When a company owns stock in another company that pays a dividend, generally accepted accounting principles (GAAP) require the investing company to record the dividend as dividend income. A scrip dividend occurs when a company has enough retained earnings on its balance sheet to pay a dividend, but not enough cash. The company paying the dividend declares the scrip dividend and promises to pay stockholders the dividend at a later date. If your company receives a scrip dividend, you can book the dividend as a note receivable to show the money you expect to collect.
1. Debit your notes receivable account in a new journal entry in your accounting records by the amount of the scrip dividend on the date the investee company declares it. This increases the notes receivable account to show the money you expect to collect from the dividend. For example, if a company whose stock your company owns declares a scrip dividend, of which you expect to receive $1,000, you would debit your notes receivable account by $1,000.
2. Credit your dividend income account by the same amount in the same journal entry. This increases your dividend income account. Continuing with the example from Step 1, credit your dividend income account by $1,000.
3. Debit your cash account in a new journal entry by the amount of the scrip dividend on the date you receive the cash payment for the scrip dividend. A debit increases the cash account. In this example, debit cash for $1,000 when you receive the cash payment for the dividend.
4. Credit your notes receivable account by the amount of the cash payment in the same journal entry. This decreases your notes receivable account to show that the company no longer owes you a dividend payment. In this example, credit notes receivable by $1,000.
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