Reporting and Interpreting Owners’ Equity - Dividends Chapter 11 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

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Reporting and Interpreting Owners’ Equity - Dividends Chapter 11 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Dividends on Common Stock Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash. Declaration date Board of directors declares the dividend. Record a liability.

Date of Record Stockholders holding shares on this date will receive the dividend. (No entry) Dividend Dates Date of Payment Record the dividend payment to stockholders.

Record these events On January 15 th Mike Company’s board of directors declared a $0.25 dividend for each outstanding common share to shareholders of record as of January 31. The dividend will be paid on February 15 th. There are 5,000,000 shares authorized, 1,500,000 shares issued. The company has 500,000 of treasury shares. What gets recorded on January 15 th, January 31 st, and February 15 th ?

Date of Declaration Account NameDebitCredit Retained Earnings$250,000 Dividends Payable$250,000

Date of Record Account NameDebitCredit No entry

Date of Payment Account NameDebitCredit Dividends Payable$250,000 Cash$250,000

Stock Dividends Distribution of additional shares of stock to owners. No change in total stockholders’ equity. All stockholders retain same percentage ownership. No change in par values. Stock dividend < 20-25% Record at current market value of stock. Small Stock dividend > 20-25% Record at par value of stock. Large

Record these Stock Dividends Mike Company declared and issued a stock dividend of 500,000 common shares on January 15 th. The shares have a par value of $0.10. At the time of the dividend the market price of the stock was $15 per share. Record this dividend assuming this is considered a small stock dividend. Record this dividend assuming this is considered a large stock dividend.

Small Stock Dividend Account NameDebitCredit Retained Earnings (small stock dividends you use market price) $7,500,000 Common Stock ($0.10 par value)$50,000 Capital in excess of Par$7,450,000

Large Stock Dividend Account NameDebitCredit Retained Earnings (large stock dividends use par value) $50,000 Common Stock ($0.10 par value)$50,000

Stock splits change the par value per share, but the total par value is unchanged. Stock Splits Assume that a corporation had 3,000 shares of $2 par value common stock outstanding before a 2–for–1 stock split. Increase Decrease No Change

E11-26 (page 591)