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Thanks John. This is really well explained. Are my conclusions below correct?
If a company goes into receivership (and then bankruptcy) between x-dividend date and pay date, then the dividend is not paid to shareholders. It forms part of the assets from which all liabilities are paid, with shareholders near the bac of the queue? This is why it is not accounted for until pay date?
In the example given, those who paid 0.80 per share have more at stake than those who paid 0.50 if bankruptcy occurs. But if there was enough money left over, would they also receive more back, I’m thinking not?
Thanks
Can the nominal value be subject to revaluation like the way we do non-current assets or does it stay fixed for the full life cycle of the company regardless of market forces?
The nominal value never changes. Market forces affect the market value of the shares, but this is irrelevant for the financial accounts.
Dear Mr. John
I was wondering that who issues the shares of a company, is it the directors or the owners?
Thanks for the lecture sir.
If 100 shares were first issued for $1 each. (Nominal).
Then next year 100 more shares were issued at $1.5 each. So $1 is nominal, $0.5 becomes the share premium, and the capital reserve.
My question – if the new share holders paid more – why not record it as more, rather than divide it into nominal and premium? Is the reason technical ? – because the share was printed in $1 value and registered ? If yes, are the company not allowed to changed the print value and re-register with the State ?
Second – this share premium, if the company liquidates – does it get treated as profit and distributed to all the share holders equally, or only to the ones it was taken from initially, to be given back, ie to the ones who both the next 100 shares.
First: because it is the law in the UK. Some other countries do record it all as share capital. However it makes no difference anyway.
Second: if a company liquidates then any money left after paying all liabilities is distributed to the then current shareholders in the proportion of the shares they then hold.
Dear Mr. John
I tried to do the test FA Chapter 13 Questions – Accounting for Limited Companies. I answered all the questions correctly, except for question number 4, which has something I do not understand.
The rules is: The dividend only recorded when actually paid.
So:
Financial year in this question include 30 June 2005 – 30 June 2006, Right?
On September 2005 is paid $100,000, the final dividend for the year ending June 2005( It had been declared in August 2005)
The question is
Why this amount should not be appeared on the SOFP? (as the payment is done on September and the declaration is entered the financial year 2006…
Thank you in advance
In future please ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture 🙂
The $100,000 was paid during the year – there is no liability for it at the end of the year and so there is nothing to appear in the Statement of Financial Position. (And, of course, there is nothing to appear for it in the Statement of Profit or Loss because dividends never appear in the SOPL).
Thank you for the clarification
Sorry Mr. John, please ignore above query since i replaced it with this one. “In case of loss, where the company already have previous retained earning standing on their financial statement. Would the loss be eliminated from that retained earning?
A loss is simply a negative profit. So just as a profit increases the retained earnings, a loss reduces the retained earning.
Hello sir,
The accounting treatment of the dividends is a bit confusing to me, so I did a little research also on the Internet. Many sources claim that the amount of the dividends to be paid is treated as a current liability (increase of Dividends payable account) and when the actual payment happens the current liability account is closed. If that is true, would it be right this operation to have an impact on the SOFP at the year-end too?
As far as I know, current liability treatment, sometimes, is relevant for Preference Shares if they are reedemable within one year, because these dividends have fixed % attached to them (let’s say 20000_7% redeemable preference shares). The company does not have to (but can if directors decided so) pay Ordinary Dividends that’s why it is not liability in the SoFP
Does Revenue Reserve Contain dividends ,I am confused .I got this that Retained Earnings is the Called the final amount which should be added at the end, after it has Already deducted the Dividends for the Year.
Retained earnings is a revenue reserve.
It increases each year by the profits less the dividends i.e. the amount retained.
Sir, why are dividends not agreeed upon not treated in the same way as contingent liabilities?
Because we treat them the way that the Financial Reporting Standards tell us to treat them 🙂
The reason is because dividends go to the owners of the company (and can always be cancelled), whereas other liabilities (whether contingent or not) are liabilities to those external to the company.