Affects of declaring dividends and liquidating
See also final dividend, General Utilities Doctrine.A type of payment made by a corporation to its shareholders during its partial or full liquidation. At the date of declaration the bonds had a market value of 0,000. Date of Declaration Investments in Lie Dharma Company [Debit]. Gain on Appreciation of Bonds = 100,000 [0,000 – 0,000] [Debit]. In such case, firms may elect to declare a “”—by issuing promissory notes requiring them to pay the dividends at a later date. Cash = 2,500,000 A firm with adequate retained earnings but insufficient liquidity may elect to issue “stock dividends” by a pro rate distribution of additional shares of the firm’s own stock to its stockholders. Common Stock Dividend Distributable = 120,000 [Credit]. Cash = 2,000,000 Let’s assume that the PUTRA Corporation declares a property dividend, payable in bonds of Lie Dharma Company being held to maturity and costing 0,000. Investments in Lie Dharma Company Bonds = 600,000 Firms may find themselves with sufficient retained earnings to declare a dividend but not enough liquidity for distribution.Price Implications When a dividend is paid, several things can happen.The first of these is changes to the price of the security and various items tied to it.This usually happens when shareholders believe that the company is no longer sustainable or profitable.Therefore, liquidating dividends are considered a return of shareholders' investments, rather than profit on them.
Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid.On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades.