Connect with us

Retained Earning-2: Property and Liquidating Dividends

Published

on

Property and Liquidating Dividends are another two items which are also included on the “Retained Earning” Accounts. On this post I am going to give some case examples with Journal/entries needed for each.

 What is Property Dividends?

Advertisement

Property Dividends

Sometimes a corporation may not wish to issue a dividend in cash because it needs the cash in the business. Instead, it may issue a dividend in the form of property (usually shares of stock it owns in other corporations).

According to APB Opinion No. 29, a journal entry must first be made to raise or lower the property on the books to its fair market value. Fair market value can be determined by reference to quoted market prices or by independent appraisals.

 

Property Dividends Case-1:

On June 1, A Company declares a property dividend to be paid from its portfolio of 5,000 shares of B Company stock. On its books, these shares were recorded at their cost of $10,000. However, today their fair market value is $11,000.

 

The journal entries are:

On the date of declaration (couple of entries):

[Debit]. Investments—Securities 1,000
[Credit]. Gain on Appreciation of Securities 1,000

[Debit]. Retained Earnings 11,000
[Credit]. Property Dividend Payable 11,000

On the date of payment

[Debit]. Property Dividend Payable 11,000
[Credit]. Investments—Securities 11,000

 

If the fair market value had been less than the book value, a loss, rather than a gain, would have been recognized. If a corporation wishes to pay a cash dividend but has no cash at the moment, it may issue a special type of note payable to the stockholders promising to pay later. This is called “scrip“. If the scrip pays interest, the interest portion of the payment should be debited to Interest Expense and not be treated as part of the dividend. The interest period runs from the date of record to the date of payment.

 

Property Dividends Case-2:

On January 1, a corporation declares a scrip dividend of $300,000 payable on June 1 to stockholders of record on April 1. The scrip pays interest at 10%.

 

The journal entries are:

On the date of declaration

[Debit]. Retained Earnings 300,000
[Credit]. Notes Payable to Stockholders 300,000

On the date of payment

[Debit]. Interest Expense 5,000
[Debit]. Notes Payable to Stockholders 300,000
[Credit]. Cash 305,000

The interest computation is: 300,000 × 0.10 × 2/12 = 5,000. The interest period is from the date of record to the date of payment—2 months.

Next is “Liquidating Dividends”………

 

Liquidating Dividends

As stated earlier, most dividends are paid out of retained earnings and are simply distributions to the stockholders of the corporate earnings. Sometimes, however, a dividend may be paid out of contributed capital instead. These dividends are called “liquidating dividends” and represent a reduction of the corporate paid-in capital. This information must be disclosed in the footnotes to the financial statements.

Liquidating Dividend Case Example:

If a corporation declares a dividend of $100,000, of which $70,000 is to be considered a liquidating dividend, the journal entry is:

[Debit]. Retained Earnings 30,000
[Debit]. Additional Paid-in Capital 70,000
[Credit]. Cash Dividends Payable 100,000

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *




Are you looking for easy accounting tutorial? Established since 2007, centre-potential.ru hosts more than 1300 articles (still growing), and has helped millions accounting student, teacher, junior accountants and small business owners, worldwide.

Trending


Related pages


cost of goods sold chart of accountsasc 820describe the assumptions underlying cvp analysisrelevant costs in a make or buy decisioncreditors balance confirmation letter samplegaap fixed asset capitalization rulescpaexcel vs beckerfraudulent financial reporting definitionreceivables formulahow to journalize notes receivablecash disbursement formulatax return penalty appealauditor competenceebit eps analysis calculatoreconomic ordering quantity modelstock turnover days definitionpayroll process flow diagramjournal entry for dividend incometroubled debt restructuring accountingadvantages and disadvantages of profit maximisationvacation accrual accountingcpa reviewer in auditing problemswhat is the normal balance of salesexplain the accounting cycletally leasinghow to book accrued expensesaccounting attestationcomputation of deferred taxrelease of promissory note templatefavorable and unfavorable varianceshow to calculate break even sales in dollarsdays sales outstanding calculationdifference between igaap and us gaapthe entry to record depreciation expensejob order costing definitionhow to prepare statement of cash flows direct methodcapitalization versus expenseasc450fasb asset definitionhow to calculate ending work in process inventorylimitations of target costingaccounting for forward contracts journal entriessingle step format income statementsample accounting services engagement lettersample of confirmation letter receiving moneycheap asset labelsstockholder equity accountsstaff accountant career pathjournalizeforensic audit report templatecalculating fcffmatching principle fasbdownload peachtree 2012times interest earned ratio analysishow to reverse accrued expensesrectification of errors in accountinghow to calculate dividend rate on preferred stockhow to determine cogsreflash definitionshort term marketable securitieshow to analyze financial statements pdfdefine relevant costswhat is economic order quantity in inventory managementstatement of cash flows operating activities exampleasset revaluation reserve journal entriesforecasting and budgeting techniques9 steps in accounting cyclecapital vs finance leaseaccounting entry for prepaid expensesinternal audit interview questions and answersrevenue recognition percentage of completion methodaudit flowchart symbolscash flow coverage ratio formulahow to write a past due invoice lettercalculate contribution margin percentagedouble entry of depreciationwhat does it mean to capitalize interestproperty tax accrual accounting