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Hello Sir,
Could you please help me with the question below?
Howard Co provided the following extracts from the SOFP for the year ended 31st Dec:
‘000’. ‘000’
20×6. 20×7
Accumulated Profit 72000 82000
10% loan notes. 30,000. 40,000
Tax payable. 12,000. 15,000
Dividends payable. 1200. 1600All dividends were declared and proposed before the year end. There was no adjustment for under/over provision of tax in the year ended 31st Dec 20×7. No interim dividends were paid during the year. The additional 10% loan notes were issued on the 1st Jan 20×7.
What is Howard Co’s Operating profit (Profit before interest and tax) for the year ended 31st December 20×7?
Ans: 30,000
Sir, according to the solution, the’ve added back the dividends payable for the year (1600)
I can understand the tax and loan interest payable part, but could you please explain how dividends are dealt with here?
The difference in accumulated profit would give us the profit for the year after paying dividends right? But provided that anything is paid. However, they state that dividends were payable and not paid.Would really appreciate your help!
Thank you!
The fact that the dividends appeared in the SOFP as payable means that the amount was finalised and that they had been recorded in the accounts. Therefore they would have been subtracted in arriving at the retained earnings and do therefore need adding back.
Until the dividends have been voted on and are therefore final, they are not recorded in the accounts at all, which means that usually they are only recorded when they are actually paid. However here they had been recorded because they appeared in the SOFP.
Oh ok, so they are in the SOFP because they are declared, and in this case, also paid.
But I came across some examples wherein they said dividends declared at YE but not paid at YE. So I assumed this would not be deducted from profit since it’s a payable.Could you please clarify the following:
If a declared dividend is recorded as a liability, do we assume that is it going to be paid before year end and that it is to be subtracted from profit, unless they mention that it is paid after YE?Thank you so much!
If they are recorded as a liability, then by definition they have not been paid but are still owing.
Dividends are only recorded once they become certain (they are first proposed – at that stage they are not certain – but are then voted on and then they do become certain). As a result they are usually recorded when they are actually paid (because they are paid soon after having been voted on) but if they are certain and have been declared then they are recorded.
If they appear as a liability in the SOFP then they have been recorded (otherwise they would not be in the SOFP if there had been no record) and if they have been recorded then the double entry is to retained earnings.
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