Dividends on
Common Stock Created in 2006 By Michael Worthington Elizabeth City State University Click this button to
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Dividends
Dividends are distributions to stockholders
of some of the corporation’s earned profits
The Net Income is added into the
“Retained Earnings” account each year,
and dividends are said to be paid out of
“Retained Earnings”
Board of Directors declares (decides)
whether or not to pay dividends and
the amount of any dividends
Limited Liability
Principal Corporate Characteristic
18th Century government officials
worried that stockholders would pull
money out, let the corporation go bust,
and leave the creditors holding the bag
So they enacted laws that
placed two legal limits on
the stockholders’ ability to
withdraw money
Empty
Bag
1
Limits on the stockholders’
ability to withdraw money
#1
Dividends can only be paid when the
Retained Earnings Account has a
positive (credit) balance
In other words a corporation that
reports more losses than profits
may not legally pay dividends
#2
“Par Value” is the minimum price
for which stock may be issued
Accounting Equation
Assets = Liabilities + Owners’ Equity
Subtract “Liabilities” from both sides
Assets ­ Liabilities = Owners’ Equity
So as long as Owners’ Equity is positive,
Assets must be greater than Liabilities
Declaring Dividends
Board of Directors votes whether or not
to distribute dividends in the first place;
and on the size of dividends
Stockholders have the right to share in
any dividends that have been declared
But stockholders CANNOT legally force
Board of Directors to declare dividends
On the other hand, stockholders elect the
Board of Directors, so if the stockholders
are unhappy they can elect someone else
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Three Dividend Dates
1. Declaration Date when the Board Of
Directors declares the dividends
2. Those who own shares of stock on
the “day of record” receive a dividend
(no journal entry for day of record)
“Ex-dividends” means that the stock was
purchased AFTER the day of record,
thus the old stockholder gets the dividend
instead of the new stockholder
3. Dividends are distributed on “payment date”
Two Different Kinds of
Common Stock Dividends
1. Cash Dividends
2. Stock Dividends
Stock
Certificates
Cash Dividends
Every stockholder receives the same
amount of money per share of stock
Cash Dividends are usually paid quarterly
(every three months = four times a year)
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General Journal Entries
for Cash Dividends
1. Declaring Dividends
Debit “Dividends Account”
Credit “Dividends Payable”
No journal entry for day of record
2. Payment Date
Debit “Dividends Payable”
Credit “Cash”
3. Closing Entry
Debit “Retained Earnings”
Credit “Dividends”
Closing Entry for Cash Dividends
“Dividends Account” is closed to
“Retained Earnings” at year end
Debit “Retained Earnings”
Credit “Dividends Account”
Cash Dividends are said to be paid out
of “Retained Earnings” because the
Retained Earnings account decreases
when it is debited
Three Journal Entries
for Cash Dividends
Debit “Dividends” account
Credit “Dividends Payable”
Debit “Dividends Payable”
Credit “Cash”
Debit “Retained Earnings”
Credit “Dividends” account
“Dividends” account cancels out
“Dividends Payable” cancels out too
Net result of the journal entries:
Debit to “Retained Earnings”
Credit to “Cash”
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Stock Dividends
Issue current stockholders additional
shares of stock
Stockholders can keep the new shares
of stock, or they can sell them
After the dividend, the stockholders own
the same percentage of the corporation
as they did before the dividend, so stock
dividends have no real effect although the
psychological effect may increase price
General Journal Entries
for Stock Dividends
1. Declaring Stock Dividends
Debit “Stock Dividends Account”
Credit “Stock Dividends Distributable”
No journal entry for day of record
2. Distribution Date
Debit “Stock Dividends Payable”
Credit “Common Stock”
Credit “Paid­in Capital” for small dividends
3. Closing Entry
Debit “Retained Earnings”
Credit “Stock Dividends”
Closing Entry for Stock Dividends
“Stock Dividends Account” is
closed to “Retained Earnings”
Debit “Retained Earnings”
Credit “Stock Dividends Account”
“Capitalize” in accounting means
“to record on the balance sheet”
Stock Dividends are said to “capitalize
earnings” because Retained Earnings
decreases while the stock dividend amount
is recorded as increase in Common Stock
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Three Journal Entries for
Large Stock Dividends
Debit “Stock Dividends Account”
Credit “Stock Dividends Distributable”
Debit “Stock Dividends Distributable”
Credit “Common Stock”
Debit “Retained Earnings”
Credit “Stock Dividends Account”
“Stock Dividends Account” cancels out
“Dividends Distributable” cancels out too
Net result of the journal entries:
Debit “Retained Earnings”
Credit “Common Stock”
Economics Law of
Supply and Demand
Stock Dividends increase the supply
of stock, which decreases the price
Small stock dividends have a minor effect,
so the current market price is used for
valuation
But large stock dividends have a significant
effect on the price of stock, so par value is
used instead of the current market price
Large or Small
Stock dividends are described as a
percentage of the number of shares
of stock currently outstanding
Large stock dividends are more than
25% of the number of outstanding shares
Small stock dividends are less than
20% of the number of outstanding shares
Between 20% and 25%, accountants
have to use professional judgment
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Large or Small
Acme Corporation: $5 par common stock 30,000
shares issued, 50,000 shares authorized, with a
current market price of $15 per share
Acme’s Board of Directors declared
10% stock dividend
Click below on valuation per
share for common stock dividend
$30,000
$15
$5
Sorry, but your response is incorrect
10% is a SMALL stock dividend
market value for small stock dividends
Click here to try again
Correct!
10% is a SMALL stock dividend
market value for small stock dividends
$15 per share
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Large or Small
Acme Corporation: $5 par common stock 30,000
shares issued, 50,000 shares authorized, with a
current market price of $15 per share
Acme’s Board of Directors declared
10% stock dividend
Click below on the number of
shares in the stock dividend
30,000
5,000
3,000
Sorry, but your response is incorrect
Authorized shares have
nothing to do with the problem,
how many shares were issued?
10% of 30,000 shares = ????
Click here to try again
Correct!
10% of 30,000 shares = 3,000 shares
8
Large or Small
Acme Corporation: $5 par common stock 30,000
shares issued, 50,000 shares authorized, with a
current market price of $15 per share
Acme’s Board of Directors declared
10% stock dividend
Click below on the amount of the stock dividend
$15,000
$150,000
$45,000
Sorry, but your response is incorrect
10% of 30,000 shares = 3,000 shares
3,000 shares x $15 = ?????
Click here to try again
Correct!
10% of 30,000 shares = 3,000 shares
3,000 shares x $15 per share = $45,000
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DIVIDENDS SUMMARY
Dividend Types
Cash Dividends
(paid out of retained earnings)
Stock Dividends (capitalize earnings)
Board of Directors
Declare quarterly dividends
Cannot be forced to declare dividends
Three dividend dates
Declaration Date
Day of Record (no journal entry)
Distribution or payment date
THE END
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