129. Dividends (General Accounting and Reporting)

Cash Dividends

- Dividends are NOT mandatory - Dividends are ONLY a liability when declared Three dates for a cash dividend: 1. Date of declaration DR Dividends Declared (or RE) CR Dividend Payable - This JE reduces owner's equity (and thus reduces net assets as well, which is A-L = E) 2. Date of record - No accounting happens here - It's to figure out who still owns the dividend 3. Date of payment DR Dividends Payable CR Cash - Close the dividends declared account into retained earnings

Types of Questions on CPA

1. Calculate amount of dividend 2. Determine impact on financial statements / specific accounts - Retained earnings, APIC, owner's equity, etc. Use JEs and T-accounts!

Recap of Dividends

1. Cash dividends: - Recorded as liability when declared 2. Property dividends: - Will typically have gains or losses associated with them because we have to write the property to fair value from book value - Recorded as liability when declared 3. Scrip dividends: - Record liability when they are declared and interest can be accrued on them 4. Liquidating dividends: - Recorded at date of declaration and cash is credited when paid.

MC Tips

1. Property dividends use fair value at the date of issuance - Market value "directly after issuance" is counted for gains 2. Only the declaration of dividends have an effect on working capital, since it's a decrease in equity (RE) and an increase in liabilities (payable) - Working capital is assets - liabilities 3. For scrip dividends with interest, interest expense needs to be recognized at the end of every year. - Ex if a scrip note is given in middle of year that takes a year to mature, half of interest expense is recognized in first year and the other half is recognized in the next year. 4. For liquidating dividends, only APIC is affected and reduced, not retained earnings 5. Screenshot: With property dividends the overall effect on retained earnings is net of the gain on the disposal of the asset - Since it's a credit gain and a debit payable at FV, the net effect on RE will just be the book value 6. For scrip dividends, the amount paid to shareholders at maturity will be the total amount + interest accrued throughout the life of the note given 7. Dividends in arrears are footnoted only, they are not accrued as a liability until declared.

Example: Property Dividend

A firm declares property dividends in the form of stocks held for investment and accounted for by the fair value method: Facts: 1. Shares were purchased earlier this year for $400,000 2. At date of declaration, the shares are worth $430,000 Question: What is the amount of dividends payable? JEs are in the screenshot - Basically recognize a gain at date of declaration and then the dividend is reported at FAIR VALUE - Crediting the investment in stock at date of payment b/c it's not cash

Scrip Dividends

A substitute or alternative to legal tender. - Holding a scrip entitles the bearer to receive something in return. - Scrips come in many different forms, primarily as a form of credit, with the document acknowledging the debt. - Scrips also represent a temporary document representing fractional shares resulting from a split or spin-off, or they may indicate currency issued by a private corporation such as frequent flier miles. - Throughout history it has taken various forms, but it's essentially just a promise to pay later - Done usually when company declares a dividend but doesn't have the cash to pay the dividend

Example: Scrip Dividends

Company URGR8 declares dividend of $0.40 per share (10,000 shares). - URG8 has no cash to pay the dividend, so it promises to pay shareholders the dividend in 6 months, plus 10% interest. JEs in the screenshot: - At declaration the entry will be the same as in other cases - At payment, we have to recognize the interest expense accrued, REMEMBER TO WEIGHT INTEREST BY NUMBER OF MONTHS - Credit cash for the amount paid, dividends + interest expense

Dividend Principles

Definition: a distribution of cash or other property to shareholders 1. It is a distribution of earnings from the business, thus it is not an expense. 2. A liability is only recognized upon declaration - b/c dividends are not something companies are obligated to pay, they choose to pay out to their shareholders 3. Retained earnings is the usual source of dividends 4. Owner's Equity is reduced for dividends except for stock dividends. - Stock dividends are not a transfer of assets, and thus no liability is recognized (since we are just giving more equity)

Property Dividends

Distribution of an asset OTHER THAN cash to shareholders - Most commonly securities of another entity (ex. if you own shares of Apple you can use that to pay) Property dividend is recorded at fair value of the asset at the date of declaration - Record a gain or loss based on the difference between FV and CV of the asset distributed.

Example: Liquidating Dividends

Mining Corp. has 50K net income, which reflects 10K of depletion. - A dividend of up to $60,000 can be paid because depletion can be ignored - Assume a $56,000 dividend is declared, what are the JEs? 1. DR Dividends Declared (or RE) 50,000 2. DR APIC 6,000 (this is the key, it's the excess amount above net income that is being declared) 3. CR Dividends Payable 56,000

Liquidating Dividend

note: Not tested very much 1. When the dividend is greater than the balance in retained earnings, that dividend is liquidating - Thus, any additional amounts beyond RE is paid from APIC, NOT retained earnings 2. Liquidating dividends are a return OF capital rather than a return ON capital 3. Commonly scene in mining or oil industry - Dividends are possible to pay beyond earnings for the amount of depletion