The term property dividend refers to the formal distribution of an asset other than cash to holders of preferred or common shares of stock. A property dividend can take many forms, including real estate, items held in inventory, equipment, and even investments held by the company.
The payment of dividends must be formally approved by the company’s board of directors, even if the company has a long history of quarterly payments; the same is true whether the dividends are paid in cash or property. In addition to board approval, companies are also required to have adequate earned capital and assets that can be distributed before the property dividend is declared.
Also known as a dividend in kind, a property dividend involves the distribution of an asset other than cash to shareholders. Generally Accepted Accounting Principles require property dividends to be recorded at fair market value, which is oftentimes different than the net book value of the asset. The company is also required to recognize a gain or loss on the asset when distributed.
The fair market value of the asset can be determined in a number of ways, including a quoted market price, comparison to a similar asset, or even a professional appraisal.
On January 15, Company A’s board of directors approved the transfer of marketable securities to its shareholders in the form of a property dividend. The book value of these securities was $2,250,000; however, their current market value was $2,500,000. The property dividend was to be paid to holders of common stock on February 5 to shareholders of record on January 22.
The journal entry on the date of declaration to account for the $250,000 increase in the securities’ value would be as follows:
|Gain on Marketable Securities||$250,000|
Since retained earnings are used to fund the dividend, a second journal entry is needed on the date of declaration.
|Property Dividends Payable||$2,500,000|
On February 5, the following journal entry is made to reflect the distribution of the property dividend to shareholders: