 Hello, and welcome to this session in which we would look at a CPA exam simulation that deals with liquidating dividend Now what is liquidating dividend? It's very important first to understand what is dividend when is dividend distributed? Well dividend is distributed when the company earns a profit and they decide to distribute some of that profit to shareholders So simply put dividend as a result of revenues minus expenses for a company. They generate revenues They incur expenses then they have net income, which is a profit now this profit initially sits in an account called Retained earnings basically we are retained and retaining mean keeping it Then at some point the company might decide to pay this retained earnings Some of it or all of it now in this session We're gonna be dealing with a special type of dividend called Liquidating dividend so the best way to illustrate liquidating dividend is to actually look at an example Before we proceed any further. 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Go ahead start your free trial today No obligation no credit card required on June 1st Adam company board of directors declare a cash dividend of 750,000 to its 750,000 shareholders payable on June 15th to shareholders on record June 10th Now let's translate in simple English the board of directors basically the company the people in charge of Adam company decided to make a dividend payment How much is that dividend payment? 750,000 well, let's take a look at the equity section of Adam company. They only have 550,000 and retained earnings Well, what does that mean? It means they want to distribute in cash dividends 750,000, but they only have 550 and retained earnings Is that possible? Yes, it is possible as long as they have the cash they can Send the cash they can mail the checks they can transfer the money to the shareholders However in terms of dividend they cannot consider the whole thing in dividend Why because dividend comes out of retained earnings So simply put we only we can only reduce retained earnings to zero and by doing so we can debit retained earnings 550,000 now we declared 750,000 of dividend now we have a liability of 750,000 but notice those two entries don't balance. We are missing 200,000 What do we debit for that 200,000? Well, let's think about it for a moment if we are given out 750,000 of which only 550,000 is profit to the shareholder What is the remainder? Well, we're gonna assume that the remainder is we're giving the the shareholders their money back Basically, we are liquidating the dividend liquid. It's a liquidating dividend We are in a sense. We are partially liquidating the company. We're not liquidating the company But basically we are giving back the money to the shareholders Therefore the remaining 200,000 would reduce additional paid-in capital because we are giving back the money now This is an important concept in taxation. It's called a return of capital or ROC We are giving the shareholders their money back and guess what if we are giving their money back just from a tax perspective This is not taxable. Why why because it's considered return of capital We are given given them back their money which is should not be taxed because it's not a profit They're supposed to be taxed. So on June 1st, we debit retained earning We debit additional paid-in capital for the difference and we credit dividend payable. Now, we're gonna assuming they have enough cash They have 750,000 in cash on the on the balance sheet June 10th, which is the record state again on the record state We have no entry The record state means on that date we review our shareholder list who owns the stock on June 10th Get their name addresses social security EIN Whatever we need to do to send them the money on June 15th on June 15 We'll cut the check or we wild the money to the various shareholders by debiting the payable and Crediting the cash. So let's see what happened overall. Let's take a look at this scenario Dividend payable is gone Basically our cash went down And our equity went down by 750,000. So notice liquidating dividend reduces your cash and reduces your equity And this is what your equity would looks like after notice Common stock we did not touch common stock 750 a 450 450 Additional paid-in capital was reduced from 1.5 million to 1.3 million and we zeroed retained earning Our retained earnings is zero and notice what happened to equity equity went down by Overall 750,000 which is the amount of the cash We paid out. So equity went down Cash went down. We zeroed retained earnings and we are ready to go back Generate more revenues incur expenses try to increase our retained earnings again So this is a liquidating dividend. Make sure you are comfortable with this topic What should you do now go to far hat lectures and look at additional mcqs through false additional resources That's going to help you the various type of dividends we could have Good luck. Study hard liquidating dividend is important and stay safe