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Chapter 15: Question 25Q (page 810)

The following comment appeared in the notes of Colorado Corporation’s annual report: “Such distributions, representing proceeds from the sale of Sarazan, Inc., were paid in the form of partial liquidating dividends and were in lieu of a portion of the Company’s ordinary cash dividends.” How would a partial liquidating dividend be accounted for in the financial records?

Short Answer

Expert verified

When a corporation declares a liquidation dividend, the retained earnings and common stock accounts are debited, and the dividend payable account is credited. Common stock is a paid-in capital expense recorded under the equity section in the balance sheet.

Step by step solution

01

Meaning of Liquidating dividend

A liquidating dividend is a payout paid as part of a company's liquidation procedure. Liquidation is the process of corporation ceasing operations and exiting the market. Liquidation can take place either voluntarily or involuntarily (forced).

02

Explaining how a partial Liquidating Dividend be accounted for in the financial records

A partially liquidated dividend will debit both Retained Earnings and Paid-in Capital in Excess of Par. Dividends that are a capital return should be deducted from Paid-in Capital in Excess of Par.

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Most popular questions from this chapter

Why is the distinction between paid-in capital and retained earnings important?

(Equity Items on the Balance Sheet) The following are selected transactions that may affect stockholders’ equity.

  1. Recorded accrued interest earned on a note receivable.
  2. Declared a cash dividend.
  3. Declared and distributed a stock split.
  4. Approved a retained earnings restriction.
  5. Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance.
  6. Paid the cash dividend declared in item 2 above.
  7. Recorded accrued interest expense on a note payable.
  8. Declared a stock dividend.
  9. Distributed the stock dividend declared in item 8.

Instructions

In the following table, indicate the effect each of the nine transactions has on the financial statement elements listed. Use the following code: I = Increase, D = Decrease, NE = No effect.

Item

Asset

Liabilities

Stockholders’ Equity

Paid-in Capital

Retained

Earnings

Net Income

Describe the accounting for the issuance for cash of no-par value common stock at a price in excess of the stated value of the common stock.

On February 1, 2017, Buffalo Corporation issued 3,000 shares of its \(5 par value common stock for land worth \)31,000. Prepare the February 1, 2017, journal entry.

Discuss the propriety of showing:

  1. Treasury stock as an asset.
  2. “Gain” or “loss” on sale of treasury stock as additions to or deductions from income.
  3. Dividends received on treasury stock as income.
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