Allocating Cash Dividends Between Preferred and Co PDF
Allocating Cash Dividends Between Preferred and Co PDF
Allocating Cash Dividends Between Preferred and Co PDF
COMMON SHARES
Example #1:
IBR Inc. has on December 31, 2003:
1, 000 $8 cumulative preferred shares
5, 000 common shares
At Dec 31, 2003 the Board of Directors declares a $6, 000 cash
dividend to be paid to shareholders on January 13, 2004.
REQUIRED
Prepare the journal entries to record the declaration, date of record
and payment of the dividend.
DIVIDEND ALLOCATION
1, 000 pref shares x $8 = $8, 000
HOWEVER the amount of dividends declared is only $6, 000.
Therefore only $6, 000 will be declared and paid AND $2, 000 will
accumulate forward.
NOTE: Dividends in arrears (ie. dividends owed to cumulative Pref
shareholders) are not recorded as a liability (until they are declared)
Dividends in arrears should be disclosed in the notes financial
statements.
JOURNAL ENTRIES
2003
DATE
Particulars
Dec 31
Cash Dividends Pref
Dividends Payable -Pref
PR DEBIT
6, 000
CREDIT
6, 000
DATE OF
RECORD
2004
Jan 13
6, 000
6, 000
Example #2:
IBR Inc. has on December 31, 2004:
1, 000 $8 cumulative preferred shares
5, 000 common shares
At Dec 31, 2004 the Board of Directors declares a $50, 000 cash
dividend to be paid to shareholders on January 13, 2005.
REQUIRED
Prepare the journal entries to record the declaration, date of record
and payment of the dividend.
DIVIDEND ALLOCATION
TOTAL DIVIDEND (2004)
Allocated to Preferred shares:
Dividends in arrears 2003
(1, 000 x $2)
Dividends - 2004
(1, 000 x $8)
Total Allocated to Preferred
shares:
REMAINDER allocated to Common
Shares
$50, 000
$2, 000
$8, 000
$10, 000
$40, 000
JOURNAL ENTRIES
2004
DATE
Dec 31
Particulars
Cash Dividends Pref
Cash Dividends - Common
Dividends Payable -Pref
PR DEBIT
10, 000
40, 000
CREDIT
50, 000
DATE OF
RECORD
2005
Jan 13
10, 000
40, 000
50, 000
Example #3:
IBR Inc. has on December 31, 2004:
1, 000 $8 non- cumulative preferred shares
5, 000 common shares
At Dec 31, 2004 the Board of Directors declares a $50, 000 cash
dividend to be paid to shareholders on January 13, 2005.
How much money will the Preferred and Common shareholders receive
in this case?
Preferred
Common
TOTAL
$8, 000
$42, 000
$52, 000
NOTE:
In the majority of cases, a company does not declare a combined
dividend amount for both classes of shares. Rather it would declare a
specified dividend for each.