Liquidating Dividend Journal Entry

Overview

Liquidating dividend is a term used when the company payout the cash dividend from its common stock when it does not have sufficient retained earnings. Likewise, the journal entry for the liquidating dividend is a bit different from the cash dividend.

Liquidating dividends is not a common practice because when the company declares and payout such dividends, the balance of paid-in capital will be reduced. This is why, in many jurisdictions, this practice is not allowed.

Liquidating divined journal entry

Declaration date

When the company declares the liquidating dividend, it can make the journal entry by debiting the retained earnings account and common stock account and crediting the dividend payable account.

Account Debit Credit
Retained earnings \$\$\$
Common stock \$\$\$
Dividend payable \$\$\$

Common stock is a paid-in capital account in the balance sheet. Though the journal entry debits the common stock, when the company has the additional paid-in capital, it will change to the debit of additional paid-in capital instead.

Account Debit Credit
Retained earnings \$\$\$
Dividend payable \$\$\$

Payment date

When the company pays out the liquidating dividend, it can make the journal entry by debiting the dividend payable account and debiting the cash account.

Account Debit Credit
Dividend payable \$\$\$
Cash \$\$\$

Liquidating dividend example

For example, on December 31, 2020, the board of directors of the company ABC declares to pay dividends of \$0.20 per share of common stock on January 11, 2020, which is equivalent to \$200,000 of dividend payments. However, on December 31, 2020, the company ABC has only \$150,000 of the retained earnings, and its paid-in capital contains only common stock.

What is the journal entry for liquidating dividends?

• on December 31, 2020, when the company ABC declares the dividend
• on January 11, 2020, when the company ABC payout the dividend

Solution:

Declaration date

When the company ABC declares the \$200,000 dividend with only \$150,000 retained earnings, it needs to make the journal entry for liquidating dividend with the \$50,000 reduction of common stock as below:

Account Debit Credit
Retained earnings 150,000
Common stock 50,000
Dividend payable 200,000

Payment date

When the company ABC makes the dividend payment on January 11, 2021, it can make the journal entry as below:

Account Debit Credit
Dividend payable 200,000
Cash 200,000

This journal entry will eliminate the dividend payable that the company has recorded in the prior period. Likewise, the balance of dividend payable will become zero.