DIVIDENDS ON PREFERENCE AND ORDINARY SHARES

Preference shareholders are entitled of certain advantages or benefits over

the ordinary shareholders. In declaration of cash dividends, holders of preference
shares are entitled to receive dividends first before ordinary shareholders do.

Dividends are distributions of cash, property, or shares from the

unappropriated retained earnings based on all issued and fully paid shares and all
subscribed par value shares except those treasury shares. Unrestricted or
unappropriated retained earnings are earnings that are available for distribution.
The percentage of the par value preference shares represents the dividend. For
example, 10% preference shares with a par value of P90 entitled the preference
shareholders for an annual dividend of P9 per share before ordinary shareholders
receive any distribution.

A corporation that accumulates large earnings does not always mean that
there will be an automatic payment of large dividends. Some corporation generates
big amount of profit but instead of paying the profit out to shareholders, they
choose to restrict the earnings for re-investing it back to the company where it is
voluntarily cannot be issued as dividends and must stay to the company for
expansion of operation, product development, built of personnel, future expenses,
contingencies, or for other purposes.

The law or contractual arrangements may also require restrictions of retained

earnings for specified purposes. Appropriation or restriction of retained earnings
reduces the amount of earnings available for payment of dividends, which leads
for a corporation to declare only small amount of dividends or do not pay at all.
Another possible reason for no payment of cash dividends is that earnings that are
an equity account do not necessarily match to cash. Always remember that in
declaring cash dividends, corporation must have appropriate amount of retained
earnings and needed amount of cash available for cash dividends.

In addition, a corporation is not compelled to pay dividends annually so

companies can cancel dividends at any time. In case that payment of dividends is
missed and the preference shares are cumulative, that dividend missed (called
dividends in arrears) will be paid, if and when dividends are declared, along with the
current preference dividends. Cumulative preference shares are kind of shares
where the holders have a right to payment of not just the current dividends but also
the dividends in arrears, if and when dividends are declared, before ordinary
shareholders receive distribution.

But if the preference shares are non-cumulative and the corporation did not
declare dividends, that dividends missed will never be paid for the reason that
holders of non-cumulative preference shares are entitled only to payment of current
dividends, upon declaration of dividends, up to the extent of the preference rate,
before ordinary shareholders receive any distribution.
 There are other features of preference shares aside from cumulative and
non-cumulative, and they are called participating and non-participating preference
shares. Participating preference shares allow the holders of it to have a share on the
remainder/excess dividends with the ordinary shareholders based on the ratio of
their outstanding par values after holders of ordinary shares received their initial
share based on the preference rate. While non-participating preference shares does
not entitled the holders to share with the ordinary shareholders in any
remainder/excess dividends after they have received their preferred dividends; they
are only entitled to extent of their stipulated preference dividend.

Stated below are four combinations of features of preference shares:

1. Non-cumulative and Non-participating Preference Shares

 Non-cumulative and Non-participating preference shares entitled the holders
of it to receive only the current preference dividends as its total dividend
when declaration of dividends is made. Past dividends are ignored if there is
any as it is non-cumulative and they will not receive a share from the
remainder/excess dividends as it is also non-participating. Excess dividends
will be all distributed to ordinary shareholders.
 Preference shares are assumed to be non-cumulative and non-participating in
case the stipulation of combinations of features of the preference shares is
not present.

Formula for Current Preference Dividends:

 Outstanding Preference Share Capital x Preference Rate

Formula for Excess Dividends or Remainder to Ordinary in Non-cumulative and Non-

participating Preference Shares:
 Cash Dividends Declared – Current Preference Dividends

Formula for Dividends per Share:

 Total dividend distribution per each class of share ÷ Corresponding
outstanding shares

Problem:
Cathetea Group, Inc., which provides a variety of products posted on its
website that can be ordered by the consumer and deliver it at their doorstep, has
the following shares outstanding and retained earnings stated below:

10% Preference Shares, P50 par, authorized 10, 000 shares,

6,000 shares issued and outstanding

P300,000

Ordinary Shares, P50 par, authorized 12,000 shares,

 8,000 shares issued and outstanding
P400,000

Retained Earnings
P380,000

Due to insufficient profit, the directors did not declare any dividends last
year. On the current year, the directors decided to declare cash dividends of
P300,000.

Required: Compute the dividends per share and the total dividends to be
received by each class of shares if the preference shares are non-cumulative and
non-participating.

Solution:

Preference Ordinary Total

Outstanding Share P300,000 P400,000 P 700,000

Capital

Current Preference
Dividends:
P30,000 P30,000
(P300,000 x 10%)

Remainder to
Ordinary:
P270,000 P270,000
(P300,000 –
P30,000 =
P270,000)

Total P30,000 P270,000 P300,000

Dividends per P5.00 P33.75

Share

Explanation:
 If the preference shares are non-cumulative, the preference shareholders are
only entitled to receive current dividends up to the extent of their preference rate, if
and when dividends are declared, before ordinary shareholders receive any
payment. Any missed dividends from the past are ignored. The reason is that if
dividends are not declared and the preference shares are non-cumulative, that
dividends missed are lost forever and will not be paid, only the current dividends
are paid. In this illustration, the preference shareholders will receive only P30,000
current preference dividends since preference shares are non-cumulative and the
balance of P270,000 that we got after deducting the current preference dividends of
P30,000 from P300,000 (amount of cash dividends declared in the current year) are
then distributed all to the ordinary shareholders since preference shares are also
non-participating. Remember that a non-participating preference shares means that
holders of this feature, after they are entitled to receive their preferred dividends,
do not share with ordinary shareholders in any remainder. Thus, total dividend
distribution to preference shares is P30,000 and for ordinary shares is P270,000.

We will get Dividends per Share by dividing the total dividend distribution per
each class of share by its corresponding outstanding shares. For preference shares,
the dividends per share is P5.00 since P30,000 ÷ 6,000 outstanding preference
shares is equal to P5.00 while dividends per share of ordinary shares is P33.75 as
P270,000 divided by 8,000 outstanding ordinary shares is P33.75.

2. Cumulative and Non-Participating Preference Shares

 Cumulative and Non-participating preference shareholders will be entitled to
receive a total dividend distribution of preference dividends in arrears and
current preference dividends when dividends are declared. The ordinary
shareholders will receive all the remainder or excess dividends.

Formula for Preference Dividends in Arrears:

 Outstanding Preference Share Capital × Preference Rate × Number of years
when dividends are in arrears

Formula for Current Preference Dividends:

 Outstanding Preference Share Capital × Preference Rate

Formula for Excess Dividends/Remainder to Ordinary in Cumulative and Non-

participating Preference Shares:
 Cash Dividends Declared - Preference Dividends in Arrears - Current
Preference Dividends

Formula for Dividends per Share:

 Total dividend distribution per each class of share ÷ Corresponding
outstanding shares
Problem:
In January 1, 2016, JYG Motors Corporation, specializes in automobiles was
authorized to issue 10,000 shares of 8% cumulative and non-participating
preference shares at P150 par value and 15,000 ordinary shares at P150 par value.

JYG Motors Corporation shows the outstanding shares and retained earnings
balances in its 2020 shareholders' equity:

8% Cumulative and Non-Participating Preference Shares,

P150 par value, authorized 10,000 shares,

4,000 shares issued and outstanding

P600,000

Ordinary Shares, P150 par value, authorized 15,000 shares,

6,000 issued and outstanding

P900,000

Retained Earnings
P800,000

In 2018 business operation of General Motors Corporation, the economy slowed

down. Because of it, the company only paid half of the dividends of the preference
shareholders. While in 2019, the economy was even worse resulting for the
company to pay no dividend at all. Thus, preference dividends in arrears have
grown with each missed deadline for payment. Fortunately, in the year 2020, the
economy booms due to intensified foreign investments leading the board to declare
cash dividends of P500,000.

Required:

1. Determine the dividends per share and the total dividends distributed to each
preference shareholders and ordinary shareholders.
2. Amount of preference dividends in arrears for the year 2018 and 2019.

Solution:

Preference Ordinary Total

Outstanding Share P600,000 900,000 P 1,500,000

Capital

Preference
Dividends in
Arrears:
 2018: P600,000 x
8% ÷ 2
P24,000
2019:

P600,000 x 8% x 1
year
P48,000 72,000

Current P48,000 P48,000

Preference
Dividends:

P600,000 x 8%

Remainder to
Ordinary:

P500,000 –
P380,000 P380,000
P72,000 – P48,000
= P380,000

Total P120,000 P380,000 P500,000

Dividends per P30.00 P63.33

Share

Explanation:

The cumulative preference shares entitled the holder to payment of not only
current dividends but also dividends in arrears, upon declaration of dividends,
before payment to ordinary shareholders is made. In this illustration, the holders of
preference shares are entitled to receive P72,000 of past dividends and P48,000 of
current preference dividends since preference shares are cumulative. The amount
of preference dividends in arrears (past dividends) totaled P72,000 because in
2018, the company owes the preference shareholders only half of the dividends
which is P24,000 since half of it was paid. And in 2019, the dividends in arrears
equaled to P48,000 (P600,000 x 8% x 1 year) resulting for the company to owe the
preference shareholders a total of P72,000 preference dividends in arrears.
 The excess dividends of P380,000 is all distributed to the ordinary shareholders
since preference shares are also non-participating. Excess dividends are calculated
through deducting the preference dividends in arrears and current preference
dividends from the amount of P500,000 which is the declared cash dividends for the
current year.

The preference shares have P30.00 dividends per share (P120,000 ÷ 4,000
outstanding preference shares) and ordinary shares have P63.33 dividends per
share (P380,000 ÷ 6,000 outstanding ordinary shares).

3. Cumulative and Participating Preference Shares

 Cumulative and Participating preference shareholders are entitled to
payment of not just the current preference dividends and dividends in arrears
(cumulative) but also its pro-rata share from the remainder for participation
after an initial allocation to ordinary shares (participating), if and when
dividends are declared. While ordinary shareholders will receive an initial
share based on the preference rate, of which is done before both shares
share the excess dividends, together with its share to the remainder for
participation.

Formula for Preference Dividends in Arrears:

 Outstanding Preference Share Capital × Preference Rate × Number of years
when dividends are in arrears

Formula for Current Preference Dividends:

 Outstanding Preference Share Capital × Preference Rate

Formula for Current Ordinary Dividends:

 Outstanding Ordinary Share Capital × Preference Rate

Formula for Excess Dividends in Cumulative and Participating Preference Shares:

 Cash Dividends Declared – Preference Dividends in Arrears - Current
Preference Dividends – Current Ordinary Dividends

Formula for Share in the Remainder for Participation or Excess Dividends:

 Ratio of their outstanding par values × Excess Dividends

Formula for Dividends per Share:

 Total dividend distribution per each class of share ÷ Corresponding
outstanding shares

Problem 3.1: ONE WITH DIFFERENT PERCENTAGE OF CUMULATIVE AND

PARTICIPATING
 The outstanding preference and ordinary shares and retained earnings of
Enter Tain Ment Corporation’s 2019 shareholders’ equity follow:

Preference Shares, P50 par, 30,000 shares

issued and outstanding

P1,500,000

Ordinary Shares, P40 par value, 50,000 shares

issued and outstanding

P2,000,000

Retained Earnings
P1,500,000

The preference shares are cumulative and participating. In 2018, Enter Tain
Ment Corporation that produces products like circuits in printers and cellphones
decided to restrict a large portion of its earnings for expansion of their business
operation in 2020 and cancelled payment of dividends.

In 2019, board of directors declared a total amount of P600,000 for cash

dividends.

Required:

Determine the dividends per share and the total dividends paid each to
preference shareholders and ordinary shareholders if the preference shares are
10% cumulative and 8% participating.

Solution:

Preference Ordinary Total

Outstanding Share P1,500,000 P2,000,000 P 3,500,000

Capital

Preference
Dividends in
Arrears:
P150,000 P150,000
(P1,500,000 x 10%
x 1 year)

Current Preference
 Dividends:

(P1,500,000 x 8%) P120,000 P120,000

Current Ordinary
Dividends at
preference rate:
P160,000 P160,000
(P2,000,000 x 8%)

Remainder for
Participation:

(P600,000 –
P170,000
P150,000 –
P120,000 –
P160,000 =
P170,000)

Preference: 30/80 x P63,750

P170,000

Ordinary: 50/80 x
P106,250
P170,000

Total P333,750 P266,250 P600,000

Dividends per P11.13 P5.33

Share

Explanation:

There are cases that a company fails to comply with payment of dividends. If
the payment of dividends is missed and the preference shares are cumulative,
these dividends missed are called dividends in arrears and will be paid along with
the current dividends, if and when the company declares dividends, before payment
to ordinary shareholders is established.

In this illustration, holders of preference shares are entitled of P150,000 as

dividends in arrears of the past 1 year, P120,000 for the current dividends, and a
pro-rata share of P63,750 from the remainder for participation after ordinary
shareholders receive its initial allocation of P160,000 since preference shares are
cumulative and participating.

Preference Dividends in Arrears which is P150,000 is calculated by

multiplying the outstanding preference share capital of P1,500,000 to 10% since
preference shares are 10% cumulative. After multiplying P1,500,000 to 10%, the
answer will be multiplied to 1 as Enter Tain Ment Corporation failed to declare
dividends for 1 year.

While the amount of P120,000 as the current preference dividends is

calculated through multiplying the outstanding preference share capital of
P1,500,000 to 8% (percentage of preference shares as participating). Percentage of
preference shares as participating is used to get the current preference dividends
since current dividends are the participation.

Take note that when preference shares are also participating, holders of
preference and ordinary shares will share to the remainder for participation of
P170,000 based on the ratio of their outstanding par values after the holders of
ordinary shares received their initial share of P160,000 (called current ordinary
dividends) based on the preference rate of 8%. The ratio used for preference shares
is 30/80 (P30,000/P80,000) and for ordinary shares is 50/80 (P50,000/P80,000). For
preference shares, its share to the remainder for participation of P170,000 is
P63,750 (30/80 x P170,000) and for ordinary shares is P106,250 (50/80 x P170,000).
The remainder for participation which is P170,000 is calculated through deducting
the preference dividends in arrears, current preference dividends, and current
ordinary dividends from the amount of P600,000 which is the declared cash
dividends in the current year.

To get the dividends per share, dividing total dividend distribution per
ordinary and preference shares by its corresponding outstanding shares is made. In
this problem, dividends per share of preference shares is P11.13 (P333,750 ÷
30,000 outstanding preference shares) while dividends per share of ordinary shares
is P5.33 (P266,250 ÷ 50,000 outstanding ordinary shares).

Problem 3.2: ONE WITH THE SAME PERCENTAGE

The accounts below are selected in the 2018 shareholders’ equity of Massimo
Corporation:

6% Cumulative and Participating Preference Shares, P50 par,

200,000 shares authorized,

50,000 shares issued and outstanding

P2,500,000

Ordinary Shares, 70 par, 400,000 shares authorized,

 60,000 shares issued and outstanding
P4,200,000

Retained Earnings
P1,500,000

In year 2017, Massimo Corporation postponed the declaration of dividends

due to financial trouble. Thus, dividends for the year 2017 are in arrears. In the year
of 2018, the board declared a total amount of P750,000 cash dividends.

From the account and information given, compute the dividends per share
and the total dividends to be received by each class of shares.

Solution:

Preference Ordinary Total

Outstanding Share P2,500,000 P4,200,000 P 6,700,000

Capital

Preference
Dividends in
Arrears:
P150,000 P150,000
(P2,500,000 x 6% x
1 year)

Current Preference
Dividends:
P150,000 P150,000
P2,500,000 x 6%

Current Ordinary
Dividends at
preference rate:
P252,000 P252,000
(P4,200,000 x 6%)

Remainder for
Participation:

(P750,000 –
P198,000
P150,000 –
 P150,000 –
P252,000 =
P198,000)

Preference: 25/55 x P90,000

P198,000

Ordinary: 30/55 x
P108,000
P198,000

Total P390,000 P360,000 P750,000

Dividends per P7.80 P6.00

Share

Explanation:

In this problem, holders of preference shares have the right to payment of

P150,000 for past dividends, P150,000 current dividends, and share of P90,000 in
excess dividends based on the ratio of their outstanding par values after initial
allocation of P252,000 to ordinary shareholders is done since preference shares are
cumulative and participating. Take note that a cumulative preference shares entitle
the holder for the payment of not only the current dividends but also to past
dividends, if dividends are declared, before payment to ordinary shareholders is
made. Since preference shares are also participating, preference shareholders are
also entitled to have a share on the amount of P198,000 (excess of declared
dividends of P750,000 in the current year after deducting the preference dividends
in arrears, current preference dividends, and current ordinary dividends) with the
holders of ordinary shares in the ratio of their outstanding par values which is 25/55
and 30/55 for preference and ordinary shares, respectively. For preference shares,
its share to the remainder for participation of P198,000 is P90,000 (25/55 x
P198,000) and for ordinary shares is P108,000 (30/55 x P198,000).

Take note that this process of distribution of the remainder between

preference shareholders and ordinary shareholders based on the ratio of their
outstanding par values is established after ordinary shareholders have received
their initial share or what we called the current ordinary dividends based on the 6%
preference rate.

The preference shares have P7.80 dividends per share (P390,000 ÷ 50,000
outstanding preference shares) and ordinary shares have P6.00 dividends per share
(P360,000 ÷ 60,000 outstanding ordinary shares).
 4. Non-cumulative and Participating Preference Shares
 Non-cumulative and Participating preference shareholders are entitled to
receive current preference dividends (non-cumulative) and their share from
the remainder for participation after an initial allocation to ordinary shares
(participating), if and when dividends are declared. While ordinary
shareholders will receive an initial share based on the preference rate and
share in the remainder for participation.

Formula for Current Preference Dividends:

 Outstanding Preference Share Capital × Preference Rate

Formula for Current Ordinary Dividends:

 Outstanding Ordinary Share Capital × Preference Rate

Formula for Excess Dividends in Non-cumulative and Participating Preference

Shares:
 Cash Dividends Declared – Current Preference Dividends – Current Ordinary
Dividends

Formula for Share in the Remainder for Participation or Excess Dividends:

 Ratio of their outstanding par values × Excess Dividends

Formula for Dividends per Share:

 Total dividend distribution per each class of shares ÷ Corresponding
Outstanding Shares

Problem:
FAGCOR AND ABPE Corporation, nationally known as a company with
business related to real estate and hotels has 13% non-cumulative and participating
preference shares of 9,000 issued and outstanding at P160 par value and has
15,000 ordinary shares issued and outstanding, P180 par value as shown in their
2020 shareholders’ equity. Retained Earnings totaled P950,000.

Last year, February 2019, FAGCOR AND ABPE Corp. encountered an issue
about their service of which circulated through internet leading for their customer
satisfaction to rapidly decrease. FAGCOR AND ABPE accumulated loss. Because of
this, FAGCOR AND ABPE Corporation failed to declare dividends for that year.
FAGCOR AND ABPE successfully cleared the issue on January, 2020 and increased
again their customer satisfaction. In the current year 2020, the board of directors
declared and paid cash dividends of P700,000.

Required:
 1. Determine the dividends per share and the total dividends of each classes of
share.
2. Are there any dividends in arrears? Explain your answer.

Solution:

Preference Ordinary Total

Outstanding Share P1,440,000 P2,700,000 P4,140,000

Capital

Current
Preference
P187,200 P187,200
Dividends:

(P1,440,000 x 13%)

Current Ordinary
Dividends at
preference rate:
P351,000 P351,000
(P2,700,000 x 13%)

Remainder for
Participation:

(P700,000 –
P161,800
P187,200 –
P351,000 =
P161,800)

Preference: 3/8 x P60,675

P161,800

Ordinary: 5/8 x
P101,125
P161,800

Total P247,875 P452,125 P700,000

Dividends per P27.54 P30.14
Share

Explanation:

In this illustration, the non-cumulative and participating preference

shareholders are entitled to payment of P187,200 current preference dividends and
P60,675 pro-rata share in the remainder after ordinary shareholders receive their
initial share of P351,000 based on the preference rate.

Preference shares are also participating that is why preference shareholders

are also entitled to have a share on the amount of P161,800 with the holders of
ordinary shares in the ratio of their outstanding par values which is 9/24 or 3/8 and
15/24 or 5/8 for preference and ordinary shares, respectively. Preference
shareholders will have a share of P60,675 (3/8 x P161,800) to the remainder and for
ordinary shares is P101,125 (5/8 x P161,800). Remainder for participation of
P161,800 is computed through subtracting current preference dividends and
current ordinary dividends from the declared dividends of P700,000. Take note that
this process of distribution of the remainder between preference shareholders and
ordinary shareholders based on the ratio of their outstanding par values is
established after ordinary shareholders have received their initial share of P351,000
based on the 6% preference or what we called current ordinary dividends.

The preference shares have P27.54 dividends per share (P247,875 ÷ 9,000
outstanding preference shares) and ordinary shares have P30.14 dividends per
share (P452,125 ÷ 15,000 outstanding ordinary shares).
 ANSWER KEY

1. PROBLEM FOR NON-CUMULATIVE AND NON-PARTICIPATING

PREFERENCE SHARES

Answer:

1. Preference dividends per share is P5.00 and the total dividends paid to
preference shareholders is P30,000.
2. Ordinary dividends per share is P33.75 and the total dividends paid to
ordinary shareholders is P270,000.

2. PROBLEM FOR CUMULATIVE AND NON-PARTICIPATING PREFERENCE

SHARES

Answer:

1. Preference dividends per share is P30.00 and the total dividends paid to
preference shareholders is P120,000. Ordinary dividends per share is P63.33
and the total dividends paid to ordinary shareholders is P380,000.
2. Dividends in arrears for the year 2018 is P24,000 while in 2019 is P48,000. A
total of P72,000.

3. PROBLEM FOR CUMULATIVE AND PARTICIPATING PREFERENCE SHARES

3.1 ONE WITH DIFFERENT PERCENTAGE

Answer:
 1. Preference dividends per share is P11.13 and the total dividends paid to
preference shareholders is P333,750.
2. Ordinary dividends per share is P5.33 and the total dividends paid to ordinary
shareholders is P266,250.

3.2 ONE WITH THE SAME PERCENTAGE

Answer:

1. Preference dividends per share is P7.80 and the total dividends paid to
preference shareholders is P390,000.
2. Ordinary dividends per share is P6.00 and the total dividends paid to ordinary
shareholders is P360,000.

4. PROBLEM FOR NON-CUMULATIVE AND PARTICIPATING PREFERENCE

SHARES
Answer:

1. Preference dividends per share is P27.54 and the total dividends paid to
preference shareholders is P247,875. Ordinary dividends per share is P30.14
and the total dividends paid to ordinary shareholders is P452,125.
2. There are no dividends in arrears since the preference shares are non-
cumulative. In other words, even though FAGCOR AND ABPE Corp. failed to
declare dividends in 2019, that dividends missed will never be paid because
preference shares are non-cumulative.

Submitted by:
Suson, Pamela
Del Rosario, Kaye Ann
Ranoco, Angela
Asenjo, Marvin John