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Hi Sorry if this is a silly question. Not sure if it is a P question.
But there is a question I need help with.
PT issues million 4% cumulative redeemable $1 preference shares on 1st Jan x1. Which of the following is incorrect?
a) The dividend of $40,000 paid each year would be recognized in the SOCIE.
Why is option A wrong? I thought dividend paid would be shown in the SOCIE. The answer says.. the dividend would be expensed through the p&l as a finance cost rather than being shown as a dividend paid in the statement of changes in equity. Why is that? is there something special about redeemable preference shares?
Yes, there is something special about redeemable preference shares
They are not equity! They DON’T satisfy the definition of equity whereas they DO satisfy the definition of a debt obligation
They are an obligation of the entity that must be settled at a fixed or determinable future date and they rank higher than equity shares in a liquidation
Part of the definition of equity is that it represents the residual interest after all prior claims have been settled in a liquidation
So, as debt, the “dividend” payable to a preference share holder is, in effect, a payment of interest … but we don’t call it that and we don’t call the preference shares “preference debts” or “preference obligations”
OK?
ahhh ok. Yes… goes back to the fundamental definition of the preference shares. Ok that is clear. thanks
so if it was a normal ordinary share.. then dividend will go to the SOCIE. ok Clear.thanks a bunch
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