How to Account for a Property Dividend

In this video, I'm going to talk about how to account for a property dividend. So, a property dividend occurs when a company distributes some type of non-cash property to its shareholders. So, you could have a company that mines gold that's distributing gold to its shareholders instead of paying them cash. Or you could have a winery that's distributing bottles of wine to its shareholders. So, those are examples of property dividends. And here's an overview of the accounting. And then we're going to jump into an example. So, we've got the date that the dividends are actually declared, so the declaration date. And what's going to happen is the company's going to record a liability. They're going to have property dividends payable. But also, to mark the asset up to its fair value if the asset is not on the balance sheet currently at its fair value. So, if it's inventory that was acquired, uh, it was purchased from a manufacturer or the company constructed this inventory, it's not on the balance sheet at its fair value, they're going to have to increase it to its fair value, which is going to trigger a gain. Now, when the dividends are actually uh paid, the company's going to get rid of the liability because it no longer has the obligation. It gave out the property to the shareholders and it's going to reduce an asset account. So, if this is inventory that's being distributed to shareholders, then it would reduce the inventory account. Then, at the year-end closing, the company is going to have to get rid of a property dividend account that was just a temporary account. It's going to do that by reducing retained earnings. And then, if it had recognized a gain, the gain is also a temporary account, and it's going to have to increase retained earnings. So, that's a

lot of info, but let's jump into an example, and I don't think you'll find it that bad. So, let's say that the company Walmart were to give each shareholder a toy as a property dividend, right? So, Walmart currently, as of this video, uh gives cash dividends to shareholders, but let's say it gave them each this beautiful toy. So, this is going to be a property dividend. And let's say that the board of directors has approved this dividend on January 1st. So, that's going to be our declaration date. Now, the dividends payable to shareholders of record as of January 8th, we don't make a journal entry on that date. That's just when the company goes and looks and does kind of recordkeeping of, oh, who actually is a shareholder. So, no journal entry as of that date. But then the dividend is distributed. These toys are sent out on January 15th, and we're going to have a journal entry there. Now, Walmart had purchased these toys for $475,000. So before this dividend, right before declaring the dividend, these toys were on Walmart's balance sheet at their cost, their historical cost of $475,000. But the fair value of the toys is $500,000. That's what Walmart was going to sell the toys for. So they were it could actually sell the toys for $500,000. They were on the balance sheet at 475, but the dividend to the shareholders. So, this dividend is going to be treated at its fair value, but the toys aren't on the balance sheet at the fair value. They're in cost 475. So, we're going to have to mark the inventory up $25,000 so that the inventory is on the balance sheet at its fair value of 500,000. So, let's run through these journal entries. So

January 1st, we're going to be debiting property dividends and we're going to debit it for the fair value of this dividend, which is $500,000. This property dividends account is a temporary account. We'll close it out to retain earnings at the end of the period, but right now we're just using it to keep track of our property dividends. Now, the property dividends payable, that's a liability that's going to go on the balance sheet. That is going to be credited for 500,000. But remember, I said that because the inventory was not on the balance sheet at its fair value, we had to mark it up. Inventory is an asset. So, we are going to debit it. And we're going to debit it for $25,000. And that's going to result in a gain which is going to increase this company's profit. Now you say, what are we doing with this inventory debit of 25,000? Remember the inventory was on the balance sheet pre- dividend 475,000. But we're going to treat the dividend as the fair value the property being distributed. So we need to get it to its fair value. So that's why we're increasing it by 25,000. which means now the inventory is on the balance sheet at 500,000. January 8th, that's our record date. No journal entry as I mentioned before, so we don't have to worry about that. That's easy. January 15th, now this company is actually distributing this inventory to the shareholders. Everybody's going to get their toy now. Think all excited they'll be instead of cash getting such a beautiful toy. So, we need to credit the inventory account. And it's on the balance sheet, remember now at 500,000 because it was marked up to its fair value. So, we're going to credit it. inventory for $500,000. The company is reducing its inventory by $500,000 and we're going to debit property dividend payable. Why? We don't need this liability anymore. We recorded the liability when the board said, "Hey, guess what? We're giving everybody a toy. company incurred an obligation. So, we had a payable, a liability. But now, we gave the toy to everybody. So, we're going to reduce that liability. So, we no longer have this property dividend payable because we debited it. So, we have given out the toys. We've covered everything except the year end closing. Remember the property dividends account, not that so the dividend payable account was different than property dividends account. Let me just go back real quick so you can see. So here we initially recorded that property dividend account. Then we had this liability and then we got rid of the liability. Okay. So this and this these canceled out. They were gone. But we still have this that property dividend account we debited. That's a temporary account. So we need to credit that. So we're going to credit property dividends for 500,000 which was the fair value of that dividend. What do we debit? Retained earnings. When we close out our temporary accounts, we close them out to retained earnings. So, retained earnings is effectively going to go down $500,000 as a result of that property dividend. However, it's a little more complicated because we also recorded that gain because the inventory was not on the balance sheet at its fair value. We had to increase it to its fair value, right? Which triggered that gain. That was the plug in that journal entry there. Gain is a temporary account. So, this would have increased the company's profit on its income statement. But now the period's over. We're doing the closing. So, we need to eliminate that gain. The gain had increased with a credit. So, we are going to debit that gain. And then what do we credit? Well, we are going to credit our old friend retained earnings. Now, I put this into two separate entries for closing to try and make it easier for you to see the different things happening. But you might be wondering, hey, could you just combine that closing those closing entries into a single journal entry? And the answer is absolutely you could have. And had you done so, this would have been the journal entry here to close out those temporary accounts at the end of the fiscal year.