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I have been looking at single company accounts and struggled to understand preference dividends. I understand the finance cost however what does ‘redeemed at par’ actually mean?
some questions are clear what date it is redeemed and some tell you but i was doing question 27 Tourmalet and it states that the 6% preference shares redeemable 20×6 – £30m and at th bottom of the trial balance ‘interim preference dividend £900’….. AND … note (iv) ‘the preference shares will be redeemed at par. the finance cost is equivalent to annual dividend’.
The answer shows interim preference dividend from Tb £900
Accrued dividend (30m x 6% x 6/12) £900I can see these are the same but why is it (6/12)?
The preference share should be 30m X 6 % = $1.8m
Interim preference share is $900 is half of all the redeemable dividend
so the accrued dividend should calculate as (30m X 6% X 6/12)=$900Sarah is correct. Check out the mini exercises at the back of the OT course notes. On MANY occasions the examiner gives a preference share item or a loan item and typically this will have been issued 3 months into this year. Half a year’s dividend / loan interest will have been paid and will appear in the trial balance but you need to make an accrual for the last three months – and he will not normally highlight this! You need to be aware of it!!
“Redeemed at par” means that, when the company pays off the preference shareholders, they will only receive the face value of the preference shares. Sometimes they are to be redeemed at a premium and the premium needs to be added in to the obligation – but he will normally give you that detail sufficient to calculate the increase in the obligation.
Hope that helps
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