Acct 387 - Chapter 16 1

Dividends

Dividends need to be legal and requirements vary by state:• Can pay as long as not insolvent• Can pay if fair value of net assets exceeds dividends• Other states vary

Restrictions are designed to protect creditors

Payment of dividends is a strategic decision and depends on growth state of company

Acct 387 - Chapter 16 2

Types of dividends:• Cash• Property• Scrip• Liquidating• Stock

Important dates:• Declaration date• Record date• Ex-dividend date• Payment date

Acct 387 - Chapter 16 3

Cash dividends become a liability when declared

Property dividends require that the property be revalued to

fair value and gain/loss recognized before distribution

Scrip dividends are when the corporation distributes an

“IOU” instead of cash.

Liquidating dividends represent a return of capital instead

of retained earnings and should be charged to paid in capital

Acct 387 - Chapter 16 4

Stock Splits

Stock dividends are a pro rata distribution of shares to owners which change no one’s ownership share.

Small stock dividend (less than 20-25%) are accounted for at market; Large stock dividends are accounted for at par.

Actual impact of a stock dividend is to reduce retained earnings and future cash dividend potential.

Acct 387 - Chapter 16 5

Stock Splits

Stock splits are used to reduce the share price in the market to

keep a stock in the trading range.

Simply reduce the par value and increase the shares

outstanding. No formal journal entry is needed.

Unlike a stock dividend, retained earnings is not affected.

Like a stock dividend, total stockholders equity is not

affected.

Acct 387 - Chapter 16 6

Preferred Dividends

Preferred dividends can be cumulative or noncumlative; participating or nonparticipating

Acct 387 - Chapter 16 7

Appropriations of Retained Earnings

If management wants to send a message that certain parts of retained earnings are legally or strategically not available for dividends, retained earnings may be appropriated.

This is done with a simple journal entry which is reversed when the appropriation is no longer needed.

The same thing can be accomplished, many believe with less confusion, through a note disclosure.

Acct 387 - Chapter 16 8

Ratios

Return on equity = Net income – preferred divAvg Common SE

Payout ratio = Common cash dividend Net income – preferred dividend

Price Earnings Ratio = Market price per shareEPS