Companies will pay liquidating dividends under the following circumstances: Distributions can only be made to shareholders after the money owed to creditors has been paid.
Cash can only be paid to shareholders if the company's net assets are positive.
On its books, these shares were recorded at their cost of ,000. If the fair market value had been less than the book value, a loss, rather than a gain, would have been recognized.
If a corporation wishes to pay a cash dividend but has no cash at the moment, it may issue a special type of note payable to the stockholders promising to pay later. If the scrip pays interest, the interest portion of the payment should be debited to Interest Expense and not be treated as part of the dividend.
On this post I am going to give some case examples with Journal/entries needed for each.
As stated earlier, most dividends are paid out of retained earnings and are simply distributions to the stockholders of the corporate earnings.
Creditors are always senior to shareholders in receiving the corporation's assets upon winding up.
However, in case all debts to creditors have been fully satisfied, there is a surplus left to divide among equity-holders.
This concept is different than regular dividends, which are paid from the company's profits or retained earnings.
This difference has income tax implications to shareholders.