Question

reported the following balances on December 31, 2020.
14% nonparticipating, noncumulative preference share capital, par value of P75, 50,000 shares P3,750,000

8%, fully participating, cumulative preference share capital, par value of P50, 80,000 shares P4,000,000
Ordinary share capital, par value of P60, 65,000 shares P3,900,000
The entity plan
s to declare share dividends. It has not paid any stock or cash dividends before. Also, there hasn’t been any change it the capital balances since the entity started operation 5 years ago.

The entity reported the following net income and loss for the previous years:

2016 P1,500,000
2017 (P750,000)
2018 (P250,000)
2019 P1,500,000
2020 P1,900,000
If the maximum amount available for dividend on December 31, 2020 is paid, what amount should be distributed to:

1. 14% Preference shareholders?
2. 8% Preference shareholders?
3. Ordinary shareholders?

What is the book value per share of:

4. Ordinary shares?
5. 14% Preference Shares?
6. 8% Preference share?

What is the total balance of the following shares:
7. Ordinary shares
8. 14% Preference Shares
9. 8% Preference Shares
10. What is the amount of the total dividends declared?

Answer 1

Dividend on Non-Participating, Non-Cumulative Preference Shares

This is a type of Preference share which has no right on profit of the organisation after paying the dividend as per its legitimate dividend percentage. Also, if the company make loss in any year then the dividend of that year cannot be accumulated and paid in the later years in which the company make profit.

Dividend on Participating, Cumulative Preference Shares

This is a type of Preference share which has a right on the profit of the organisation over and above its legitimate percentage of dividends. This extra profit can be paid to these shareholders after imposing some condition. Also if the company incure loss in any year then the dividend of that year must have to be accumulated and paid by the company to these shareholders in the later years when the comapany make profits.

Dividend on Common Shares

After paying off the dividends to the Preference Shareholders if any profit remains then the dividend is paid to the Common shareholders at a percentage declared by the Board of Directors of the Company in its Annual General Meeting. The diviends can also be paid out of the Retained Earning balance of the company.

Answer

Amount Of Dividend Distributed

1) 14% Preference Shareholders = P3750000 X 14/100 = P525000

2) 8% Preference Shareholders = (P4000000 X 8/100 ) X 5 Years = P1600000

The amount of previous 4 years dividend must have to be accumulated in the case of 8% Preference Shares as it is a Participating, Cumulative Preference Shares. So the total dividend will be previous 4 years dividend plus current years dividend i.e total 5 years dividend must be paid.

Please note that as there is no condition is give in the question regarding the extra dividend payment to the participating shareholders thus no extra dividend is paid to these shareholders.

3)

Balance of total profit available to Pay Dividend

= ( P1500000 - P750000 - P250000 + P1500000 + P1900000 ) = P3900000

Out of the total profit of P3900000, Preference Dividend paid ( P525000 + P1600000 ) = P2125000.

So the remaining balance of profit of ( P3900000 - P2125000 ) = P1775000 is paid as dividend to the Common Shareholders.

Note There is no payout ratio or dividend percentage is given in the question regarding the dividend on the Common Shares. So, a 100% payout ratio is assumed on Common Shares.

Book Value Per Share

4) Ordinary Shares = P60 per share

5) 14% Preference Share = P75 per share

6) 8% Preference Share = P50 per share

Total Balance Of the Shares

7) Ordinary Shares = ( 65000 Shares X P60 Per Share ) = P3900000

8) 14% Preference Shares = ( 50000 Shares X P75 Per Share ) = P3750000

9) 8% Preference Shares = ( 80000 Shares X P50 Per Share ) = P4000000

10) Amount of Total Dividend Declared -

( Dividend paid to 14% Preference Shares + Dividend paid to 8% Preference Shares + Dividend paid to Common Shareholders )

= ( P525000 + P1600000 + P1775000 ) = P3900000