Dividends Dividend – pro rata distribution of a corporation’s retained earnings Cash Dividend – distribution of cash to shareholders. To pay it must have the following: 1. Enough retained earnings – have to have a buffer against possible future losses – usually a deficit can’t be declared 2. Enough cash – enough to pay the dividend and also to pay its bills 3. Declaration of dividends – company cannot pay dividends unless its board of directors decides to do so Three dates: 1. Declaration date – when the company’s board of directors declares the dividend 2. Record date – the date of who they are going to pay the dividend to 3. Payment date – dividend cheques are mailed and the payment is recorded. Entries On declaration date Cash Dividends – Preferred/Common Dividends Payable XXX XXX On payment date Dividends Payable Cash XXX XXX Stock Dividend Distribution of the corporation’s own share to shareholders. Dividend is paid in stock instead of cash. Ex. You own 100 of a company’s 500 common shares. The company declares a 20% stock dividend. You will receive 100*.2=20 shares. You now own more shares, but it is the same percentage. Total shares are 500*.2=100. Total 600 – you own 120 – 120/600 = 20% Why give a stock dividend? To give a dividend without giving cash, to increase the number of stock which will decrease the market price, to emphasize that some of the earnings have been permanently retained. Entries Assume RB Company has retained earnings of $1 million. On April 30, it declares a 5 percent stock dividend on its 100,000 common shares, to be distributed on May 10 to shareholders of record of April 20. The market value of its shares on April 30 is $50 per share, on April 20, the market value was $48 per share and on May 10 it is $55 per share. We us the market value at the declaration date – not the other two dates. The number of shares to be issues is 100,000*5% = 5,000. The total amount to be debited to Stock Dividends is $250,000 (5,000*50). The journal entry when declared is: Apr. 30 Stock Dividends – Common 250,000 Common Stock Dividends Distributable 250,000 To record declaration of 5% stock dividend (Common stock dividends distributable is a shareholders’ equity account) Journal entry when issued is: May 10 Common Stock Dividends Distributable 250,000 Common Shares 250,000 To record issue of 5,000 common shares in a stock dividend This has moved $250,000 from retained earnings into common stock. Before Stock Dividend Shareholders’ Equity Common Shares Retained Earnings Total Shareholders’ Equity Number of Shares After Stock Dividend 500,000 1,000,000 1,500,00 750,000 750,000 1,500,000 100,000 105,000 Stock Splits Larger than stock dividend. Purpose is to allow more people to be able to buy the stock by reducing the price. Generally market value drops in proportion to split Number of shares increased by a set proportion. A two for one split means that each shares is exchanged for two. Does not affect share capital, retained earnings, or shareholders’ equity. Only number of shares. No journal entry, just a memo describing split. If preferred shares are split and they have a stated dividend, that stated dividend must be split. Basically you are to leave shareholders in the exact same position as before, just with double the number of shares. Assume the above example RM Company instead split their stock two-for-one. Before Stock Split Shareholders’ Equity Common Shares Retained Earnings Total Shareholders’ Equity Number of Shares After Stock Split 500,000 1,000,000 1,500,00 500,000 1,000,000 1,500,000 100,000 200,000 Comparison Cash Dividend Stock Dividend Stock Split Homework E14-1,2(a), P14-1 Assets NE NE Liabilities NE NE NE Shareholders’ Equity Share Capital Retained Earnings NE + NE NE