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Allocation of Dividends DIscussion and Problem

The document discusses how to allocate cash dividends between preference shares and ordinary shares. It outlines different types of preference shares and their dividend rights. It then provides two example problems and requires determining the allocation of dividends to preference and ordinary shares under different scenarios.

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242 views2 pages

Allocation of Dividends DIscussion and Problem

The document discusses how to allocate cash dividends between preference shares and ordinary shares. It outlines different types of preference shares and their dividend rights. It then provides two example problems and requires determining the allocation of dividends to preference and ordinary shares under different scenarios.

Uploaded by

hm92q9fjfy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Allocation of Cash Dividends Between Preference Shares and Ordinary Shares

1. Preference shares have priority over ordinary shares in terms of dividends.


2. The amount of dividend payment to preference shares depends on the type and preferential
rights attached
to the share, which could be cumulative or non-cumulative and participating or non-participating.
a. A cumulative preference share has a right to receive current dividends in arrears before
ordinary
shareholders receive any dividends.
b. A participating preference share provides for additional dividends to be paid to its holder after
dividends of a specified amount or rate are paid to ordinary shareholders.
If the problem is silent, the preference shares are assumed to be noncumulative and
nonparticipating.

Dividends for the current year are called current dividends, while dividends that were not declared in
the previous years are called dividends in arrears.
Dividends not declared in the previous years are usually considered forfeited unless the preference
shares are cumulative in nature.
Dividends in arrears must be specifically disclosed, otherwise, no dividends in arrears shall be
assumed.

In case there are two or more classes of participating preference shares with different rates, the
LOWER rate shall be the basis of allocation to the ordinary shares. If only one of them is participating,
then that rate shall be used regardless whether the other preference share but nonparticipating shall
have a lower rate.

PROBLEM 1 Allocation of Dividends


The shareholder’s equity in the statement of financial position on December 31, 2022 of NITCHELLE Corporation
showed the following:

Preference share capital, 10% P50 par, 40,000 shares P2,000,000

Ordinary shares capital, P100 par, 30,000 shares 3,000,000

Share premium 500,000

Retained earnings 2,500,000

Total shareholder’s equity P8,000,000

No dividends are in arrears up to December 31, 2020. The company declared P1,000,000 dividend at the end of
2022 at the appropriate rate for preference shares and the remainder for ordinary.

REQUIRED:

Determine the allocation of the dividend to (1) preference and (2) ordinary, assuming the following cases
independently:

a. Preference share is noncumulative and nonparticipating.

b. Preference share is cumulative and nonparticipating.

c. Preference share is cumulative and participating.

d. Preference share is cumulative and participating up to 12%.


PROBLEM 2. Allocation of Dividends - more than one class of preference shares

The shareholder’s equity in the statement of financial position on December 31, 2022 of Quijones Corporation
showed the following:

Class “A” Preference share capital, 10% P50 par, 40,000 shares P2,000,000

Class “B” Preference share capital, 14% P50 par, 20,000 shares 1,000,000

Ordinary shares capital, P100 par, 30,000 shares 3,000,000

Share premium 500,000

Retained earnings 2,500,000

Total shareholder’s equity P9,000,000

No dividends are in arrears up to December 31, 2020. The company declared P1,100,000 dividend at the end of
2014 at the appropriate rate for preference shares and the remainder to ordinary. Determine the allocation of
the dividend to

(1) preference and to

(2) ordinary assuming both class of preference shares are cumulative and participating.

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