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Hi, I have a confused with pref share treatment in P/L and B/S. It is Dec 2008 past exam question 2.
Trial balance says there are 8% redeemable pref shares with fin cost 12%. Value 20,000.Interest is 20,000 x 12%=2400 x 6/12 (time apportioned). That I understand. But where goes dividends paid? In the year were paid 800 (20,000 x 8%). I see just part of dividend €400 as accrual in B/S. I can understand accrual but not about second half. From understanding dividends paid should be treated as finance cost and included in P/L in fin cost. Can you please help me with that?
correct, pref divs should be shown as a finance cost. the accrual should be Dr expense in income statement in finance charges and Cr the obligation on the SoFP
I guess there is mistake in answers. Are dividends expensed in P/L in full (800) or it will be time apportioned?
Maybe I just do not understand something. Is the fin cost of 1,200 split into 2 parts (8%interest of 800 and balance/accrual of 400)? Very confusing part for me.
Yes, all 1,200 should be expensed through I/S with the 400 not yet paid ( difference between rate paid and effective rate ) being added to the obligation. And yes, the 1,200 is the result of time apportioning ie 20,000 x 12% = 2,400. For half a year, that gives 1,200.
I have a question. On preference shares it reads: the preference shares were issued on the 1 January 2010 at par. They are redeemable at a large premium which is gives them an effective interest rate of 10 percent per annum. The trial balance reading date is 31 December 2016 with a paid preference dividend of 2000 and a 6 percent redeemable preference shares of $1 each 23500.
This is how I answer it.
23500-2000=21500
6years a year was paid so. 5year *10%=50%
21500*50%=10750
10750+21500=32250
Dr financial cost 32250
Cr. Obligation 32250
Please tell me where I when wrongI believe that you have not typed the question out correctly
For one thing 1 January, 2010 to 31 December, 2016 is 7 years, not 6 (use your fingers!)
You have written that the trial balance figures as at 31 December, 2016 are $2,000 preference dividend paid (that cannot be correct) and $23,500 for the preference shares
The dividend that will be paid on a 6% preference share will be 6% of the face value of the shares
You have used a figure of $2,000 which looks to me like 10% of $20,000 so I’m thinking that the face value of those preference shares is $20,000 and that a dividend of 6% will be payable
That suggests an annual payment (Dr Dividends Cr Cash) of $1,200 not $2,000
You haven’t told me on which side of the trial balance that you found the $2,000
You haven’t told me the date if redemption of these shares
It would also have helped me if you had given me the printed solution so that I could have a chance of working backwards to sort out the correct detail of the question
What would be really helpful now is if you will give me the name of the question and the examination reference for this question eg December 2015
IF there are $20,000 face value preference shares in issue my calculations show that the obligation as at 31 December, 2016 should be $27,589 and IF the face value were $23,500 the obligation as at 31 December, 2016 should be $34,410
Maybe you’ll let me know
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