Question

Discuss the accounting treatment or disclosure that should be accorded a declared but unpaid cash dividend, an accumulated but undeclared dividend on cumulative preferred stock, and a stock dividend distributable.

Short answer

The amount of unpaid dividend is treated as liability from the declaration date to until it is disbursed. In the case of accumulated dividends, the shareholders here are treated as the creditors with the value of dividend expected from them. In case of stock dividend distributable, the undistributed stock is normally listed in the stockholders’ equity part.

Step-by-step solution

Meaning of dividend

Dividends are sort of income that shareholders of the company get for per share of stock held by them. It is usually drawn from retained earnings of the firm.

Accounting treatment that should be accorded a declared but unpaid cash dividend

A cash dividend officially authorized by the board of directors would be listed by a debit to retained earnings and credited to dividends payable account. The dividends payable account should be grouped as a current liability.

Accounting treatment for an accumulated but undeclared dividend on cumulative preferred stock

An accumulated but undeclared dividend on cumulative preferred stock is not listed in the books as a liability till is declared by the board, but such arrears should be presented by a footnote to the balance sheet as well as excursively in the capital stock part.

Accounting treatment for stock dividend distributable

A stock dividend distributable, officially authorized and declared by the board, does not make an appearance as a liability as the stock dividend does not need future payments for assets or services and is voidable by the board before issuance. Though, an undistributed stock dividend is usually recorded in the stockholder’s equity part as it displays retained earnings in the way of transfer to paid-in-capital.