Dividend | Cash Dividend | Stock Dividend | Small and Large Dividends

 

 

 

Dividend | Cash Dividend | Stock Dividend  

Dividends

A Limited Liability Company (LLC) or Limited Company establishes on the basic of common stocks.

When the company needs more capital, it issues preferred stocks.

The company has to pay some profit percentage on pro rata to its stockholders (shareholders).

This distributed profit percentage is known as dividends.

 

Accumulated profit is transferred to retained earnings.

The company pays dividends from the retained earnings.

Dividends are NOT expenses; therefore, they are not shown in the income statement.

Dividends are recorded or shown in retained earnings or profit and loss appropriation account.

 

Generally, the company pays dividends in cash but sometimes it pays in the form stock (share).

When the company pays dividends in stocks, it is known as stock dividends.

 

Types of dividends

There are two types of dividends; they are:

Cash dividends

Stock dividends

 

 

Cash Dividends

Dividend is the reward of investment in shares or stocks.

Cash dividends (usually referred to as dividends) are a distribution of the corporation’s net income.

Generally, dividend is paid from profits earned by the company.

There are two types of cash dividend; they are interim dividend and final dividend.

Dividends are not expenses for the company; they will not appear in the income statements.

They are distributed from profit; so, they are recorded in retained earnings.

 

The company never distributes entire profits to its stockholders as dividend.

Company transfers profits to general reserve, capital reserve, sinking fund, dividend equalization fund etc.

New established or growing company may pay no dividends at all.

 

Before distributing cash dividend to its stockholders, the company’s board of directors must declare a dividend.

When the board declares dividend date, it is known as the declaration date.

On this date, the liability for the dividend is created.

 

Legally, the company must have a credit balance of retained earnings to declare cash dividend.

Practically, the company must have cash balance to pay the dividend.

There must be remaining cash balance to meet payment of current liabilities and some reserves.

 

Time lag

The company first declares dividends at its annual general meeting (AGM).

Then, the company fixes dividends payable date.

Finally, the company pays dividends in certain date.

 

Here, time lags are:

Declaration date (suppose 20^th March) = approved at the AGM

Recording date (suppose 5^th April) = recording in the shareholders register

Payment date (suppose 15^th April) = payment made to shareholders

 

Journal Entry

In the book of ABC Company Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
Mar 20	Declaration of dividend
	Retained earnings  account	Dr		xxxx
	To Dividend payable account				xxxx
	(Being: BOD declared dividend on…….)
Apr 5	Recording date
	No journal entry
Apr 15	Dividend paid
	Dividend payable account	Dr		xxxx
	To Bank account				xxxx
	(Being: dividend paid in cash)

 

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country 

PROBLEM: 6A

The board of directors of EP Company Ltd approves dividend $2 per share on 20^th March. The company has 6,000 issued and outstanding shares of $10 par value. The company has sufficient balance in retained earnings statement. Payment made to stockholders on 15^th April.

Required: Journal entries

[Answer: Dividend = $12,000]

SOLUTION

Journal Entries

In the book of EP Company Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
Mar 20	Declaration of dividend
	Retained earnings  account	Dr		12,000
	To Dividend payable account				12,000
	(Being: BOD declared dividend on 6,000 stocks @ $2)
	Dividend paid
Apr 15	Dividend payable account	Dr		12,000
	To Bank account				12,000
	(Being: dividend paid in cash)

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country 

PROBLEM: 6B

The board of directors of KP Company Ltd approves 22% dividend on 20^th March. The company has 6,000 issued and outstanding shares of $10 par value. The company has sufficient balance in retained earnings statement. Payment made to stockholders on 15^th April.

Required: Journal entries

[Answer: Dividend = $13,200]

SOLUTION

Given and working note:

Dividend = 6,000 shares x $10 per share x 22%       = $13,200

 

Journal Entries

In the book of KP Company Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
Mar 20	Declaration of dividend
	Retained earnings  account	Dr		13,200
	To Dividend payable account				13,200
	(Being: BOD declared dividend)
	Dividend paid
Apr 15	Dividend payable account	Dr		13,200
	To Bank account				13,200
	(Being: dividend paid in cash)

 

 

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Dividends to Preferred Stocks

The company issues common stocks and preferred stocks.

The persons who own preferred stocks, they are known as preferred stockholders.

Preferred stockholders have prior rights on dividends.

Dividends rate is prefixed on preferred stocks.

 

There are 8 types of preferred stocks.

Out of them, cumulative and participating preferred stocks effect more on dividends.

Cumulative preferred stockholders will receive arrears dividends.

Participating preferred stockholders will get extra or surplus dividend.

 

 

PROBLEM: 6C

The equity section of balance sheet of B&B Company Ltd in December end 2020 appeared as follows:

Liabilities	Amount $
Common stock of $10 par: 10,000 stocks issued and outstanding	1,00,000
8% Preferred stocks of $100 par: 2,000 stocks issued and outstanding	2,00,000
Additional paid in capital	3,00,000
Retained earnings	5,00,000
Total stockholders’ equity	11,00,000

 

The company has declared a total cash dividend of $160,000 in December end 2020. It could not pay dividend for 2 years prior to the year 2020. Assuming that the preferred stocks are cumulative and participating.

You are required to distribute the dividend to both the common and preferred stock and also pass the journal entry to record the declaration and payment of cash dividend. The dividend was paid on 1^st January 2021.

Also calculate the dividend per share for both the stocks.

[Answer: Total dividends = $117,333 and $42,667;

Dividend per share = $58.67 and $4.27]

SOLUTION

Preferred stock is cumulative and participating

Cumulative preferred stockholders will receive arrears dividend (here 2 years arrears).

Participating preferred stockholders will get extra surplus dividend.

Dividend declared in December end viz 1 year

 

Preferred stocks		Common stocks
Dividend amount for preferred stocks		Dividend amount for common stocks
= $200,000 x 8% x 3 years		= $1,00,000 x 8%
= $48,000		= $8,000
Remaining dividend	= $160,000 – $48,000 – $8,000
	= $104,000 is distributed in par value ratio
Stock ratio = 2,00,000 : 1,00,000 or 2: 1 or 1: 2
Again,
$104,000 x 2/3 = 69,333
$104,000 x 1/3 = 34,667
Total dividend = 48,000 + 69,333 = $117,333		Total dividend = 8,000 + 34,667 = $42,667
Now,
Dividend per share of preferred stockholders		Dividend per share of common stockholders
= Dividend amount ÷ No. outstanding stocks		= Dividend amount ÷ No. outstanding stocks
= $117,333 ÷ 2,000 stocks		= $42,667 ÷ 10,000 stocks
= $58.67		= $4.27

Journal Entries

Date	Particulars		LF	Amount Dr	Amount Cr
2020	Declaration of cash dividend
Dec 31	Retained earnings  account	Dr		160,000
	To Cash dividend distributable (common stocks)				117,333
	To Cash dividend distributable (preferred stocks)				42,667
	(Being: cash dividend declared)
2021	Distribution cash stock dividend
Jan 1	Cash dividend distributable (common stocks)	Dr		117,333
	Cash dividend distributable (preferred stocks)	Dr		42,667
	To Cash account				160,000
	(Being: cash dividend paid to common and preferred stocks)

 

 

 

Stock Dividend | Bonus Shares

Generally, the dividend is paid in cash.

But sometimes a company declares a stock dividend instead of a cash dividend.

Often this occurs when the company has insufficient cash but wants to keep its shareholders happy.

The major purpose of stock dividends is to benefit to the shareholders of the company by returning in wealth.

Stock dividends are also known as scrip dividends.

When a company issues a stock dividend, it distributes additional shares of stock to existing shareholders.

 

These shareholders (stockholders) do not have to pay income taxes on stock dividends when they receive them; in its place, they are taxed when the investor sells them in the future.

A stock dividend distributes shares in such a way so that after the distribution, all stockholders have the exact same percentage of ownership that they held prior to the dividend.

 

Stock dividend is distributed to the shareholders of the company on a percentage basis.

These are the payments given by the company, from their profits to their shareholders.

It is considered as a monetary benefit to its shareholders; it is given from profit earned by the company.

As per the Companies Act, stock dividends are paid to the shareholders only when the company earns enough profit at the end of the year.

 

 

Reasons for stock dividend

There are many reasons for stock dividend; out of them, some major reasons are:

(a) The company wants to conserve cash,

(b) The company does have sufficient cash to pay cash dividend,

(c) Large company that is profitable, but have little potential for growth,

(d) The company wants to increase the number of shares of stock outstanding,

(e) The company wants to move some of its retained earnings to paid-in capital,

(f) The company wants to minimize distributing the cash to its stockholders etc.

 

 

Date of dividend

Date of declaration

On this date, the board of directors approved a motion declaring that dividends should be paid.

The board action creates the liability for dividends payable.

Dividend rate on common stocks is declared at the Annual General Meeting.

 

Date of record

The boards of directors establish the date of record.

This date determines which stockholders receive dividends.

The firm’s records (the stockholders’ ledger) determine its stockholders as of the date of record.

 

Date of payment

This date indicates when the corporation will pay dividends to the stockholders.

 

 

Advantages of stock dividends

The major advantages of stock dividend are explained below:

Yielding income

Dividend is steady yielding income of the investors in the future.

For earning income through stock dividends, investors need to find good stocks for yielding profitable dividends.

 

Dividend re-investment

Dividends received from stocks can be used to re-invest in various secondary investment options.

These options are bonds, mutual fund, gold etc.

It can help expand one’s portfolio.

 

Longstanding investment

Stock dividends offer a steady and long term income.

It benefits to most investors who favour holding the stocks for a long time

It helps to reap the benefits of long-term investing.

 

 

Disadvantages of stock dividend

Price of stock

The company declares stock dividends in a shortage of cash.

In this condition, the prices of the stocks may fall in the market.

 

Dividend cut

The board of directors changes the dividend policy of the company from time to time.

When the company cuts the dividends, the share prices may fall.

Dividend cut will harm the stock or share investors.

 

Low-growth companies 

Reputed companies offer a large profit to their shareholders.

But low growth companies may not offer high returns stock investment.

 

 

Different between Stock Dividend and Bonus Shares

Bases	Stock dividend	Bonus shares
Meaning	Stock dividend is a part of company profit that the company distributes to its shareholders in the form of cash.	When a company decides to give extra shares to its existing shareholders, it is known as bonus shares.
Purpose	The purpose of stock dividends is to distribute wealth back to the shareholders of the company.	The purpose of issue of bonus shares is that of increasing the liquidity of the shares of a company.
Mode of calculation	Stock dividends are decided to be distributed to the shareholders in the form of a percentage.	Bonus shares are decided to be distributed to the shareholders in the form of a ratio.
Benefit	Stock dividend is a monetary benefit.	Bonus shares provide non-monetary benefits.
Allocation to shareholders	A company can pay the dividends to the shareholders only when the company earns substantial profits at the end of the financial year.	A company can issue bonus shares to its shareholders even when the company has incurred losses; this can be done from the accumulated reserves.

 

 

 

Types of Stock Dividend

There are two types of stock dividends; they are:

(1) Small stock dividends

(2) Large stock dividends.

 

Small stock dividends

Here, small stock dividend means dividend of small company.

Small company is to be expanded.

The company is earning profit from its business but has not well established.

Therefore, small company distributes less dividend percentage than large company. 

A small stock dividend occurs when stock dividend distribution is less than 25% of the total outstanding shares.

It is based on market par value of shares outstanding.

 

 

Large stock dividends

Here, large stock dividend means dividend of large company.

We assume large company has already established and expanded.

The company is earning good profit from its business.

Therefore, large company can distribute more dividend percentage than small company. 

A large stock dividend occurs when stock dividend distribution is more than 25% of the total outstanding shares.

It is based on the par value of shares outstanding prior to the dividend distribution.

 

 

Differences between Small Stock Dividends and Large Stock Dividends

Bases	Small Stock Dividends	Large Stock Dividends
Threshold	Less than 25% of total shares.	More than 25% of total shares.
Par or market	Dividend is calculated on market value per share.	Dividend is calculated on par value per share.
From	Dividend is issued from new shares.	Dividend is issued from retained earnings .

 

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country 

PROBLEM: 6D         Small stock dividend

MK Corporation Ltd has following extracted information:

Authorized and outstanding stock 6,000 common stock of $10 each

Additional paid in capital $5,000

Retained earnings $40,000

The board of directors declares a 15% stock dividend on the last day of the year

The market value of each share of stock on the same day was $28.

Required: (a) Journal entries; (b) Stockholders’ equity prior and post to the stock declaration;

(c) The stockholders’ equity section of balance sheet

[Answer: Dividends = $25,200

SOLUTION

Given and working note:

Stock dividend distributable	= 6,000 stocks x $28 MVPS x 15%	= $25,200	Retained earnings Dr
Stock dividend declared	= 6,000 stocks x $10 par value x 15%	= $9,000	Common stock Cr
Retained earnings	= 25,200 – 9,000	= $16,200	Additional paid in capital Cr

 

Journal Entries

In the book of MK Corporation Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
	Distributable of small stock dividend
	Retained earnings  account	Dr		25,200
	To Stock dividend distributable account				25,200
	(Being: small stock dividend distributable)
	Declaration of small stock dividend
	Stock dividend distributable account	Dr		25,200
	To Common stock account				9,000
	To Additional paid in capital account				16,200
	(Being: 900 stocks of $10 issued for dividend)

 

 

Stockholders’ equity prior and post to the stock declaration

Stockholders’ equity	Before Stock Dividend	Stock Dividend	After Stock Dividend
Common stock	60,000	9,000	69,000
Additional paid in capital	5,000	16,200	21,200
Retained earnings	40,000	(25,200)	14,800
	$105,000	Nil	$105,000

 

Extracted Balance Sheet

MK Corporation Ltd

		Amount	Amount
Shareholders’ Equity:
	Common stock	69,000
	Additional paid in capital	21,200
	Retained earnings	14,800	105,000

 

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country 

PROBLEM: 6E         Large stock dividend

MK Corporation Ltd has following extracted information:

Authorized and outstanding stock 6,000 common stock of $10 each	$60,000
Additional paid in capital	$5,000
Retained earnings	$40,000

The board of directors declares a 35% stock dividend on the last day of the year

The market value of each share of stock on the same day was $28.

Required: (a) Journal entries; (b) Stockholders’ equity prior and post to the stock declaration;

(c) The stockholders’ equity section of balance sheet;

[Answer: Dividends = $21,000]

SOLUTION

Given and working note:

Stock dividend declared	= 6,000 stocks x $10 par value x 35%	= $21,000	Common stock Cr
Retained earnings	= $40,000 – $21,000	= $19,000	Retained earnings Cr balance

 

Journal Entries

In the book of MK Corporation Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
	Declaration of large stock dividend
	Retained earnings  account	Dr		21,000
	To Common stock dividend account				21,000
	(Being: large stock dividend declared)
	Distribution of large stock dividend
	Common stock dividend account	Dr		21,000
	To Common stock account				21,000
	(Being: 2,100 stocks of $10 issued for dividend)

 

 

Stockholders’ equity prior and post to the stock declaration

Stockholders’ equity	Before Stock Dividend	Stock Dividend	After Stock Dividend
Common stock	60,000	21,000	81,000
Additional paid in capital	5,000	0	5,000
Retained earnings	40,000	(21,000)	19,000
	$105,000	Nil	$105,000

 

Extracted Balance Sheet

MK Corporation Ltd

		Amount	Amount
Shareholders’ Equity:
	Common stock	81,000
	Additional paid in capital	5,000
	Retained earnings	19,000	105,000

 

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country 

PROBLEM: 6F                     Small and large stock dividend

JK Corporation Ltd has following extracted information:

10,000 common stocks of $10 par value outstanding.

The market price per share is $18 on the date.

Required: Stock dividend if:

(a) The company issued 14% small stock dividend

(b) The company issued 35% large stock dividend

[Answer: Dividends = $25,200]

SOLUTION

Given and working note:

Stock dividend distributable	= 10,000 stocks x $18 MVPS x 14%	= $25,200	Retained earnings Dr
Stock dividend declared	= 10,000 stocks x $10 par value x 14%	= $14,000	Common stock Cr
Retained earnings	= 25,200 – 14,000	= $11,200	Additional paid in capital Cr

 

Given and working note:

Stock dividend declared	= 10,000 stocks x $10 par value x 35%	= $35,000	Common stock
Retained earnings			Retained earnings

 

 

Journal Entries

In the book of JK Corporation Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
	Distributable of small stock dividend
	Retained earnings  account	Dr		25,200
	To Stock dividend distributable				25,200
	(Being: small stock dividend distributable)
	Declaration of small stock dividend
	Stock dividend distributable account	Dr		25,200
	To Common stock				14,000
	To Additional paid in capital account				11,200
	(Being: 1,400 stocks of $10 issued for dividend)

 

 

Journal Entries

In the book of JK Corporation Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
	Distributable of large stock dividend
	Retained earnings  account	Dr		35,000
	To Stock dividend distributable				35,000
	(Being: large stock dividend distributed)
	Declaration of large stock dividend
	Stock dividend distributable	Dr		35,000
	To Common stock account				35,000
	(Being: 3,500 stocks of $10 issued for dividend)

 

 

#####

PROBLEMS  AND  ANSWERS  OF  CASH  DIVIDENDS   &  STOCK  DIVIDENDS

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country 

PROBLEM: 6A

The board of directors of AM Company Ltd approves dividend $4 per share on 20^th March. The company has 15,500 issued and outstanding shares of $10 par value. The company has sufficient balance in retained earnings statement. Payment made to stockholders on 15^th April.

Required: Journal entries

[Answer: Dividend = $62,000]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country 

PROBLEM: 6B 

The stockholders’ equity section of balance sheet of Birat Company Ltd on 31^st December 2020 appeared as follows:

Details	Amount $
Common stock of $10 par: 40,000 stocks issued and outstanding	4,00,000
8% Preferred stock of $100 par: 2,000 stocks issued and outstanding	2,00,000
Additional paid in capital	5,00,000
Total contributed capital	11,00,000
Retained earnings	9,00,000
Total stockholders’ equity	20,00,000

 

The footnotes to the financial statements indicate that dividends were not declared and paid for 2018 and 2019. The company wants to declare a dividend of $118,000 for 2020.

Required: Determine the total and the per share amounts that should be declared to the preferred and common stockholders under the following assumptions:

The preferred stock is cumulative and participating on the basis of the proportion of the total par values of the preferred and common stock.

[Answer: Total dividends = $60,667 and $57,333;

Dividend per share = $30.33 and $1.43]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country 

PROBLEM: 6C                     Small stock dividend

EP Corporation Ltd has following extracted information:

	Amount $
Authorized and outstanding stock 6,000 common stock of $10 each	60,000
Additional paid in capital	44,000
Retained earnings	51,000

The board of directors declares a 12% stock dividend on the last day of the year

The market value of each share of stock on the same day was $25.

Required: (a) Journal entries; (b) Stockholders’ equity prior and post to the stock declaration;

(c) The stockholders’ equity section of balance sheet

[Answer: Dividends = $18,000; Premium = $10,800

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country 

PROBLEM: 6D                     Large stock dividend

MK Corporation Ltd has following extracted information:

Authorized and outstanding stock 6,000 common stock of $10 each	$60,000
Additional paid in capital	$25,500
Retained earnings	$40,000

The board of directors declares a 40% stock dividend on the last day of the year

The market value of each share of stock on the same day was $35.

Required: (a) Journal entries; (b) Stockholders’ equity prior and post to the stock declaration;

(c) The stockholders’ equity section of balance sheet;

[Answer: Dividends = $24,000]

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country 

PROBLEM: 6E                     Small and large stock dividend

JB Corporation Ltd had following extracted data:

100,000 common stocks of $10 par value outstanding.

The market price per share is $200 on the date.

Required: Stock dividend if:

(a) The company issued 10% small stock dividend

(b) The company issued 40% large stock dividend

[Answer: (a) RE = $20,00,000; CS = $100,000; APIC = $19,00,000;

(b) CS = $400,000]

 

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