Retained Earnings - This topic covers illustrative problems for dividends, quasi-reorganization, PDF

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DividendsIllustrative Problem #1 (Outstanding Shares Computation). Google Company was incorporated on January 1, 2026.Jan 2 Number of shares authorized 80, Feb 1 Number of shares issued 60, Jul 1 Number of shares reacquired but not cancelled (Treasury) 5, Dec 1 2 for 1 Share SplitOn December 31, 202...

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Dividends Illustrative Problem #1 (Outstanding Shares Computation). Google Company was incorporated on January 1, 2026. Jan 2 Feb 1 Jul 1 Dec 1

Number of shares authorized Number of shares issued Number of shares reacquired but not cancelled (Treasury) 2 for 1 Share Split

80,000 60,000 5,000

On December 31, 2026, what is the number of shares outstanding? 110,000. Solution: (60,000 – 5,000) = 55,000 * 2 = 110,000.

Illustrative Problem #2 (Distribution of Cash Dividend). Ninja Company declared P7,200,000 cash dividends to its preference and ordinary shareholders out of its profit in 2023. No dividends have been declared since 2021. Ninja Company shareholders’ equity immediately before dividend declaration is as follows: 10% Preferential share capital, P800 par Ordinary share capital, P400 par Retained earnings Total shareholders’ equity

8,000,000 32,000,000 20,000,000 60,000,000

Noncumulative. Solution: Ordinary Basic 3,200,0002 Remaining 3,200,000 Total 6,400,000 1 (8,000,000 * 10%) = 800,000. 2 (32,000,000 * 10%) = 3,200,000.

Preference 800,0001 800,000

Total 4,000,000 3,200,000 7,200,000

Cumulative. Solution: Ordinary Basic 3,200,000 Remaining 1,600,000 Total 4,800,000 1 (800,000 * 10% * 3 years) = 2,400,000. Noncumulative and fully participating.

Preference 2,400,0001 800,000

Total 5,600,000 1,600,000 7,200,000

Solution: (32,000,000 + 8,000,000) = 40,000,000. Ordinary Preference Basic 3,200,000 800,000 Remaining 2,560,0001 640,0002 Total 5,760,000 1,440,000 1(3,200,000 * (32,000,000/40,000,000)) = 2,560,000. 2(3,200,000 * (8,000,000/40,000000)) = 640,000.

Total 4,000,000 3,200,000 7,200,000

Cumulative and fully participating. Solution: Ordinary Preference Basic 3,200,000 2,400,000 Remaining 1,280,0001 320,0002 Total 4,480,000 2,720,000 1(1,600,000 * (32,000,000/40,000,000)) = 1,280,000. 2(1,600,000 * (8,000,000/40,000,000)) = 320,000.

Total 5,600,000 1,600,000 7,200,000

Cumulative and participating up to 16%. Solution: Full participating rate (1,600,000 / 40,000,000) = 4% (Since it’s lower). Remaining rate (16% - 10%) = 6% Ordinary Basic 3,200,000 Remaining 1,280,0001 Total 4,480,000 1(8,000,000 * 4%) = 320,000. 2(1,600,000 – 320,000) = 1,280,000.

Preference 2,400,000 320,0002 2,720,000

Total 5,600,000 1,600,000 7,200,000

Illustrative Problem #3 (Distribution of Property Dividend) Ana Company, a real estate developer, is owned by five founding shareholders. On December 1, 2016, the entity declared a property dividend of a “one-bedroom flat” for each shareholder. The property dividend is payable on January 31, 2017. On December 1, 2016, the carrying amount of the flat was P1,000,000 and the fair value is P1,500,000. However, the fair value is P1,800,000 on December 31, 2016, and P1,900,000 on January 31, 2017.

Dividend payable on December 1, 2016? Solution: PDP December 1, 2016 December 31, 2016 December 31, 2017 (1,500,000 * 5 shareholders) = 7,500,000.

NCA 1,500,000 1,800,000 1,900,000

1,000,000 1,000,000 1,000,000

Dividend Payable on December 31, 2016? Solution: (1,800,000 * 5 shareholders) = 9,000,000. Amount of gain as a result of settlement on December 31, 2017? Solution: (1,900,000 – 1,000,000) = 900,000. (900,000 * 5 shareholders) = 4,500,000.

Illustrative Problem #4 (Distribution of Property Dividend) On November 1, 2016, Good Looking Company declared a property dividend of equipment payable on March 1, 2017. The carrying amount of the equipment is P3,000,000 and the fair value is P2,500,000 on November 1, 2016. However, the fair value less cost to distribute the equipment is P2,200,000 on December 31, 2016, and P2,000,000 on March 1, 2017. Dividend payable on December 31, 2016? Solution: PDP November 1, 2016 December 31, 2016 December 31, 2017

NCA 2,500,000 2,200,000 2,000,000

2,500,000 2,200,000 2,200,000

Measurement of the equipment on December 31, 2016? Solution: PDP November 1, 2016 December 31, 2016 December 31, 2017

NCA 2,500,000 2,200,000 2,000,000

Loss on distribution of property dividend is recognized on December 31, 2017?

2,500,000 2,200,000 2,200,000

Solution: (2,000,000 – 2,200,000) = (200,000).

Illustrative Problem #5 (Distribution of Share Dividend) At the beginning of the current year, Edith Company declared a 10% stock dividend. The market price of the entity’s 30,000 outstanding shares of P20 par value was P90 per share on that date. The stock dividend was distributed on July 1, when the market price was P100 per share. What amount should be credited to share premium for the stock dividend? Solution: Retained Earnings 270,0001 Share Dividends Payable 60,0002 Share Premium 210,0003 (30,000 * 10%) = 3,000. 1 (3,000 * P90) = 270,000. 2 (3,000 * P20) = 60,000. 3 (P90 – P20) = (P70 * 30,000) = 210,000.

Illustrative Problem #6 (Distribution of Share Dividend) At the current year end, Nice Company issued 4,000 ordinary shares of P100 par value in connection with a stock dividend. The market value per share on the date of declaration was P150. The shareholders’ equity accounts immediately before issuance of the stock dividend shares were as follows: Ordinary share capital P100 par, 50,000 shares authorized, 20,000 shares outstanding Share Premium Retained Earnings What amount should be debited to RE immediately after the stock dividend? Solution: (4,000 / 20,000) = 20% - Large Share Dividend. Retained Earnings 400,0001 Dividends Share Payable 400,000 1 (4,000 * 100) = 400,000.

Illustrative Problem #7 (Distribution of Share Dividend)

2,000,000 3,000,000 1,500,000

Ninja Company declared a 5% stock dividend on 100,000 issued and outstanding shares of P20 par value, which had a fair value of P50 per share before the stock dividend was declared. The stock dividend was distributed 60 days after the declaration date. What is the increase in current liabilities as a result of the stock dividend decalaration? 0. Explanation: Share dividends have no effect on SHE and does not incur current liabilities unlike cash and property dividends.

Recapitalization Illustrative Problem #1 (Share Split) During the current year, Vin Company declared a 1 for 5 reverse share splits, when the market value of the share was P100. Prior to the split, the entity had 100,000 shares of P10 par value issues and outstanding. After the split, what is the par value of the share? Solution: (P10 * 5) = P50.

Illustrative Problem #2 (Share Split) The shareholders of Lil Peace Company approved a 2 for 1 split of the entity’s share capital, and an increase in authorized shares from 100,000 shares with P20 par value to 200,000 shares with P10 par value. The shareholders’ equity accounts immediately before the split shares were: Share Capital Share Premium Retained Earnings

1,000,000 150,000 1,350,000

What is the balance of the share premium after the share split is effected? 150,000. What is the balance of the retained earnings after the share split is effected? 1,350,000. Explanation: There is no entry, and the share split will not affect any of the balances.

Quasi Reorganization Illustrative Problem #3 Pepper Corporation has suffered losses from operations for some time. The company decides to undergo a quasi-reorganization, which was approved by the shareholders and creditors of the corporation as well as the SEC. An appraisal of property, plant, and equipment was recommended on the basis of an unrealistic valuation of these assets.

The following restatements and information are relevant to the quasi-reorganization: -

-

The property, plant, and equipment costing P5,000,000 with accumulated depreciation of P1,500,000 are determined to have a fair value of P5,250,000. Pepper is using revaluation model. The inventory should be written down by P200,000. Accounts payable amounting to P150,000 are not recognized in the accounts. The retained earnings account has a debit balance of P1,000,000 prior to quasireorganization.

Prepare the necessary journal entries. Entries: Accumulated Depreciation Revaluation Surplus

1,750,0001 1,750,000

Retained Earnings Inventory

200,000 200,000

Retained Earnings Accounts Payable Revaluation Surplus Retained Earnings

150,000 150,000 1,350,0002 1,350,000

1

(5,000,000 – 1,500,000) = 3,500,000. (5,250,000 – 3,500,000) = 1,750,000. 2 (-1,000,000 – 200,000 – 150,000) = (1,350,000).

Illustrative Problem #4 Pepper Corporation has suffered losses from operations for some time. The company decides to undergo a quasi-reorganization, which was approved by the shareholders and creditors of the corporation as well as the SEC. As a result of the quasi-reorganization, the company’s property, plant, and equipment with total carrying amount of P2,000,000, have been determined to have recoverable amount of P1,500,000. Before the write-down of assets, the company’s shareholders’ equity balances are as follows: Ordinary share capital, P50 par Share Premium Retained Earnings

3,000,000 150,000 (600,000)

The company will redeem its P50 par ordinary shares and will issue equal number of ordinary shares with par value of P30.

Prepare the necessary journal entries. Retained Earnings Accumulated Depreciation

500,0001 500,000

Share Capital, P50 Par Share Capital, P30 Par Share Premium

3,000,000

Share Premium Retained Earnings

1,100,000

Ordinary Share Capital Share Premium Retained Earnings Total SHE

1,800,0004 250,0005 0 2,050,000

1,800,0002 1,200,000 1,100,0003

1(2,000,000 – 1,500,000) = 500,000. 2(3,000,000 / P50) = 60,000 * 30 = 1,800,000. 3(-600,000 – 500,000) = 1,100,000....