15.04 Retained Earnings & Dividends

declaration date

the board of directors commits to the dividend

record date

the shareholders at this date are identified as the ones entitled to the dividend (no journal entry)

stock splits effected in the form of stock dividends

these are large stock dividends (typically more than 25%), and are recorded at the par value of the stock

types of dividends

-cash -property (FMV @ date of declaration) -scrip (interest bearing notes payable) -liquidating (return of capital) -stock -small(FMV)/Large (Par) -stock split

stock dividends

are not actual distributions of assets from a company, but represent transfers of capital from retained earnings to contributed capital accounts. Total stockholders' equity is unchanged. There are two types: ordinary stock dividends, stock splits effected in the form of stock dividends

payment date

distribution is made to the shareholders of record

retained earnings

represents the accumulated earnings since inception of the company that have not been paid out to shareholders in the form of a dividend. At the end of each accounting year, net income is closed into retained earnings. In addition, retained earnings is periodically reduced for dividends.

ordinary stock dividends

these are small stock dividends (typically less than 20%), and are recorded at the fair market value of the stock at the time of the dividend

dividend-in-kind

when a company pays a dividend in the form of property other than cash, this is known as a..... Such dividends are treated as simultaneous sales of property and distributions of cash, and results in gain or losses

liquidating dividend

when a dividend exceeds the balance of retained earnings prior to declaration, the amount of the dividend in excess of retained earnings represents a return of contributed capital, and is known as a....

retained earnings

are assumed to be available for the payment of dividends, so when a company faces contingent liabilities that may require large payments in the future, it will often appropriate a portion of the retained earnings to indicate to its shareholders its unavailability for dividend payments

stock splits

__________________ _________________ in which old stock is exchanged for new stock are accounted for by adjusting the par value of the new shares for the split.

quasi-reorganization (fresh start)

in general, retained earnings may not be increased except when net income is closed into it. An exception is when a company has a..... Since new companies always begin with retained earnings of $0, a company with a deficit in retained earnings has the ability to eliminate that deficit by reorganizing as a new company. Accounting principles, therefore, allow a company to restate its accounts as if they had reorganized