Question

Problem No. 6 At December 31, 2020, the equity accounts of Sample Corporation were as follows: 10% Preference share capital (P100 par, 50,000 shares) P5,000,000 Ordinary share capital (P10 par, 1,500,000 shares) 15,000,000 Retained earnings 5,000,000 Sample Corporation has never paid cash or share dividend. The capital accounts have not changed since Sample Corporation began operations on January 1, 2016. If the maximum amount available for cash dividend is declared on December 31, 2020? Requirements: Determine the amount of dividends to be paid to preference shareholders and ordinary shareholders, respectively, under each of the following independent situations: a. The preference shares are non-cumulative and non-participating b. The preference shares are cumulative and non-participating c. The preference shares are non-cumulative and fully participating. d. The preference shares are cumulative and fully participating. e. The preference shares cumulative and participating up to 15% Notes: Non-cumulative and non-participating Cumulative and non-participating Non-cumulative and fully participating Cumulative and fully participating

Answer 1

Participating Preference Shares are shares where the right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid is given. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.

Cumulative preference shares are the kind of shares where the holders have a right of dividend even if the company has missed to give them the dividends in the past.

In the given question

a. The preference shareholders are non cumulative non participating

Dividend to Preference shareholders =10% of 5,000,000 = $500,000

Dividend to Common shareholders = 5,000,000 - 500,000 = $4,500,000

b. The preference shareholders are cumulative non participating

Dividend to Preference shareholders =10% of 5,000,000 * 5 years = $2,500,000

Dividend to Common shareholders = 5,000,000 - 2,500,000 = $2,500,000

c. The preference shareholders are non cumulative and fully participating

Total retained earning = $5,000,000

Total Capital (common shareholders + Preference shareholders) = 20,000,000

Dividend per $ capital = $0.25

Dividend to Preference shareholders (Subject to a minimum of 10% of 5,000,000 = $500,000) = 0.25 *5,000,000 = $1,250,000

Dividend to Common shareholders = 5,000,000 - 1,250,000 = $3,750,000

d. The preference shareholders are cumulative and fully participating

Total retained earning = $5,000,000

Total Capital (common shareholders + Preference shareholders) = 20,000,000

Dividend per $ capital = $0.25

Dividend to Preference shareholders (Subject to a minimum of 10% of 5,000,000 * 5 Years = $2,500,000) = 0.25 *5,000,000 = $1,250,000 which is less than $2,500,000. Therefore dividend to preference shareholders = $2,500,000

Dividend to Common shareholders = 5,000,000 - 2,500,000 = $$2,500,000

Kindly up vote.