Example: On December 1, 2005 ABC Inc. declares a dividend of $2 per share. The dividend is payable on December 21 to stockholders of record on December 10. There are 10,000 shares of stock outstanding. Debit Credit ------- -------- 12/1 Retained Earnings 20,000 Dividends Payable 20,000
An additional issue arises when a corporation has issued both preferred and common stock. In this situation, the dividends declared must be allocated between the common stock and the preferred stock. The basic rule is that preferred stockholders receive up to the specified dividend first, with the remaining amount (if any) being given to common stockholders.
Example: A corporation has the following shares outstanding: Preferred Stock (6%) 10,000 shares, $10 par $100,000 at par Common stock 200,000 shares at $1 par $200,000 at par The yearly preferred dividend is calculated as $100,000 x 6% = $6,000 Thus, the preferred stockholders would receive up to the first $6,000 in dividends and common stockholders would receive any dividends beyond $6,000. The preferred stock may also have a cumulative feature. The cumulative feature would mean that in any year in which the preferred stockholders did not receive their full dividend ($6,000 in the above example), any deficiency would have to be made up before common stockholders could receive a dividend. For example, in year 1 a $4,000 dividend was declared. In year 2 a $20,000 dividend was declared. The yearly preferred dividend is $6,000 and the preferred stock is cumulative. In year 1, the preferred stockholders would receive the full $4,000 and the common stockholders would not receive anything. Also, the corporation must make up the deficiency (dividends in arrears) in future years before the common stockholders can receive a dividend. In year 2, the preferred stockholders would receive $8,000 (the $2,000 dividends in arrears and $6,000 for the current year). The common stockholders would receive the remaining $12,000. Note that preferred stock could also be participating meaning that after common stockholders receive a certain stated amount of dividend, preferred stockholders could receive dividends beyond their initial distribution.
A stock dividend occurs when a corporation gives stockholders additional shares of stock as a dividend instead of cash. The impact of a stock dividend is that the corporation transfers retained earnings to contributed capital. The amount transferred is equal to the market value of the shares issued. There is no impact on total assets, total liabilities, or total stockholders' equity.
Example: ABC Inc. has 10,000 shares of stock outstanding with a par value of $1 per share. On December 1, ABC declares a 10% stock dividend to be distributed on December 21 to stockholders of record on December 10. The market price of the stock on December 1 (the declaration date) is $5 per share. The dividend distributed to the stockholders will be 1,000 shares of stock (10,000 shares x 10%), so the recorded value of the dividend is $5,000 (1,000 shares x $5 market price per share). The entries to record the dividend would be as follows: Debit Credit ------- -------- 12/1 Retained Earnings 5,000 Stock Dividends Distributable 1,000 Paid-in-Capital in Excess of Par 4,000 12/21 Stock Dividends Distributable 1,000 Common Stock 1,000 Note that "Stock Dividends Distributable" is not a liability. It is actually a component of stockholders equity. This is in contrast to dividends payable for cash and property dividends. Dividends payable is a liability.
When a corporation want to decrease the market price per share for their stock (i.e., possibly to make it more affordable on a per share basis), they can issue a stock split. For example, if a stock is currently selling for $100 per share, a 2-for-1 stock split could be used to reduce the price per share. In this case, each stockholder would receive 2 new shares of stock for each share they turn in. Assuming that the market does not adjust the price for other changes, each old share worth $100 would now be 2 new shares worth $50 each.
Under a 2-for-1 stock split, the number of shares outstanding would double and the par value per share would be cut in half. There is no journal entry necessary as a result of a stock split. However, shareholder records are updated for the increased number of shares.