Chapter 11: Dividends

Recording Transactions for Cash Dividends, Stock Dividends, and Stock Splits 1. Cash Dividends • • • Definition: Cash dividends are payments made to shareholders from a corporation’s earnings. Key Dates: o Date of Declaration: The board of directors officially announces the dividend, creating a liability. o Date of Record: The date for identifying shareholders eligible for the dividend; no entry is recorded. o Date of Payment: The corporation distributes the cash, reducing its liability and cash. Example Journal Entries: o Declaration Date (e.g., January 9): plaintext Debit Retained Earnings $5,000 Credit Dividends Payable $5,000 o Payment Date (e.g., February 1): plaintext Debit Dividends Payable $5,000 Credit Cash $5,000 2. Stock Dividends • • • • Definition: A stock dividend distributes additional shares of stock to shareholders rather than cash, transferring a portion of retained earnings to contributed capital. Reasons: Used to lower the stock price (making it more affordable) and signal management confidence. Types: o Small Stock Dividend (≤25%): Retained earnings are reduced by the market value of shares issued. o Large Stock Dividend (>25%): Retained earnings are reduced by the par or stated value of shares issued. Example Journal Entries: o Small Stock Dividend (e.g., 10% at $15/share): plaintext Debit Retained Earnings $15,000 Credit Common Stock Dividend Distributable $10,000 Credit Paid-In Capital in Excess of Par $5,000 o Large Stock Dividend (e.g., 30%): plaintext Debit Retained Earnings $30,000 Credit Common Stock Dividend Distributable $30,000 • Distribution Date (for both types): plaintext Debit Common Stock Dividend Distributable $30,000 Credit Common Stock $30,000 3. Stock Splits • • • • Definition: A stock split increases the number of shares outstanding and reduces the par or stated value per share, such as a 2-for-1 split where each existing share is divided into two new shares. Purpose: Reduces the stock price, making it more affordable and signaling positive performance expectations. Effect on Financial Statements: No journal entry is required; only a change in the par value and the number of shares is recorded. Example: o Before Split: 100,000 shares at $20 par value. o After a 2-for-1 Split: 200,000 shares at $10 par value. 4. Financial Statement Implications • • • Cash Dividends: Reduce cash and retained earnings, decreasing overall stockholders' equity. Stock Dividends: Reallocate amounts within equity, reducing retained earnings and increasing paid-in capital without affecting total equity. Stock Splits: No impact on the equity balance, but par value per share is adjusted. This summary highlights the key accounting processes and implications of each type of dividend and stock split on a corporation’s financial records and equity structure.