ACCCOB2 Chapter 10 - Corporations: Retained Earnings

What is Retained Earnings?

It is part of shareholders' equity that represents the cumulative profit of the corporation as well as other adjustments from the date of its creation up to the current accounting period.

Transactions involving Retained Earnings

1) Net income/loss - the net income/loss is closed to Retained Earnings through the Income Summary account

2) Dividend declaration - this always decreases the balance of Retained Earnings

3) Appropriation/Reversal of Appropriation - these do not affect TOTAL Retained Earnings at year-end

Components of Total Retained Earnings

1) Free Retained Earnings (Unappropriated) - the part of retained earnings that can be declared as dividend.

2) Appropriated Retained Earnings - the part that has been set aside for some special purpose; this cannot be declared as dividend.

What is dividend?

It is the distribution of profit or capital to owners (shareholders) of the corporation. These are the different types of dividend:

- Cash dividend
- Share dividend
- Property dividend
- Liability dividend
- Liquidating dividend

Important Dates Involving Dividend

1) Date of declaration - the date when the decision to give dividends is announced by the Board of Directors (decreases retained earnings)

2) Date of record - the cut-off date to determine who is entitled to receive dividend (no journal entry)

3) Date of payment or distribution - the date when cash is paid or the share certificate is distributed (no effect on retained earnings)

Outstanding Shares

These are fully paid shares in the hands of the shareholders. The steps for computing the number of outstanding shares are as follows:

1) Number of issued shares (share capital)
2) Less: Number of treasury shares
3) Number of outstanding shares

Shares Entitled To Dividends

1) Outstanding shares - fully paid shares

2) Subscribed shares - partially paid shares

3) Share Dividend Distributable - share dividend awaiting issuance or distribution of share certificates

* All of these are recorded based on the PAR VALUE of the shares, whether ordinary or preference

Dividends for Preference Shares

Allocation of dividends to preference shares depends upon its features:

1) Cumulative
2) Participating
3) Cumulative and participating

Cumulative Preference Shares

These are preference shares that are entitled to both current dividends and dividends in arrears (passed dividends).

Participating Preference Shares

These are preference shares that participate with ordinary shares any remaining dividends after the basic dividends have been allocated to both preference and ordinary shares.

Cumulative and Participating Preference Shares

These are preference shares that:

1) are entitled to dividends in arrears
2) shares with ordinary shares any remaining dividends after the basic dividends have been allocated to both preference and ordinary shares

Book Value Per Share (BVPS)

This is the amount that each share would receive if the corporation will be liquidated for an amount equal to its book value today.

If the corporation issues only one class of shares, the formula to compute the BVPS is:

Total Shareholders' Equity/No. of Outstanding Shares

BVPS - Total Shareholders' Equity

Add: Share Capital
Add: Subscribed Share Capital
Add: Share Dividend Distributable
Add: Share Premium
Add: Retained Earnings
Less: Treasury Share (at cost)
= Total Shareholders' Equity

* Subscription Receivable is DISREGARDED when computing for BVPS

BVPS - Total Outstanding Shares

Add: Number of issued shares
Add: Number of subscribed shared
Add: Number of share dividend distributable
Less: Number of treasury shares
= Total Outstanding Shares

Basic Earnings Per Share (BEPS)

BEPS is the amount attributable to every ordinary share outstanding during the period (profitability of the shares). The earnings per share (EPS) information pertains ONLY to ORDINARY shares and it is NOT necessary to compute EPS for preference shares because there is a definite rate of return for such shares.

The formula to compute BEPS is:

Net Income/No. of outstanding ORDINARY shares

BEPS - Net Income

The net income is equal to the amount after deducting dividends on preference shares.

- 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 net income ONLY if there is a declaration.