Hello, and welcome everyone. In today's lesson, our example will focus on some transactions related to contributed equity, mainly distribution of dividends, declaration and payment of dividends, stock dividends, stock split, cash dividend. One example that I will group all those components in one exercise. Let's take a look. On January 1st, 2021, Universal Incorporation had the following account balances in its shareholders equity accounts. I have common stock with number of shares issued. I have paid in capital, PIC common stock, PIC preferred stock. I have the preferred stock also that has one million dollars per value times the number of shares outstanding, and the retained earnings. The last one that I want to point your attention is on the treasury stock, and that cost I have 5,000 shares. Here, I wanted to emphasize the difference between issued, those 250,000 shares are issued. If I have 5,000 shares that are in treasury that I purchase back, then it is important to know that actually 245,000 shares are outstanding. The issued is 250,000 minus the 5,000 shares that are in treasury, then the one that are outstanding will be 245,000 shares. This is important because when we do the distributions, we are actually calculating the distributions, the dividends based on the outstanding. Those treasury stock do not have any right for any dividends or any distributions. This is important. That's why I'm focusing from the very beginning on the difference between the issued and the outstanding. The outstanding here is 245,000 shares. Here are some transactions that happen during the year. On January 15th, declared a property dividend of 100,000 shares of United Company. United Company, that's another company, so I have investment in that company, now I am actually declaring property dividend. But because the carrying value, the book value is $10 per share, and actually the fair value is nine dollar per share, before I declare the dividends, I have to record the loss on those shares, which is the difference between the 10 and the nine. Then in February 17th, I distributed the property dividend. When I declare I recognize as a liability, property dividend payable. While in the payment when pay out the distribution, then I will decrease my liability. On April 10th, two for one stock split was declared and distributed on outstanding common stock. Remember, outstanding, which is the 245,000 shares that I was talking about. It's effected in the form of a stock dividend, then it will be accounted as a reduction, then there will be a journal entry here because it's affected as a stock dividend. The fair value of the stock was four dollars on this date. Actually, if it's a large stock dividend, 25 percent and above, then obviously, I will not use the fair value or the market value of the stock, but I'll use the par value per share. On July 18th, declared and distributed a three percent stock dividend on outstanding. Remember, this is the outstanding number of shares as of July 18th. You'll see that that is extremely important when we go to the journal entries. Because now I have a two for one stock split, so it's no longer now a July 18th, it was actually 245 because of the two for one stock split. The 245,000 are now 490,000 shares, because I took each share and multiplied it by two, two for one stock split. That will be shown up when I calculate the three percent. On December 1st, I declared a 50 cent per share cash dividend on outstanding common shares. Now, the outstanding on December 1st is no longer 490,000. How did I get the 490,000? It's the 245,000 that were outstanding at the beginning of the year, two for one stock split made them 490,000, and now there is a three percent stock dividend, which will make them more. We'll see that in a minute. December 20, I paid the cash dividend, let's take a look at how I record each of those general [inaudible] For the January 15th for declaration of the property dividend, as I said, I had to record the loss on the investment, and I actually decreased the investment by 100,000, bringing it down to the 900,000. Then I declared the dividend, decreasing the retained earnings and recognizing a liability property dividend payable. When I actually pay that, I actually reduce my liability and reduce my investment for the 900,000, easy go. On April 10th, I actually have dividend in the two for one stock split, but it's affected in the form of a stock dividend, that's why I took the 250,000 minus the 5,000, that's the 245,000 outstanding shares, multiplied it by the one dollar because it's a large stock dividend, and that's the value that I debited to the retained earnings. Sometimes companies instead of debiting the retained earnings, they will debit the paid-in-capital common stock instead, but sometimes you do the retained earnings as instructed. What about on July 18th, when I actually have the three percent stock dividend. Three percent is a small stock dividend, and that is affected by actually using the market value. That's why at the time of the stock dividend, who was five-dollar market value, the value of the stock, and here is the number of stock that were issued. The 490,000, that's what I kept emphasizing to 145,000 times two because of the two for one stock split, times the three percent and that is the value of the stock dividend debited in the retained earnings using the market value. Obviously, the common stock will be credited for the one dollar per value, and the paid in capital in excess of pair will be credited to balance the entry. On December 1st, here you go, when I actually declare a 50 cent dividend to the outstanding common stockholders. Now, it's 504,700 outstanding number of shares. Where did he get this from? It's the 490,000 plus the three percent, which is actually if you take the three percent times the 490,000, that's the 14,700. When I added the 14,700 to the 490,000, the outstanding number of shares is 504,700. Have I declared 50 cents to each of those outstanding shares, the total will be 252,350, and that's why I declared and recorded as a cash dividend payable. On December 20th, when I paid that dividend, I reduced the dividend payable by the amount that I paid, and I credit cash for the 252,350. It is very important once you have a stock dividend or a stock split, you have to update the number of shares outstanding, and remember that the declaration will be based only on the number of shares outstanding, the treasury stock or the treasury shares will have no right in the stock dividend or the stock split that was announced. Hopefully, that will give you a good idea about distributions in general and how to account for those distributions. Thank you very much.
