Chapter 2.19 Retained Earnings
Par or stated value
Amount charged to retained earnings for large stock dividends
FV or par or stated if higher than FV
Amount charged to retained earnings for small stock dividends
Voluntary appropriation
Arises from the fact that management wishes to preserve funds for expansion purposes or for covering possible losses and contingencies
Legal appropriation
Arises from the fact that the legal capital cannot be returned to the shareholders until the entity is dissolved and liquidated e.g. appropriation for TS
Contractual appropriation
Arises from the fact that the terms of the bond issue and preference share issue may impose restriction on dividend payments e.g. appropriation for bond redemption and preference share redemption
Unappropriated RE
Distributable equity pertains to
Property dividends
Distribution of earnings in the form of noncash assets
Stock dividends
Distributions of earnings in the form of entity's own shares
Accumulated losses
IAS term for deficit
Profit or loss
IAS term for net income or loss
Accumulated profits
IAS term for retained earnings
Bonus issue
IAS term for stock dividend
Limit dividend declaration
Intent of RE appropriation
Scrip
Like a note which is a formal evidence of indebtedness to pay a sum of money at some future time
Lower of carrying amount and FV less CD
Measurement of noncurrent asset declared as property dividend
Cash dividends
Most common one of dividend
Dividends in kind
Other term for property dividends
Corporate readjustment
Other term for quasi reorganization
Quasi reorganization
Permissive but not a mandatory procedure under which a financially troubled entity restates its account and establishes a fresh start in accounting sense
Unappropriated retained earnings
Portion of RE which is free and and can be declared as dividends
Appropriated retained earnings
Portion of RE which is restricted and not available for dividend declaration
1. Recapitalization 2. Revaluation of PPE
Quasi reorganization may be accomplished thru
20% or more of issued and outstanding shares
Requirement of large stock dividend
Less than 20% of issued and outstanding shares
Requirement of small stock dividend
False
T/F In a quasi reorganization, adjustments concerning other assets are made through share premium
True
T/F In a quasi reorganization, increase in value of PPE is credited to revaluation surplus
True
T/F In a quasi reorganization, resulting deficit from reorganization is offset against revaluation surplus or share premium
False
T/F In closely held entities, if stock dividends are declared, RE that shall be capitalized can exceed par or stated value of shares
False
T/F Losses subsequent to quasi reorganization can be charged to the remaining RS
True
T/F On absence of evidence to contrary, all RE can be declared as dividends
False
T/F Quasi reorganization may not be approved by SEC
True
T/F RE subsequent to quasi reorganization shall be restricted to the extent of deficit wiped out during reorganization and therefore cannot be declared as dividend
True
T/F Reserves are not officially defined in any accounting standard or in the Conceptual Framework
False
T/F SEC has ruled out that stock dividends may be declared from premium on par value per share
False
T/F Statement of RE is a required component of FS and part of statement of changes in equity
True
T/F Stock dividend payable is an addition to share capital and it cannot be classified as liability because it never reduces assets
True
T/F Stock dividends create a change in components of shareholders' equity
True
T/F TS may be reissued as dividends in which cost of shares are charged to retained earnings for the declaration
False
T/F The quasi reorganization shall be disclosed for at least 2 years
True
T/F Under Philippine jurisdiction, declaration of BODs of dividends does not require further approval by relevant authority
1. Large deficit exists 2. Approved by shareholders and creditors 3. Cost basis becomes unrealistic and current value is substantially more than cost 4. Fresh start appears to be desirable or advantageous to all parties concerned
Circumstances that may justify quasi reorganization
Retained earnings
Cumulative balance of periodic net income or loss, dividend distributions, prior period errors, changes in accounting policy and other capital adjustments
Date of declaration
Date on which directors authorize payment of dividends to shareholders
Date of payment
Date on which dividend liability is to be paid
Date of declaration
Date on which liability for dividend is recognized
Date of record
Date on which stock and transfer book will be closed for registration
Special stock dividends
Dividends in terms of ordinary share given to preference shareholders or preference share given to ordinary shareholders
Wasting asset entity
Engaged solely or substantially in exploitation of natural resources
Debit RE, credit dividends payable
Entry to record dividend declaration
Debit capital liquidated, credit dividends payable
Entry to record liquidating dividend
Debit dividends payable, credit cash
Entry to record paying dividends
Debit RE appropriated, credit RE
Entry to record the reversal of appropriation when it is no longer necessary
Liquidating dividend
Example of a dividend out of capital
1. SP reserve 2. Appropriation reserve or RE appropriated 3. Asset revaluation reserve or RS 4. OCI reserve
Examples of nondistributable equity reserves
Extent of RE and accumulated depletion balance
Extent on which wasting asset can declare dividends
Statement of changes in equity
Formal statement that shows the movements in elements or components of SHE
1. Cash dividends 2. Property dividends 3. Liability dividends 4. Stock dividends or bonus issue
Forms of dividends out of earnings
Statement of RE
Shows changes affecting directly the retained earnings of an entity and relates IS to SFP
False
T/F A journal entry is made on the date of record
False
T/F An appropriation account implies establishment of a cash fund
True
T/F Any increase or decrease as a result of change in FV of property dividend at year end and date of settlement is credited or debited to retained earnings
True
T/F Appropriation of RE has no effect on total RE and total SHE
False
T/F Assets change before and after issuance of stock dividends
True
T/F Dividend standing alone implies distribution of cash
True
T/F Dividends out of earnings are charged to retained earnings
False
T/F IFRS specially addresses stock dividends
True
T/F If net income of prior period is understated, the amount of error is added to RE
False
T/F If quasi organization is the result of revaluation of PPE, the appraisal may not be made by an independent expert or specialist
True
T/F If source of stock dividends is share premium, cash payment is illegal
Dividends out of earnings and capital
Two classifications of dividends
FV of asset to be distributed
What shall be the measurement of property dividend at declaration?
Optional cash dividend
When shareholders may elect to receive cash in lieu of stock dividend, the amount charged to RE should be equivalent to ________
Profit or loss
Where to recognize difference between carrying amount of dividend payable and carrying amount of asset distributed in a property dividend?