4 forms of dividend

Posted on October 1, 2012 by shma

When dividend is paid out of profit it is called profit dividend and when it is paid out of capital it is called liquidation. Usually there are 4 forms of dividend. a) Cash dividend: it is the common method to pay the dividend. Here the shareholders get cash in form of dividend but for this purpose the company must have adequate liquid resources. b) Scrip or bond dividend: it is the promise made by the company to the shareholders to pay them at future specific date. This form of payment is generally used in case the company doesnt have sufficient money. c) Stock dividend: here the company issue bonus share to the existing shareholders. This form of payment is also used in case the company doesnt have sufficient money. d) Property dividend: it means payment made to the shareholders in form of property rather than cash.

Types of Dividends

Overview of Dividends

A dividend is generally considered to be a cash payment to the holders of company stock. However, there are several types of dividends, several of which do not involve the payment of cash to shareholders.

These dividend types are:

Cash dividend. The cash dividend is by far the most common of the dividend types used. On the date of declaration, the board of directors resolves to pay a certain dividend amount in cash to those investors holding the company's stock on a specific date. The date of record is the date on which dividends are assigned to the holders of the company's stock. On the date of payment, the company issues dividend payments. Stock dividend. A stock dividend is the issuance by a company of its common stock to its common shareholders without any consideration. If the company issues less than 25 percent of the total number of previously outstanding shares, you treat the transaction as a stock dividend. If the transaction is for a greater proportion of the previously outstanding shares, then treat the transaction as a stock split. To record a stock dividend, transfer from retained earnings to the capital stock and additional paid-in capital accounts an amount equal to the fair value of the additional shares issued. The fair value of the additional shares issued is based on their fair market value when the dividend is declared.

Property dividend. A company may issue a non-monetary dividend to investors, rather than making a cash or stock payment. You record this distribution at the fair market value of the assets distributed. Since the fair market value is likely to vary somewhat from the book valueof the assets, the company will likely record the variance as a gain or loss. Scrip dividend. A company may not have sufficient funds to issue dividends in the near future, so instead it issues a scrip dividend, which is essentially a promissory note (which may or may not include interest) to pay shareholders at a later date. This dividend creates a note payable. Liquidating dividend. When the board of directors wishes to return the capital originally contributed by shareholders as a dividend, it is called a liquidating dividend, and may be a precursor to shutting down the business. The accounting for a liquidating dividend is similar to the entries for a cash dividend, except that the funds are considered to come from the additional paid-in capital account.

Cash Dividend Example

On February 1, ABC International's board of directors declares a cash dividend of $0.50 per share on the company's 2,000,000 outstanding shares, to be paid on June 1 to all shareholders of record on April 1. On February 1, the company records this entry:

Debit

Credit

Retained earnings

1,000,000

Dividends payable

1,000,000

On June 1, ABC pays the dividends, and records the transaction with this entry:

Debit

Credit

Dividends payable

1,000,000

Cash

1,000,000

Stock Dividend Example

ABC International declares a stock dividend to its shareholders of 10,000 shares. The fair value of the stock is $5.00, and its par value is $1. ABC records the following entry:

Debit

Credit

Retained earnings

50,000

Common stock, $1 par value

10,000

Additional paid-in capital

40,000

Property Dividend Example

ABC International's board of directors elects to declare a special issuance of 500 identical, signed prints by Pablo Picasso, which the company has stored in a vault for a number of years. The company originally acquired the prints for $500,000, and they have a fair market value as of the date of dividend declaration of $4,000,000. ABC records the following entry as of the date of declaration to record the change in value of the assets, as well as the liability to pay the dividends:

Debit

Credit

Long-term investments - artwork

3,500,000

Gain on appreciation of artwork

3,500,000

Debit Retained earnings 4,000,000

Credit

Dividends payable

4,000,000

On the dividend payment date, ABC records the following entry to record the payment transaction:

Debit

Credit

Dividends payable Long-term investments - artwork

4,000,000 4,000,000

Scrip Dividend Example

ABC International declares a $250,000 scrip dividend to its shareholders that has a 10 percent interest rate. At the dividend declaration date, it records the following entry:

Debit

Credit

Retained earnings

250,000

Notes payable

250,000

The date of payment is one year later, so that ABC has accrued $25,000 in interest expense on the notes payable. On the payment date (assuming no prior accrual of the interest expense), ABC records the payment transaction with this entry:

Debit

Credit

Notes payable

250,000

Interest expense

25,000

Cash

275,000

Liquidating Dividend Example

ABC International's board of directors declares a liquidating dividend of $1,600,000. It records the dividend declaration with this entry:

Debit

Credit

Additional paid-in capital Dividends payable

1,600,000 1,600,000

On the dividend payment date, ABC records the following entry to record the payment transaction:

Debit

Credit

Dividends payable

1,600,000

Cash

1,600,000