Retained Earnings

Question 1

When the retained earnings account has a debit balance, it is called a ___________?

Answer 1

Retained earnings deficit, or simply, deficit

Question 2

When is liability for dividend first recognized?

Answer 2

Date of declaration

Question 3

Pro-forma entry for cash dividend declaration.

Answer 3

Dr. R/E - Dividends

Cr. Dividends Payable

Question 4

Explain accounting for property dividends.

Answer 4

Dividend payable is initially recognized at the fair value of the non-cash asset on date of declaration, and is increased or decreased as a result of the change in fair value of the asset at (1) year-end and (2) date of settlement.

The offsetting debit or credit is directly through retained earnings.

Upon settlement, the difference between the carrying amount of the dividend payable (i.e. FV date of settlement) and the carrying amount of the asset distributed is recognized in P/L.

Non-current assets declared as property dividends shall also be subjected to PFRS 5 (NCAHFS). If FV-COD is lower than CA, impairment loss is recognized.

Question 5

Differentiate small stock dividend from large stock dividend.

Answer 5

Small stock dividend = Less than 20%; amount charged to R/E is higher of FV and Par @ declaration date.

Large stock dividend = 20% or more; amount charged to R/E is par

Question 6

Under the Corporation Code, the declaration of treasury shares as dividend is to be treated as a _______ dividend.

Answer 6

Property dividend.

Question 7

When capital is returned to shareholders, it is known as dividend out of capital, or ____________.

Answer 7

Liquidating dividend

Question 8

It refers to the procedures of restating assets, liabilities, and share capital balances in conformity with fair value for the purpose of eliminating deficits

Answer 8

Quasi-reorganization. Achieved through:

(1) Recapitalization
(2) Revaluation of PPE

Question 9

What are the circumstances that may justify quasi-reorganization?

Answer 9

1. When a large deficit exists
2. When approved by the shareholders and creditors
3. When the cost basis of accounting for PPE becomes unrealistic.
4. When a “fresh start” appears to be desirable or advantageous to all parties concerned

A quasi-reorganization must be approved by the SEC.