Question

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

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

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).

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.