Types of Dividends

Definition of Dividends

The following article provides an outline for types of Dividends. Dividend refers to that portion of a company’s profit that the company distributes to its shareholders as the return to the investment made by the shareholders in the company where the dividends can be in the form of cash, shares, property, or in any other kind that the company decides to give.

Explanation of Types of Dividends

The profits earned by the company can be distributed to the shareholders in the form of dividends or can be reinvested in the company. The dividend is that portion of the profit of the companies that decide to give the company’s shareholders. It is at the company’s discretion that how much dividend the company wants to distribute. In fact, it is not compulsory for the company to distribute dividends. When the company wants to pay dividends, the record date is fixed, and everyone who is holding the company’s share on that date is eligible to receive dividends. Various categories of dividends distributed by the company include cash dividend, scrip dividend, stock dividend, etc.

Types of Dividends

Different types of dividends are mentioned below:

1. Cash Dividend

Cash dividends are the most commonly used dividend type. In this type of dividend, the dividend amount is paid by transferring a sum of money. The money can be transferred electronically or through cash and check. When the company declares the dividend, then all the shareholders existing on the date specified by the company are eligible to receive the payment of dividend before the company makes a payment; the company must arrange enough cash to pay off the dividends.

For example:

A company, Marini Incorporation, decided to give a dividend of $2.00 per share on 300,000 outstanding shares in the board meeting held on April 21^st, 2019 that is agreed to be paid on May 15^th, 2019. Now we need to record the above transaction.

Solution:

Total Amount of Dividend Declared is calculated as

Total Amount of Dividend Declared = Total Number of Shares * Dividend per Share

• = 300,000* $2
• = $600,000

Journal entries to record the above transactions

Date	Particulars	Debit ($)	Credit($)
21.04.2019	Retained Earnings A/c      Dr.	600,000
	To Dividend payable A/c		600,000
	(Being dividend declared)
15.05.2019	Dividend payable A/c      Dr.	600,000
	To Bank/Cash A/c		600,000
	(Being dividend paid)

2. Stock Dividend

Stock dividends refer to the dividend which is paid by allotting a certain number of shares to the existing shareholders without taking any kind of consideration. The stock dividend is treated differently in two different cases where; the first case is when the company issues less than 25 % of the outstanding shares, then it is treated as a stock dividend, but if the issue is more than 25% of the outstanding number of share, then the same is treated as stock split and nit stock dividend.

For Example:

A company Marini Incorporation declared a stock dividend of 15,000 shares. The fair value of the share is        $4 per share, and the par value is $1 per share. Now we need to record the entries for the above transaction.

Solution:

Journal entries to record the above transactions:

Date	Particulars	Debit ($)	Credit($)
15.05.2019	Retained Earnings A/c      Dr.	60,000
	To Common stock A/c $1 per share		15,000
	To Additional paid-in capital A/c		45,000
	(Being stock dividend declared)

3. Scrip Dividend

A scrip dividend is the type of dividend issued by the company in which the company gives transferrable promissory notes which promise to pay the shareholders the amount of dividend on some later date. The notice issued may or may not be interest-bearing.

For example

A company Marini Incorporation declared a dividend of $100,000 to its shareholders on April 21^st, 2019, in the form of a scrip dividend which carries an interest of 10% p.a. Now, we need to record the above transaction.

Solution:

Journal entries to record the above transactions:

Date	Particulars	Debit ($)	Credit($)
21.04.2019	Retained Earnings A/c      Dr.	100,000
	To Notes payable A/c		100,000
	(Being scrip dividend declared)
21.04.2020	Notes payable A/c      Dr.	100,000
	Interest Payable A/c   Dr.	10,000
	To Bank/Cash A/c		110,000
	(Being dividend paid with interest)

*Interest payable for a year = 100,000 * 10% = $10,000

4. Property Dividend

Property dividend is paid using non-monetary items such as assets, inventories, etc., rather than directly paying cash. The company pays this dividend when the company does not have enough cash reserves to pay off dividends. The company has to record this distribution at the fair market value of the asset, and the difference between the fair market value and the asset’s book value is recorded as gain/loss.

For example:

A company Marini Incorporation declared a property dividend on April 10^th, 2019where; the dividend was payable on April 29^th, 2019. The book value of the investment as of April 10^th, 2019, was $200,000, and the fair market value on the same date was $550,000. Now we need to record the above transaction.

Solution:

Journal entries to record the above transactions:

Date	Particulars	Debit ($)	Credit($)
10.04.2019	Investments A/c                          Dr.	350,000
	To Gain on appreciation A/c		350,000
	(Being Gain on appreciation of investment recorded)
10.04.2019	Retained earnings A/c                  Dr.	550,000
	To Property Dividends Payable A/c		550,000
	(Being dividend is payable)
29.04.2019	Property Dividends Payable A/c    Dr.	550,000
	To Investments A/c		550,000
	(Being property dividend paid)

*Gain on appreciation = $550,000- $200,000 = $350,000

5. Liquidating Dividend

The liquidating dividend is the dividend declared by the company usually when the company is in liquidation and the directors decide to pay back to the shareholders their original contribution towards the capital of the company.

For example:

A company Marini Incorporation declared a liquidating dividend of $2,500,000 on January 1^st, 2020. The date of payment of dividends is January 29^th, 2020. Now we need to record the above transaction.

Solution:

Journal entries to record the above transactions:

Date	Particulars	Debit ($)	Credit($)
1/1/2020	Additional paid-in capital A/c      Dr.	2,500,000
	To Dividend payable A/c		2,500,000
	(Being dividend declared)
29-01-20	Dividend payable A/c                 Dr.	2,500,000
	To Bank/Cash A/c		2,500,000
	(Being dividend paid)

Recommended Articles

This is a guide to Types of Dividends. Here we also discuss the definition and Types of Dividends along with examples and its Journal entries. You may also have a look at the following articles to learn more –

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