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QUESTION 21-1
ANSWER 21-1
In this connection, three dates are important in accounting for dividends, namely:
1. Date of Declaration is the date on which the payment of dividends is approved by the
board of directors
2. Date of Record is the date on which the stock and transfer book is closed for
registration. Only those shareholders registered as of this date are entitled to receive
dividends.
PAS 18, paragraph 29, provides that “dividends shall be recognized as revenue when the
shareholder’s right to receive payment is established”.
QUESTION 21-2
1. Cash dividends
2. Property dividends
3. Liquidating dividends
4. Stock dividends
ANSWER 21-2
1. Cash dividends, as the title suggests, are in the form of cash. As a rule, such
dividends are treated as income but if the equity method is used, the same should be
credited to the investment account.
2. Property dividends or dividends in kind are dividends in the form of property or assets
other than cash.
The property may be in the form of another entity’s share, inventory, equipment and
other noncash asset.
Property dividends are normally treated as income at the fair value of the property
received.
3. Liquidating dividends represent return of investment and therefore are not income.
4. Stock dividends are in the form of the issuing entity’s own shares. The IAS term for
stock dividend is “bonus issue”.
Stock dividends may be the same as those held or different from those held. Stock
dividends are not income.
Stock dividends of the same kind are recorded only by means of a memorandum entry
on the part of the investor.
Such stock dividends do not affect the total cost of the investment but reduce the cost of
the investment per share.
QUESTION 21-3
Discuss the accounting treatment of stock dividends which are different from those
held.
ANSWER 21-3
As stated earlier, stock dividends are not income whether they are the same or different
kind.
When the stock dividends are of different kind, the procedure is to allocate the cost of
the original investment between the original shares and the “different” stock dividends
on basis of fair value.
For instance, if the original investment is ordinary share and the investor receives
preference share as stock dividend, the stock dividend is recorded by debiting
investment in preference share and crediting investment in ordinary share for the
amount allocated to the stock dividend.
Accordingly, the stock dividends of different kind reduce the total cost of the original
investment because a new investment account is set up for the stock dividends received.
QUESTION 21-4
Discuss the accounting treatment for shares received in lieu of cash dividends.
ANSWER 21-4
When cash dividends are declared and received, it is without doubt that they are
income. A problem will arise when shares are received in lieu of cash dividends declared.
It is generally accepted that shares in lieu of cash dividends are income at the fair value
of shares received.
In the absence of the fair value of the shares received, the income is equal to the cash
dividends that would have been received.
Shares received in lieu of cash dividends are recorded by debiting investment in shares
and crediting dividend income.
QUESTION 21-5
Discuss the accounting treatment for cash received in lieu of stock dividends.
ANSWER 21-5
When stock dividends are declared and received, unquestionably they are not income. A
problem will arise when cash is received in lieu of stock dividends.
In this case, the “as if” approach is followed. This means that the stock dividends are
assumed to be received and subsequently sold at the cash received. Therefore, gain or
loss may be recognized.
Under the ruling of the Bureau of Internal Revenue, all cash received, whether originally
designated as cash dividend or stock dividend is income on the part of the shareholder.
However, the “as if” approach is theoretically sound and shall be followed for accounting
purposes.
QUESTION 21-6
ANSWER 21-6
A share split up is a transaction whereby the outstanding shares are called in and
replaced by a larger number, accompanied by a reduction in the par or stated value of
each share.
A share split down is a transaction whereby the outstanding shares are called in and
replaced by a smaller number, accompanied by an increase in the par or stated value.
Share split does not affect the total cost of investment. But there is a decrease or an
increase in the cost per share because the total cost now will apply to a larger or smaller
number of shares.
Only a memorandum entry is made to record the receipt on new shares by virtue of
share split.
QUESTION-7
ANSWER-7
A stock right is inherent in every share. A shareholder receives one right for one share
owned. A stock right is valuable to an investor because the price at which the new
shares are sold is generally below the prevailing market price.
The purpose of the stock right is to enable the shareholders to preserve their equity or
proportionate interest in the corporation.
QUESTION 21-8
Explain the procedure when stock rights are accounted for separately?
ANSWER 21-8
PAS 39 and PFRS 9 do not address this accounting issue categorically. But
unquestionably, a stock right is a form of a financial asset.
Under PFRS 9, financial asset is recognized initially at fair value plus transaction costs
directly attributable to the acquisition of the financial asset.
Accordingly, stock rights as a form of financial assets are measured initially at fair
value.
In other words, a portion of the carrying amount of the original investment in equity
securities is allocated to the stock rights at an amount equal to the fair value of the
stock rights at the same time of acquisition.
The reason for such an allocation is that stock rights are independent of the original
shares from which they are derived.
When stock rights are issued, the investor is now the owner of two financial assets,
namely the original shares and the related stock rights.
Stock rights are normally classified as current assets if the rights are accounted
separately.
QUESTION 21-9
ANSWER 21-9
However, PFRS 9, paragraph 4.7, provides that if the host contract is within the scope of
PFRS 9, the classification requirements of PFRS 9 are applied to the combined host
contract in its entirety.
This simply means that if the host contract is a financial asset, the embedded
derivative is not separated.
Moreover, under PAS 39, paragraph 11, if the host contract is measured at fair value
through profit or loss, the embedded derivative is not separated.
Accordingly, the stock right as an embedded derivative is not accounted for separately
because the host contract “investment in equity instrument” is a financial asset
measeured at fair value through profit or loss.
QUESTION 21-10
ANSWER 21-10
Admittedly, this subject matter is not a well-settled issue. In fact, paragraph 11 of PAS
39 states that “this standard does not address whether an embedded derivative shall be
presented separately in the statement of financial position”.
The authors strongly believe that the approach “not accounted for separately” stands
on solid and authoritative ground.
However, let us wait and see what Financial Reporting Standard Council will say on this
accounting issue.
QUESTION 21-11
ANSWER 21-11
The theoretical or parity value is the assumed fair value of the stock right that is derived
from the market value of the share.
The formulas for the computation of the theoretical or parity value of the stock are:
1. It is the date on which the stock and transfer book of the entity is closed for
registration. Only these shareholders registered as of this date are entitled to receive
dividends.
a. Date of declaration
b. Date of record
c. Date of payment
d. Date of mailing the dividend check
2. At which of the following dates has the shareholder theoretically realized income from
dividend?
a. Income
b. Retained earnings
c. Investment account
d. Share capital
a. Dividend income
b. Return of investment
c. Partly dividend income and partly return of investment
d. If the stock dividends are received and subsequently sold at the cash received and
gain or loss is recognized
10. An investor owns 10% of the ordinary shares of an investee throughout the year.
The investee has no preference shares outstanding. The investor’s interest gives the
right to
ANSWERS 21-12
1. b 6. d
2. a 7. a
3. b 8. d
4. c 9. c
5. c 10. c