Divididends, split, rights and warrants PDF

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Essay Questions What are dividends? Dividends are distributions of earnings or capital to shareholders in proportion to their shareholdings. Dividends out of earnings can be declared only from retained earnings. If the entity has a deficit, it is Illegal to pay dividends. The common forms of dividen...

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Essay Questions 1. What are dividends? Dividends are distributions of earnings or capital to shareholders in proportion to their shareholdings. Dividends out of earnings can be declared only from retained earnings. If the entity has a deficit, it is Illegal to pay dividends. The common forms of dividends out of earnings are cash dividend, property dividend and stock dividend. Dividends out of capital are distributions of capital to shareholders in proportion to their shareholdings. Such dividends are popularly known as liquidating dividends. 2.

form of the entity's own shares. When stock dividend is declared, the retained earnings of the entity are in effect capitalized, that is, transferred to share capital. The assets of the entity remain the same before and after the issuance of the stock dividend. Dividend payable in stock or stock dividend payable is not a liability but an addition to the share capital in the shareholders' equity. 7.

The IFRS does not address stock dividends. Thus, guidance is based on local GAAP in accounting for stock dividends.

When are dividends recognized?

1. If the stock dividend is 20% or more, the par or stated value is capitalized or debited to retained earnings. If the stock dividend is 20% or more, the par or stated value is capitalized because this is conceived to materially effect a reduction in the share market value. "Stock dividend of 20% or more" is considered as large stock dividend.

Under IFRIC 17 "Distribution of noncash assets to owners", paragraph 10, the liability to pay dividend shaU be recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity, which is the date: a. When the dividend is declared by management or the board of directors if the local jurisdiction does not require further approval. b. When the declaration of dividend by management or the board of directors is approved by relevant authority, for example, the shareholders, if the local jurisdiction requires such approval. Simply stated, the liability for dividend must be recognized on the date of declaration. 3.

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Explain the measurement of "noncash asset distributed" as property dividend. As amended, PFRS 5, paragraph 5A, provides that the classification, presentation and measurement requirements in this PFRS shall also apply to "a noncurrent asset to be distributed to owners" as property dividend. Paragraph 15A further provides that an entity shall measure a noncurrent asset classified for distribution to owners at the lower of carrying amount and fair value less cost to distribute. Accordingly, if the fair value less cost to distribute is lower than the carrying amount of the asset at the end of the reporting period, the difference is accounted for as impairment loss.

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However, if the fair value is lower than the par or stated value, the par or stated value is capitalized. If the fair value is higher than par or stated value, the difference is credited to share premium from stock dividend. 8.

What is a stock dividend? The IAS term for stock dividend is "bonus issue". Stock dividend is distribution of the earnings of the entity in the

May treasury shares be declared as dividend? Under Philippine GAAP, treasury shares may be reissued as dividends in which case the cost of the shares shall be charged to retained earnings. The declaration of treasury shares as dividend is termed as property dividend under the Corporation Code. However, the authors believe that such declaration shall be accounted for as stock dividend because the entity's obligation is not to convey noncash asset but to reissue its own share capital, and therefore no accounting liability arises. Under PAS 32, treasury shares are a component of shareholders' equity and not a financial asset. This is an example of economic substance of a transaction prevailing over the legal form.

Explain the measurement of "property dividend payable". IFRIC 17, paragraph 11, provides that an entity shall measure a liability to distribute noncash asset as a dividend to its owners at the fair value of the asset to be distributed. Paragraph 12 provides that if an entity gives its owners a choice of receiving either a noncash asset or a cash alternative, the entity shall estimate the dividend payable by considering both the fair value of each alternative and the associated probability of owners selecting each alternative. Paragraph 13 further provides that at the end of each reporting period and at the date of settlement, the entity shall review and adjust the carrying amount of the dividend payable with any change recognized in equity as adjustment to the amount of distribution. This simply means that the dividend payable is initially recognized at fair value of the noncash asset on date of declaration and is increased or decreased as a result of the change in fair value of the asset at year-end and date of settlement. The offsetting debit or credit is through equity or directly retained earnings. Paragraph 14 provides further that when an entity settles the dividend payable, the difference between the carrying amount of the dividend payable and the carrying amount of the noncash asset distributed shall be recognized in profit or loss.

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2. If the stock dividend is less than 20% or small stock dividend, the fair value of the share on the date of declaration is capitalized.

Explain "property dividends". Property dividends or dividends in kind are distribution of earnings of the entity to the shareholders in the form of noncash assets. The accounting for property dividend is covered by IFRIC 17 as promulgated by the International Financial Reporting Interpretations Committee. Property dividends are considered as "distribution of noncash assets to owners". There are two accounting issues with respect to property dividends, namely: 1. Measurement of the property dividend payable. 2. Measurement of the noncash asset to be distributed as property dividend.

When stock dividends are declared, what amount of retained earnings should be capitalized or what amount should be debited to retained earnings?

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Explain the treatment when shareholders may elect to receive cash in lieu of stock dividend. When shareholders may elect to receive cash in hell of stock dividend, the amount to be charged to retained earnings shall be equivalent to the optional cash dividend.

10. Explain the treatment of stock dividends declared by closely held entities. In closely held entities, if stock dividends are declared, retained earnings shall be capitalized only to the extent of par value or stated value of the shares. 11. Explain the treatment of stock dividends on proposed increase in authorized share capital. In certain cases, stock dividends are declared on the basis of a proposed increase in authorized share capital, the application for which has been filed but not yet approved by SEC at the end of reporting period. The proposed increase and such dividend declaration generally shall not be reflected in the statement of financial position prior to SEC approval. However, these matters shall be disclosed in the notes to financial statements. If the proposed increase in authorized share capital is approved by SEC after the end of reporting period and the stock dividends are subsequently effected before the issuance of statements, the new authorized share capital may be presented. Moreover, the stock dividend may be shown as part of issued share capital. However, disclosure is necessary in such a case. 12. What is a liquidating dividend. Under what circumstances can liquidating dividend be legally paid? Liquidating dividend is a distribution or return of capital to shareholders. This type of dividend can legally be paid under the following circumstances: a. When the entity is undertaking a complete dissolution and liquidation. b. When the entity is engaged in the exploitation of natural resources.

B. Date of payment C. Date of declaration D. An entry is made on all of these dates

13. May dividends be considered as an expense? PAS 32, paragraph 35, provides that distributions to holders of an equity instrument shaU be debited directly to equity. In other words, dividends out of earnings are charged to retained earnings. However, Paragraph 36 of PAS 32 provides that distributions to holders of an equity instrument classified as financial liability are recognized in same way as interest expense on a bond payable. Paragraph 40 further provides that dividends classified as an expense may be presented in the income statement either with interest on other liabilities or as a separate line item. An example of an equity instrument classified as financial liability is a "redeemable preference share with mandatory redemption". 14. Explain "rights issue". Rights issue is granted to existing shareholders to enable them to acquire new shares at a specified price during a specified period. The Philippine term for rights issue is "stock right". Whenever the share capital of a corporation is increased and new shares are issued, the new issue must be offered first to the existing shareholders in proportion to their shareholdings before subscriptions are received from the J general public. This is the legal right of shareholders which is called the right of preemption. In the accounting parlance, the preemptive right is called stock right or right issue. Share warrant represents the certificate or instrument] evidencing ownership over the right issue.

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15. Explain the accounting for rights issue. No entry is required when share warrants are issued to existing shareholders because these warrants are issued usually without consideration. The entity only needs to make a memorandum to indicate the number of rights issued to shareholders and the number of shares that can be purchased through the exercise of the rights. The subsequent issuance of new shares through the exercise of stock rights is recorded normally by debiting cash and crediting share capital and share premium, if any. 16. Explain the issuance of preference shares with share warrants. When issuing preference shares, share warrants may be included in the issuance as a "sweetener" to make the preference shares more attractive to the prospective investors. When share warrants are issued together with preference shares, there is actually a sale of two securities - the preference shares and share warrants. Thus, the consideration received shall be allocated between the preference shares and the share warrants on the basis of their market value. MCQ - Theory Basic concepts 1. Which of the following is most likely to be found in corporate laws regarding payment of dividends? A. Dividends may be paid from legal capital. B. Legal capital is available for any type of dividend. C. Capital from donated asset is available for dividends. S&S 19e* D. Retained earnings are available for dividends unless restricted by contract or by statute. Significant dates 2. Nonstock dividends shall be recognized as liabilities on the A. Date of declaration C. Date of record B. Date of payment D. Date of issuing check 3.

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Valix 2012

The "actual total amount" of a cash dividend to be paid is determined on the date of A. Record B. Payment C. Declaration D. Declaration or record, whichever is earlier K, W & W An entry is not made on the A. Date of record

An entity declared a cash dividend on a certain date, payable on another date. Retained earnings would A. Increase on the date of declaration B. Decrease on the date of payment C. Not be affected on the date of payment D. Not be affected on the date of declaration TOA © 2013

Cash dividend 6. Cash dividends are paid on the basis of the number of shares A. Issued B. Authorized C. Outstanding D. Outstanding less the number of treasury shares 7.

K, W & W

K,W&W

The liability to pay a dividend shall be recognized when the dividend is appropriately authorized and is no longer at the discretion at the entity, which is the date I. When declaration of the dividend by management or the board of directors is approved by the relevant authority, for example, the shareholders, if the jurisdiction requires such approval. II. When the dividend is declared by management or the board of directors if the jurisdiction does not require further approval. A. I only C. Either I or II B. II only D. Neither I nor II Valix 2012

Property dividends 8. An entity shall measure a noncurrent asset classified as held for distribution to owners at A. Carrying amount B. Fair value less cost to distribute C. Lower of carrying amount and fair value less cost to distribute D. Higher of carrying amount and fair value less cost to distribute Valix 2012 9.

An entity shall measure a liability to distribute noncash asset as dividend to its owners at the A. Fair value of the asset distributed B. Carrying amount of the asset distributed C. Either the carrying amount or fair value of the asset distributed D. Neither the carrying amount nor fair value of the asset distributed Valix 2012

10. An entity shall review and adjust the carrying amount of the dividend payable at the end of each reporting period and at the date of settlement with any change in the carrying amount of the dividend payable recognized A. In profit or loss. B. As adjustment of equity reserve. C. As component of other comprehensive income. D. In equity as adjustment to the amount of distribution. Valix 2012 11. When an entity settles the dividend payable, it shall recognize the difference between the carrying amount of the asset distributed and the carrying amount of the dividend payable in C. Profit or loss A. Equity B. Other comprehensive income D. Retained earnings Valix 2012 12. Which of the following statements about property dividends is not true? A. A property dividend is also called a dividend in kind. B. A property dividend is usually in the form of securities of other entities. C. The accounting for a property dividend should be based on the carrying amount of the noncash asset transferred. D. All of these statements are true. K,W&W

Stock dividends & stock split Share dividend vs. share split 13. Unlike a share split, a stock dividend requires a formal journal entry in the accounting records because A. Stock dividends are payable on the date declared. B. Stock dividends increase the shareholders' equity in the issuing entity. C. Stock dividends represent a transfer from retained earnings to share capital. Valix 2012 D. Stock dividends increase the relative book value of an individual's shareholdings. 14. If the issuing entity has only one class of share capital, a transfer from retained earnings to share capital equal to the fair value of the shares issued is ordinarily a characteristic of A. Share split but not a share dividend B. Share dividend but not a share split C. Either a share dividend or share split D. Neither a share dividend nor share split RPCPA 0592 Stock split 15. It is defined as the issuance by an entity of its own ordinary shares to its ordinary shareholders without consideration and under conditions indicating that such action is prompted mainly by a desire to increase the number of shares outstanding for the purpose of effecting a reduction in their unit market price. A. Rights issue C. Share option B. Share appreciation right D. Share split FA 2 © 2014 16. How would a share split in which the par value per share decreases in proportion to the number of additional shares issued affect each of the following? Wiley 2011 A. B. C. D. Share premium Increase No effect No effect Increase Retained earnings No effect No effect Decrease Decrease 17. How would a share split affect each of the following? Valix 2012 A. B. Asset Increase No effect Shareholders’ equity Increase No effect Share dividend 18. If an entity wishes to "capitalize" retained earnings, it may issue A. Cash dividend C. Property dividend B. Liquidating dividend D. Share dividend

C. No effect Increase

D. Increase No effect

KW&W 1e

Treasury share issued as stock dividend 19. Treasury shares may be reissued as dividends, in which case what amount shall be charged to retained earnings? A. Cost of the treasury shares B. Par value of the treasury shares C. Fair value of the treasury shares on the date of issuance D. Fair value of the treasury shares on the date of declaration Valix 2012 Closely held entities 20. In closely held entities, if stock dividends are declared, retained earnings shall be capitalized at A. Book value C. Fair value on date of issue D. Par or stated value Valix 2012 B. Fair value on date of declaration Small stock dividend 21. If the stock dividend is less than 20%, how much of the retained earnings shall be capitalized? A. Par value of the shares B. Fair value of the shares on the date of record C. Fair value of the shares on the date of issuance D. Fair value of the shares on the date of declaration Valix 2012

22. The issuer shall directly charge retained earnings for the fair value of the shares issued in C. Ten percent share dividend A. Share appreciation right B. Share options D. Two for one share split 23. The issuer should charge retained earnings for the fair value of shares issued in a A. 1 for 5 stock dividend C. 2 for 1 share split B. 1 for 8 stock dividend D. 4 for 1 share split RPCPA 0591 Large stock dividend 24. The issuer shall directly charge retained earnings for the par value of shares issued in A. 1 for 5 share dividend C. 2 for 1 share split B. 1 for 8 share dividend D. 4 for 1 share split FA 2 © 2014 25. An entity issued what is called a "20% stock dividend". At what amount per share should retained earnings be reduced for the transaction? A. Fair value at the date of issuance C. Par value B. Fair value at the declaration D. Zero Valix 2012 26. The issuer shall directly charge retained earnings for the par value of the shares issued in C. Twenty percent stock dividend A. Share appreciation right B. Share options D. Two for one share split Valix 2012 Undistributed stock dividends 27. Undistributed stock dividends shall be reported as A. A current liability B. A note to financial statements C. A reduction in total shareholders' equity D. An addition to share capital outstanding Effect of transactions 28. When a stock dividend is declared and issued A. The current ratio increases. B. Total shareholders' equity decreases. C. The amount of working capital decreases. D. Total shareholders' equity does not change.

S&S 19e

Valix 2012

29. How would the declaration and subsequent issuance of a 10% share dividend by the issuer affect each of the following when the fair value of the shares exceeds the par value of the shares? Wiley 2011* A. B. C. D. Share capital Increase Increase No effect No effect Share premium Increase No effect Increase No effect 30. The effect of recording a 100% stock dividend would be to A. Decrease the current ratio, decrease working capital and decrease book value per share. B. Leave inventory turnover unaffected, increase earnings per share and increase book value per share. C. Leave working capital unaffected, decrease earnings per share and decrease book value per share. D. Leave working capital unaffected, decrease earnings per share and decrease the debt to equity ratio. Valix 2012 31. How would retained earnings be affected by the declaration of each of the following? Wiley 2011 A. B. C. D. Stock dividend Decrease Decrease No effect No effect Share split Decrease No effect Decrease No effect Comprehensive 32. In certain cases, stock dividends are declared on the basis of a proposed increase in authorized share capital, the application for which has been filed but not yet approved by the SEC at the reporting date. Under these

circumstances, which may not be done? A. These matters shall be disclosed in the notes to financial statements. B. The proposed increase and such dividend declaration generally shall not be reflected i...