ALLOCATING CASH DIVIDENDS BETWEEN PREFERRED AND

COMMON SHARES

If a cash dividend is declared, they must first be paid to

preferred shareholders before any common shareholders are
paid.
When preferred shares are cumulative, any dividends in arrears
must be paid to preferred shareholders before allocating any
dividends to common shareholders.
When preferred shares are non-cumulative, only the current
years dividend must be paid to preferred shareholders before
paying any dividends to common shareholders.

Example #1:
IBR Inc. has on December 31, 2003:
1, 000 $8 cumulative preferred shares
5, 000 common shares
At Dec 31, 2003 the Board of Directors declares a $6, 000 cash
dividend to be paid to shareholders on January 13, 2004.
REQUIRED
Prepare the journal entries to record the declaration, date of record
and payment of the dividend.
DIVIDEND ALLOCATION
1, 000 pref shares x $8 = $8, 000
HOWEVER the amount of dividends declared is only $6, 000.
Therefore only $6, 000 will be declared and paid AND $2, 000 will
accumulate forward.
NOTE: Dividends in arrears (ie. dividends owed to cumulative Pref
shareholders) are not recorded as a liability (until they are declared)
Dividends in arrears should be disclosed in the notes financial
statements.

JOURNAL ENTRIES
2003
DATE
Particulars
Dec 31
Cash Dividends Pref
Dividends Payable -Pref

PR DEBIT
6, 000

CREDIT
6, 000

To declare cash dividend

No journal entry required

DATE OF
RECORD

2004
Jan 13

Dividends Payable Pref

Cash

6, 000
6, 000

To pay cash dividend

Example #2:
IBR Inc. has on December 31, 2004:
1, 000 $8 cumulative preferred shares
5, 000 common shares
At Dec 31, 2004 the Board of Directors declares a $50, 000 cash
dividend to be paid to shareholders on January 13, 2005.
REQUIRED
Prepare the journal entries to record the declaration, date of record
and payment of the dividend.
DIVIDEND ALLOCATION
TOTAL DIVIDEND (2004)
Allocated to Preferred shares:
Dividends in arrears 2003
(1, 000 x $2)
Dividends - 2004
(1, 000 x $8)
Total Allocated to Preferred
shares:
REMAINDER allocated to Common
Shares

$50, 000
$2, 000
$8, 000
$10, 000
$40, 000

JOURNAL ENTRIES
2004

DATE
Dec 31

Particulars
Cash Dividends Pref
Cash Dividends - Common
Dividends Payable -Pref

PR DEBIT
10, 000
40, 000

CREDIT

50, 000

To declare cash dividend

DATE OF
RECORD
2005

No journal entry required

Jan 13

Dividends Payable Pref

Dividends Payable - Common
Cash

10, 000
40, 000
50, 000

To pay cash dividend

Example #3:
IBR Inc. has on December 31, 2004:
1, 000 $8 non- cumulative preferred shares
5, 000 common shares
At Dec 31, 2004 the Board of Directors declares a $50, 000 cash
dividend to be paid to shareholders on January 13, 2005.

How much money will the Preferred and Common shareholders receive
in this case?
Preferred
Common
TOTAL

$8, 000
$42, 000
$52, 000

(1, 000 x $8 = $8, 000)

($50, 000 - $8, 000)

NOTE:
In the majority of cases, a company does not declare a combined
dividend amount for both classes of shares. Rather it would declare a
specified dividend for each.