Dividends

Question 1

What are the 3 important dates in relation to dividends?

Answer 1

1. ) Declaration date - At this date the firm recognizes a liability and reduction in RE
2. ) Date of record - cut off date. Shareholders of record on this date will be the recipients of the dividend payments.
3. ) Payment date - date dividends actually distributed

Question 2

What types of dividends require establishing a liability?

Answer 2

Those dividends involving a distribution of assets

Question 3

Define “scrip dividend”

Answer 3

A dividend in the form of an interest bearing note payable. This happens when firm does not have the cash at date of declaration, but wants to assure shareholders it can pay

Question 4

List the entry to record a scrip dividend payment

Answer 4

DR: Scrip dividend payable
DR: Interest expense
CR: Cash

Question 5

What types of dividends are returns on Capital? (Not of Capital)

Answer 5

Cash, Property and Scrip. They are distribution of earnings, not contributed capital.

Question 6

List the journal entry to record a scrip dividend declaration

Answer 6

DR: Retained earnings

CR: Scrip dividend payable

Question 7

Define “liquidating dividends”

Answer 7

1. ) A return of capital, rather than a return on capital;

2. ) Reduces contributed capital account instead of retained earnings

Question 8

List the journal entry to record payment of property dividend.

Answer 8

DR: Dividends Payable

CR: Cash or Asset

Question 9

List the journal entry to record declaration of property dividends (assuming asset fair value exceeds book value)

Answer 9

DR: Retained Earnings (at FMV at declaration date)
DR: Asset (FMV - book value)
CR: Dividends Payable (FMV)
CR: Gain on Disposal (FMV - book value)

Question 10

List the journal entries to record cash dividend declaration and payment

Answer 10

DR: Retained Earnings (or Dividends)
CR: Dividends Payable
DR: Dividends Payable
CR: Cash

Question 11

What account does a liquidating distribution reduce?

Answer 11

Contributed Capital, it does not reduce RE. This is a return of Capital, not a return on capital. It also must be disclosed as a liquidating dividend.

Question 12

Where in the financials are dividends in arrears reported?

Answer 12

As a disclosure in the footnotes

Question 13

What is the only kind of dividend Owner’s Equity is not reduced for?

Answer 13

Stock Dividend