Two (2) Classes of Share Capital:

Ordinary Share Preference Share

- Basic ownership class in the - Gives certain advantages over
corporation. ordinary shares.
- As to dividends

Cash Dividends
Rights or Privileges of Shareholders of the Preference Share

 Preference as to dividends. When a corporation declares cash dividends, those who hold
preference shares must be paid first before any dividend is distributed to the holders of ordinary
shares. In the case of liquidating dividends, this preference does not apply unless it is expressly
stipulated in the Articles of Incorporation.
Example of Articles of Incorporation:

 Cumulative Right. Dividends in arrears (dividends for the previous year/s not declared) can still
be collected by holders of preference shares.
 Participating Right. The preference shareholders can receive dividends in excess of the fixed
dividend rate but only after the ordinary shareholders receive same rate.
Illustration: The shareholders’ equity accounts of Mac Corporation showed the following balances on
December 31, 2021:

12% Preference Share Capital, par P50, authorized 50,000 shares 40,000 share issued P2,000,000
Ordinary Share Capital, par P30, authorized 250,000 shares 200,000 share issued 6,000,000
Ordinary Share Premium 600,000
Retained Earnings 3,000,000

The Corporation declared cash dividends of P1,500,000 on December 2021. There was no dividend
declaration for the post two (2) years.

CASE 1. The preference shares are non-cumulative and non-participating

Dividends Preferences Ordinary

Total dividends declared 1,500,000
Current preference dividends (12% x 2,000,000) (240,000) 240,000
Balance to ordinary shares 1,260,000
Ordinary dividends (1,260,000) 1,260,000
Distribution of dividends 0 240,000 1,260,000
Divide by outstanding shares 40,000 200,000
Dividends per share P 6.00 P6.30

CASE 2. The preference shares are cumulative and non-participating

Dividends Preferences Ordinary

Total dividends declared 1,500,000
Past preference dividends (12% x 2,000,000 x 2) (480,000) 480,000
Current preference dividends (12% x 2,000,000) (240,000) 240,000
Balance to ordinary shares 780,000
Ordinary dividends (780,000) 780,000
Distribution of dividends 0 240,000 780,000
Divide by outstanding shares 40,000 200,000
Dividends per share P 18.00 P3.90