Dividend Transactions

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A. Dividend Dates

Declaration Date

The date on which the board of directors officially approves the dividend. The dividend becomes a liability of the the corporation at this time.

Date of Record

This date is used to establish who will receive the dividend. In other words, whoever owns the stock on this date will received the dividend. Stock sells ex-dividend after this date.

Date of Payment

The date on which the dividend is disbursed to the date or record shareholders. Dividends are always based on the number of shares outstanding. Dividends are not paid on Treasury Stock.

B. Cash Dividends With Only Common Stock

  Example:

  On December 1, 2005 ABC Inc. declares a dividend of $2 per
  share.  The dividend is payable on December 21 to
  stockholders of record on December 10.  There are 10,000
  shares of stock outstanding.

                                            Debit    Credit
                                           -------  --------
  12/1   Retained Earnings                  20,000
            Dividends Payable                        20,000

C. Cash Dividends with Both Preferred and Common Stock

An additional issue arises when a corporation has issued both preferred and common stock. In this situation, the dividends declared must be allocated between the common stock and the preferred stock. The basic rule is that preferred stockholders receive up to the specified dividend first, with the remaining amount (if any) being given to common stockholders.

  Example:

  A corporation has the following shares outstanding:

     Preferred Stock (6%) 10,000 shares, $10 par  $100,000 at par

     Common stock 200,000 shares at $1 par        $200,000 at par

  The yearly preferred dividend is calculated as
     $100,000 x 6% = $6,000

  Thus, the preferred stockholders would receive up to the first
  $6,000 in dividends and common stockholders would receive any
  dividends beyond $6,000.

  The preferred stock may also have a cumulative feature.  The
  cumulative feature would mean that in any year in which the
  preferred stockholders did not receive their full dividend
  ($6,000 in the above example), any deficiency would have to be
  made up before common stockholders could receive a dividend.

  For example, in year 1 a $4,000 dividend was declared.  In year
  2 a $20,000 dividend was declared.  The yearly preferred dividend
  is $6,000 and the preferred stock is cumulative.

     In year 1, the preferred stockholders would receive the full
     $4,000 and the common stockholders would not receive anything.
     Also, the corporation must make up the deficiency (dividends
     in arrears) in future years before the common stockholders can
     receive a dividend.

     In year 2, the preferred stockholders would receive $8,000
     (the $2,000 dividends in arrears and $6,000 for the current
     year).  The common stockholders would receive the remaining
     $12,000.  Note that preferred stock could also be participating
     meaning that after common stockholders receive a certain
     stated amount of dividend, preferred stockholders could receive
     dividends beyond their initial distribution.

D. Stock Dividends

A stock dividend occurs when a corporation gives stockholders additional shares of stock as a dividend instead of cash. The impact of a stock dividend is that the corporation transfers retained earnings to contributed capital. The amount transferred is equal to the market value of the shares issued. There is no impact on total assets, total liabilities, or total stockholders' equity.

  Example:

     ABC Inc. has 10,000 shares of stock outstanding with a par value of
     $1 per share.  On December 1, ABC declares a 10% stock dividend to be
     distributed on December 21 to stockholders of record on December 10.
     The market price of the stock on December 1 (the declaration date) is
     $5 per share.

     The dividend distributed to the stockholders will be 1,000 shares of
     stock (10,000 shares x 10%), so the recorded value of the dividend is
     $5,000 (1,000 shares x $5 market price per share).  The entries to
     record the dividend would be as follows:

                                                Debit    Credit
                                               -------  --------
      12/1   Retained Earnings                  5,000
                Stock Dividends Distributable             1,000
                Paid-in-Capital in Excess of
                   Par                                    4,000

      12/21  Stock Dividends Distributable      1,000
                Common Stock                              1,000

      Note that "Stock Dividends Distributable" is not a liability.  It
      is actually a component of stockholders equity.  This is
      in contrast to dividends payable for cash and property dividends.
      Dividends payable is a liability.

E. Stock Splits

When a corporation want to decrease the market price per share for their stock (i.e., possibly to make it more affordable on a per share basis), they can issue a stock split. For example, if a stock is currently selling for $100 per share, a 2-for-1 stock split could be used to reduce the price per share. In this case, each stockholder would receive 2 new shares of stock for each share they turn in. Assuming that the market does not adjust the price for other changes, each old share worth $100 would now be 2 new shares worth $50 each.

Under a 2-for-1 stock split, the number of shares outstanding would double and the par value per share would be cut in half. There is no journal entry necessary as a result of a stock split. However, shareholder records are updated for the increased number of shares.