Reporting and Interpreting
Owners’ Equity - Dividends
Chapter 11
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.
Dividends on Common Stock
Declared 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.
GENERAL JOURNAL
Date
Description
Retained earnings (-SE)
Dividends payable (+L)
Debit
Credit
XXX
XXX
Dividend Dates
Date of Record
•
Stockholders holding shares on this date will
receive the dividend. (No entry)
Date of Payment
• Record the dividend payment to stockholders.
GENERAL JOURNAL
Date
Description
Dividends payable (-L)
Cash (-A)
Debit
Credit
XXX
XXX
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 Declaration
Account Name
Retained Earnings
Dividends Payable
Debit
Credit
$250,000
$250,000
Date of Record
Account Name
No entry
Debit
Credit
Date of Payment
Account Name
Dividends Payable
Cash
Debit
Credit
$250,000
$250,000
Stock Dividends
Distribution of additional shares of stock to owners.
No change in total
stockholders’ equity.
No change in par values.
All stockholders retain same
percentage ownership.
Small
Large
Stock dividend < 20-25%
Stock dividend > 20-25%
Record at current market value of
stock.
Record at par value
of stock.
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 Dividend
Account Name
Retained Earnings (small stock
dividends you use market price)
Debit
Credit
$7,500,000
Common Stock ($0.10 par value)
$50,000
Capital in excess of Par
$7,450,000
Large Stock Dividend
Account Name
Retained Earnings (large stock
dividends use par value)
Common Stock ($0.10 par value)
Debit
Credit
$50,000
$50,000
Stock Splits
Stock splits change the par value per share,
but the total par value is unchanged.
Assume that a corporation had 3,000
shares of $2 par value common stock
outstanding before a 2–for–1 stock split.
Before
Split
Common Stock Shares
After
Split
3,000
Par Value per Share
$
2.00
Total Par Value
$ 6,000
6,000
Increase
1.00
Decrease
$ 6,000
No Change
$
E11-26 (page 591)