Accounting for unusual dividends

October 5, 2014

You’re probably familiar with cash and stock dividends. What you may not know is that there are a few additional types of dividends that can be declared for stockholders. In this article, we’ll touch on property dividends, scrip dividends, and DRIP arrangements.

1. Property dividends

A corporation with a small number of shareholders might decide to issue some asset other than cash or company stock as a dividend. Property that might be issued could include merchandise normally held for sale or investments in stocks or bonds. The dividend needs to be recorded at fair value, so the dividend occurs in two steps.

As an example, let’s assume that Friends Company wants to distribute 10,000 XYZ Corporation shares as a dividend to its common shareholders. The shares have a current book value of $40 per share, but the market value is $50 per share. Before issuing the dividend, Friends must write the asset up to market value. The gain (or loss if applicable) is reported on the income statement. Notice that this amount is the difference between book and market value multiplied by the number of shares being issued.

Account Names

Debits

Credits

Investment in XYZ Corporation

100,000

 

       Gain on investment

 

100,000

When the shares are issued as a dividend, Friends Company will record the following entry (i.e., $50 x 10,000):

Account Names

Debits

Credits

Dividends

500,000

 

       Investment in XYZ Corporation

 

500,000

2. Scrip dividends and dividend re-investment plans (DRIP)

Sometimes a firm might want to issue a dividend but doesn’t currently have enough cash on hand to do so. In these situations, the company can issue a scrip dividend, which gives the dividend receiver a choice between a note promising future payments (and sometimes additional interest) and shares of common stock. Unlike a regular stock dividend, some shareholders will choose the note, meaning shareholders who choose common stock will end up with a higher ownership percentage after the dividend.

DRIP plans, also known as dividend re-investment plans are similar to scrip dividends. Shareholders are given the option of reinvesting cash dividends in exchange for more shares. As with scrip dividends, those shareholders who choose to participate will increase their percentage ownership in the company.

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