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Chapter 7.9® - Cumulative Dividends on Preferred Shares - Increases & Decreases of Contributed Capital & Types of Dividends - Stock, Liquidating, Scrip Dividends

Cumulative preferred shares provide that dividends not declared in a given year accumulate at the specified rate on such shares. This accumulated amount must be paid in full if and when dividends are declared in a later year before any dividends can be paid on the common.

If the cumulative preference dividends are not declared in a given year, they are said to have been passed and are called dividends in arrears on the cumulative preferred shares.

Participating Dividends on Preferred Shares:

Participating preferred shares provide that the preferred shareholders participate above the stated preferential rate on a pro rata basis in dividend declarations with the common shareholders.

First, preferred shareholders receive their preference rate. Second, the common shareholders receive a specified matching dividend. Then, if the total declared dividend is larger than these two amounts, the excess id divided on a pro rata basis between the two share classes.

Shares may be partially participating or fully participating. If partially participating, preferred shares may participate in dividend declaration in excess of their preference rate, but the participation is capped at a certain level.

Property Dividends & Spin-Offs:

Corporations occasionally pay dividends with non-cash assets. Such dividends are called property dividends or dividends in kind.

Liquidating Dividends:

Liquidating dividends are distributions that are a return of the amount received when shares were issued, rather than assets acquired through earnings. Liquidating dividends are appropriate when there is no intention or opportunity to conserve resources for asset replacement.

Scrip Dividend:

A corporation that has a temporary cash shortage might declare a dividend to maintain a continuing dividend policy by issuing a scrip dividend. A scrip dividend (also called a liability dividend) occurs when the board of directors declares a dividend and issues promissory notes, called scrips, to the shareholders.

Stock Dividends:

A stock dividend is proportional distribution to shareholders of additional common or preferred shares of the corporation. A stock dividend does not change the assets, liabilities, or total shareholders’ equity of the issuing corporation. It does not change the proportionate ownership of any shareholder. It simply increase the number if shares outstanding.

Special Stock Dividends:

A special stock dividend is a dividend in a share class different from the class held by the recipients, such as a stock dividend consisting of preferred shares issued to common shareholders.

In this case the market value of the dividend should be capitalized.

Stock Splits

A stock split is a change in the number of shares outstanding with no change in the recorded capital accounts. A stock split usually increases the number of shares outstanding by a significant amount, such as doubling or tripling the number of outstanding shares.

In contrast reverse sock split decreases the number of shares. It results in a proportional reduction in the number of shares issued and outstanding and an increase in the average book value per share.

Additional Contributed Capital:

Transactions that may change additional contributed capital are:


- receipt of donated assets

- retirement of shares at a price less than average issue price to date

- issue of par value shares at a price or assigned value higher than par

- treasury stocks transactions, shares reissued above cost


- retirement of shares at a price greater than average issue price to date, when previous contributed capital has been recorded

- treasury stock transactions, shares issued below cost, when previous contributed capital has been recorded

- financial restructuring

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