Corporations: Dividends, Closing Entries, Retained Earnings

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Cash Dividends
Example: Alpha Company on Dec. 23 declares the required $200,000 total dividend
on their preferred shares and declares a common share dividend of $0.25 per share
(2,000,000 issued). The dividends are paid on January 27 of the next year. Alpha
company has Revenue of $3,500,000 and Operating Expenses of $2,500,000 for the
year ended Dec. 31, 20-. Complete any entries needed on Dec. 23rd, the four closing
entries on Dec. 31 and any entry needed on January 27th.

Dec. 23 Cash Dividend – Common 500,000

Cash Dividend - Preferred 200,000
Common Share Dividends Payable 500,000
Preferred Share Dividends Payable 200,000

Dec. 31 Revenue 3,500,000

Income Summary 3,500,000

Dec. 31 Income Summary 2,500,000

Operating Expenses 2,500,000

Dec. 31 Income Summary 1,000,000

Retained Earnings 1,000,000

Dec. 31 Retained Earnings 700,000

Cash Dividend – Common 500,000
Cash Dividend - Preferred 200,000

Jan. 27 Common Share Dividends Payable 500,000

Preferred Share Dividends Payable 200,000
Cash 700,000

**Cash Dividend - Common and Cash Dividend – Preferred are temporary

Shareholders’ Equity accounts that must be closed to Retained Earnings at the end
of the period.
 Stock Dividends
Sometimes a public corporation may pay dividends to shareholders that consist of
more shares rather than cash.

Example: On Nov. 17 Alpha Company declares a 10 % stock dividend on its

common shares distributable on Dec. 12. There are 1,000,000 shares outstanding
before the dividend and the market price of the shares on Nov. 17 are $20.

Nov. 17 Stock Dividend - Common 2,000,000

Common Stock Dividend Distributable 2,000,000

Dec. 12 Common Stock Dividend Distributable 2,000,000

Common Shares 2,000,000

Stock Splits
Occurs when a corporation doubles, triples or quadruples the number of shares
outstanding. Unlike Stock Dividends there are no entries required for splits. The
number of shares issued simply increases.

Retained Earnings Statement

In their annual reports, corporations include along with the Balance Sheet and
Income Statement a Statement of Retaining Earnings. This statement shows the
change in the retained earnings account that occurred during the year.

Example: ABC Corporation had a retained earnings balance of $560,000 at the

beginning of 20-. The company earned net income of $290,000; declared cash
dividends of $240,000; and declared stock dividends on common shares of
$110,000.
ABC Corporation
Statement of Retained Earnings
December 31, 20-
Retained Earnings Jan. 1 560,000
Net Income 290,000
850,000

Less Cash Dividend 240,000

 Stock Dividend 110,000 350,000
Retained Earnings Dec. 31 500,000