Lesson 26 Flashcards
What is a dividend?
a distribution of cash or other property to shareholders. It is a distribution of earnings, not an expense
When are dividends recognized as a liability? Because normally they are not.
When it is declared
What is a property dividend?
most common is a transfer of securities in other entities
How do you measure a property dividend value?
with the fair value at date of declaration
Do you record a gain or loss on property dividends?
yes on the asset distributed
What is a scrip dividend?
is basically a dividend on credit - essentially an IOU- Its kind of like debt - includes interest
What is a liquidating dividend?
When the dividend is greater than the balance in retained earnings that dividend is liquidating. It is paid from contributed capital, not RE. It is a return OF capital rather than a return ON capital. You pay it out of APIC.
Liquidating dividends are most common in what industry?
mining or coal industries - where dividends are possible beyond earnings for the amount of depletion.
Why is a declared cash dividend considered a current liability?
because payment is generally required very soon.
What is another name for property dividends
dividends in kind
What are some examples of property dividends?
they can be merchandise, real estate, or investments, etc.
What needs to be included in the declaration of a liquidating dividend as to avoid deception?
proper disclosure that the paid in capital was used to pay the dividends and not retained earnings. Stockholders may believe that corporation has been operating at a profit.
What is a stock dividend?
is the issuance by corporation of its own stock to its stockholders. its a distribution to shareholders in proportion to existing holdings.
How does the issuance of stock dividends not distribute assets.?
Each stockholder maintains the exactly the same “ownership” interest in the corporation and the same book value after the issuance of the stock dividend. the only difference is that the book value per share is lower because each stockholder holds more shares.
What is a small stock dividend?
where the dividend is less than 20-25% of outstanding shares at declaration - use fair value for capitalization
What is a large stock dividend?
where the dividend is more than or equal to 20-25% of outstanding shares at declaration - use par value for capitalization
how to determine shares outstanding?
Shares issued - treasury shares = outstanding shares
What is a stock split?
It is not a dividend - so no JE needed
It doesn’t effect the equity accounts
It increases the number of shares outstanding and decreases the par or stated value
It reduces the market price of the stock
Why do corporation do a stock split?
Because they are afraid that the market price of the stocks are too high and people can’t afford them.
What is a 2 for 1 split or a 4 for 1 split on a $200 stock.
$200 2 for 1 means that it splits in two and they are both worth $100
$200 4 for 1 means the is splits in four and they each are worth $50
What does 2 for 1 actually means for a split?
means you get 2 shares for every 1 shared owned.
What does a stock dividend do the shares outstanding and par value.
It increases the shares outstanding, but it does not decreases the par value
What does. stock split do the shares outstanding and par value?
It increases the number of shares outstanding and decreases the par value.
A stock split effected in the form of a stock dividend can be called what other name?
large stock dividend - the accounting is a little difference though
On October 31, 2017, Lexington Corp. declared and issued a 12% common stock dividend. Prior to this dividend, Lexington had 302,000 shares of $.001 par value common stock issued and outstanding. The fair value of Lexington’s common stock was $16.75 per share on October 31, 2017.
As a result of this stock dividend, what happened to the company’s total stockholders’ equity?
It did not change.
Correct. Stock dividends simply reflect a reclassification of stockholder’s equity. The total of stockholder’s equity does not change.
On January 1, 2017, Vancleave Corporation had 110,000 shares of its $.001 par value common stock outstanding. On November 27, when the market price of the stock was $8, the corporation declared a 10% stock dividend to be issued to stockholders of record on December 28, 2017.
What was the impact of the 10% stock dividend on the balance of the retained earnings account?
$88,000 decrease
Correct. Small stock dividends use the fair value of the stock to record issue of the stock dividend. 110,000 shares x 10% divided = 11,000 shares x $8/share = $88,000 stock dividend. When the dividend is declared and issued, the following journal entry is recorded: Debit Retained Earnings: $88,000; Credit Common Stock $11 (11,000 shares x $.001 par), Credit Paid-in Capital in Excess of Par - Common Stock $87,989. While total Stockholder’s Equity does not change, Retained Earnings is decreased by $88,000.
Cash dividends are paid on the basis of which number of shares?
Outstanding
Correct. Cash dividends are paid only on the shares that are currently owned - the outstanding shares.
