Log in or sign up to add this lesson to a Custom Course. Login or Sign up. Sharon owns 1, shares in the Tablet Universe Company and the company just announced that it is paying a liquidating dividend. Sharon has only received regular dividends before and is not familiar with a liquidating Receipt of liquidating dividends examples. Let's see if we can help Sharon with this problem. Regular dividends are distributions of the company's profit that the company pays to its shareholders or owners.
Regular dividends are paid out of a company's retained earnings or the earnings it has accumulated every year since it has been in operation. Liquidating dividends are distributions to shareholders that comes from its capital base or the amount that shareholders invested in the company.
A liquidating dividend represents a return of the shareholder's original investment.
Let's examine the impact of this dividend payment on Sharon. The retained earnings are subtracted from the total dividend balance; and then this amount is divided by the total number of shares to get the regular dividend. After the regular dividend is paid out, whatever is left over is the liquidating dividend balance. Since liquidating dividends represent a return of a shareholder's original investment, they are usually not taxed when received by the shareholder.
A company will pay liquidating dividends if management believes the market is not valuing the business favorably if it is trying to sell it. Get FREE access for 5 days, just create an account. It could also pay a liquidating dividend if it chooses to close voluntarily or it is forced to close in the event of bankruptcy where it doesn't have enough assets to pay all of its outstanding liabilities. A company pays liquidating dividends to its shareholders after it has paid its to its creditors or the individuals to whom it owes money such as suppliers, banks for loans, employees and the government for tax payments.
A company distributes part of the company's profit to shareholders as a regular dividend. This dividend is paid from a company's retained earnings which represents the accumulation of all profit earned by the company since it started operating. Companies pay liquidating dividends from their capital base or the amount contributed by shareholders and not their retained earnings. A company could pay liquidating dividends if it attempts to sell the company but the market does not place a favorable value on it.
It may decide to sell its assets things that it owns and settle its liabilities amounts that it owes to others instead. A company could also pay a liquidating dividend if management decides to close voluntarily or if the business goes into bankruptcy and is unable to pay its outstanding debts to its creditors such as its suppliers, employees and the bank. To unlock this lesson you must be a Study. Login here for access. Did you know… We have over college courses that prepare you to earn credit by exam that is accepted by over 1, colleges and universities.
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Receipt of liquidating dividends examples Deborah Schell Deborah teaches college Accounting and has a master's degree in Educational Technology.
Add to Add to Add to. Want to watch this again later? Shareholders expect to receive dividends from companies in whom they own shares and there are many different types of dividends. In this lesson, you will learn about liquidating dividends.
What Is a Liquidating Dividend? The total dividend is: The amount of the total dividend representing the regular dividend is: Want to learn more? Select a subject to preview related courses: Lesson Summary A company distributes part of the company's profit to shareholders as a regular dividend. Register for a free trial Are you a student or a teacher? I am a student I am a teacher. Unlock Your Education See for yourself why 30 million people use Study.
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