Dividends

Types of Dividends and Its Journal Entries

Cash Dividends

Firms distribute as cash dividends a certain percentage of annual earnings in payout rates. Four dates are crucial to accounting for cash dividends as follows:

• The date of declaration is the date a resolution to pay cash dividends to stockholders of record on a specific future date is approved by the board of directors. At that date the firm incurs a liability prompting the recognition of a short-term debt—Dividends Payable and the debit to either Retained Earnings or Cash Dividend Declared.

• The ex-dividend date is the date the stock stops selling with dividends attached. The period between the date of declaration and the ex-dividend date is used by the firm to update its stockholders’ ledger.

• The date of record is the date at which the stockholders figuring in the stockholders’ ledger are entitled to the cash dividend. No entry is required.

• The date of payment is the date at which the firm distributes the dividend checks and eliminates the dividend payable as a liability.

Case Example

Let’s assume that the Lie Dharma Corporation, on March 15, 2009, declared a cash dividend of $1 per share on 2,000,000 shares payable June 1, 2009, to all stockholders of record April 15. 

The following journal entries are required:

1. Date of declaration, March 15, 2009

[Debit]. Retained Earnings [Cash Dividend Declared] = 2,000,000

[Credit]. Dividends Payable = 2,000,000

2. Date of record, April 15, 2009

Memorandum entry that the firm will pay a dividend to all stockholders of record as of today, the date of record.

3. Date of payment, June 1, 2009

[Debit]. Dividends Payable = 2,000,000

[Credit]. Cash = 2,000,000

Note: It is appropriate to note that cash dividend declared is closed at year-end to Retained Earnings.

Property Dividends

Firms may elect to declare a “property dividend” that is payable in nonmonetary assets rather than declaring a cash dividend....