Liquidating Dividend Journal Entry
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
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.
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.
|Additional paid-in capital||$$$|
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.
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
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:
When the company ABC makes the dividend payment on January 11, 2021, it can make the journal entry as below:
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.