CORPORATIONS

Dividends
 A profitable corporation may
make distributions to
stockholders in the form of
dividends.

Dividends
Dividends can be paid in forms
of cash, stock, or other
property.
 Declaring Dividends
• Suppose on May 1, Smart
Touch Learning declares a
$0.05 per share cash dividend
on 22,700 outstanding shares
of common stock (23,000
issued less 300 shares of
treasury stock. The entry on
declaration date shall be:
 Declaring Dividends
• On May 15, the date of record, no journal entry is recorded
(ironically)
• This is simply the cutoff period to determine who owns the stock,
and will, therefore, receive the cash payment.
 Payment of Dividends
• On May 30, the payment date, Smart Touch Learning shall prepare the
following journal entry:
 Payment of Dividends
• At the end of the accounting period, Smart Touch Learning will close the
Cash Dividend Account to Retained Earnings as follows:
 Cash Dividends – Preferred Shares
• The cash dividend on preferred shares is often expressed as a percentage of
the preferred stock par value, such as 6%.
• Sometimes, however, cash dividends on preferred shares are expressed as a
flat rate such as $3 per share.
• Recording is the same, but the computation of the amount depends on what
is stated in the preferred share certificate.
 Cash Dividends – Preferred Shares
• Assume that Macasaet, Inc. has 1,000 outstanding shares of 6%, $50 par
value preferred stock. The dividend is computed as follows:
 Cash Dividends – Preferred Shares
• When a company has issued both preferred and common stock, the
preferred shareholders receive their dividends first.
• The common shareholders received dividends only if the total dividend is
large enough to satisfy the preferred requirement.
• In other words, the common shareholders receive the residual – the amount
remaining after the preferred dividends are paid.
 Dividend in Arrears
• A corporation may fail to pay a dividend equal to the preferred amount if, for
example, it does not have cash to fund the dividend.
• This event is called dividend in arrears
• In other words, a preferred stock dividend is in arrears if the dividend has
not been paid for the year.
 Dividend in Arrears
• Preferred stock can either be:
• Cumulative preferred stock
• Noncumulative preferred stock
• Most preferred stock is cumulative. As a result, preferred stock is assumed to
be cumulative, unless it is specifically designated as noncumulative.
 Cumulative Preferred Stock
• Cumulative preferred shareholders must receive all dividend in arrears plus
the current year dividends before the common shareholders receive a
dividend.
 Noncumulative Preferred Stock
• If the preferred stock is noncumulative, the corporation will not have any
dividends in arrears because the corporations is not required to pay passed
dividends.
 Dividend in Arrears
• Suppose that Macasaet, Inc.’s preferred stock is cumulative and in 2018 the
business did not pay any cash dividends.
• Before paying any common dividend in 2019, Macasaet, Inc. must first pay
preferred dividends of $3,000 for 2018 and $3,000 for 2019.
 Dividend in Arrears
• Assume that on September 6,
2019, Macasaet, Inc. declares
a $50,000 total dividend. How
much of this dividend goes to
the preferred stockholders?
The allocation will be as
follows:
 Dividend in Arrears
• The accounting entry shall be:
 Dividend in Arrears
• If the preferred stock is
noncumulative, the
corporation is not required to
pay any passed dividends.
• Using our previous example,
the distribution of dividends
shall be as follows:
 Dividend in Arrears
• The preferred dividends will
lose the $3,000 from 2018
forever.
• Macasaet, Inc. would only
need to pay the 2019
preferred dividends.
 Up Next!
We initially covered the cash dividents, we’ll be learning about share dividents
in the next topic

Proceed to practice quiz, then next topic.