Lesson 26

Question 1

What is a dividend?

Answer 1

a distribution of cash or other property to shareholders. It is a distribution of earnings, not an expense

Question 2

When are dividends recognized as a liability? Because normally they are not.

Answer 2

When it is declared

Question 3

What is a property dividend?

Answer 3

most common is a transfer of securities in other entities

Question 4

How do you measure a property dividend value?

Answer 4

with the fair value at date of declaration

Question 5

Do you record a gain or loss on property dividends?

Answer 5

yes on the asset distributed

Question 6

What is a scrip dividend?

Answer 6

is basically a dividend on credit - essentially an IOU- Its kind of like debt - includes interest

Question 7

What is a liquidating dividend?

Answer 7

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.

Question 8

Liquidating dividends are most common in what industry?

Answer 8

mining or coal industries - where dividends are possible beyond earnings for the amount of depletion.

Question 9

Why is a declared cash dividend considered a current liability?

Answer 9

because payment is generally required very soon.

Question 10

What is another name for property dividends

Answer 10

dividends in kind

Question 11

What are some examples of property dividends?

Answer 11

they can be merchandise, real estate, or investments, etc.

Question 12

What needs to be included in the declaration of a liquidating dividend as to avoid deception?

Answer 12

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.

Question 13

What is a stock dividend?

Answer 13

is the issuance by corporation of its own stock to its stockholders. its a distribution to shareholders in proportion to existing holdings.

Question 14

How does the issuance of stock dividends not distribute assets.?

Answer 14

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.

Question 15

What is a small stock dividend?

Answer 15

where the dividend is less than 20-25% of outstanding shares at declaration - use fair value for capitalization

Question 16

What is a large stock dividend?

Answer 16

where the dividend is more than or equal to 20-25% of outstanding shares at declaration - use par value for capitalization

Question 17

how to determine shares outstanding?

Answer 17

Shares issued - treasury shares = outstanding shares

Question 18

What is a stock split?

Answer 18

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

Question 19

Why do corporation do a stock split?

Answer 19

Because they are afraid that the market price of the stocks are too high and people can’t afford them.

Question 20

What is a 2 for 1 split or a 4 for 1 split on a $200 stock.

Answer 20

$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

Question 21

What does 2 for 1 actually means for a split?

Answer 21

means you get 2 shares for every 1 shared owned.

Question 22

What does a stock dividend do the shares outstanding and par value.

Answer 22

It increases the shares outstanding, but it does not decreases the par value

Question 23

What does. stock split do the shares outstanding and par value?

Answer 23

It increases the number of shares outstanding and decreases the par value.

Question 24

A stock split effected in the form of a stock dividend can be called what other name?

Answer 24

large stock dividend - the accounting is a little difference though

Question 25

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?

Answer 25

It did not change.
Correct. Stock dividends simply reflect a reclassification of stockholder’s equity. The total of stockholder’s equity does not change.

Question 26

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?

Answer 26

$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.

Question 27

Cash dividends are paid on the basis of which number of shares?

Answer 27

Outstanding
Correct. Cash dividends are paid only on the shares that are currently owned - the outstanding shares.