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Hello sir..!
I have a doubt relating to a question from ACCA STUDY HUB Practice Qn from Chapter 13 : Capital Structure and Finance Costs.
The question goes:
A company’s assets and liabilities at the beginning ( 1 January )and end(31 December) of a year respectively were as follows:
Non-current assets 100,000 150,000
Current assets 120,000 110,000
Payables & accrued expenses 30,000 40,000
Liability for taxation 20,000 18,000
Issued equity shares of $1 100,000 125,000
Share premium 5,000 10,000
Reserves 50,000 ?(Closing amount not given)
Dividends payable 15,000 20,000During the year, the company issued a further 25,000 shares at $1.20 whilst cash payments of $20,000 for dividends and $22,000 for taxation were made.
What was the company’s profit before taxation for the year?
A.$36,000
B.$39,000
C.$42,000
D.$48,000The provided answer is as follows:
The correct answer is C.
Opening net assets (100 + 120 ? 30 ? 20 ? 15) 155,000
Closing net assets (150 + 110 ? 40 ? 18 ? 20) 182,000Increase in net assets 27,000
Add: Dividends appropriated (20 ? 15 + 20) 25,000
Tax charge (22 ? 20 + 18) 20,000Less: Proceeds of share issue (30,000)
Profit before tax 42,000
I don’t understand why they have adjusted $25000 for DIVIDEND.
Shouldn’t DIVIDEND PAID be accounted for on CASH BASIS and only the cash dividend paid of $20000 be adjusted to arrive at the PROFIT BEFORE TAX figure.
I attempted this Qn in the following way:
Firstly, I calculated the closing EQUITY Bal as $182000.
Then I arrived at closing RESERVES amounting to $47000 as a balancing figure (since other items in equity are already given in the question )
So, the movement from opening reserves to closing (i.e earnings for the year) would be -3000
Then I added back DIVIDEND PAID ($20000) AND TAX EXPENSE CHARGED ($20000) to this -3000.This amounted to $37000 as PROFIT BEFORE TAX.
Could you kindly explain the adjustment relating to DIVIDEND in this question.
Kindly forgive if the message was too lengthy. Thanks in advance…
The dividend that needs adding back to arrive at the profit is the total dividend charged for the year.
They paid 20,000 during the year, but 15,000 of this had been owing from last year, leaving 5,000 relating to this year. In addition they are owing another 20,000 at the end of this year, which means that the total charge for this year is 5,000 + 20,000 = 25,000.
Your explanation in arriving at the figure of 25000 is clear.
Isn’t DIVIDEND on Ordinary Shares issued by a company a distrubution of profits rather than a CHARGE in SOPL?
So is there really a need to apply ACCRUALS basis in order to arrive at that figure?
Yes it is, but the reserves will increase due to the profit after tax and decrease due to the divided for the year.
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