In 2016, there are no declaration of dividends due to the company’s policy that there should be at least

60:160 ratio of retained earnings over total shareholder’s equity. The company decided that to address
difficulty of declaring dividends and to prevent future loss of inventors because there is still no
declaration of dividends since 2016, finally in 2019, the entity reduced the requirement by 7.5% in
retained earnings and declare P3,000,000 dividends when it meets the policy accordingly.

Details of shareholder’s equity after adjustment of policy:

12% Preference share capital, P150 par, cumulative and nonparticipating P1,200,000
10% Preference share capital, P100 par, noncumulative and participating 3,400,000
Ordinary share capital, P90 par 5,400,000
Retained Earnings 5,000,000

Requirement: Compute for the dividends payable (if it meets the policy) to each class of shareholders.

Solution:

Old policy: 60/160 ratio or 37.5% in retained earnings

New policy: 37.5% - 7.5% = 30% in retained earnings

5,000,000 RE over 15,000,000 SHE = 33.3%

Total dividends declared P3,000,000

Allocation:

1. (1.2M*12%*4yrs) 576,000
2. (3.4M*10%*1yr) 340,000
3. (5.4M*10%) 540,000
Excess
2. (1544,000*3.4M/8.8M) 596,545
3. (1544,000*5.4M/8.8M) 947,455

Total dividends

12% Preference shares 576,000

10% Preference shares 936,545
Ordinary shares 1,487,455