Dividend Received Journal Entry
Overview
When the company makes a stock investment in another’s company, it may receive the dividend from the stock investment before it sells it back. Likewise, the company needs to properly make the journal entry for the dividend received based on whether it owns only a small portion or a large portion of shares.
If the company owns less than 20% shares of stock of another company, it can record the dividend received as the dividend income. In this case, the dividend received journal entry will increase both total assets on the balance sheet and total revenues on the income statement.
On the other hand, if the company owns between 20% to 50% shares of stock of another company, it needs to record the dividend received as a reduction of its stock investments on the balance sheet. This is due to the company needs to use the equity method where it records its share of the net income of the company it invests as its own income on the income statement. Hence, it already recognizes the income from the investments when the investee reports the net income.
Dividend received journal entry
Holding shares of less than 20%
When the company owns the shares less than 20% in another company, it needs to follow the cost method to record the dividend received.
In this case, the company can make the dividend received journal entry by debiting the cash account and crediting the dividend income account.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Dividend income | 000 |
Dividend income is usually presented in the other revenues section of the income statement. This is due to the dividend income is usually not the main income that the company earns from the main operation of its business.
Holding shares of between 20% and 50%
When the company owns the shares between 20% to 50% in another company, it needs to follow the equity method for recording the dividend received.
In this case, the company needs to make the journal entry for the dividend received by debiting the cash account and crediting the stock investments account instead.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Stock investments | 000 |
As the normal balance of stock investments is on the debit side, this journal entry will decrease the stock investments by the amount of the dividend received by the company.
Dividend received example
For example, on December 31, the company ABC receives a cash dividend from one of its stock investments. The dividend received is $5 per share holding and the company ABC has a total of 1,000 shares which represent 10% of ownership.
In this case, the company ABC can make the journal entry for the $5,000 ($5 x 1,000) of dividend received on December 31, by debiting this amount to the cash account and crediting the same amount to the dividend income account.
| Account | Debit | Credit |
|---|---|---|
| Cash | 5,000 | |
| Dividend income | 5,000 |
After this journal entry, total assets on the balance sheet and total revenues on the income statement of the company ABC will increase by $5,000.
Example 2:
For example, the company ABC has stock investment in the company XYZ where it holds 30% shares of ownership. On December 31, the company XYZ reports a net income of $500,000 for the year, and at the same time, it also declares and pays the cash dividend of $60,000 to its stockholders.
As the company ABC owns 30% of shares of ownership, under the equity method, it needs to record 30% of XYZ’s net income which is $150,000 ($500,000 x 30%)as an increase in the stock investments. And at the same time, it also needs to record the dividend received of $18,000 ($60,000 x 30%) as a decrease in stock investments.
Hence, the company ABC can make the journal entry for the share percentage of XYZ’s net income and the dividend received on December 31, as below:
30% of XYZ’s net income
| Account | Debit | Credit |
|---|---|---|
| Stock investments | 150,000 | |
| Revenue from stock investments | 150,000 |
Dividend received
| Account | Debit | Credit |
|---|---|---|
| Cash | 18,000 | |
| Stock investments | 18,000 |
In this journal entry, the $18,000 of the dividend received is not recorded as the dividend income but as a decrease of stock investments instead.
For the holding of more than 50% of shares, the company will become a parent company where the investee company that it has invested in becomes the subsidiary company. In this case, the company will need to prepare consolidated financial statements where they present all assets, liabilities, revenues, and expenses of subsidiary companies.