
Net Assets or Shareholders' Equity
No. of Shares Outstanding
BOOK VALUE PER SHARE
To illustrate, assume the following balances are taken from the ledger of ABC Corp. with
10,000 ordinary shares issued and outstanding:
Assets P1,010,000
Liabilities P200,000
Stockholders' Equity P810,000
The book value per share is P81 computed as follows:
1,010,000 - 200,000
10,000 shares = P81 per share
BOOK VALUE PER SHARE
It means that a share is entitled to P81 worth of assets. An investor may also compare the
market value (assume P90) against the earnings per share (assume P16.875) and book
value (P81) to evaluate the attractiveness of the stock of a corporation.
When there are two classes of stock, preference and ordinary, compute the net assets (o
shareholders' equity) between the preference share and the ordinary share to arrive at book
value:
1. Assign an amount equal to the par value or liquidation value to the preference shares
and to the ordinary shares (including the subscribed shares).
2. Compute for dividend share of the preference share considering its preferential rights.
3. Residual net assets or shareholders' equity after deducting 1) and 2) is assigned to the
common or ordinary shareholders.
BOOK VALUE PER SHARE
To illustrate, assume the shareholders' equity of ATO Corp. on December 31, 2015 is as
follows:
10% Preference Shares, par P50, 5,000 issued P250,000
Ordinary Shares, par P50, 10,000 issued P500,000
Share Premium P40,000
Retained Earnings P60,000
Total P850,000
Net Assets P850,000
BOOK VALUE PER SHARE
A. Preference share is non-cumulative and has received dividends on July 1, 2015:
Total Net Assets Preference Ordinary
Par Value P750,000 P250,000 P500,000 Dividends (10% x
P250,000 x 1/2) P12,500 P12,500
Remainder (850,000 - 762,500) P87,500 P87,500 Total
P850,000 P262,500 P587,500 Book Value per Share:
Preference (P262,500/5,000) P52.50
Ordinary (P587,500/ 10,000) P58.75
BOOK VALUE PER SHARE
B. Preference share is cumulative, 2 years dividends in arrears including current:
Total Net Assets Preference Ordinary
Par Value P750,000 P250,000 P500,000 Dividends (10% x P250,000
x 2) P50,000 P50,000
Remainder (850,000-800,000) P50,000 P50,000
Total P850,000 P300,000 P550,000 Book
Value per Share:
Preference (P300,000 / 5,000) P60.00
Ordinary (P550,000/ 10,000) P55.00
BOOK VALUE PER SHARE
c) Preference share is non-cumulative but participating:
Total Net Assets Preference Ordinary
Par Value P750,000 P250,000 P500,000
Dividends for: preferred (10% x P250,000) P25,000 P25,000
ordinary(10% x P500,000) P50,000 P50,000
Balance distributed based on capital ratio* P25,000 P8,333 P16,667
Total P850,000 P283,333 P566,667
Book Value per Share:
Preference (P283,333/5,000) P56.67
Ordinary (P566,667/ 10,000) P56.67
*P25,000 X P250,0000/P750,000= 8,333
P25,000 X P500,0000/P750,000 = 16,667
BOOK VALUE PER SHARE
d) Preference share is non-cumulative but participating with a liquidation value of P52.
Total Net Assets Preference Ordinary
Par Value P750,000 P250,000 P500,000
Liquidation premium (P2 x 5,000)* P10,000 P10,000
Dividends for preference(10% x P250,000) P25,000 P25,000
Dividends for ordinary(10% x P500,000)P50,000 P50,000
Balance distributed based on capital ratio P15,000 P5,000 P10,000
Total P850,000 P290,000 P560,000
Book Value per Share:
Preference (P290,000 / 5,000) P58.00
Ordinary(P560,000 / 10,000) P56.00
*Liquidation premium is the difference between the liquidation value and the par value.
BOOK VALUE PER SHARE
If the preference share is not preferred as to assets, the equity for the preference share will
only be the liquidation value with the balance all assigned to the ordinary shares.
Dividend claim is not applicable if the preference share is not preferred as to assets.
APPROPRIATION OF RETAINED EARNINGS
Unless there is a restriction, the total amount of Retained Earnings may be available for
dividends. However, there may be instances when a corporation may need its resources so
that it would not be advisable to declare and distribute all of its amount as dividends. To
limit the distribution of the retained earnings, an appropriation must be set up. (SFAS
18.31)
APPROPRIATION OF RETAINED EARNINGS
To illustrate: Sure Corp. has retained earnings of P1,000,000 and the company plans to
reacquire its own shares amounting to P400,000. The Corporation Code provides that an
equal amount of retained earning must be set aside and must not be available for
dividends. (CCP Sec. 8). An entry will be prepared as follows:
Entry: Retained Earnings P400,000
Appropriation Reserve for Treasury Shares P400,000
Presentation in the Shareholders' Equity will appear as follows:
Unappropriated Retained Earnings P600,000
Appropriation Reserve for Treasury Stock P400,000
Total P1,000,000
APPROPRIATION OF RETAINED EARNINGS
Note that an appropriation is still a retained earnings account, only that now! available for
dividends. The maximum dividends that the corporation can declare is P600,000
representing the free portion.
APPROPRIATION OF RETAINED EARNINGS
Other appropriations usually created are as follows:
1. Appropriation for contingencies - if the company has a pending lawsuit which is
probable of losing, thus resources must be available to meet such contingency in case the
company will be liable to pay in the future.
2) Appropriation for Plant Expansion - if there is a plan to acquire land or plant facilities,
thus resources must be available for such project.
3) Appropriation for Bonds and Stock Redemption - if there is a provision in the bond
issue or stock issue, that an equal amount of retained earnings be appropriated, thus
resources must be set aside to ensure the eventual payment of the bonds or redemption of
the stocks.
APPROPRIATION OF RETAINED EARNINGS
Appropriations covered by the Board as approved by the shareholders such as for
contingencies and plant expansion are called voluntary appropriations. Appropriations
covered by bond issues or stock issues are called contractual appropriations and those
covered by law such as for treasury shares are called legal appropriations.
When may the appropriation be released? When the intent or purpose of the appropriation
has been accomplished, then the appropriation is reverted to the unrestricted portion. This
entry cancels out the appropriation and increases the retained earnings available for
dividend distribution. The pro-forma entry is:
Appropriation Reserve for Treasury Shares xxx
Retained Earnings xxx
STATEMENT OF RETAINED EARNINGS
Name of Corporation
Statement of Retained Earnings
For the year ended December 31, 2015
Unappropriated:
Balance, January 1 P500,000 Add Net Income
P350,000
Reversal of Appropriation for Treasury Shares 50.000 400,000
Total P900,000
Less Dividends Declared P250,000
Appropriation Reserve for Plant Expansion 100,000 350,000 P550,000
Appropriated for Plant Expansion P100,000 Retained Earnings,
December 31 P650,000
STATEMENT OF RETAINED EARNINGS
Take note that it has 2 sections: the Retained Earnings Unappropriated which is P650,000
available for dividends, P550,000 and the Appropriation Reserve of P100,000 which is
not available for dividends.
PAS 1 does not require the preparation of this statement. What is required is the Statement
of Changes in Shareholders' Equity which is discussed and illustrated at the end of this
chapter
STATEMENT OF CHANGES IN S.H.E.
