Section A

During the year ended 31 December 20X9, a limited company paid an interim dividend of $20,000. On 15 January 20Y0, the directors proposed a final dividend of $30,000 for the year ended 31 December 20X9.

How should these dividends be treated in the financial statements for the year ended 31 December 20X9?

Answer options:

Deduct $50,000 from retained earnings in the statement of changes in equity.

Deduct $20,000 from retained earnings in the statement of changes in equity; disclose the $30,000 in the notes.

Charge $20,000 as an expense in the statement of profit or loss.

Recognize a liability of $30,000 in the statement of financial position.

How to approach this question

Remember that dividends are distributions, not expenses. Also, dividends proposed after the year-end do not meet the definition of a liability at the year-end.

Full Answer

B.Deduct $20,000 from retained earnings in the statement of changes in equity; disclose the $30,000 in the notes.✓ Correct

Dividends paid during the year ($20,000) are recognized as a deduction from retained earnings in the Statement of Changes in Equity. Dividends proposed after the reporting date ($30,000) are not recognized as a liability at the reporting date (IAS 10). They are only disclosed in the notes.

Common mistakes

Treating dividends as an expense in the P&L, or accruing for proposed dividends.

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