How to Journalize Stock Dividends
Dividends are considered income by the IRS and can include a distribution of assets from stocks, property, or trusts. Most dividends are paid in cash and must therefore be entered like a cash entry if on the receiving end and a distribution of cash if on the distribution end. The following article focuses on the entry created for an organization that is distributing dividends.
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Instructions
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Define your variables. As an example, let's assume ABC Corp had 400,000 shares of common stock outstanding at the beginning of the year with a par value of $2 per share. The board of directors has declared a dividend on December 1. The declared dividend is at a rate of 10 percent with a date of record listed for December 20, payable on January 2. The market value of ABC Corp. is $10 per share on December 20.
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Determine how many shares will be issued to pay the dividend. A 10 percent dividend means you will be distributing 40,000 shares (40,000 common stock * 10 percent).
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Create a debit entry for the date of declaration (December 20). This requires a debit to retained earnings of $400,000 (40,000 * $10) or the number of shares times the price of the shares on the day of declaration.
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Create a credit entry to common stock dividends distributable for $80,000 ("number of shares distributed [40,000]" * "par value [$2]".
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Create a second credit entry for additional paid in capital which is the difference between the par value and the amount actually distributed. This equals $320,000 ($400,000 - $80,000).
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Create an entry for the date of distribution. This requires only two entries, each of which are fairly straightforward. Create a debit and a credit for the same amount, that of the par value of the distributed amount, or $80,000.
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