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?