UNIT 8ACCUMULATED PROFITS, APPROPRIATIONS AND DIVIDENDS

Exercise 8 -1 Review Questions1. The accumulated profits/retained earnings account represents the undistributed earnings of the corporation. It represents capital of the corporation arising from its operations. Accumulated

profits/Retained earnings is shown as a line item under the shareholders’ equity section of the statement of financial position.

2. Accumulated profits/ Retained earnings is appropriated a. to comply with legal requirements (e.g. treasury shares)b. to comply with contractual requirements (e.g. sinking fund)c. upon discretion of management (e.g. plant expansion)

3. Dividends are distribution to shareholders of corporate earnings in proportion to the number of shares held by them. Dividends may also be paid as a return of shareholders’ invested capital (liquidating dividends).

4. The following are entitled to receive dividends (out of earnings):a. All issued shares which are in the hands of the shareholdersb. All subscribed par value shares

The following are not entitled to receive dividendsa. Unissued sharesb. Subscribed no par value sharesc. Treasury shares

5.The three dates to consider are:a. Date of declaration – this is the date when the board of directors approved the resolution to distribute the dividends; the liability to the shareholders is recorded on this

date.b. Date of record – this is the date when the company determines who are entitled to receive dividends; no entry is prepared on this date.c. Date of payment or distribution – this is the date when dividends are paid or distributed to the shareholders.

6. The kinds of dividends are:a. Cash dividends – dividend that is distributable in the form of cashb. Property dividends – dividend that is distributable in the form of non-cash assets such as merchandise inventory or marketable securitiesc. Scrip dividends – a deferred cash dividend; notes or other evidence of corporate indebtedness are distributed to the shareholders.

1

d. Share dividends – dividend that is distributable in the form of company’s own stock.

7. The two kinds of stock dividends are:a. Small share dividend – represents less than 20% of the outstanding shares.b. Large share dividend – represents 20% or more of the outstanding shares.

8. The accounting methods are:Small share dividend – use fair market value method; retained earnings is debited for the fair market value of the shares to be distributed as dividends.Large share dividend – use par value method; retained earnings is debited for the par value of the shares to be distributed as dividends.

9. The properties of preference shares area. Cumulative – entitles the holder to receipt of previous years’ unpaid dividends before any payment can be made to ordinary shareholders.b. Non-cumulative – entitles the holder to current year’s dividends only; previous years’ unpaid dividends are forfeited.c. Participating – entitles the holder to the receipt of additional dividend after holders of both preference and ordinary share have been paid up to the current year’s dividends.d. Non-participating – entitles the holder to the receipt of dividends up to the current period only; all excess dividends are given to the ordinary shareholders.

10. Cash Dividends Payable is shown as a current liability under the liabilities section of the statement of financial position.

Exercise 8 - 2 Multiple Choice

1 C 6 E2 J 7 L3 M 8 D4 K 9 O5 N 10 H

2

Journal Entries

Exercise 8 - 3 Jan 15 Accumulated profits 10,000

Cash dividends payable 10,000

Feb 15 No entry

Mar 15 Cash dividends payable 10,000 Cash 10,000

Jan 15 Accumulated profits 15,000 Cash dividends payable 15,000

Feb 15 No entry

Mar 15 Cash dividends payable 15,000 Cash 15,000

Exercise 8 - 4DOD Accumulated profits 40,000

Share Dividend Distributable-Ordinary 10,000 Share Premium-Ordinary Share Dividend 30,000

DOR No entry

DOP Share Dividend Distributable-Ordinary 10,000 Share Capital – Ordinary 10,000

3

Exercise 8 - 5DOD Accumulated profits 30,000

Share Dividend Distributable-Ordinary 30,000

DOR No entry

DOP Share Dividend Distributable-Ordinary 30,000 Share Capital - Ordinary 30,000

Exercise 8 - 6ADOD Accumulated profits 28,000

Cash Dividends Payable – Preference 5,000 Cash Dividends Payable –Ordinary 23,000

DOP Cash Dividends Payable – Preference 5,000Cash Dividends Payable –Ordinary 23,000 Cash 28,000

  Preference Ordinary TotalPreference (10,000x 5% x P10) 5,000 5,000Ordinary (28,000-5,000)   23,000 23,000Cash dividends 5,000 23,000 28,000Divided by Outstanding shares 10,000 40,000Dividend per share             0.50                   0.58

4

BDOD Accumulated profits 28,000

Cash Dividends Payable – Preference 15,000 Cash Dividends Payable –Ordinary 13,000

DOP Cash Dividends Payable – Preference 15,000Cash Dividends Payable –Ordinary 13,000 Cash 28,000

  Preference Ordinary TotalPreference (10,000x 5% x P10 x 3 yrs) 15,000 15,000Ordinary (28,000-5,000)   13,000 13,000Cash dividends 15,000 13,000 28,000Divided by Outstanding shares 10,000 40,000Dividend per share         1.50             0.33

CDOD Accumulated profits 28,000

Cash Dividends Payable – Preference 9,333.33 Cash Dividends Payable –Ordinary 18,666.67

DOP Cash Dividends Payable – Preference 9,333.33Cash Dividends Payable –Ordinary 18,666.67 Cash 28,000

  Preference Ordinary Total

5

Preference (10,000x 5% x P10 ) 5,000 5,000Ordinary (40,000x5% xP5) 10,000 10,000Balance (28,000-15,000)Preference (13,000x 100/300 ) 4333.33Ordinary (13,000 x 200/300) 8,667 13,000

     9,333.33         18,666.67 28,000Divided by Outstanding shares 10,000 40,000Dividend per share 0.93         0.47

DDOD Accumulated profits 28,000

Cash Dividends Payable – Preference 16,000 Cash Dividends Payable –Ordinary 12,000

DOP Cash Dividends Payable – Preference 16,000Cash Dividends Payable –Ordinary 12,000 Cash 28,000

  Preference Ordinary TotalPreference (10,000x 5% x P10x3 ) 15,000 15,000Ordinary (40,000x5% xP5) 10,000 10,000Balance (28,000-25,000)Preference (3,000x 100/300 ) 1000Ordinary (3,000 x 200/300) 2000 3,000Cash dividend 16000 12000 28,000Divided by Outstanding shares 10,000 40,000Dividend per share 1.60 0.28

6

Case 8 – 1

Issued shares 40,000

Treasury shares     (5,000)

Shares entitled to dividends 35,000

Issued shares 40,000Treasury shares (5,000)Shares entitled to dividends 35,000x Cash dividend per share P5.00Decrease in accumulated profits P175,000

Decrease on Total Assets P175,000==========

Case 8 – 2

  Preference Ordinary TotalPreference (10,000x 6% x P100 ) 60,000 60,000Ordinary (150,000-60000) 90,000 90,000Cash dividend 60,000 90,000 150,000Divided by Outstanding shares 10,000 20,000Dividend per share 6.00 4.5

7

a) P6.00 per share

b) P4.50 per share

c) Decrease of P150,000

Case 8 – 3

a) Outstanding shares 80,000Share dividend rate 20%

16,000x  Par value P5Debited to Accumulated profits P80,000

b) 16,000 shares

c) NO EFFECT on total Assets & Total Shareholders’ Equity

d) Outstanding shares 80,000Cash dividend per share P2.50Debited to Accumulated profits P200,000

e) P200,000 cash

f) DECREASE on Total Assets & Total Shareholders’ Equity

8

g) Cash dividend

Case 8 – 4

a) Accumulated profits, January 1 P  1,500,000 

Add Net income       800,000 

Sub-total P  2,300,000 

Less: Cash dividends P        190,000 

         Share dividends          170,000  360,000

Accumulated profits, December 31 P 1,940,000

b) Yes, the full amount can be declared as dividends

Case 8 – 5

a) Accumulated profits,  December 31 P     250,000 

Less Appropriation for treasury shares 12,000Accumulated profits - Free P 238,000

b) NO EFFECT

9

C) NO EFFECTd)

d) Purpose of appropriation of accumulated profits1) to comply with legal requirements2) to comply with contractual 

requirements3) upon discretion of management

e) The corporation was done with the appropriation

10