6.4 Dividend

6.4.1 Dividend Definition and Date

A dividend is a distribution by a corporation to its shareholders on a pro rata basis. Dividends may be in the form of cash, property, scrip, or stock. A cash dividend is a pro rata distribution of cash to shareholders.

Three dates are important in connection with dividends:

² Declaration date: the date on which the board of directors formally declares a cash dividend and the liability is recorded.

Dr Retained earning    xxx

Cr Dividend payable     xxx

² Record date: the date that marks the time when ownership of outstanding shares is determined from the shareholders’ records maintained by the corporation. The corporation makes no journal entry on the date of record because no transaction occurs and the corporation. 

² Payment date: the date dividend cheques are mailed to the shareholders and the payment of the dividend is recorded.

Dr Dividend payable  xxx

Cr Cash            xxx

6.4.2 Cash Dividends

A cash dividend is money paid to stockholders, normally out of the corporation's current earnings or accumulated profits. Not all companies pay a dividend.  

All dividends are taxable as income to the recipients.

6.4.3 Stock Dividend  

A share dividend is a dividend in the form of extra shares. From the point of the investor, no ‘real’ dividend is received. Extra shares are issued that are given to existing shareholders. Thus, the value of the firm is spread out over an increased number of shares, thus decreasing the value per share.

Dr Retained earnings          xxx

Cr Share dividend to be issued    xxx

Cr Share premium              xxx

When the stock is distributed, the following entry is made:

Dr. Stock dividend to be issued   xxx

Cr. Common stock            xxx

【Example 1】

At the beginning of the year, ABC company had 250,000 shares of no-par-value common share outstanding. Prepare journal entries to record the following selected transactions during the year:

March 1   Declared a cash dividend of 80 cents per share, payable on Mar.21

March 21  Paid cash dividend declared on Mar.1

Aug. 10    Declared 5% share dividend, the market price of the share on this date was $40 per share

Please journalize the transaction

Answer:

March 1

Dr Retained earnings   200,000

   Cr Dividend payable   200,000

March 21

Dr. Dividend payable    200,000

Cr Cash              200,000

Aug. 10

Dr Retained earning      500,000

Cr Common stock      500,000