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Cash Dividends
The most common form of dividends are cash dividends. These are distributions of profits from the company to its shareholders in cash.
Things to know
- Preferred shareholders must be paid first.
- Including all current dividends in dividends in arrears.
- Common shareholders are paid an equal share of remaining dividends.
Preferred Dividends
- Fixed dollar amount
- Percentage of average issue price, called the dividend rate.
- Dividends in arrears must be paid first.
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Example: Cash Dividends
If Bank of America declares a $220,000 cash dividend on January 13th, 2020 to the holders of record on Monday February 3rd, 2020, to be paid on February 17th, 2020. The company has 50,000 outstanding common shares and 5,000 outstanding $2 preferred shares.
Prepare all journal entries related to these dividends.
Journal entry to record the declaration of the cash dividend
Journal entry to record the distribution of the cash dividend
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Example: Cash Dividends
The following excerpt from Brownstein Inc.'s balance sheet is available:
On February 11th, 2023 the company declared a $47,000 cash dividend. The preferred shares are cumulative and dividends were not paid in 2022.
- What is the total amount of dividends in arrears?
- What is the total amount of dividends paid to preferred shareholders?
- What is the total amount of dividends paid to common shareholders?
Practice: Cash Dividends
ABC Inc. did not pay dividends in 2017, 2018 or 2019. On April 12th, 2020 the company declares that it will pay $2.20 per share dividend to common shareholders of record of record on April 26th. The preferred shares are cumulative.
On May 7th, the company paid the dividends.
Use the following information to prepare all necessary journal entries.
Journal entry on April 12
Transactions:
| Account | Debit | Credit |
|---|---|---|