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Why are redeemable preference shares not paid half of dividend in this question?

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FA – FIA FFA › Why are redeemable preference shares not paid half of dividend in this question?

  • This topic has 3 replies, 2 voices, and was last updated 2 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • March 11, 2023 at 3:59 pm #681088
    menpagalhoon
    Participant
    • Topics: 73
    • Replies: 35
    • ☆☆

    Question

    ___________

    Bird Ltd. has the following share capital:
    $0.25 ordinary share capital $ 2,000,000

    8% irredeemable preference share capital $800,000

    6% redeemable preference share capital $ 500,000

    It paid interim dividend of 0.3 / share on 3rd July 20X8. It announced a final dividend on ordinary shares of $ 0.2 / share on 2nd February 20X9.
    Half of the dividend on preference shares was paid before year ended 31st December, 20X8.

    Find out the dividend charged to SOCE for year ended 31st December 20X8.

    Solution

    __________

    No of ordinary shares = 8,000,000 shares

    Interim dividend = $ 2, 400, 000

    Final dividend (declared after year end)

    Preference dividend

    800,000 x 8% = 64000

    Total dividend = 2,400,000 $ + $ 32,000 + $ 32,000

    Total dividend = 2,464,000 $ charged to SOCE

    I have three problems regarding this solution:

    A) Why are shareholders that own 6% redeemable preference shares not paid half of dividend?

    B) Why is 8% of share capital (irredeemable) the preference dividend? Why is it not 8% of par value as per the open tuition lecture?

    I did it like this(which is wrong) :
    Irredeemable shares must be 3,200,000 issued at par value of 0.25 per share giving capital of $ 800,000.

    Now taking 8 percent of par value (0.25) gives 0.02 $ but half is paid so 0.01 $ per share.

    Multiple 3,200,000 shares with 0.01$ / share = $32,000.

    Why is this incorrect? Please point out.

    C) Why does the solution add paid as well as unpaid dividend for calculating total dividend?

    Thank you!

    March 11, 2023 at 5:21 pm #681144
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54711
    • ☆☆☆☆☆

    A For the 6% preference shares nothing is included because redeemable preference shares are treated the same way as long-term loans and the dividend is treated the same way as interest (so nothing appears on the SOCE).

    B Why do you assume that the preference shares have a nominal value of $0.25? There is no reason at all why they should have the same nominal value as the ordinary shares. However even if they did have a nominal value of $0.25, there would be 3,200,000 shares and the total dividend would be 3,200,000 x 8% x $0.25 = $64,000 (which is what the answer has included). It is irrelevant that half of this is paid after the year end because it indefinitely going to be paid out of this years profits.

    C I don’t understand you. This is only relevant for the ordinary shares and for them only the dividend paid during the year appears.

    March 13, 2023 at 4:48 pm #681249
    menpagalhoon
    Participant
    • Topics: 73
    • Replies: 35
    • ☆☆

    Thank you, I get it now.

    March 13, 2023 at 4:57 pm #681251
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54711
    • ☆☆☆☆☆

    You are welcome 🙂

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