TYPES OF DIVIDENDS

Overview of Dividends

A dividend is generally considered to be a cash payment issued to the holders of company

stock. However, there are several types of dividends, some of which do not involve the
payment of cash to shareholders. These dividend types are:

 Cash dividend. The cash dividend is by far the most common of the dividend types used. On
the date of declaration, the board of directors resolves to pay a certain dividend amount in
cash to those investors holding the company's stock on a specific date. The date of record is
the date on which dividends are assigned to the holders of the company's stock. On the date
of payment, the company issues dividend payments.
 Stock dividend. A stock dividend is the issuance by a company of its common stock to its
common shareholders without any consideration. If the company issues less than 25 percent
of the total number of previously outstanding shares, you treat the transaction as a stock
dividend. If the transaction is for a greater proportion of the previously outstanding shares,
then treat the transaction as a stock split. To record a stock dividend, transfer from retained
earnings to the capital stock and additional paid-in capital accounts an amount equal to the
fair value of the additional shares issued. The fair value of the additional shares issued is
based on their fair market value when the dividend is declared.
 Property dividend. A company may issue a non-monetary dividend to investors, rather than
making a cash or stock payment. Record this distribution at the fair market value of the
assets distributed. Since the fair market value is likely to vary somewhat from the book value
of the assets, the company will likely record the variance as a gain or loss. This accounting
rule can sometimes lead a business to deliberately issue property dividends in order to alter
their taxable and/or reported income.
 Scrip dividend. A company may not have sufficient funds to issue dividends in the near
future, so instead it issues a scrip dividend, which is essentially a promissory note (which
may or may not include interest) to pay shareholders at a later date. This dividend creates
a note payable.
 Liquidating dividend. When the board of directors wishes to return the capital originally
contributed by shareholders as a dividend, it is called a liquidating dividend, and may be a
precursor to shutting down the business. The accounting for a liquidating dividend is
similar to the entries for a cash dividend, except that the funds are considered to come from
the additional paid-in capital account.

Cash Dividend Example

On February 1, ABC International's board of directors declares a cash dividend of $0.50 per
share on the company's 2,000,000 outstanding shares, to be paid on June 1 to all
shareholders of record on April 1. On February 1, the company records this entry:
Debit Credit

Retained earnings 1,000,000

Dividends payable 1,000,000

On June 1, ABC pays the dividends, and records the transaction with this entry:

Debit Credit

Dividends payable 1,000,000

Cash 1,000,000

Stock Dividend Example

ABC International declares a stock dividend to its shareholders of 10,000 shares. The fair
value of the stock is $5.00, and its par value is $1. ABC records the following entry:

Debit Credit
Retained earnings 50,000

Common stock, $1 par value 10,000

Additional paid-in capital 40,000

Property Dividend Example

ABC International's board of directors elects to declare a special issuance of 500 identical,
signed prints by Pablo Picasso, which the company has stored in a vault for a number of
years. The company originally acquired the prints for $500,000, and they have a fair market
value as of the date of dividend declaration of $4,000,000. ABC records the following entry
as of the date of declaration to record the change in value of the assets, as well as the liability
to pay the dividends:

Debit Credit

Long-term investments - artwork 3,500,000

Gain on appreciation of artwork 3,500,000

Debit Credit

Retained earnings 4,000,000

Dividends payable 4,000,000

On the dividend payment date, ABC records the following entry to record the payment
transaction:

Debit Credit

Dividends payable 4,000,000

Long-term investments - artwork 4,000,000

Scrip Dividend Example

ABC International declares a $250,000 scrip dividend to its shareholders that has a 10
percent interest rate. At the dividend declaration date, it records the following entry:

Debit Credit

Retained earnings 250,000

Notes payable 250,000

The date of payment is one year later, so that ABC has accrued $25,000 in interest expense
on the notes payable. On the payment date (assuming no prior accrual of the interest
expense), ABC records the payment transaction with this entry:

Debit Credit

Notes payable 250,000

Interest expense 25,000

Cash 275,000

Liquidating Dividend Example

ABC International's board of directors declares a liquidating dividend of $1,600,000. It

records the dividend declaration with this entry:

Debit Credit

Additional paid-in capital 1,600,000

Dividends payable 1,600,000

On the dividend payment date, ABC records the following entry to record the payment
transaction:

Debit Credit

Dividends payable 1,600,000

Cash 1,600,000