PREFERENCE SHARES

Features often associated with preference shares.

1. Preference as to dividends.

2. Preference as to assets in the event of liquidation.

3. Convertible into ordinary shares.

4. Callable at the option of the corporation.

5. Non-voting.

15-1 LO 5
 PREFERENCE SHARES

Features of Preference Shares

 Cumulative
A corporation may attach
 Participating whatever preferences or
 Convertible restrictions, as long as it does
not violate its
 Callable country’s incorporation law.
 Redeemable

The accounting for preference shares at issuance is similar

to that for ordinary shares.

15-2 LO 5
 PREFERENCE SHARES

Illustration: Bishop Co. issues 10,000 shares of £10 par

value preference shares for £12 cash per share. Bishop
records the issuance as follows:

Cash 120,000
Share Capital—Preference 100,000
Share Premium—Preference 20,000

15-3 LO 5
 DIVIDEND POLICY

Few companies pay dividends in amounts equal to

their legally available retained earnings. Why?
 Maintain agreements with creditors.
 Meet corporation requirements.
 To finance growth or expansion.
 To smooth out dividend payments.
 To build up a cushion against possible losses.

15-4 LO 6
 DIVIDEND POLICY

Financial Condition and Dividend Distributions

 Before declaring a dividend, management must
consider availability of funds to pay the dividend.
 Should not pay a dividend unless both the present and
future financial position warrant the distribution.

15-5 LO 6
 DIVIDEND POLICY

Types of Dividends

1. Cash dividends. 3. Liquidating dividends.

2. Property dividends. 4. Share dividends.

All dividends, except for share dividends, reduce the total

equity in the corporation.

15-6 LO 7
 DIVIDEND POLICY

Cash Dividends
 Board of directors vote on the declaration of cash
dividends.
 A declared cash dividend is a liability.

 Companies do not Three dates:

declare or pay cash a. Date of declaration
dividends on treasury b. Date of record
shares.
c. Date of payment

15-7 LO 7
 DIVIDEND POLICY

Illustration: Roadway Freight Corp. on June 10 declared a cash

dividend of 50 cents a share on 1.8 million shares payable July
16 to all shareholders of record June 24.

At date of declaration (June 10)

Retained Earnings 900,000
Dividends Payable 900,000

At date of record (June 24) No entry

At date of payment (July 16)

Dividends Payable 900,000
Cash 900,000

15-8 LO 7
 DIVIDEND POLICY

Property Dividends
 Dividends payable in assets other than cash.
 Restate at fair value the property it will distribute,
recognizing any gain or loss.

15-9 LO 7
 DIVIDEND POLICY

Illustration: Tsen, Inc. transferred to shareholders some of its

investments (held-for-trading) in securities costing HK$1,250,000
by declaring a property dividend on December 28, 2014, to be
distributed on January 30, 2015, to shareholders of record on
January 15, 2015. At the date of declaration the securities have a
fair value of HK$2,000,000. Tsen makes the following entries.

At date of declaration (December 28, 2014)

Equity Investments 750,000
Unrealized Holding Gain or Loss—Income 750,000
Retained Earnings 2,000,000
Property Dividends Payable 2,000,000

15-10 LO 7
 DIVIDEND POLICY

Illustration: Tsen, Inc. transferred to shareholders some of its

investments (held-for-trading) in securities costing HK$1,250,000
by declaring a property dividend on December 28, 2014, to be
distributed on January 30, 2015, to shareholders of record on
January 15, 2015. At the date of declaration the securities have a
fair value of HK$2,000,000. Tsen makes the following entries.

At date of distribution (January 30, 2015)

Property Dividends Payable 2,000,000
Equity Investments 2,000,000

15-11 LO 7
 DIVIDEND POLICY

Liquidating Dividends
Any dividend not based on earnings reduces amounts
paid-in by shareholders.

15-12 LO 7
 DIVIDEND POLICY

Illustration: McChesney Mines Inc. issued a “dividend” to its

ordinary shareholders of £1,200,000. The cash dividend
announcement noted that shareholders should consider £900,000
as income and the remainder a return of capital. McChesney Mines
records the dividend as follows.

Date of declaration
Retained Earnings 900,000
Share Premium—Ordinary 300,000
Dividends Payable 1,200,000

15-13 LO 7
 DIVIDEND POLICY

Illustration: McChesney Mines Inc. issued a “dividend” to its

ordinary shareholders of £1,200,000. The cash dividend
announcement noted that shareholders should consider £900,000
as income and the remainder a return of capital. McChesney Mines
records the dividend as follows.

Date of payment
Dividends Payable 1,200,000
Cash 1,200,000

15-14 LO 7
 DIVIDEND POLICY

Share Dividends
 Issuance by a corporation of its own shares to shareholders
on a pro rata basis, without receiving any consideration.
 Par value, not the fair value, is used to record the share
dividend.
 Share dividend does not affect any asset or liability.
 Journal entry reflects a reclassification of equity.
 Ordinary share dividend distributable reported in the equity
section as an addition to share capital—ordinary.

15-15 LO 8
 DIVIDEND POLICY

Illustration: Vine Corporation has outstanding 1,000 shares of

£100 par value ordinary shares and retained earnings of £50,000. If
Vine declares a 10 percent share dividend, it issues 100 additional
shares to current shareholders. If the fair value of the shares at the
time of the share dividend is £130 per share, the entry is:

Date of declaration

Retained Earnings 10,000

Ordinary Share Dividend Distributable 10,000

15-16 LO 8
 DIVIDEND POLICY

Illustration: Vine Corporation has outstanding 1,000 shares of

£100 par value ordinary shares and retained earnings of £50,000. If
Vine declares a 10 percent share dividend, it issues 100 additional
shares to current shareholders. If the fair value of the shares at the
time of the share dividend is £130 per share, the entry is:

Date of distribution

Ordinary Share Dividend Distributable 10,000

Share Capital—Ordinary 10,000

15-17 LO 8
 DIVIDEND POLICY

Share Splits
 To reduce the market value of shares.
 No entry recorded for a share split.
 Decrease par value and increased number of
shares.

ILLUSTRATION 15-13
Effects of a Share Split

15-18 LO 8
 DIVIDEND POLICY

Share Split and Share Dividend Differentiated

A share split differs from a share dividend. How?
 A share split increases the number of shares
outstanding and decreases the par or stated value per
share.
 A share dividend,
► increases the number of shares outstanding.
► does not decrease the par value.
► increases the total par value of outstanding shares.

15-19 LO 8
 PRESENTATION AND ANALYSIS

Presentation of Equity ILLUSTRATION 15-16

Comprehensive Equity
Presentation

15-20 LO 9
 PRESENTATION AND ANALYSIS

Presentation of Statement of Changes in Equity

ILLUSTRATION 15-17
Statement of Changes
in Equity
15-21 LO 9
 PRESENTATION AND ANALYSIS

Illustration: Troy Co. has cash dividends of €100,000 and net

income of €500,000, and no preference shares outstanding.

Illustration 15-15

ILLUSTRATION 15-19

15-22 LO 9
 PRESENTATION AND ANALYSIS

Illustration: Chen Corporation’s ordinary shareholders’ equity is

HK$1,000,000 and it has 100,000 ordinary shares outstanding.

ILLUSTRATION 15-20

Amount each share would receive if the company

were liquidated on the basis of amounts reported
on the statement of financial position.
15-23 LO 9
 DIVIDEND PREFERENCES AND BOOK
APPENDIX 15A
VALUE PER SHARE

Dividend Preferences
Illustration: In 2015, Mason Company is to distribute €50,000 as
cash dividends, its outstanding ordinary shares have a par value of
€400,000, and its 6 percent preference shares have a par value of
€100,000.

1. If the preference shares are noncumulative and nonparticipating:

ILLUSTRATION 15A-1
Dividend Distribution, Non-
Cumulative and Non-
Participating Preference LO 10 Explain the different types of preference share
15-24
dividends and their effect on book value per share.
 DIVIDEND PREFERENCES

Illustration: In 2015, Mason Company is to distribute €50,000 as

cash dividends, its outstanding ordinary shares have a par value of
€400,000, and its 6 percent preference shares have a par value of
€100,000.

2. If the preference shares are cumulative and non-participating,

and Mason Company did not pay dividends on the preference
shares in the preceding two years:
ILLUSTRATION 15A-2

15-25 LO 10
 DIVIDEND PREFERENCES

3. If the preference shares is noncumulative and is fully participating:

ILLUSTRATION 15A-3
15-26 LO 10
 DIVIDEND PREFERENCES

Illustration: In 2015, Mason Company is to distribute €50,000 as

cash dividends, its outstanding ordinary shares have a par value of
€400,000, and its 6 percent preference shares have a par value of
€100,000.

4. If the preference shares are cumulative and fully participating,

and Mason Company did not pay dividends on the preference
shares in the preceding two years: ILLUSTRATION 15A-4

15-27 LO 10
 BOOK VALUE PER SHARE

Book value per share is computed as net assets divided by

outstanding shares at the end of the year. The computation
becomes more complicated if a company has preference shares.

ILLUSTRATION 15A-5
Computation of Book Value per Share
—No Dividends in Arrears

15-28 LO 10
 BOOK VALUE PER SHARE

Assume that the same facts exist except that the 5 percent preference
share are cumulative, participating up to 8 percent, and that dividends
for three years before the current year are in arrears.

ILLUSTRATION 15A-6
15-29 Computation of Book Value per Share—with Dividends in Arrears, Participating LO 10