How to Declare a Property Dividend Impact on Retained Earnings

by Rose Johnson

Companies occasionally distribute assets other than cash as dividends to investors. Property dividends are non-monetary dividends that may take the form of land, equipment, government bonds, another corporation's bonds or inventory. To issue property dividends, companies must meet the same requirements needed to distribute cash dividends. The requirements include the corporation declaring the property dividend, the company physically possessing the assets it desires to distribute and earning a sufficient amount of capital. Property dividends are recorded at fair market value and impact a company’s retained earnings. A corporation's management and directors must understand the steps to declare a dividend and know how to record the transaction properly to give an accurate view of the company's financial health.

Set the declaration date. The declaration date is when a corporation’s board of directors agrees to distribute the property dividend. Once the declaration date is set, the dividend becomes a liability on the company’s books.

Set the date of record. This date is used to determine the investors that will receive the dividend. All investors owning the stock on the date of record receive the property dividend paid by the company. If an investor sold the stock before the date of record or bought the stock after the date, the investor is excluded from the dividend payment.

Distribute the property dividend approved by the board of directors to the company’s shareholders. Dividends are paid on outstanding shares and not shares the company repurchased.

Record the property dividend transaction using the date of payment. The date of payment is the date the company actually distributes the dividend to shareholders. The amount of the first accounting entry is recorded as the fair market value of the asset minus the book value. For example, a company declares the distribution of a collection of 500 rare coins to shareholders. The company paid $100,000 for the coins and the fair market value is $500,000. The first transaction is recorded for $400,000.

Debit the long-term investment -- rare coins account for $400,000 -- and credit the gain on appreciation for rare coins account for $400,000 using the declaration date.

Debit the retained earnings account for $500,000 and credit the dividends payable account for $500,000 using the declaration date. $500,000 is the market value of the asset.

Debit the dividends payable account for $500,000 and credit the long-term investment -- rare coins account for $500,000 using the date of payment.

Tip

  • If the fair market value of the property is greater than the book value, the corporation must recognize a gain for tax purposes.

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