ACCUMULATED PROFITS AND TRANSACTIONS SUBSEQUENT

TO FORMATION

ACCUMULATED PROFITSAlso known as Retained Earnings.Summation of the profits earned by the

corporation since its organization, reduce by losses, dividends and some share capital transactions (like treasury shares)

A negative balance in Accumulated profits is termed “DEFICIT”.

APPROPRIATION OF ACCUMULATED PROFITS

To indicate that a portion of earnings thereof is not available for dividends.

It involves establishments of a formal policy of Board of Directors.

It does not affect the total amount of Accumulated profits and total amount of shareholder’s equity.

A. LEGAL REQUIREMENTS – the law requires the appropriation of retained earnings when a corporation reacquire its own share as Treasury shares. This requirement sees to it that the legal capital is not impaired.

B. CONTRACTUAL AGREEMENTS – This provide some assurance that sufficient assets will be maintained in the corporation to satisfy the third parties. (like Bonds)

C. DISCRETIONARY ACTIONS – This includes restriction related to planning for future plant expansion or in anticipation of potential future losses.

Appropriation of Accumulated profits may be accounted for by either

journal entry or disclosure in the notes to financial statement.

Appropriation of Accumulated profits may be accounted for by either

journal entry or disclosure in the notes to financial statement.

If appropriation is taken up through journal entry, such entry is:

Accumulated profits – Unappropriatedxxx

Accumulated profits appropriated for (indicate the reason)xxxTo record appropriation of Accumulated profits

If appropriation is taken up through journal entry, such entry is:

Accumulated profits – Unappropriatedxxx

Accumulated profits appropriated for (indicate the reason)xxxTo record appropriation of Accumulated profits

PRESENTATION IN SHAREHOLDER’S EQUITY SECTION

Another item affecting the balance of Accumulated profit is the “DIVIDEND”. A dividend is a distribution of a corporate

profits to the shareholders on a pro rata basis. Only holder’s of outstanding shares are entitled to received dividends.

Another item affecting the balance of Accumulated profit is the “DIVIDEND”. A dividend is a distribution of a corporate

profits to the shareholders on a pro rata basis. Only holder’s of outstanding shares are entitled to received dividends.

What are those dates?

What are those dates?

A power to declare dividends is vested by the corporation code upon the board of directors of the corporation. Three (3) important dates are noted in the formal dividend announcement,

namely: 1. Date of declaration, 2. Date of record, and 3. Date of payment or distribution.

A power to declare dividends is vested by the corporation code upon the board of directors of the corporation. Three (3) important dates are noted in the formal dividend announcement,

namely: 1. Date of declaration, 2. Date of record, and 3. Date of payment or distribution.

DATE OF DECLARATION

Is the date when the board of directors formally approves and announces the dividend declaration. It is the date that the obligation to the shareholders is recorded in the accounts of the corporation.

DATE OF RECORD

Usually, the record date follows the declaration date by a period of 2 to 3 weeks. On the record date, the list of current shareholders is prepared as the basis for the payment of dividends. Only the names of the shareholders listed as of the date of record will received the dividends.

DATE OF PAYMENT OR DISTRIBUTION

Is determined by the BOD and stated in the declaration. On this date, the corporation discharges its obligations to the shareholders for the dividends previously declared.

FORMS OF DIVIDENDSCASH DIVIDENDS – which are distributions of cash to the shareholders.

PROPERTY DIVIDENDS – distribution of non cash assets to the shareholders.

SHARE DIVIDENDS – also known as BONUS ISSUE, where share of the company are distributed to shareholders.

SCRIP DIVIDENDS – where promissory notes are distributed to shareholders.

CASH DIVIDENDS

Is a pro rata distribution of cash to shareholders. A corporation must have sufficient balance in Accumulated profits and cash account.

Declaration of cash dividend is charge to Accumulated profits with corresponding credit to CASH DIVIDENDS PAYABLE.

CASH DIVIDENDS

Is a pro rata distribution of cash to shareholders. A corporation must have sufficient balance in Accumulated profits and cash account.

Declaration of cash dividend is charge to Accumulated profits with corresponding credit to CASH DIVIDENDS PAYABLE.

ILLUSTRATIVE EXAMPLE

Assume that the Board of Directors of Badyang Corporation, at its meeting on January 20, 2014, declared dividend of P1.50 per share, payable on March 31, 2014, to shareholders of record on March 1, 2014. There were 10,000 ordinary shares outstanding.

The Account CASH DIVIDENDS PAYABLE is reported as current liability in the statement of

financial position, if unpaid as of year end.

The Account CASH DIVIDENDS PAYABLE is reported as current liability in the statement of

financial position, if unpaid as of year end.

SHARE DIVIDENDS OR BONUS ISSUE

A share dividend or bonus issue is a pro rata distribution of the company’s own share capital to its shareholders. Bonus issue does not affect total assets and total shareholders equity. It simply represents a transfer of amount from Accumulated profits to contributed capital.

SHARE DIVIDENDS OR BONUS ISSUE

A share dividend or bonus issue is a pro rata distribution of the company’s own share capital to its shareholders. Bonus issue does not affect total assets and total shareholders equity. It simply represents a transfer of amount from Accumulated profits to contributed capital.

In recording bonus issue declaration, a distinction between SMALL and LARGE bonus issue should be made. When the proportion of the

shares issued is small (1% - 19.99% or less than 20%) in relation to shares previously outstanding, the current market value of the shares

should be the amount transferred from Accumulated profits to contributed capital.

In recording bonus issue declaration, a distinction between SMALL and LARGE bonus issue should be made. When the proportion of the

shares issued is small (1% - 19.99% or less than 20%) in relation to shares previously outstanding, the current market value of the shares

should be the amount transferred from Accumulated profits to contributed capital.

When the proportion of the shares issued is large (at least 20%) in relation to shares previously outstanding, the amount capitalized is

equal to the par or stated value of the share capital, thus, no additional paid in capital (premium) is created.

When the proportion of the shares issued is large (at least 20%) in relation to shares previously outstanding, the amount capitalized is

equal to the par or stated value of the share capital, thus, no additional paid in capital (premium) is created.

ILLUSTRATIVE EXAMPLEAssume the following capital structure for Badyang Corporation at December 31, 2013:

Ordinary share capital, P10 par, 100,000 share issuedand outstanding P1,000,000

Share premium – ordinary 200,000Accumulated profits 900,000

Assume that on February 1, 2014, the BOD declared a15% bonus issue, distributable on March 31, 2014 to shareholders of record as of March 1, 2014. The market value of each share on February 1 is P15.

ILLUSTRATIVE EXAMPLEAssume the following capital structure for Badyang Corporation at December 31, 2013:

Ordinary share capital, P10 par, 100,000 share issuedand outstanding P1,000,000

Share premium – ordinary 200,000Accumulated profits 900,000

Assume that on February 1, 2014, the BOD declared a 25% bonus issue, distributable on March 31, 2014 to shareholders of record as of March 1, 2014. The market value of each share on February 1 is P15.

If at the end of the reporting period, the bonus issue had not been distributed, the balance of “Share dividends distributable” is reported as addition to share capital account. Share dividends distributable is

not reported as liability.

If at the end of the reporting period, the bonus issue had not been distributed, the balance of “Share dividends distributable” is reported as addition to share capital account. Share dividends distributable is

not reported as liability.

W O R K B O O K E X E R C I S E S

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