Retained Earnings Mrs. Paz Castro

Case 4. cumulative and participating preference shares

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	Preferenc e	Ordinar y	Total
Outstanding Share Capital	P200,000	P300,000	P500,000
Preference Dividends in Arrears	P 48,000		P 48,000
Current Preference Dividends	24,000		24,000
Current Ordinary Dividends		P 36,000	36,000
Remainder for Participation			92,000
Preference	36,000
Ordinary	.	55,200	.

Prior Period Errors

• Per IAS No. 8, Accounting Policies, Changes in Accounting Estimates and Errors, prior period errors are omissions from and other misstatements of the entity’s financial statements for one more prior periods that are discovered in the current period.
• Errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretations of facts, fraud or oversights.

• Material prior periods must be restated to report financial position and results of operations as they would have been presented had the error never taken place.
• Reported by adjusting the opening balances of retained earnings and affected assets and liabilities.
• The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered.

• If an error resulted in an understatement of

profit in previous periods, a correcting entry
would be needed to increase retained earnings.

• If an error overstated profit in prior periods,

then retained earnings would have to be decreased.

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Ex.: In 2012, the bookkeeper of Castro Realty,
Inc. debited Advertising Expense and credited Cash to record the purchase of a small parcel of land to be used as the company’s sale training
venue. The entry should have been a debit to Land and a credit to Cash of P250,000. The effect of this prior period error is to overstate 2012 advertising expense and ultimately, understate 2012 profit by the same amount. Land is also understated by P250,000. The external auditors discovered the prior period error in 2013. The correcting entry will be:
Land 250,000
Retained Earnings 250,000

This entry increased assets and shareholders’ equity by P250,000. Advertising expense, a temporary account, is closed to income summary and income summary is in turn closed to retained earnings; therefore, any corrections to income or expense of the prior periods should be made directly to the retained earnings account. The preceding analysis purposely did not include the income tax effects of the error.