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An entity issued preference shares at a premium of ₹1,00,000 to compensate buyers for an ABOVE-market dividend in later periods. Identify the EPS treatment over the dividend-free period.
ARecognise in OCI
BIgnore the premium
CAmortise the premium to retained earnings using EIR and ADD it back to profit attributable to ordinary equity holders for EPS (the premium represents a reverse 'pre-paid' dividend benefit to ordinary holders)
DAmortise as preference dividend deduction
Answer & Solution
Correct answer: C. Amortise the premium to retained earnings using EIR and ADD it back to profit attributable to ordinary equity holders for EPS (the premium represents a reverse 'pre-paid' dividend benefit to ordinary holders)
Symmetry with the discount case (which is amortised as preference dividend DEDUCTION). Premium-issue increasing-rate preference shares mean ordinary holders effectively benefit during the low-dividend period — amortisation is ADDED to numerator. Both directions handled by the effective-interest method to retained earnings.
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