Preference Ordinary

Amount Shares Amount Shares

Issued 2,000,000 20,000 4,000,000 40,000

Subscribed 2,000,000 20,000

Total 2,000,000 20,000 6,000,000 60,000

Less: Treasury at Par ---- ---- (800,000) (10,000)

Outstanding 2,000,000 20,000 5,200,000 50,000

Excess over Par Preferences Ordinary

Balances 3,400,000 2,000,000 5,200,000

Preference Dividends Arrears (600,000) 600,000

Balance to common 2,800,000 ___ 2,800,000

Total Shareholder’s Equity 2,600,000 8,000,000

Divided by: Shares outstanding 20,000 50,000___

Book Value Per Share 130 160

Book Value Per Share is defined as the amount that would be paid on each share if the company were to
be liquidated. There are two types of share capital in this problem: ordinary and preference shares.
According to Intermediate Accounting Book written by Conrado Valix, when there are two classes of
share capital, the shareholder's equity must be apportioned between two different classes of share.

As indicated in Accounting Procedures, for the purpose of apportionment, the stated amount equal to
par must be allocate to both preference and ordinary. When there are treasury shares and subscribe
share capital, Subscribe Share Capital will be added to Share Capital Issue while Treasury Shares will be
treated as retired for the purpose of book value computation. Therefore, it is deducted to total shares
issued and subscribed. Hence, the computed total amount outstanding for Preference and Ordinary
Shares written above are 2,000,000 and 5,200,000 respectively. On the other hand, the total shares for
Preference share are still 20,000 because it is not deducted by any amount as it stated that Subscribed
Share Capital and Treasury Shares is only subjected to ordinary. Moreover, the total shares for ordinary
are now 50,000.

For the next computation, it is also stated that any shareholder’s equity excess of par is apportioned
taking into liquidation value and dividend rights of the preference shares. The excess over par is then
deducted to 600,000 (2,000,000 x 10% x 3 years) dividends in arrears. The preference share is
cumulative and participating. Therefore, undeclared dividends accumulate each year until paid and is
entitled to pay dividends in any excess of fixed rate. In short, dividends in arrears are recognized and
paid. The balance after recognizing dividends in arrears is then added to 5,200,000 outstanding number
of ordinary shares to get the total shareholder’s equity.

Lastly, to compute the Book Value Per Share, the formulas are as follows:

Book Value Per Preference Share = Preference Shareholder’s Equity

Number of Preference Shares Outstanding

Book Value Per Ordinary Share = Ordinary Shareholder’s Equity

Number of Ordinary Shares Outstanding

Problem 18-20, only asked for Book Value Per Ordinary. Therefore, 8,000,000 total shareholder’s equity
divided by 50,000 shares outstanding is equals to 160 Book Value Per Ordinary.

Simplex Company reported the following shareholders' equity on December 31, 2021:
Preference share capital, 10% cumulative and nonparticipating,
P100 par, 20,000 shares 2,000,000
Ordinary share capital, P100 par, 40,000 shares 4,000,000
Subscribed ordinary share capital, 20,000 shares 2,000,000
Subscription receivable 500,000
Share premium 1,000,000
Retained earnings 2,400,000
Treasury ordinary shares, 10,000 at cost 800,000

The preference dividends are in arrears for 2019, 2020 and 2021. What amount should be reported as
book value per ordinary share?

a. 172
b. 200
c. 160
d. 150

Tunn Company revealed the following shareholder's equity on December 31, 2021:
12% noparticipating, noncumulative preference share
capital, par value of 100, 10,000 shares 1,000,000
10% fully participating, cumulative preference share
capital, par value of 100, 25,000 shares 2,500,000
Ordinary share capital, par value of 100, 75,000 shares 7,500,000

The entity had not paid a cash or issued a share dividend since inception of operations. There was no change in the
capital balances since the entity started operations five years ago.
The entity reported net loss for 2017, 2018 and 2019 at 1,500,000, 1,000,000 and 500,000 respectively, and net
income for 2020 and 2021 at 1,750,000 and 6,250,000 respectively.
The maximum amount available for dividend on December 31, 2021 is declared and paid.
What amount of dividend should be distributed to:

1.Ordinary Shareholders?
a. 3,750,000
b. 2,910,000
c. 500,000
d. 750,000

2.12% Preference shareholders?

a. 120,000
b. 600,000
c. 300,000
d. 0

3.10% preference shareholders?

a. 1,250,000
b. 1,970,000
c. 720,000
d. 250,000

Solution:

Net income:(2020-2021) 8,000,000

Net loss:(2017-2019) 3,000,000
Maximum dividend 5,000,000
Excess over par Preference 12% Preference 10% Ordinary share
Balances 5,000,000 1,000,000 2,500,000 7,500,000
Preference12%(1M×12%) (120,000) 120,000
Preference10% (1,250,000) 1,250,000
( 2.5M×10%×5 years)
Ordinary Share(7.5M×10%) (750,000) 750,000
Balance 2,880,000
Preference 10%
(2,880,000×2.5/10) (720,000) 720,000
Ordinary Share (2,160,000) 2,160,000
(2,880,000×7.5/10) _______________________________________________________________________
Total 0 1,120,000 4,470,000 10,410,000
Outstanding share 10,000 25,000 75,000
Book Value per Share 112 178.8 138.8

Dividends for
Preference share 12% - 120,000
Preference Share 10% - 1,250,000+720,000= 1,970,000
Ordinary Share - 750,000+2,160,000= 2,910,000
The problem consists of noncumulative and nonparticipating 12% preference shares, also cumulative and
participating 10% preference share. It means that the dividends will be allocated first to the 12% preference shares
and the balance will be allocated to the 4 years arrears and to the current year, total of 5 years. After that the
ordinary shares will have 10% of its balance to get a dividend since the 10% preference share is participating. The
balance will be allocated to the 10% preference shares and to the ordinary share with their specific ratio. But to get
the maximum dividend it simply deduct the net loss for 3 years(2017-2019) to the net income for the last 2(2020-
2021). The maximum dividend total of 5,000,000 will be allocated to the 2 types of preference shares and to the
ordinary shares. To get the total dividend distributed to them, the dividends from diffirent allocations will be
added.