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10 Nov 2010
to its shareholders. Cash dividends are the most common. Stock dividends are also
declared often. Dividends may be expressed in two ways: as a dollar amount per
share, or as a percentage of the stated or par value of the shares if shares have been
issued with stated or par values. Dividends are generally reported quarterly as a
dollar amount per share.
Cash Dividends
¾ A cash dividend is a pro rata distribution of cash to shareholders. For a dividend
distribution to occur, it must have all the following: Sufficient retained earnings,
adequate cash, and a declaration of dividends. Note that dividends are not accrued;
they only become a liability when declared. The amount and timing are crucial as
large cash dividends may lead to liquidity problems and small and/or missed
dividends may lead to unhappiness among shareholders.
¾ Entries for Cash Dividends ± three dates are important for dividends: the declaration
date, the record date, and the payment date. On the declaration date, the board of
directors formally declares the cash dividend and announces it to shareholders.
Declaration of a cash dividend commits the corporation to a legal obligation. An
entry is required to recognize the decrease in retained earnings and the increase in the
current liability, Dividends Payable. The entry being DR Cash dividends, CR
Dividends Payable can be written as a DR to retained earnings directly.
On record date, ownership of the shares is determined. If ownership is transferred, so
are the rights to the dividends. On the payment date, the entry DR dividends payable,
CR cash is required to record the transaction of actually distributing cash dividends.
¾ Allocating Cash Dividends between Preferred and Common Shares - Cash dividends
must first be paid to preferred shareholders before any common shareholders are
paid. When preferred shares are cumulative, any dividends in arrears must be paid to
preferred shareholders before allocating any dividends to common shareholders.
When preferred shares are non-cumulative, only the current year¶VGLYLGHQGPXVWEH
paid to preferred shareholders before paying any dividends to common shareholders.
Stock Dividends
shares. A stock dividend results in a decrease in retained earnings and an increase in
share capital. A stock dividend results in a decrease in retained earnings and an
increase in share capital since a portion of retained earnings is transferred to legal
capital. In most cases, the fair market value is assigned to the dividend shares. Total
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