Professional Documents
Culture Documents
You have to consult your partner and negotiate more as you cannot take decisions by yourself.
The duration of the partnership is always uncertain.
Delay may take place in decision-making process.
Case 1 Both partners are ordinary people (do not intend on investing his business)
Illustration: A and B decides to form a partnership. A will contribute P100,000 while B will contribute a piece of land
which costs P150,000 and has a Fair Market Value of P175,000
Opening Entries
Cash 100000
A, Capital 100000
Cash Contribution of A
Land 175000
B, Capital 175000
Contribution of B
*note that non-current assets are recorder at Fair Market Value and not at cost.
Case 2 At least one partner decides to contribute his business to the partnership
Illustration: A and B decides to form a partnership called A & B partnership. A decides to contribute his business
which has the following ledger accounts after closing entries: Cash P50,000 Accounts Receivable P30,000 Merchandise
Inventory 20,000 Office Equipment P10,000 Allowance for doubtful Accounts P2,000 Accumulated Depreciation P3,000
Accounts Payable P7,000. B will contribute enough cash so that he gets 50% of partnership equity. B tells A that he needs to
revalue his assets. Revaluation of assets are as follows: Accounts Receivable P25,000 Merchandise inventory P28,000
Office Equipment P8,000
Entries
A, Capital 3000
Allowance for doubtful accounts 3000
Revaluation
*note accounts with contra accounts will decrease or increase by adjusting their respective contra accounts.
Entries
A, Capital 104000
Accounts Payable 7000
Allowance for doubtful Accounts 5000
Accumulated Depreciation 2000
Cash 50000
Accounts Receivable 30000
Merchandise Inventory 28000
Office Equipment 10000
Closing Sole Proprietor's books
Opening Entries
Cash 50000
Accounts Receivable 30000
Merchandise Inventory 28000
Office Equipment 10000
A, Capital 104000
Accounts Payable 7000
Allowance for doubtful Accounts 5000
Accumulated Depreciation 2000
Opening Entries
Cash 104000
B, Capital 104000
Opening Entries
Much difference only lies in the distribution of profits and losses. Each partner has his own capital account, drawing
account. Net income is closed up to drawing accounts only. This is to protect the profit sharing ratio between partners.
Case 1 Profit and loss will be shared based on Beginning capital contributions
A B C Total
Profit Distributed P450,000 P300,000 P750,000 P1,500,000
4 (1,500,000)*(4/10)
5 (1,500,000)*(5/10)
1 (1,500,000)*(1/10)
A B C Total
Profit Distributed P600,000 P750,000 P150,000 P1,500,000
Case 3 Profit and loss will be shared on an arbitrary ratio and it will allow salary to industrial partners.
Illustration: A,B and C formed a partnership. They decided to share the profits and losses in the ratio 4:5:1 respectively.
business operations were favorable and showed a Net income of P1,500,000. Partner C will receive an annual salary of
P300,000
A B C Total
Salary Allowance P300,000 P 300,000
remaining distributed P480,000 P600,000 120,000 1,200,000
Total Distribution P480,000 P600,000 P420,000 P 1,500,000
*Note Salary Allowance will be applied first before arbitrary distribution. 1,500,000 less 300,000 is 1,200,000. this amount
will be divided amongst partners based on their profit and loss ratio
Illustration: A,B and C formed a partnership. They decided to share the profits and losses in the ratio 4:5:1 respectively.
business operations were favorable and showed a Net income of P1,500,000. Partner C will receive an annual salary of
P300,000. A, being the managing partner, will receive a 10% bonus on Net income.
A B C Total
Bonus Given to A P150,000 P 150,000
Salary Allowance P300,000 300,000
remaining distributed 420,000 P525,000 105,000 1,050,000
Total Distribution P570,000 P525,000 P405,000 P1,500,000
*Note Salary Allowance and Bonus given will be applied first before arbitrary distribution. 1,500,000 less 450,000 is
1,050,000. this amount will be divided amongst partners based on their profit and loss ratio
Case 5 Profit and loss will be shared on an arbitrary ratio and will allow interest, bonus, and salary to the partners.
Illustration: A,B and C formed a partnership. They decided to share the profits and losses in the ratio 4:5:1 respectively.
business operations were favorable and showed a Net income of P1,500,000. Partner C will receive an annual salary of
P300,000. A, being the managing partner, will receive a 10% bonus on Net income. 5% Interest is allowed to each partner
based on his capital balance
*Note Salary Allowance, Bonus given and Interest will be applied first before arbitrary distribution or capital ratio
distribution. 1,500,000 less 550,000 is 950,000. this amount will be divided amongst partners based on their profit and loss
ratio
Illustration: A,B and C formed a partnership. They decided to share the profits and losses in the ratio 4:5:1 respectively.
business operations were unfavorable and showed a Net loss of P500,000. Partner C will receive an annual salary of
P300,000. A, being the managing partner, will receive a 10% bonus on Net income. 5% Interest is allowed to each partner
based on his capital balance
*Note Salary Allowance and Interest will be applied first before arbitrary distribution or capital ratio distribution. Bonus does
not apply to Net loss situations. (500,000) less 400,000 is (900,000). this amount will be divided amongst partners based on
their profit and loss ratio
Dissolution
- terminates all authority of any partner to act for the partnership. When the partnership is
dissolved, the partners are dissociated to continue the business as a going concern.
- is the change in the relation of the partners cased by any partner ceasing to be
associated in the carrying on of the business.
- does not necessarily mean an automatic termination of the business activities. It
may continue until the winding up or liquidation of partnership affairs is completed.
Dissolution does not always lead to liquidation while liquidation is always a result
of dissolution.
Causes of Dissolution
C, Capital 300,000
D, Capital 300,000
C, Capital 150,000
D, Capital 150,000
C, Capital 300,000
D, Capital 300,000
Case 4: C sold 100% of his interest in the partnership to D for P400,000. The partners agreed that
the excess payment represents goodwill to recognize the true worth of the partnership because of
its established name.
C, Capital 400,000
D, Capital 400,000
Case 5: AB and C sold 20% of their respective interest in the partnership to D for P200,000. They
agreed that there would be no goodwill to be recognized.
A, Capital 20,000
B, Capital 40,000
C, Capital 60,000
D, Capital 120,000
Case 1.1: Partners approved the admission of D provided that the latter will contribute to the
partnership equipment with a fair value of P100,000 and cash, P50,000. They further agreed that
they would receive capital interest equal to their actual contributions to the partnership.
Cash 50,000
Equipment 100,000
D, Capital 150,000
2. Bonus Method
Case 2.1: Bonus to the new partner. D is admitted by investing cash of P200,000 for 30%
interest in the partnership. The partners agreed that any discrepancy in the partners actual
contributions and their respective capital credits should be treated under the bonus method.
Cash 200,000
A, Capital 8,000
B, Capital 16,000
C, Capital 16,000
D, Capital 240,000
Case 2.2: Bonus to the old partners. D is admitted by investing cash of P200,000 for 20%
interest in the partnership. The partners agreed that any difference between capital contributed
by the new partner and his capital credit should be treated under the bonus method.
Cash 200,000
A, Capital 8,000
B, Capital 16,000
C, Capital 16,000
D, Capital 160,000
Case 3.1: Goodwill to the old partners. D is admitted by investing cash of P200,000 for 20%
interest in the partnership. It is also agreed that the investment should be recorded under goodwill
method.
Cash 200,000
Goodwill 200,000
A, Capital 40,000
B, Capital 80,000
C, Capital 80,000
D, Capital 200,000
Case 3.2: Goodwill to new partner. D is admitted by investing cash of P200,000 for 40%
interest in the partnership. It is also agreed that the investment should be recorded under goodwill
method and it shall be given to D, the new partner.
Cash 200,000
Goodwill 200,000
D, Capital 400,000
Cash 200,000
Goodwill 100,000
A, Capital 15,000
B, Capital 30,000
C, Capital 30,000
D, Capital 225,000
Case 3.4: Goodwill and Bonus. D is admitted into the partnership by investing P200,000
for 20% interest in the total agreed capitalization of P900,000.
Cash 200,000
Goodwill 100,000
A, Capital 24,000
B, Capital 48,000
C, Capital 48,000
D, Capital 180,000
Case 1: All of the remaining partners consented that B will sell his entire capital interest to
an outside person named E for P250,000.
B, Capital 250,000
E, Capital 250,000
B, Capital 200,000
A, Capital 200,000
Sale to partnership
Case 1: Less than book value. C is withdrawing from the partnership. He agreed to be paid
P225,000 cash for his total interest in the partnership. The partners agreed to revalue the
inventory before Jonahs withdrawal. The payment is based on the agreed revaluation of
inventory believer to be overstated.
A, Capital 10,000
B, Capital 15,000
C, Capital 25,000
Merchandise Inventory 50,000
C, Capital 225,000
Cash 225,000
C, Capital 250,000
A, Capital 10,000
B, Capital 15,000
Cash 225,000
C, Capital 250,000
Cash 100,000
Inventory 150,000
Case 4: Partners agreed to pay C P100,000 cash and P150,000 notes payable with 12% interest
per year. In this case, C is considered out of the partnership and he now becomes a creditor to the
partnership.
C, Capital 250,000
Cash 100,000
Notes Payable 150,000
Insolvency
- commonly a result of excessive losses from operations, the over-extension of credit to
customers, or excessive investments in inventories or in plant assets.
Case 1:
Cash 450,000
B, Capital 200,000
C, Capital 250,000
1. Adjust the assets and liabilities directly to the partners capital accounts.
2. Close (debit) the partners capital accounts and credit the appropriate capital stock
accounts corresponding to the amount of the partners capital accounts which have
been closed.
Liquidation
- the process of converting all assets of the business into cash (realization), followed y the
final payments of creditors claims and the partners capital balances in the partnership
(liquidation).
- Gains or losses, and liquidation expenses, if any, must be allocated to the partners before
actual cash payments are made to the individual partners.
Kinds of Liquidation
1. Lump Sum Liquidation (Total Liquidation)
- all noncash assets of the partnership are converted first into cash before payments
are made first to the creditors, then to the partners. The payment to the partners is
made only once in a lump sum amount after all the outside creditors are paid.
2. Installment Liquidation (Piecemeal Liquidation)
- Involves selling of the noncash assets on a gradual basis because the complete
liquidation process might take several months. Payments to creditors and partners
may not be postponed. Consequently, cash payments to creditors and partners are on
installment basis as the cash becomes available.
Cash 195,000
Loss on Realization 40,000
Accounts Receivable 150,000
Merchandise Inventory 80,000
Unused Supplies 5,000
A, Capital 8,000
B, Capital 16,000
C, Capital 16,000
Loss on Realization 40,000
Cash 4,000
B, Capital 4,000
C, Capital 6,000
Cash 6,000
Case 2: B is an insolvent.
Cash 195,000
Loss on Realization 40,000
Accounts Receivable 150,000
Merchandise Inventory 80,000
Unused Supplies 5,000
A, Capital 8,000
B, Capital 16,000
C, Capital 16,000
Loss on Realization 40,000
A, Capital 1,333
C, Capital 2,667
B, Capital 4,000
C, Capital 3,333
Cash 3,333
Case 1:
Cash 140,000
Loss on Realization 10,000
Accounts Receivable 150,000
Cash 74,000
Loss on Realization 6,000
Merchandise Inventory 80,000
H, Capital 1,200
I, Capital 2,400
J, Capital 2,400
Loss on Realization 6,000
Cash 3,000
Loss on Realization 2,000
Unused Supplies 5,000
H, Capital 400
I, Capital 800
J, Capital 800
Loss on Realization 2,000
H, Capital 200
I, Capital 400
J, Capital 400
Loss on Realization 1,000
H, Capital 1,000
I, Capital 2,000
J, Capital 2,000
Loss on Realization 5,000
Corporation is an entity created by law that is separate and distinct from its owners and its continued existence is dependent
upon the corporate statutes of the state in which it is incorporated.
Characteristics of a corporation
1. Separate legal entity a corporations personality is separate from its owners
2. Created by operation of law generated by law; contracts cannot give rise to a corporation
3. Right of succession the withdrawal, death, insolvency or incapacity of the owners or the changes in the ownership
structure do not dissolve the corporation
4. Powers, attributes, properties expressly authorized by law exercise powers provided by law and powers which are
incidental to existence
5. Ownership divided into shares proprietorship is divided into units known as shares of stocks
6. Board of Directors decision making body of the corporation
7. Stockholders have limited liability
8. Easy to obtain capital through issuance of stock
9. Subject to numerous government regulations
10. Double taxation: income tax for earnings and dividend taxes for stockholders
Types of Corporation
1. According to purpose
a. Public formed to render government service
b. Private formed for private purpose, aim or benefit
c. Quasi-public privately owned corporation
2. According to Law of Creation
a. Domestic organized under Philippine Laws
b. Foreign organized by Laws of other countries
3. According to membership holdings
a. Stock capital is divided into shares of stock and has the authorization to distribute dividends to the
shareholders who own stock certificates; profit-oriented
b. Non-stock capital comes from fees or contributions; profit are used for improvement; non-profit in nature
4. According to the Extent of Membership
a. Open many investors
b. Closely held or family 50% or more of the stock is owned by 5 persons or less
Forming a corporation
1. Filing an application with Securities and Exchange Commission
2. Paying an incorporation fee
3. Receive the Articles of Incorporation
4. Develop By-laws
Legal requirements
1. Promotion makes preliminary arrangements and solicits subscription to raise sufficient
capital. Requirements
a. At least 25% of the authorized capital stock stated in the Articles of Incorporation must be subscribed
b. At least 25% of total subscription must be paid upon subscription
2. Incorporation submitting necessary documents such as Articles of Incorporation and treasurers affidavit to SEC;
upon approval, SEC issues a certificate of incorporation, the date shall be considered as the date of incorporation.
3. Commencement of the business business operations should start within 2 years
Pre-operating costs/ organization expense/ organization cost costs incurred in the formation of the corporation such
as filing fees, cost of printing stock certificates, promoters commission and legal fees
Articles of Incorporation filed with SEC; all the power and limitations of the corporation shall be based in this article
1. Name of the corporation
2. Purpose/s for which the corporation is formed
3. Place of the principal office
4. Term of existence, not exceeding 50 years
5. Names, addresses and nationalities of incorporators
6. Name of directors who will serve until their successors are elected and qualified in accordance to by-laws
By-Laws contain provisions of internal administration; shall be submitted a month after the date of issuance of Articles of
Incorporation
1. Date, place and manner of calling the annual stockholders meeting
2. Manner of conducting meetings
3. Circumstances which may permit the calling of special meetings of the stockholders
4. Manner of voting and using proxies
5. Manner of electing directors
6. Term of office of the directors
7. Authority and duties of the directors
8. Manner of selecting the corporate officers
9. Procedures for amending the Articles of Incorporation and by-laws
Classes of stocks
1. Par value a share of stock with a fixed value stated in the Articles of Incorporation; legal capital retained for
protection of corporate creditors
2. No Par value share of stock with no fixed value; may not be issued for less than 5 pesos; BOD can assign stated
value which becomes the basis for legal capital per share. When there is no stated value, proceeds are considered
legal capital.
3. Common stock ordinary shares
Rights exercised by ordinary share holders
1. Vote in stockholders meeting
2. Share in dividends
3. Share in corporate profits upon liquidation
4. Purchase additional shares if the corporation increases its capital stock
4. Preferred stock specific preference over common stock
Rights exercised by preference shareholders
1. Payment of dividends
2. Distribution of assets upon liquidation
Terms
1. Authorized shares maximum number of shares which may be issued
2. Issued shares shares issued to the stockholders in the past but may or may not be in the their hands at present
3. Unissued shares shares available for issuance in the future
4. Outstanding shares total of issued and subscribed shares, whether fully or partially paid except treasury shares
5. Treasury shares reacquired shares by issuance or donation
Corporation may issue stocks directly to investors (closely held companies) and indirectly through investing-banking firm
(public held corporation).
Capital stock
Payment of capital stock
1. Cash
2. Property record by value using
a. Fair value of the property
b. Fair value of the shares of stock
c. Par value of the shares of stock
3. Labor or services record cost labor services rendered
Note: when shares of capital are issued for services or non-cash assets, cost is either fair market value of the
consideration given up or received.
Capital stock may be issued
1. At par
2. At premium amount more than the par value; paid in capital
Note: Capital stock cannot be issued at a discount or an amount less than par
Watered stock stock issued less than par value
When a par value common stock is issued for cash, the par value is credited to common stock and the proceeds above or
below par will be recorded in a separate account title called paid-in capital or premium.
NOTES: 1. Subscription receivable is recorded at subscription prices (subscription receivable = subscribed shares x
subscription price).
2. Subscribed capital stock and capital stock are credited at par value.
3. Paid in capital in excess of par is recorded at an amount above par (Paid in capital in excess of par =
(subscription price par value)(subscribed shares))
Authorized to issue 10,000 preference shares with par value of $100 and 10,000 ordinary shares with a par value of $20.
Cash 1,500,000
Preference share 500,000
Ordinary share 1,000,000
Sale of stock
Cash 1,500,000
Unissued preference share 500,000
Unissued ordinary share 1,000,000
Sale of stock
b. The other half of each class of authorized shares is issued at $2 above par for ordinary share and $5 above par for
preference share in cash.
Cash 1,535,000
Preference share 500,000
Ordinary share 1,000,000
Share premium preference 25,000
Share premium ordinary 10,000
Sale of stock
Cash 1,535,000
Unissued preference share 500,000
Unissued ordinary share 1,000,000
Share premium preference 25,000
Share premium ordinary 10,000
Sale of stock
Cash 5,000
Subscription Receivable - ordinary 5,000
Subscribed share capital - ordinary 10,000
Subscription of ordinary shares
a. 2) 500 shares are sold on subscription for $20.00 each. 50% is due as initial payment. The subscriber plans to pay $22
per share.
Cash 5,000
Subscription Receivable - ordinary 6,000
Subscribed share capital - ordinary 10,000
Share premium ordinary 1,000
Subscription of ordinary shares
Cash 2,500
Subscription Receivable - ordinary 2,500
Partial payment
Cash 2,500
Subscribed share capital ordinary 10,000
Subscription Receivable - ordinary 2,500
Ordinary share capital 10,000
Cash 2,500
Subscribed share capital ordinary 10,000
Subscription Receivable - ordinary 2,500
Unissued ordinary share 10,000
Cash 3,500
Subscribed share capital ordinary 10,000
Subscription Receivable - ordinary 3,500
Ordinary share capital 10,000
Cash 3,500
Subscribed share capital ordinary 10,000
Subscription Receivable - ordinary 3,500
Unissued ordinary share 10,000
Case: 1. a. Bradley Corporation issues 10,000 shares, no par at $15 per share.
Cash 150,000
Ordinary share, no par 150,000
2. a. Bradley Corporation issues 10,000 shares, no par at $15 per share. The subscriber gave an initial down
payment of 50%.
Cash 75,000
Subscription receivable 75,000
Subscribed share capital 150,000
b. Bradley Corporation issues 10,000 shares, no par at $15 per share with $10 stated value. The subscriber
gave an initial down payment of 50%.
Cash 75,000
Subscription receivable 75,000
Subscribed share capital 100,000
Share premium 50,000
4. a. Full payment
Cash 37,500
Subscribed share capital 150,000
Subscription receivable 37,500
Ordinary share, no par 150,000
b. Cash 37,500
Subscribed share capital 100,000
Subscription receivable 37,500
Ordinary share, no par 100,000
Incorporating a Partnership
4. Close the accounts for partnership except 4. Record the issuance of stocks
the capital accounts.
5. Record the receipt of stocks.
6. Record the distribution of stocks
2. Close all the ledger accounts with balances except the partners capital account and debit Receivable from
name of corporation
Accounting for delinquent subscription If subscriber cannot pay in full the amount he subscribed to, he will receive
several notices from the corporation. If payment is still not being delivered, his subscription shall be declared as delinquent
subscriptions and the subscriber is called a defaulting subscriber. Delinquent stocks are offered for sale in public a public
auction.
1. Delinquent stocks are advertised to have bidders. All expenses incurred including advertising and the unpaid balance of
subscription will be charge to the account title Receivable from Highest Bidder which will be collected from the highest
bidder.
2. Highest will be chosen during the auction sale.
3. Delinquent subscriptions will be issued to the highest bidder.
4. Highest bidder is willing to pay for all the unpaid balance of subscription plus all sale related expenses but willing to
receive the least shares.
5. When the subscription is fully paid, all subscribed shares are issued first to the highest bidder then the excess will be for
the defaulting subscriber.
6. If there is no bidder, all delinquent shares shall be given to the corporation under the account title treasury stocks.
The defaulting subscriber shall receive none of the shares.
3. Corporation sends several notices but no payment was paid by the subscriber
No entry
5. The highest bidder pays and corresponding stock certificates are issued
Cash xxx
Subscribed capital stock xxx
Receivable from highest bidder xxx
Subscriptions receivable xxx
Capital stock xxx
Case:
Case: a. Caprock Corporation purchased 1,000 shares of its ordinary shares from the market
worth $50 per share.
Treasury stock ordinary 50,000
Cash 50,000
b. When treasury stocks are reissued or sold at more than cost, the excess shall be called
Additional Paid in capital - treasury stock or share premium treasury stock.
Pro-forma entry:
Cash xxx
Treasury Stock xxx
Additional Paid in Capital-treasury stock xxx
Re-issued treasury stocks at above cost
Case: b. Caprock sold 500 treasury shares for $60 per share.
Cash 30,000
Treasury stock 25,000
Share premium treasury stock 5,000
c. When treasury stocks are reissued or sold below cost, the indicated loss will be debited to
the following account titles:
1) Additional Paid in Capital treasury stock the balance in this account shall be used
until there is no more remaining balance
2) Retained Earnings will only be used if there is no more balance for additional paid in capital
Case: c. 200 treasury stocks were sold for $48 per share.
Cash 9,600
Additional Paid in Capital- treasury stock 400
Treasury Stock 10,000
Or
Cash xxx
Additional Paid in Capital- treasury stock xxx
Retained Earnings xxx
Treasury Stock xxx
Re-issued treasury stocks below cost.
Case: d. 200 treasury stocks were sold for $26 per share.
Cash 5,200
Additional Paid in Capital- treasury stock 4,600
Retained Earnings 200
Treasury Stock 10,000
Or
Cash xxx
Retained Earnings xxx
Treasury Stock xxx
Case: e. 100 treasury shares were sold for $30 per share.
Cash 3,000
Retained Earnings 2,000
Treasury Stock 5,000
2. Reacquisition by donation stocks received from donation; may be reissued without discount liability; does not affect
the entitys assets, liabilities and stockholders equity; increase premiums through sale with the account title
Additional Paid in Capital Donated stocks.
Pro-forma entry: receipt for donation
Memorandum entry: Received ___ shares from _____ as donation.
NOTES: 1. Treasury shares are not outstanding shares; therefore, the former is not entitled to dividends.
2. Treasury shares are not entitled of the rights of stockholders.
3. Treasury shares are not assets; instead, they are a decrease in stockholders equity.
4. A portion of retained earnings is restricted equal to the cost of treasury for the sake of creditors.
Case:
The Beta Corporation was organized in 20x1 in the state of Arizona. Its charter authorized the corporation to issue 1,000,000
shares of $1 par value ordinary shares and an additional 25,000 shares, $20 par value cumulative convertible preference
shares. Here are the transactions that related to the companys stock during 20x1.
Feb. 1 Issued 100,000 shares of ordinary shares for $125,000.
15 Issued 3,000 shares of ordinary shares for accounting and legal services. The services were billed to the
company at $3,600.
Retained Earnings represent the cumulative balance of periodic income or losses, dividend distribution, adjustments of prior
period earnings and other capital adjustments. Retained earnings are increased by periodic net income and decreased by
periodic net losses and distribution of earnings called dividends to stock holders.
dividends
Retained Earnings............................................XXX
Appropriation for Treasury Shares..................XXX
*recapitalizations
*quasi-reorganization
*these will be discussed in higher accounting. For now, take it as part of theory.
retained earnings is said to be appropriated when it is set aside for a specific purpose. It is appropriated in order to retain
assets in the business for some particular purpose or some general contingency. The appropriation of retained earnings may
be made in the following cases:
Discretionary Appropriation the management of the corporation may deem it necessary to retain the assets of the
corporation for some particular purpose or contingency like pending lawsuits, plant expansions, increase in working capital
etc.
Legal requirements the legal capital of the corporation cannot be returned to the stockholders until the corporation is
dissolved, liquidated and the creditors of the corporation have been paid. An appropriation for an amount equal to the cost of
treasury stock should be made.
Contractual Requirements when a corporation issues a bond or redeemable preferred share, the terms bond and
preferred share issue imposes restrictions on the payment of dividends.
Income Summary..................................................XXX
Retained Earnings.................................................XXX
Retained Earnings.................................................XXX
Income Summary.................................................XXX
Dividends
A Dividend is a distribution of cash, non-cash assets or the corporation's own stock among the stockholders. It may be
either a distribution of profits earned by the corporation or a return of the capital investments of the stockholders.
Date of declaration at this date, the corporation becomes liable for the dividends
Retained Earnings......................................XXX
Dividends Payable...................................XXX
Date of record a list of the stockholders who are entitled to receive dividends is prepared
Date of Payment date when dividends are to be paid. This would cancel the previous liability the corporation has.
Kinds of dividends
Cash Dividends
Illustration: Assume that on December 1,2010, the board of directors declared an annual dividend of P10.00 per
share on 100,000 shares of common stock issued and outstanding, payable on January 15, 2011 to stockholders of record on
December 31, 2010.
Share Dividends
Share Dividends are divided into Small Share and Large Share Dividends. Small share Dividends are
dividends declared that are less than 20%. large share dividends are dividends declared that are 20% or higher.
Illustration: ASSUME THAT THE CAPITAL ACCOUNTS OF XYZ CORPORATION ARE CAPITAL
STOCK OF P100 PAR VALUE, 30,000SHARES AUTHORIZED, 20,000 SHARES ISSUED AND OUTSTANDING
AMOUNTING TO P2,000,000, SHARE PREMIUM P600,000 AND RETAINED EARNINGS OF P800,000
assume 10% share dividends are declared and the market value on the date of declaration was P125 per share.
assume that 40% share dividends are declared and the market value on the date of declaration was P125 per
share.
A cumulative dividend means if dividends are declared, preferred stockholders will receive their current-year dividend plus
any dividends not paid in prior years before the common stockholders receive a dividend. Owning a share of preferred stock
that includes a cumulative dividend still does not guarantee the preferred stockholder a dividend because the company is not
liable to pay dividends until they are declared. Having cumulative preferred stock simply reinforces the preference preferred
stockholders receive when a dividend is declared. If a company has issued cumulative preferred stock and does not declare a
dividend, the company has dividends in arrears. Although not a liability, the amount of any dividends in arrears must be
disclosed in the financial statements.
The participating dividend feature provides the opportunity for the preferred stockholders to
receive dividends above the stated rate. It occurs only after the common stockholders have
received the same rate of return on their shares as the preferred stockholders. For example, say
the preferred dividend rate is 5% and the preferred stock has a participating feature. This means
that the preferred stockholders will receive a larger dividend if the authorized dividend exceeds
the total of the 5% dividend for the preferred stockholder and a 5% dividend to the common
stockholders.
Generally speaking, preferred stockholders only receive their stated dividends and nothing more.
If a preferred stock is described as 10% preferred stock with a par value of $100, then its dividend
will be $10 per year (whether the corporation's earnings were $10 million or $10 billion).
Preferred stock that earns no more than its stated dividend is the norm; it is known as
nonparticipating preferred stock.
If a preferred stock is designated as cumulative, its holders must receive any past dividends that
had been omitted on the preferred stock and its current year dividend, before common
stockholders are paid any dividends. (A corporation might omit its dividends because it is
suffering operating losses and has little cash available.) If a corporation omits a dividend on its
cumulative preferred stock, the past, omitted dividends are said to be "in arrears" and this must be
disclosed in the notes to the financial statements.
Illustration: Assume that in 2010, Mason Company is to distribute $50,000 as cash dividends,
its outstanding common stock has a par value of $400,000, and its 6 percent preferred stock has a
par value of $100,000.
Illustration: Assume that in 2010, Mason Company is to distribute $50,000 as cash dividends, its outstanding common
stock has a par value of $400,000, and its 6 percent preferred stock has a par value of $100,000.
If the preferred stock is cumulative and nonparticipating, and Mason Company did not pay dividends on the preferred
stock in the preceding two years:
Illustration: Assume that in 2010, Mason Company is to distribute $50,000 as cash dividends, its outstanding common
stock has a par value of $400,000, and its 6 percent preferred stock has a par value of $100,000.
If the preferred stock is cumulative and is fully participating, and Mason Company did not pay dividends on the
preferred stock in the preceding two years:
It is the amount that would be paid on each share assuming the company is liquidated and
the amount available to shareholders is exactly the amount reported as shareholders equity.
Book value per share represents the equity an ordinary stockholder has in the net assets of
the corporation from owning one share of stock. Book value per share is not synonymous with the
value of the stock in liquidation and does not generally equal market value per share.
1. An amount equal to the par or stated value is allocated to the preference share and ordinary
share
2. Any balance of the shareholders equity in excess of par is apportioned taking into account
the liquidation value and dividend rights of the preference shareholders.
3. For book value purposes, following are assumed to be available for dividends:
Accumulated Profit
Share Premium
Revaluation Reserve
Shares Amount
Share capital issued xx P xx
Add: Share capital subscribed xx xx
Sub-total xx P xx
Less: Treasury share at par xx xx
Amount and shares outstanding xx P xx
5. Treasury share shall be treated as a retired share. Any gain on retirement is added to Share
Premium, and loss on retirement is charged first to Share Premium and then to Accumulated
Profit.
SPECIAL NOTES
1. Liquidation value amount to be received upon the liquidation of the corporation. It can
be more than the par value.
2. In the absence of liquidation values, the preference shareholders shall receive and amount
equal to the par or stated value.
3. If there is a deficit, the preference shareholders would share on a pro-rata basis with
ordinary shareholders.
4. The preference share call price or redemption price is ignored for book value computation.
5. Preference to assets preference shareholders are entitled to payment not only for the
liquidation value but also for dividends in arrears.
6. Preference as to dividends
Non-cumulative
Cumulative
Non-participating
Participating
7. In the absence of any statement to the contrary, the preference share is preference as to
dividends.
10. If there are two classes of preference share with different dividend rates -
11. In computing for share outstanding, the Subscriptions Receivable balance is NOT
deducted from Subscribed Share Capital.
The earnings per share figure is the amount attributable to every share of ordinary share
outstanding during the period.
The objective of the basic earning earnings per share information is to provide a measure of the
interest of each ordinary share of a parent entity in the performance of the entity over the
reporting period.
It is not necessary to compute EPS for preference shares because there is a definite rate of
return for such share.
Earnings per share (EPS) indicates the net income earned by each share of outstanding ordinary
stock.
a. The formula for computing earnings per share is:
b. Most companies are required to report earnings per share on the income statement.
c. When the income statement contains any of the sections for material non-typical
items, earnings per share should be disclosed for each component.
d. When there has been a change in the number of shares outstanding during the year, the
denominator in the formula becomes the weighted average shares outstanding.
When a corporation has both preference and ordinary stocks outstanding, dividends declared on
preference stock are subtracted from net income in determining earnings per share. If the
preference stock is cumulative, the dividend for the current year is deducted whether or not it is
declared.
1. The presentation of earnings per share is required for enterprises whose ordinary shares
or potential ordinary shares are publicly traded and
2. By enterprises that are in the process of issuing ordinary shares or potential ordinary
shares in the public securities market.
Note: Nonpublic enterprises are not required to present earnings per share but are
1. Simple Capital Structure means that the corporation has only ordinary and
nonconvertible preference share.
2. Complex Capital Structure means that the corporation has one or more
instruments outstanding that could result in issuance of additional ordinary shares.
or
The net income is equal to the amount after deducting dividends on preference stock.
If the preference share is cumulative, the preference dividend for the current year only is
deducted from the net income, whether such dividend is declared or not.
If the preference share is non-cumulative, the preference dividend for the current year is
deducted from the net income only if there is a declaration.
Stock dividend is recognized retroactively, meaning, it is treated as a change from the date,
the original shares are issued.
1.)
Date Shares Months outstanding Month-shares
2.)
Date Shares Stock Dividend Months outstanding Month-shares