DIVIDENDS

FEBRUARY 5, 2025
 Accounting for Dividends

• Dividends
o Are distributions of cash or stock to stockholders
on a pro rata (proportional to ownership) basis

o Can take four forms

 Cash
 Property
 Stock
 Scrip (a promissory note to pay cash)

LO 3
 Cash Dividends

• Cash dividends
o Are a pro-rata distribution of cash to stockholders
o Are not paid on treasury shares
• To pay a cash dividend, a corporation must have
o Retained earnings
• Payment of cash dividends from retained earnings is
legal in all states
 Dividends declared out of paid-in capital are
liquidating dividends
o Adequate cash
o A declaration of dividends by board of directors LO 3
 DIVIDENDS ON PREFERENCE SHARES

 The preference share has a priority over the

share in terms of dividends.
 The allocation of cash dividends between the
preference shares and the ordinary shares
depends on the type of preference share.
 TYPES OF PREFERENCE SHARES

Cumulative- preference shareholders are entitled to the payment of past years’

unpaid dividends or dividends in arrears before the payment of current year’s
dividends.
Noncumulative – preference shareholders are not entitled to payment of
dividends in arrears; they are entitled to current year’s dividends only.
Participating – preference shareholders are entitled to additional dividends
after the payment of regular dividends to both the preference and ordinary
shareholders.

Nonparticipating – preference shareholders are not entitled to any dividend in

excess of the regular rate
 TYPES OF PREFERENCE SHARES

Cumulative- preference shareholders are entitled to the payment of past years’

unpaid dividends or dividends in arrears before the payment of current year’s
dividends.
Noncumulative – preference shareholders are not entitled to payment of
dividends in arrears; they are entitled to current year’s dividends only.
Participating – preference shareholders are entitled to additional dividends
after the payment of regular dividends to both the preference and ordinary
shareholders.

Nonparticipating – preference shareholders are not entitled to any dividend in

excess of the regular rate
 ILLUSTRATIVE PROBLEM

 The Fortunewell Corp. declared and paid cash dividends for the last three
years as follows: 2021- P120,000; 2022- P200,000; 2023- P300,000. No
dividends were paid for two years prior to 2021. The capital structure of the
company for the last three years follows:

 10% Preference Share Capital, P100 par, 5,000 shares outstanding

P500,000
 Ordinary Share capital, P50 par, 5,000 shares outstanding
250,000
 The annual dividend requirement on preference shares is P50,000 or P10 per
share (i.e., P100 par x 10% x 5,000 shares outstanding). At the beginning of
2021, dividends are in arrears (unpaid dividends for prior years) for two years.
 CASE 1- The preference shares are noncumulative
and nonparticipating

2021 2022 2023

Preference Shares 50,000.00 50,000.00 50,000.00
Ordinary Shares 70,000.00 150,000.00 250,000.00
Total dividends 120,000.00 200,000.00 300,000.00
Dividends per share
Preference shares 10.00 10.00 10.00
Ordinary shares 14.00 30.00 50.00
 CASE 2 - The preference shares are cumulative but
nonparticipating

2021
Preference Ordinary Total
Dividends in arrears:
P50,000 x 2 100,000.00 100,000.00
Current Dividends:
Required 50,000.00
Available 20,000.00 20,000.00 20,000.00
In arrears, end of 2021 30,000.00
Total dividends 120,000.00 - 120,000.00

Dividends per share 24.00

CASE 2 - The preference shares are cumulative but
nonparticipating

2022
Preference Ordinary Total
Dividends in arrears:
P50,000 x 2 30,000.00 30,000.00
Current Dividends: 50,000.00 50,000.00
Balance- to ordinary shareholders 120,000.00 120,000.00
Total dividends 80,000.00 120,000.00 200,000.00

Dividends per share 16.00 24.00

 CASE 2 - The preference shares are cumulative but
nonparticipating

2023
Preference Ordinary Total
Current Dividends: 50,000.00 50,000.00
Balance- to ordinary shareholders 250,000.00 250,000.00
Total dividends 50,000.00 250,000.00 300,000.00

Dividends per share 10.00 50.00

 CASE 3 - The preference shares are noncumulative
but fully participating

2021
Preference Ordinary Total
Regular dividends
Preference 50,000.00 50,000.00
Ordinary - P50x 10% x 5,000 sh 25,000.00 25,000.00
Balance- P45,000 -
Preference: 500/750 x P45,000 30,000.00 30,000.00
Ordinary: 250/750 x P45,000 15,000.00 15,000.00
Total dividends 80,000.00 40,000.00 120,000.00

Dividends per share 16.00 8.00

 CASE 3 - The preference shares are noncumulative
but fully participating

2022
Preference Ordinary Total
Regular dividends
Preference 50,000.00 50,000.00
Ordinary - P50x 10% x 5,000 sh 25,000.00 25,000.00
Balance- P125,000 -
Preference: 500/750 x P125,000 83,333.00 83,333.00
Ordinary: 250/750 x P125,000 41,667.00 41,667.00
Total dividends 133,333.00 66,667.00 200,000.00

Dividends per share 26.67 13.33

CASE 3 - The preference shares are noncumulative
but fully participating

2023
Preference Ordinary Total
Regular dividends
Preference 50,000.00 50,000.00
Ordinary - P50x 10% x 5,000 sh 25,000.00 25,000.00
Balance- P225,000 -
Preference: 500/750 x P225,000 150,000.00 150,000.00
Ordinary: 250/750 x P225,000 75,000.00 75,000.00
Total dividends 200,000.00 100,000.00 300,000.00

Dividends per share 40.00 20.00

CASE 4 - The preference shares are cumulative and
fully participating
CASE 4 - The preference shares are cumulative and
fully participating

2022
Preference Ordinary Total
Dividends in arrears: 30,000.00 30,000.00
Current Dividends: 50,000.00 25,000.00 75,000.00
Balance: P95,000 -
Preference: 500/750 x P95,000 63,333.00 63,333.00
Ordinary: 250/750 x P95,000 31,667.00 31,667.00
Total dividends 143,333.00 56,667.00 200,000.00

Dividends per share 28.67 11.33

CASE 4 - The preference shares are cumulative and
fully participating

2023
Preference Ordinary Total
Current Dividends: 50,000.00 25,000.00 75,000.00
Balance- P225,000 -
Preference: 500/750 x P225,000 150,000.00 150,000.00
Ordinary: 250/750 x P225,000 75,000.00 75,000.00
Total dividends 200,000.00 100,000.00 300,000.00

Dividends per share 40.00 20.00

 CASE 5 - The preference shares are noncumulative and but participating
up to an additional 8%.

This means that the maximum participation of the preference shares on the excess
dividends is P40,000 (i.e., 8% of P500,000).

2021
Preference Ordinary Total
Regular dividends
Preference 50,000.00 50,000.00
Ordinary - P50x 10% x 5,000 sh 25,000.00 25,000.00
Balance- P45,000 -
Preference: 500/750 x P45,000 30,000.00 30,000.00
Ordinary: 250/750 x P45,000 15,000.00 15,000.00
Total dividends 80,000.00 40,000.00 120,000.00

Dividends per share 16.00 8.00

 CASE 5 - The preference shares are noncumulative and but participating
up to an additional 8%.

This means that the maximum participation of the preference shares on the excess
dividends is P40,000 (i.e., 8% of P500,000).

2022
Preference Ordinary Total
Regular dividends
Preference 50,000.00 50,000.00
Ordinary - P50x 10% x 5,000 sh 25,000.00 25,000.00
Balance- P125,000 -
Preference: 500/750 x P125,000 = 83,333 40,000.00 40,000.00
Ordinary: 250/750 x P125,000 85,000.00 85,000.00
Total dividends 90,000.00 110,000.00 200,000.00

Dividends per share 18.00 22.00

 CASE 5 - The preference shares are noncumulative and but participating
up to an additional 8%.

This means that the maximum participation of the preference shares on the excess
dividends is P40,000 (i.e., 8% of P500,000).

2023
Preference Ordinary Total
Regular dividends
Preference 50,000.00 50,000.00
Ordinary - P50x 10% x 5,000 sh 25,000.00 25,000.00
Balance- P225,000 -
Preference: 500/750 x P225,000 = 150,000 40,000.00 40,000.00
Ordinary: 250/750 x P225,000 185,000.00 185,000.00
Total dividends 90,000.00 210,000.00 300,000.00

Dividends per share 18.00 42.00

 EXERCISE PROBLEM
 The Sky Corp has paid dividends for the last three years as follows: 2022-
P2,500,000; 2023- P3,500,000; 2024- P6,500,000. During the last three years,
the company has the following outstanding shares capital: 100,000 shares of
P100 par, 12% Preference share capital and 500,000 shares of P10 par
Ordinary Share Capital. Dividends are in arrears for two (2) years at the
beginning of 2022.
 Calculate the amount that will be paid per share and in total on preference
shares and ordinary shares for each year under each of the following
independent assumptions:

a) Preference shares are noncumulative and nonparticipating

b) Preference shares are cumulative but nonparticipating

c) Preference shares are noncumulative but participating

d) Preference shares are cumulative and participating

CASE 1- The preference shares are noncumulative and nonparticipating

CASE 1
2022 2023 2024
Preference Shares 1,200,000.00 1,200,000.00 1,200,000.00
Ordinary Shares 1,300,000.00 2,300,000.00 5,300,000.00
Total dividends 2,500,000.00 3,500,000.00 6,500,000.00
Dividends per share
Preference shares 12.00 12.00 12.00
Ordinary shares 2.60 4.60 10.60
CASE 2 - The preference shares are cumulative but nonparticipating

2022
Preference Ordinary Total
Dividends in arrears:
P1,200,000 x 2 2,400,000.00 2,400,000.00
Current Dividends:
Required 1,200,000.00
Available 100,000.00 100,000.00 100,000.00
In arrears, end of 2022 1,100,000.00
Total dividends 2,500,000.00 - 2,500,000.00

Dividends per share 25.00

 CASE 2 - The preference shares are cumulative but nonparticipating

2023
Preference Ordinary Total
Dividends in arrears:
Year 2022 1,100,000.00 1,100,000.00
Current Dividends: 1,200,000.00 1,200,000.00
Balance- to ordinary shareholders 1,200,000.00 1,200,000.00
Total dividends 2,300,000.00 1,200,000.00 3,500,000.00

Dividends per share 23.00 2.40

2024
Preference Ordinary Total
Current Dividends: 1,200,000.00 1,200,000.00
Balance- to ordinary shareholders 5,300,000.00 5,300,000.00
Total dividends 1,200,000.00 5,300,000.00 6,500,000.00

Dividends per share 12.00 10.60

 CASE 2 - The preference shares are cumulative but nonparticipating

2023
Preference Ordinary Total
Dividends in arrears:
Year 2022 1,100,000.00 1,100,000.00
Current Dividends: 1,200,000.00 1,200,000.00
Balance- to ordinary shareholders 1,200,000.00 1,200,000.00
Total dividends 2,300,000.00 1,200,000.00 3,500,000.00

Dividends per share 23.00 2.40

2024
Preference Ordinary Total
Current Dividends: 1,200,000.00 1,200,000.00
Balance- to ordinary shareholders 5,300,000.00 5,300,000.00
Total dividends 1,200,000.00 5,300,000.00 6,500,000.00

Dividends per share 12.00 10.60

CASE 3 - The preference shares are noncumulative but fully participating

2022
Preference Ordinary Total
Regular dividends
Preference 1,200,000.00 1,200,000.00
Ordinary - P10x 12% x 500,000 sh 600,000.00 600,000.00
Balance- P700000 -
Preference: 10/15 x P700000 466,667.00 466,667.00
Ordinary: 5/15 x P700000 233,333.00 233,333.00
Total dividends 1,666,667.00 833,333.00 2,500,000.00

Dividends per share 16.67 1.67

CASE 3 - The preference shares are noncumulative but fully participating

2023
Preference Ordinary Total
Regular dividends
Preference 1,200,000.00 1,200,000.00
Ordinary - P10x 12% x 500,000 sh 600,000.00 600,000.00
Balance- P1,700000 -
Preference: 10/15 x P1700000 1,133,333.00 1,133,333.00
Ordinary: 5/15 x P1700000 566,667.00 566,667.00
Total dividends 2,333,333.00 1,166,667.00 3,500,000.00

Dividends per share 23.33 2.33

CASE 3 - The preference shares are noncumulative but fully participating

2024
Preference Ordinary Total
Regular dividends
Preference 1,200,000.00 1,200,000.00
Ordinary - P10x 12% x 500,000 sh 600,000.00 600,000.00
Balance- P4700000 -
Preference: 10/15 x P4700000 3,133,333.00 3,133,333.00
Ordinary: 5/15 x P4700000 1,566,667.00 1,566,667.00
Total dividends 4,333,333.00 2,166,667.00 6,500,000.00

Dividends per share 43.33 4.33

CASE 4 - The preference shares are cumulative and fully participating

2022
Preference Ordinary Total
Dividends in arrears:
P1,200,000 x 2 2,400,000.00 2,400,000.00
Current Dividends:
Required 1,200,000.00
Available 100,000.00 100,000.00 100,000.00
I n arrears, end
1,100,000.00
of 2022
Total dividends 2,500,000.00 - 2,500,000.00

Dividends per share 25.00

CASE 4 - The preference shares are cumulative and fully participating

2023
Preference Ordinary Total
Dividends in arrears:
Year 2022 1,100,000.00 1,100,000.00
Current Dividends: 1,200,000.00 600,000.00 1,800,000.00
Balance- P600000
Preference: 10/15 xP600000 400,000.00 400,000.00
Ordinary: 5/15 x P600000 200,000.00 200,000.00
Total dividends 2,700,000.00 800,000.00 3,500,000.00

Dividends per share 27.00 1.60

CASE 4 - The preference shares are cumulative and fully participating

2024
Preference Ordinary Total
Current Dividends: 1,200,000.00 600,000.00 1,800,000.00
Balance- P4,700,000
Preference: 10/15 x P4700000 3,133,333.00 3,133,333.00
Ordinary: 5/15 x P4700000 1,566,667.00 1,566,667.00
Total dividends 4,333,333.00 2,166,667.00 6,500,000.00

Dividends per share 43.33 4.33

CASE 5 - The preference shares are noncumulative and but
participating up to an additional 8%.

2022
Preference Ordinary Total
Regular dividends
Preference 1,200,000.00 1,200,000.00
Ordinary 600,000.00 600,000.00
Balance- P700000 -
Preference: 10/15 x 700000 466,667.00 466,667.00
Ordinary: 5/15 * 700,000 233,333.00 233,333.00
Total dividends 1,666,667.00 833,333.00 2,500,000.00

Dividends per share 16.67 1.67

CASE 5 - The preference shares are noncumulative and but
participating up to an additional 8%.

2023
Preference Ordinary Total
Regular dividends
Preference 1,200,000.00 1,200,000.00
Ordinary - 600,000.00 600,000.00
Balance- P1,700000 -
Preference: 10/15 x P1700000 800,000.00 800,000.00
Ordinary: 5/15 x P1700000 900,000.00 900,000.00
Total dividends 2,000,000.00 1,500,000.00 3,500,000.00

Dividends per share 20.00 3.00

CASE 5 - The preference shares are noncumulative and but
participating up to an additional 8%.

2024
Preference Ordinary Total
Regular dividends
Preference 1,200,000.00 1,200,000.00
Ordinary - 600,000.00 600,000.00
Balance- P4,700000 -
Preference: 10/15 x P4700000 800,000.00 800,000.00
Ordinary: 5/15 x P4700000 3,900,000.00 3,900,000.00
Total dividends 2,000,000.00 4,500,000.00 6,500,000.00

Dividends per share 20.00 9.00

 PROPERTY DIVIDENDS

The corporation records the property dividends at the fair value of the non-cash asset
distributable by a charge to Retained Earnings and a credit to Property Dividends Payable on
the declaration date. The corporation shall update the carrying value of the asset distributable
as dividends under the applicable measurement basis: the lower of cost and net realizable
value for inventories, fair value for trading securities, and cost (revalued amount) less
accumulated deprecation or amortization for property, plant and equipment and intangible
assets.
Assets distributable as Dividends Measurement Basis
Securities Held for Trading Fair Value
Inventories Lower between cost and net realizable value
Property, Plant and Equipment Lower between adjusted carrying values (as
Intangible Assets at declaration date) and fair value at
measurement date
 Stock Dividends

• Are pro rata (proportional to ownership) distributions of the

corporation’s own stock to stockholders
• Transfer an amount from retained earnings to paid-in capital, which
decreases retained earnings and increases paid-in capital
• Do not decrease total stockholders’ equity nor total assets
• Are often considered to be nothing more than a publicity gesture
o Neither increases nor decreases the assets in the company
o Investors own the same value and percentage of stock before and after the
dividend
 Stock Dividend Effect on Ownership
Assume that you own 20 of Cetus Inc.’s 1,000 shares of
outstanding common stock representing a 2% ownership
interest. Cetus declares a 10% stock dividend.
Effects of stock dividend
Total shares Cetus will issue = 1,000 × 10% = 100
Shares you will receive = 20 × 10% = 2 shares
Ownership % after stock dividend = 22 ÷ 1,100 = 2%
 Reasons Corporations Issue
Stock Dividends
• To satisfy stockholders’ dividend expectations without
spending cash
• To increase the marketability of the corporation’s stock
o Increasing the number of shares outstanding decreases
the market price per share, making it easier and
cheaper for smaller investors to purchase the shares
• To emphasize that a company has permanently
reinvested in the business a portion of stockholders’
equity, which therefore is now unavailable for cash
dividends
 SHARE DIVIDENDS OR BONUS ISSUE

A share dividend, otherwise known as bonus issue, is a pro-rata distribution of the corporation’s share capital to
its shareholders. A bonus issue does not affect total assets and shareholders’ equity. It simply represents a
transfer of an amount from retained earnings to contributed capital. The total assets and total shareholders’
equity are unchanged after the declaration and distribution of share dividends.

1. Small bonus issue- considered less than 20% of the previously outstanding shares.
2. Large bonus issue – equal to or more than 20% of the previously outstanding shares.
 Effects of Stock Dividends

• Change the composition of stockholders’ equity

o Because they transfer a portion of retained earnings to paid-in capital
• No change to total stockholders’ equity
• No effect on the par or stated value per share
• Increases the number of shares outstanding
 EXERCISES

Jishutech Corporation had the following shares outstanding from 2020 through 2023:
 Preference Shares, P50 par, 8% cumulative, 10,000 shares outstanding
 Ordinary Shares, P5 par, 20,000 shares authorized, issued and outstanding
 The corporation paid P30,000; P30,000; P94,000; and P130,000 in dividends during 2020, 2021, 2022 and
2023, respectively.
 Determine the dividend per share and the total dividends paid to ordinary shareholders and preference
shareholders in 2020, 2021, 2022 and 2023