1) Retained earnings represent cumulative profits retained by a business and not yet distributed to owners. Dividends are distributions of cash or property to shareholders that are accounted for by debiting retained earnings and crediting dividends.
2) There are key dates for accounting of dividends including the date of declaration when dividends are announced and the date of distribution when dividends are paid to shareholders.
3) Preference shares may receive preference over ordinary shares in the distribution of assets in liquidation or distribution of dividends.
1) Retained earnings represent cumulative profits retained by a business and not yet distributed to owners. Dividends are distributions of cash or property to shareholders that are accounted for by debiting retained earnings and crediting dividends.
2) There are key dates for accounting of dividends including the date of declaration when dividends are announced and the date of distribution when dividends are paid to shareholders.
3) Preference shares may receive preference over ordinary shares in the distribution of assets in liquidation or distribution of dividends.
1) Retained earnings represent cumulative profits retained by a business and not yet distributed to owners. Dividends are distributions of cash or property to shareholders that are accounted for by debiting retained earnings and crediting dividends.
2) There are key dates for accounting of dividends including the date of declaration when dividends are announced and the date of distribution when dividends are paid to shareholders.
3) Preference shares may receive preference over ordinary shares in the distribution of assets in liquidation or distribution of dividends.
1) Retained earnings represent cumulative profits retained by a business and not yet distributed to owners. Dividends are distributions of cash or property to shareholders that are accounted for by debiting retained earnings and crediting dividends.
2) There are key dates for accounting of dividends including the date of declaration when dividends are announced and the date of distribution when dividends are paid to shareholders.
3) Preference shares may receive preference over ordinary shares in the distribution of assets in liquidation or distribution of dividends.
CHAPTER 16: Accounting for Dividends • date of record
o the date on which the stock and
Retained earnings transfer book of the corporation is • represent the cumulative profits (net of closed for registration losses, distribution to owners, and other o only those listed as of this date are adjustments) that are retained to the business entitled to dividends and not yet distributed to owners • date of distribution • consists of: o the date when the dividends declared o unrestricted are distributed to the shareholders ▪ the portion of retained earnings that is available for Accounting for cash dividends future distribution to the • the most common for of distribution to shareholders owners o appropriated (restricted) • may be declared as a certain amount per ▪ the portion of retained share or as a certain percentage of the par earnings that is not available value of the shares for distribution unless the • only outstanding shares are entitled to restriction is subsequently dividends reversed • outstanding shares = issued shares + ▪ appropriations do not mean subscribed shares – treasury shares that a cash fund has been set • the ‘dividends account’ may be debited in aside, only indicate amounts lieu of ‘retained earnings’ and may be used that are not available for if dividends are declared more than once a distribution to the owners year • when retained earnings has a negative • the dividends account is closed to retained balance, it is described as “deficit” earnings, similar to the drawings account • when total shareholders’ equity has a negative balance, it is described as “capital Accounting for share dividends deficiency” • if share dividends are considered ‘small’ meaning less than 20% of the outstanding Dividends shares, the share dividends are accounted for • distributions to shareholders at fair value • may be in the form of o retained earnings is debited at fair o cash dividends value on declaration date ▪ distributions in the form of o difference between the fair value and cash par value is credited to share o property dividends premium ▪ distributions in the form of • if share dividends are considered ‘large’ noncash assets meaning 20% or more of the outstanding o share dividends shares, the share dividends are accounted for ▪ distributions in the form of at par value the entity’s own share o retained earnings are debited for the par value of the share dividends Dates relevant to the accounting for dividends o no share premium arises • date of declaration • share dividends do not affect total o the date when the board of directors shareholders’ equity, a portion of the formally announces the distribution retained earnings is just transferred to the of dividends share capital and share premium accounts • the stock dividends payable or share dividends payable is an adjunct equity account, not a liability account Treasury shares declared as dividends • the accounting for ‘small’ or ‘large’ share Preference over dividends dividends do not apply to treasury shares • upon declaration, preference shares that are • the cost method is used ‘preferred as to dividends’ are paid first o retained earnings is debited for the before ordinary shareholders cost of the treasury shares declared • preference dividends may be o no share premium arises o noncumulative ▪ is one which the dividend Preference shares entitlement for a year is • preference shares have one or both of the forfeited when dividends are following preferences over ordinary shares not declared in that year o preference in the distribution of o cumulative assets in case of liquidation ▪ is one which the dividend (preferred as to assets) entitlement accumulates each o preference in the distribution of year until paid dividends (preferred as to • accumulated unpaid dividends) dividends are disclosed as dividends Preference over assets in arrears but not • upon liquidation and after creditors’ claims accrued as liability (liabilities) are settled, preference shares that unless the dividends are preferred as to assets are settled first are declared and any remaining amount is paid to o nonparticipating ordinary shareholders ▪ is one which is entitled only • if the preference shares are not preferred as to a fixed amount of to assets, the remaining amount after dividends settlement of liabilities is shared o participating proportionately by the preference and ▪ is one which is entitled to an ordinary shareholders amount in excess of the fixed • preference shares that are preferred as to amount of dividends assets are normally entitled to liquidation ▪ the amount of participation is value computed after both the o liquidation value pertains to the preference and ordinary amount that preference shareholders shares are allocated their are entitled to receive in case of basic dividends liquidation • the basic dividend of o usually more than the par value of cumulative the preference shares preferred shares • in case where the net assets after settlement includes dividends in of liabilities are insufficient to pay the arrears liquidation value, the preference • the basic dividend of shareholders will be entitled only to the noncumulative remaining net assets preferred shares o none will be paid to ordinary includes only the shareholders, but they will not be current-year dividends obliged to provide any additional entitlement capital • the basic dividend of o in accordance with the limited ordinary liability characteristic of a shareholders is equal corporation, the personal assets are to the aggregate par not subject to corporate claims value of the outstanding ordinary o P5 preference shares multiplied by share the preference rate ▪ In the absence of evidence to • if there is more than the contrary, preference one class of shares are presumed to be preference shares, the ‘preferred as to dividends’ lowest preference rate with dividend preference of is used to compute for ‘noncumulative and the basic dividend nonparticipating’ • any excess of ▪ when preference shares are dividends declared participating only up to a after deducting the certain percentage, the basic dividends is the participation is computed as amount subject to the excess of the participation participation percentage over the fixed ▪ participating preference dividend rate multiplied by shares may be either the aggregate par value of • fully participating preference shares outstanding o participates on a pro rata Liquidating dividends basis (based • are dividends declared out of capital, rather on aggregate than from retained earnings par values of • normally declared only upon liquidation outstanding • however, the wasting asset doctrine permits shares) with wasting asset corporations to declare ordinary dividends of capital during their existence shareholders • there may be instances where unintentional • partially participating liquidating dividends occur such as when o participates dividends are declared out of retained only up to a earnings that is overstated certain • when unintentional liquidating dividends are amount or subsequently discovered, a correcting entry percentage is made to adjust the retained earnings and ▪ preference shares may have other affected accounts more than one dividend • dividends declared in excess of unrestricted preference retained earnings are considered liquidating ▪ preference shares may be dividends both cumulative and • liquidating dividends are charged to the participating capital liquidated account which is a ▪ the dividend entitlement of deduction from total shareholders’ equity preference shares may be expressed as: Share split • percentage of par • share splits may be in the form of value (fixed rate o split up or share split based on par value) o split down or reverse share split o 12% • split up occurs when old shares are cancelled preference and replaced by a larger number of new share shares but with a reduced par value (stated • specific monetary value) per share amount per share o share split increases the number of shares available for issuance while decreasing the fair value per share o the fair value of the entity’s net assets will be divided by a larger number of outstanding shares o with decreased fair value per share, the shares become more affordable to potential investors • split down is whereby old shares are cancelled and replaced by a smaller number of new shares but with an increased par value (stated value) per share • share splits only affect the number of outstanding shares and par value per share • they do not affect assets, liabilities, equity, or the aggregate par value of issued shares • share splits are recorded only through memo entry