Chapter 16

Intermediate Accounting II

Otto Chang

Professor of Accounting

Accounting for Cash Dividend

• On the date of declaration Retained Earning (or Dividends Declared) XXX

Dividends Payable XXX

• On the date of payment Dividends Payable XXX

Cash XXX

Accounting for Property Dividends

• At declaration:Investment in Securities XXX

Gain on Appreciation of Securities XXX

Retained earning(Dividends Declared) XXX

Dividends Payable XXX

• At distribution:Dividends Payable XXX

Investment in Securities XXX

Accounting for Scrip Dividends

• Companies decided to pay dividends in the form of a note payable– At declaration:

Retained Earning XXX Notes Payable to Stockholders XXX

– At payment:Notes Payable to Stockholders XXXInterest Expense XXX Cash XXX

Accounting for Small Stock Dividends

• Small stock dividends (<20% -25%)– At declaration: recorded at market value

Retained Earning (or Dividends Declared) XXX

Common Stock Dividend Distributable XXX

Paid-in Capital in Excess of Par XXX

– At distribution:Common Stock Dividend Distributable XXX

Common Stock XXX

Accounting for Large Stock Dividends

• Stock dividends > 20%-25% (a split-up effected in the form of a dividend)– At declaration: recorded at par value

Retained Earning (or Dividend Declared) XXX

Common Stock Dividend Distributable XXX

– At distribution:Common Stock Dividend Distributable XXX

Common Stock XXX

Liquidating Dividends

• Companies distribute dividends when there is negative or zero retained earning (a return of contributed capital to shareholders)– At declaration:

Additional paid-in Capital XXX

Dividends Payable XXX

– At distribution:Dividends Payable XXX

Cash XXX

Stock Split

• To decrease the share price to encourage general public to own the shares

• No journal entry is required

• A memorandum note of the increase in the number of shares issued and the decrease in par value is made

• Unlike large stock dividends, the total par value of the stock remains unchanged

Dividend Preferences for Preferred stock

• Cumulative: entitled to dividends in arrears• Participating: entitled to additional

dividends after the common stockholders are paid certain minimum dividends

• Fully participating: after the preferred dividend are paid, common shares receive a “like” % of par value. The remainder of dividends is shared in proportion to par value dollars in each class of stock.

Example of Distribution: Cumulative & Fully Participation• Total Dividends Declared: $50,000 • Common stock par value: $400,000• 6% preferred stock par value: $100,000• Preferred dividends in arrears for two years Preferred CommonDividends in arrears $12,000Current year, 6% 6,000 $24,000Participating dividends, 1.6%* 1,600 6,400 Total Dividends $50,000 = $19,600 + $30,400

*1.6% = ($50,000 - $12,000 - $6,000 - $24,000)/$500,000

Appropriation of Retained Earning

• A reclassification of Retained earning for a specific purpose

• In theory, appropriated retained earning is no longer available for dividend

• Journal entry:Retained Earning XXX Appropriate Retained Earning XXX

• When the specific purpose disappear, the above entry is reversed

Financial Statement Analysis

• Rate of return on common stockholders’ equity = (Net income - Preferred dividends) / Average common stockholders’ equity

• Pay out ratio = Cash Dividends / (Net income - Preferred dividends)

• Price earning ratio = Market Price of stock / Earnings per share

• Book value per share = Common stockholders’ equity / Outstanding shares