CORPORATION ACCOUNTING

Dividends
Two Kinds of Dividends
1. Dividends out of earnings distribution to shareholders of
corporate earnings in proportion to the number of shares held by
them; also known as return on investment.
2. Dividends out of capital a return of shareholders invested
capital (liquidating dividends); also known as return of
investment.
Special Notes
1. The power to declare dividends is vested upon the board of
directors.
2. ividends shall be paid out of unrestricted or free retained
earnings.
3. The following shares are entitled to receive dividends!
a. all issued and outstanding shares
b. all subscribed par value shares
4. The following shares are not entitled to receive dividends!
a. unissued shares
b. subscribed no par shares
c. treasury shares
5. ividends may be in the form of
a. Cash distributable in the form of cash. This is the most
common type of dividend.
b. Property payable in assets other than cash such as
investment in trading securities and merchandise
inventory.
c. Scrip consists of a written promise to pay certain
amounts at a future date. The payment normally includes
the principal amount and an interest at a speci"ed rate.
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d. Stock distributable in the form of corporations own
shares.
6. There are three dates to consider
a. Date of declaration this is the date when the board of
directors approved the resolution to distribute dividends.
The commitment to shareholders is recorded on this date.
b. Date of record this is the date when the company
determines who are entitled to receive dividends. #o entry
is required on this date. $tocks are selling dividends%on
prior to this date and are selling e&%dividends the day
following this date.
c. Date of distribtion this is the date when the dividends
are distributed to the shareholders.
A!C CORPORATION
Notice of Cash Dividends
#otice is hereby given that in a special meeting of the 'oard of
irectors of (') )orporation held on *ebruary +,- +..&- a cash
dividend of /0... per share was approved by the 'oard of irectors
payable on 1arch 02- +..& to shareholders of record as of 1arch 3-
+..&.
$ignature
Stock Dividends/Bonus Issue
1. The corporation declares stock dividends when it wishes to
declare dividends but at the same time retain the net assets of
the business.
2. *or a corporation to declare stock dividends- there should be
a. unrestricted retained earnings;
b. available original and unissued shares which may be issued
as stock dividends.
3. This type of dividend does not a4ect total assets and total
shareholders equity.
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4. 5t only involves transfer of amount from retained earnings to
contributed capital.
5. 5t does not change the percentage interest of a shareholder in
the business.
6. There are two kinds of stock dividends
a. $mall stock dividend a stock dividend representing less
than +.6 of the outstanding shares. 7etained earnings is
debited for the fair market value of the stock on the
date of declaration.
b. 8arge stock dividend a stock dividend representing +.6
or more of the outstanding shares. 7etained earnings is
debited for the par or stated value of the stock.
7. The account Stock Dividends Distribtable or Stock
Dividends Payable is credited for the par or stated value of the
shares to be distributed regardless of whether the stock dividend
is small or large.
a. This account is not a current liability because it will not be
settled through the use of current assets.
b. 5t is shown as an addition to share capital outstanding.
Pro-forma Entries Small Stock Dividend !less than "#$%
ate of 7etained earnings &&&
declaration $tock dividends distributable &&&
$hare premium % stock
dividends
&&&
Note: The share premium
account is credited for the
excess of the fair market value
over its par or stated value.
ate of record #o entry
ate of $tock dividends distributable &&&
distribution $hare capital &&&
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Pro-forma Entries &ar'e Stock Dividend ! "#$ or more%
ate of 7etained earnings &&&
declaration $tock dividends distributable &&&
ate of record #o entry
ate of $tock dividends distributable &&&
distribution $hare capital &&&
(lassroom E)ercise
$hare )apital (uthori9ed to issue +.-... shares at
/2.. par; 2.-... shares issued and outstanding
/ 2-...-...
$hare premium ,..-...
7etained earnings 3,.-...
(ssume
a. 2.6 stock dividend was declared and market value is /2,. per
share.
b. ,.6 stock dividend and market value is /2,. per share.
7equired! /repare all the necessary :ournal entries.
(ash Dividends
1. )ash dividends is dividends that is distributable in the form of
cash.
2. *or a corporation to declare cash dividends- there should be
a. free or unrestricted retained earnings
b. su;cient cash
3. )ash dividends decrease corporate assets and total
shareholders equity.
4. )ash dividends may be e&pressed as follows
a. 6 of par value
b. an amount per share
c. arbitrary amount
5. The accont Cash Dividends Payable is classi"ed as a
crrent liability#
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6. ividends for preference shares shall depend on the type of
preference share issued by the corporation. /reference shares
may be
a. C$lative entitles the holder to the receipt of previous
years unpaid dividends (dividends in arrears<passed
dividends<back dividends) before any payment can be
made to ordinary shareholders.
b. Non%c$lative entitles the holder to the receipt of
current dividends but not on the previous years unpaid
dividends.
c. Participatin& entitles the holder to the receipt of
additional dividends after holders of both preference and
ordinary shares have been paid up to the current years
dividends.
d. Non% participatin& entitles the holder to the receipt of
dividends up to the current period only. (ll e&cess
dividends are given to holders of ordinary shares.
Pro-forma Entries
ate of 7etained earnings &&&
declaration )ash dividends payable preference &&&
)ash dividends payable ordinary &&&
ate of #o entry
record
ate of )ash dividends payable preference &&&
distribution )ash dividends payable ordinary &&&
)ash &&&
(lassroom E)ercises
1. The board of directors of =>? )orporation declared on 1arch 2-
+..& a 2.6 cash dividend payable on 1ay 0.- +..& to
shareholders of record on (pril 0.- +..&. 5ssued and outstanding
shares are +.-... shares with a par value of /0. per share.
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2. (ssume the same given information in #o. 2 but the cash
dividend declared is /2. per share.
3. (') )orporation has the following shares issued and outstanding
2.6 /reference $hare )apital 2-... shares with a /+.. par value
@rdinary $hare )apital 0-... shares with a /2.. par value
The board of directors declared a cash dividend of /A.-... this
year. #o dividend was declared last year. (ssume
a. /reference is non%cumulative and non%participating
b. /reference is cumulative and non%participating
c. /reference is non%cumulative and participating
d. /reference is cumulative and participating.
7equired! Bournali9e the above transactions.
Buly +.2C
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