Question

Please answer and discuss the questions below in detail or add your own similar topic.

A. Discuss the accounting nuts and bolts with both a cash dividend or a stock dividend.

B. Preferred stock – what are the advantages of issuing preferred stock that is cumulative, noncumulative, participating, and convertible? What would be your preference if you invested in preferred stock? Why?

C. Which is preferred, a cash dividend or a stock dividend? For an investor, is it “show me the money” or is it wanting to grow the investment? Advantage/disadvantage to the corporation?

Answer 1

a. Accounting nuts and bolts with regards to cash dividends:

When cash dividends are declared by the board of a company then on that date the accounting requirement will be to debit the retained earnings account and credit the dividends payable account. On the date when dividends are actually paid out to stockholders the dividends payable account will be debited and cash account will be credited.

The net impact of the above two accounting journal entries is that retained earnings (part of equity) and cash will be reduced.

For example suppose that a company has 20,000 shares outstanding and it declares a dividend of $2 per share on 1^st December 2017. The journal entry will be:

Date	Particulars	Debit	Credit
1-Dec-17	Retained earnings	40,000.00
	Dividend payable		40,000.00
	(20,000 shares*$2 = $40,000)

When cash dividend is paid on 31st December the entry would be:

Date	Particulars	Debit	Credit
31-Dec-17	Dividend payable	40,000.00
	Cash		40,000.00

Accounting nuts and bolts with regards to stock dividend:

In case of stock dividends a company issues common stock to its shareholders without any consideration from them. Just like cash dividends in case of stock dividends retained earnings are reduced but the common stock account is increased.

For example suppose that a company issues 20,000 shares as dividends to existing stockholders. Fair value of each stock is $5 and its par value is $1. The date of issue is 1^st December 2017.

Thus the journal entry will be:

Date	Particulars	Debit	Credit
1-Dec-17	Retained earnings (20,000*5)	100,000.00
	Common stock, $1 par value		20,000.00
	Additional paid in capital (20000*(5-1))		80,000.00