corporation accounting - dividends

7/17/2019 Corporation Accounting - Dividends

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CORPORATION ACCOUNTINGDividends

Two Kinds of Dividends

1. 1. Dividends out of earnings distribution to shareholders of corporate earningsin proportion to the number of shares held by them; also known as return on

investment.

1. 2. Dividends out of capital a return of shareholders invested capital(liquidating dividends); also known as return of investment.

Special Notes

1. 1. he power to declare dividends is vested upon the board of directors.

1. !. "ividends shall be paid out of unrestricted or free retained earnings.

1. #. he following shares are entitled to receive dividends$a. a. all issued and outstanding sharesb. b. all subscribed par value shares

a. %. he following shares are not entitled to receive dividends$b. a. unissued sharesc. b. subscribed no par sharesd. c. treasury shares

a. &. "ividends may be in the form of

a. a. Cash distributable in the form of cash. his is the most commontype of dividend.

a. b. Property payable in assets other than cash such as investment intrading securities and merchandise inventory.

a. c. Scripconsists of a written promise to pay certain amounts at a futuredate. he payment normally includes the principal amount and an interestat a speci'ed rate.

a. d. Stock distributable in the form of corporations own shares.

a. . here are three dates to consider

a. a. Date of decaration this is the date when the board of directorsapproved the resolution to distribute dividends. he commitment toshareholders is recorded on this date.


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a. b. Date of record this is the date when the company determines whoare entitled to receive dividends. o entry is required on this date. *tocksare selling dividends+on prior to this date and are selling e,+dividends theday following this date.

a. c. Date of distrib!tion this is the date when the dividends aredistributed to the shareholders.

A"C CORPORATIONNotice of Cash Dividends

otice is hereby given that in a special meeting of the -oard of "irectors of -//orporation held on 0ebruary !& !22, a cash dividend of 3#.22 per share was approvedby the -oard of "irectors payable on 4arch #1 !22, to shareholders of record as of4arch 5 !22,.

*ignature

Stock Dividends/Bonus Issue

a. 1. he corporation declares stock dividends when it wishes to declare dividendsbut at the same time retain the net assets of the business.

a. !. 0or a corporation to declare stock dividends there should beb. a. unrestricted retained earnings;c. b. available original and unissued shares which may be issued as stock

dividends.

a. #. his type of dividend does not a6ect total assets and total shareholdersequity.

a. %. 7t only involves transfer of amount from retained earnings to contributedcapital.

a. &. 7t does not change the percentage interest of a shareholder in the business.

a. . here are two kinds of stock dividends

b. a. *mall stock dividend a stock dividend representing less than !28 ofthe outstanding shares. 9etained earnings is debited for the fair marketvalueof the stock on the date of declaration.

a. b. :arge stock dividend a stock dividend representing !28 or more ofthe outstanding shares. 9etained earnings is debited for the par or statedvalueof the stock.


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a. 5. he account Stock Dividends Distrib!tabe or Stock DividendsPayabeis credited for the par or stated value of the shares to be distributedregardless of whether the stock dividend is small or large.

a. a. his account is not a current liability because it will not be settledthrough the use of current assets.

b. b. 7t is shown as an addition to share capital outstanding.

Pro-forma Entries Small Stock Dividend !less than "#$%

"ate of 9etainedearnings

,,,

declaration *tockdividendsdistributable

,,,

*harepremium +stock dividends

,,,

Note: Theshare premiumaccount iscredited for theexcess of thefair marketvalue over itspar or statedvalue.

"ate of record o entry

"ate of *tock dividendsdistributable

,,,

distribution *hare capital ,,,

Pro-forma Entries &ar'e Stock Dividend ! "#$ or more%

"ate of 9etained

earnings

,,,

declaration *tockdividendsdistributable

,,,

"ate of record o entry


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"ate of *tock dividendsdistributable

,,,

distribution *hare capital ,,,

(lassroom E)ercise

*hare /apital uthoried toissue !2222 shares at 3122 par;

12222 shares issued andoutstanding

3 1222222

*hare premium &222229etained earnings 5&2222

ssumea. a. 128 stock dividend was declared and market value is 31&2 per share.b. b. &28 stock dividend and market value is 31&2 per share.

9equired$ 3repare all the necessary


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a. c. Participatin' entitles the holder to the receipt of additionaldividends after holders of both preference and ordinary shares have beenpaid up to the current years dividends.

a. d. Non& participatin'entitles the holder to the receipt of dividends upto the current period only. ll e,cess dividends are given to holders ofordinary shares.

Pro-forma Entries

"ate of 9etainedearnings

,,,

declaration /ashdividendspayable preference

,,,

/ash

dividendspayable ordinary

,,,

"ate of o entryrecord

"ate of /ash dividendspayable preference

,,,

distribution /ash dividends

payable ordinary

,,,

/ash ,,,

(lassroom E)ercises

a. 1. he board of directors of ?@A /orporation declared on 4arch 1 !22, a 128cash dividend payable on 4ay #2 !22, to shareholders of record on pril #2!22,. 7ssued and outstanding shares are !2222 shares with a par value of 3#2 pershare.

a. !. ssume the same given information in o. 1 but the cash dividend declaredis 312 per share.

a. #. -/ /orporation has the following shares issued and outstanding


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128 3reference *hare /apital 1222 shares with a 3!22 parvalue

Brdinary *hare /apital #222 shares with a 3122 parvalue

he board of directors declared a cash dividend of 3C2222 this year. o dividendwas declared last year. ssume

a. a. 3reference is non+cumulative and non+participatingb. b. 3reference is cumulative and non+participatingc. c. 3reference is non+cumulative and participatingd. d. 3reference is cumulative and participating.

9equired$ Dournalie the above transactions.

E,ample$

-/ /orporation has the following shares issued and outstanding128 3reference *hare /apital 1222 shares with a 3!22 par

valueBrdinary *hare /apital #222 shares with a 3122 par

value

he board of directors declared a cash dividend of 3C2222 this year. o dividendwas declared last year. ssume

a. a. 3reference is non+cumulativeb.

b. 3reference is cumulativec. c. 3reference is non+ participatingd. d. 3reference is participating.

(. Preference is non&c!%!ative Co%p!te ony for the c!rrent dividend ) Iyear* to preference+ re%ainder to Ordinary

3reference Brdinary otal3reference(1222 shares ,

128 , 3!22)F

3!2222 3!2222

-alance toBrdinary(C2222+!2222)

32222 2222

Cashdividends

P,-+--- P-+--- P/-+---

Fo. of shares outstanding , "ividend rate , 3ar value


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,. Preference is c!%!ative (ompute for the current dividend plusdividends in arrears to preference* remainder to +rdinar,

3reference Brdinary otal3reference(1222 shares ,

128 , 3!22, !years)F

3%2222 3%2222

-alance toBrdinary(C2222+!2222)

3%2222 %2222

Cashdividends

P0-+--- P0-+--- P/-+---

Fo. of shares outstanding , "ividend rate , 3ar value , ! years(1 current plusdividend in arrears)

1. Preference is non&participatin' Co%p!te ony for the c!rrent dividendto preference+ re%ainder to Ordinary

Preference Ordinary Tota3reference(1222 shares ,128 , 3!22)F

3!2222 3!2222

-alance to

Brdinary(C2222+!2222)

32222 2222

Cashdividends

P,-+--- P-+--- P/-+---

Fo. of shares outstanding , "ividend rate , 3ar value

0. Preference is participatin' Co%p!te ony for the c!rrent dividend topreference+ c!rrent dividend to ordinary and re%ainder to be shared bypreference and ordinary

Preference Ordinary Tota

3reference(1222 shares ,128 , 3!22)

3!2222 3!2222

Brdinary (#222shares , 128,3122)

3#2222 &2222


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-alance (C222+&2222G!2222)3reference$3!2222 , !>&G3C222

C222

Brdinary$3!2222 , #>& G31!222

1!222 !2222

F

Cashdividends

P,/--- P0,+--- P/-+---

R23I24 252RCIS2S26ercise (0 7 1. 8OURNA9I:ATION

Dournalie the following selected transactions of *ummer /orporation for themonth of 4ay !211. s of pril #2 !211 the end of *ummers 'scal year theledger balances revealed the following$

C8 on+participating 3referenceshare capital 3122 par; &2222shares authoried; 12222 sharesissued

31222222

Brdinary share capital with a parvalue of 3&2; 122222 sharesauthoried; %2222 shares issued

!222222

*hare 3remium 3reference 1&2222*hare 3remium Brdinary !!2222ccumulated 3ro'ts !&22222

ransactions for the month of 4ay$

4ay 1 7ssued for cash C222 preferenceshares at 312& per share

! &222 ordinary shares were issuedfor 3!2222

# 4r. *antos subscribed to !222


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ordinary shares at 3&& andreceived #28 down payment

% 1222 ordinary shares werereacquired at 3%& per share.

& 9eceived subscriptions to %222preference shares at 312! pershare.

4r. *antos failed to settle hissubscription balance. he stockwas declared delinquent andadvertised for public auction andincurred selling e,penses of 3C&2.

5 *tock certi'cate for &22 ordinaryshares was issued to the lawyersof the corporation in payment of abill for 3#2222 covering legalservices in organiing thecorporation.

C he -oard of "irectors transferred31!22222 of accumulated pro'tsto an appropriations for plante,pansion.

12 he highest bidder accepted 1122ordinary shares and paid thecorresponding amount due.

11 he -B" declared 3&22222 cashdividend to all shareholders onrecord as of 4ay 1! payable onugust 1 !211.

1! 9eceived full payment of 4ay &subscribers and issued thecorresponding certi'cates.

1# *old &22 treasury shares for3#2222.

1% 9e+issued !22 treasury shares at3#2 per share.

!2 he -B" declared a 128 sharedividend. 4arket value of thestocks at the date of declaration

was 31!!.&2 for preference sharesand 3&!.22 for ordinary shares.

!! /ompleted the plant e,pansionpro


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were subsequently sold at 3 pershare

!& *old !22 treasury shares at 3!2per share.

#2 et loss for the month of 4ayamounted to 3!!2222.

#1 ppropriated for the cost of the

remaining treasury shares.

Identify each ite% referred to in Gro!p ". Choose ans;ers fro%Gro!p A. 4rite etters ony.

Gro!p A

rticles of7ncorporation

H /ash "ividends

- /ontributed/apital

: :egal /apital

/ Brdinary *hares 4 "elinquent*ubscriptions

" ccumulated3ro'ts

*hareholdersEquity

E reasurers=davit

B /orporate by+:aws

0 7ncorporators 3 *crip "ividends

I 3articipating

3referenceshares

J !&8 of otal

uthoried*hare /apital

K !&8 of*ubscribed *hare/apital

9 "ividends inarrears

7 3re+BperatingE,penses

* /erti'cate of7ncorporation

D 3ar Lalue *hare *hare /apital

Gro!p "

MMM1. he document issued by the *ecurities and E,change /ommission signifying the

corporations right to do business.MMM!. /ontains provision for the internal administrative organiation of the

corporation.

MMM#. he residual interest of owners in the net assets of a corporation measured bythe e,cess of assets over liabilities.

MMM%. 3ortion of contributed capital arising from issuance of share capital whichcannot be returned to the shareholders in any form during the lifetime of the


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corporation.

MMM&. 3ersons who have agreed to organie a corporation.

MMM. document attesting that the corporation has subscribed to at least !&8 of theauthoried share capital and that !&8 thereof has been paid+up.

MMM5. hese are unpaid subscriptions against which legal proceedings may beinitiated by the corporation.

MMMC. *hares that provide for additional dividends to preference shareholders

after a speci'ed amount is paid to ordinary shareholders.

MMMN. deferred cash dividend evidenced by a promissory note.

MM12. he portion of shareholders equity that represents the net accumulatedearnings of a corporation.

MM 11 .*hares that possess the basic rights of ownership including the right tovote.

MM1!. dividend that reduces both the assets and the shareholders equity of acorporation.

MMM1#. "ividends on preference shares that are not declared in any one year.

MMM1%. E,penses such as attorneys fees cost of printing stock certi'catesincorporation fees and promotional e,penses incurred in the process oforganiation of a corporation.

MM 1&. 4inimum required subscription.

Orite the word TRU2 if the statement is correct. Btherwise replace the

underlined words to make it correct.MMMMMMMMMM1. certi'cate of stock is a document evidencing subscription.

MMMMMMMMMM!. Pnder the par value method the purchase of treasury shares isrecorded by debiting the treasury shares account for the cost ofthe purchase and by crediting cash.

MMMMMMMMMM#. 7ssued shares plus subscribed shares equal authoried shares.

MMMMMMMMMM%. *hare premium is recorded at date of subscription.

MMMMMMMMMM&. stock certi'cate is issued to the subscriber upon receipt ofdown payment for his subscription.

MMMMMMMMMM. ppropriations of accumulated pro'ts do not change the totalamount of shareholders equity.

MMMMMMMMMM5. n issuance of additional shares of !28 or more as sharedividend would require capitaliation of accumulated pro'ts at fairmarket value.

MMMMMMMMMMC. reasury shares should be reported as a deduction at cost fromthe total contributed capital.


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MMMMMMMMMMN. :oss from sale of treasury shares should be charged to sharepremium from original issuance and then to accumulated pro'ts.

MMMMMMMMMM12.7f shares are issued for non+cash consideration the proceedsshould be measured by the fair value of the non+cashconsideration received.

PRO"92< SO93ING

*olve the following problems. Orite your solutions in good accounting form anddouble rule your 'nal answer.

1. 9uby /ompany issued 1222 ordinary shares with 3& par value to tty. Doey ascompensation for 1222 hours of legal services performed. tty. Doey usuallybills 312 per hour for legal services. Bn the date of issuance the share wastrading in the stock market at 31%2 per share.

B, what amount should share premium increase as a result of thistransaction

!. Ierald /ompany has #2222 authoried ordinary shares with 312 par value.Bn Danuary 1 !2111 !2222 shares were already issued 28 of which wereissued at 31! per share while %28 were issued at par.

Bn ugust 1& !211 Ierald purchased 1222 treasury shares at 31# per share.Ierald uses the cost method. Bn *eptember 1% !211 Ierald sold &22 treasuryshares for 31% per share. "uring Bctober Ierald declared and distributed 128share dividend from unissued shares when the market value of the ordinary

shares was 31 per share.

Bn "ecember !2 !211 Ierald declared a 31 cash dividend payable on Danuary12 !21! to shareholders of record on "ecember #1 !211. et income duringthe year amounted to 3#&2222..ow much is total shareholders e0uit, at Decem1er 23* "#33

#. Bn Dune 1 !211 9oselle /ompany declared a !28 share dividend on its 3!2par ordinary shares to all shareholders on record as of Dune 1& !211 to bedistributed on Dune #2 !2@N. Bn Dune 1& !211 9oselle /ompanys capital

structure is composed of the following$

uthoried shares 122222

7ssued shares C2222*ubscribed shares 12222reasury shares 1222

he accountant of 9oselle /ompany recorded the share dividend as a small


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share dividend capitaliing accumulated pro'ts at fair market value of 3#2 pershare.

4hat is the e5ect of this error on accumulated pro6ts 4hat is thee5ect of this error on total shareholders e0uit,

ngelo /ompany has 1222 58 preference shares with a 3122 par value and

%2222 ordinary shares with 3& par value which are outstanding for the lastthree years. "uring that period dividends paid totaled 3222 3!C222 and3#2222 for each year respectively.

7e0uired8/ompute the amount of dividends that ngelo /ompany mustpay to preference and ordinary shareholders for each of the followingindependent assumptions. /ompute also dividend per share.

a. 3reference share capital is non+participating and non+cumulative

b. 3reference share capital is non+participating and cumulative

c. 3reference share capital is fully

participating and cumulatived. 3reference share capital is

fully participating and non+cumulative

corporation accounting - dividends

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