Liquidating dividend tax treatment
Sharon has only received regular dividends before and is not familiar with a liquidating dividend. 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.
A company will pay liquidating dividends if management believes the market is not valuing the business favorably if it is trying to sell it.
For example, if Tablet Universe's management believes the company is worth 0 million but the highest offer it receives to purchase the company is 0 million, it may decide to liquidate by selling all of the company assets (items of value that it owns) and pay its liabilities (debts that it owes) instead.
Because the dividends are totally paid out of relevant year net income, they are all ordinary dividends and must be recognized as income by Company A.
The journal entry in the first year would be: In the third year and fourth year, dividends declared exceeded the available income.
The company must use its retained earnings balance of 0,000 first and the remainder of the dividend, 0,000 (0,000 - 0,000), will come from the company's paid-up capital.
Because a 10% holding neither shows significant influence nor control, it must be recorded using the cost method (also called fair value method).
The following table shows Company B’s net income, accumulated earnings and dividends declared for the last five years (all amounts in USD in millions): During the first and second year, net income was million and million respectively, and dividends declared amounted to million and million respectively.
While conventional dividends are recorded by the investor as an income from its investment, liquidating dividends are recorded not as an income but as return of the investment.
Each blocks of shares acquired must be treated separately and accumulated earnings since the acquisition should be considered only in determining whether a dividend is an ordinary dividend or a liquidating dividend.