reporting and interpreting owners’ equity - dividends chapter 11 mcgraw-hill/irwin © 2009 the...
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Reporting and InterpretingOwners’ Equity - Dividends
Chapter 11
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
Dividends on Common StockDeclared by board of
directors.Not legally required.
Creates liability at declaration.
Requires sufficient Retained Earnings and
Cash.
Declaration date• Board of directors declares the dividend.• Record a liability.
Date Description Debit Credit
Retained earnings (-SE) XXX
Dividends payable (+L) XXX
GENERAL JOURNAL
Date of Record• Stockholders holding shares on this date will
receive the dividend. (No entry)
Dividend Dates
Date of Payment• Record the dividend payment to stockholders.
Date Description Debit Credit
Dividends payable (-L) XXX
Cash (-A) XXX
GENERAL JOURNAL
Record these events
• On January 15th Mike Company’s board of directors declared a $0.25 dividend for each outstanding common share to shareholders of record as of January 31. The dividend will be paid on February 15th. There are 5,000,000 shares authorized, 1,500,000 shares issued. The company has 500,000 of treasury shares.
• What gets recorded on January 15th, January 31st, and February 15th?
Date of DeclarationAccount Name Debit Credit
Retained Earnings $250,000
Dividends Payable $250,000
Date of RecordAccount Name Debit Credit
No entry
Date of PaymentAccount Name Debit Credit
Dividends Payable $250,000
Cash $250,000
Stock DividendsDistribution of additional shares of stock to owners.
No change in total stockholders’ equity.
All stockholders retain same percentage ownership.
No change in par values.
Stock dividend < 20-25%Stock dividend < 20-25%
Record at current market value of stock.
Record at current market value of stock.
SmallStock dividend > 20-25%Stock dividend > 20-25%
Record at par valueof stock.
Record at par valueof stock.
Large
Record these Stock Dividends
• Mike Company declared and issued a stock dividend of 500,000 common shares on January 15th. The shares have a par value of $0.10. At the time of the dividend the market price of the stock was $15 per share.
• Record this dividend assuming this is considered a small stock dividend.
• Record this dividend assuming this is considered a large stock dividend.
Small Stock DividendAccount Name Debit Credit
Retained Earnings (small stock dividends you use market price)
$7,500,000
Common Stock ($0.10 par value) $50,000
Capital in excess of Par $7,450,000
Large Stock DividendAccount Name Debit Credit
Retained Earnings (large stock dividends use par value)
$50,000
Common Stock ($0.10 par value) $50,000
Stock splits change the par value per share,but the total par value is unchanged.
Stock Splits
Assume that a corporation had 3,000shares of $2 par value common stock
outstanding before a 2–for–1 stock split.
Increase
Decrease
No Change
Before Split
After Split
Common Stock Shares 3,000 6,000
Par Value per Share 2.00$ 1.00$
Total Par Value 6,000$ 6,000$
E11-26 (page 591)