Acct 387 - Chapter 161 Dividends Dividends need to be legal and requirements vary by state: Can pay as long as not insolvent Can pay if fair value of net.

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Acct Chapter 161 Dividends Dividends need to be legal and requirements vary by state: Can pay as long as not insolvent Can pay if fair value of net assets exceeds dividends Other states vary Restrictions are designed to protect creditors Payment of dividends is a strategic decision and depends on growth state of company

Acct Chapter 162 Types of dividends: Cash Property Scrip Liquidating Stock Important dates: Declaration date Record date Ex-dividend date Payment date

Acct Chapter 163 Cash dividends become a liability when declared Property dividends require that the property be revalued to fair value and gain/loss recognized before distribution Scrip dividends are when the corporation distributes an “IOU” instead of cash. Liquidating dividends represent a return of capital instead of retained earnings and should be charged to paid in capital

Acct Chapter 164 Stock Splits Stock dividends are a pro rata distribution of shares to owners which change no one’s ownership share. Small stock dividend (less than 20-25%) are accounted for at market; Large stock dividends are accounted for at par. Actual impact of a stock dividend is to reduce retained earnings and future cash dividend potential.

Acct Chapter 165 Stock Splits Stock splits are used to reduce the share price in the market to keep a stock in the trading range. Simply reduce the par value and increase the shares outstanding. No formal journal entry is needed. Unlike a stock dividend, retained earnings is not affected. Like a stock dividend, total stockholders equity is not affected.

Acct Chapter 166 Preferred Dividends Preferred dividends can be cumulative or noncumlative; participating or nonparticipating

Acct Chapter 167 Appropriations of Retained Earnings If management wants to send a message that certain parts of retained earnings are legally or strategically not available for dividends, retained earnings may be appropriated. This is done with a simple journal entry which is reversed when the appropriation is no longer needed. The same thing can be accomplished, many believe with less confusion, through a note disclosure.

Acct Chapter 168 Ratios Return on equity = Net income – preferred div Avg Common SE Payout ratio = Common cash dividend Net income – preferred dividend Price Earnings Ratio = Market price per share EPS