Financial Accounting: An Integrated Statements Approach, 2nd Edition

A corporation must usually meet the following three conditions in order to pay a

cash dividend:

1. Sufficient retained earnings


2. Sufficient cash


3. Formal action by the board of directors

A large amount of retained earnings does not always mean that a corporation is

able to pay dividends. As we indicated earlier in the chapter, the balances of the cash

and retained earnings accounts are often unrelated. Thus, a large retained earnings ac-

count does not mean that there is cash available to pay dividends.

A corporation’s board of directors is not required by law to declare dividends. This

is true, even if both retained earnings and cash are large enough to justify a dividend.

However, many corporations try to maintain a stable dividend

record in order to make their stock attractive to investors.

Although dividends may be paid once a year or semiannually,

most corporations pay dividends quarterly. In years of high prof-

its, a corporation may declare a specialorextradividend.

You may have seen announcements of dividend declarations

in financial newspapers or investor services. An example of such

an announcement is shown below.

On November 18, the board of directors of Mattel Inc. declared

a quarterly cash dividend of $0.45 per share payable on Decem-

ber 17 to shareholders of record on December 3.

This announcement includes three important dates: the date

of declaration(November 18), the date of record(December 3), and

thedate of payment(December 17). During the period of time be-

tween the record date and the payment date, the stock price is

usually quoted as selling ex-dividends. This means that, since the

date of record has passed, a new investor will not receive the

dividend.

To illustrate, assume that on December 1the board of directors of Hiber Corporation

declares the following quarterly cash dividends. The date of record is December 10, and

the date of payment is January 2.

Dividend Total

per Share Dividends

Preferred Stock, $100 par, 5,000 shares outstanding $2.50 $12,500

Common stock, $10 par, 100,000 shares outstanding 0.30 30,000

Total $42,500

Hiber Corporation records the $42,500 liability for the dividends on December 1,

the declaration date, as follows:^8

506 Chapter 11 Stockholders’ Equity: Capital Stock and Dividends

8 Alternatively, the debit could be to “Cash Dividends,” which is then closed to Retained Earnings.

Dec. 1 Retained Earnings 42,500

Cash Dividends Payable 42,500

SCF BS IS

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