Cash 4,000 Dividend Income 4,000 Record dividend income from XYZ Company.
20% of ,000 The Cost Method During the year, XYZ has net income of ,000 and pays dividends of ,000.
Dividends are reported to the Internal Revenue Service () and to the receivers of the dividends on Form 1099-DIV, Dividends and Distributions.Some distributions that are called dividends are actually considered interest, such as the distributions received from building and loan associations, cooperative banks, savings and loan associations, credit unions, and mutual savings banks.Other distributions, or portions thereof, often referred to as dividends are actually the return of invested capital, which is nontaxable, or may consist of capital gains.Distribution from life insurance policies are treated as a nontaxable return of premium, but distributions exceeding the total premiums paid are taxable.Distributing profits to shareholders signals a healthy future for the company and gives it additional publicity when it declares dividends.
The primary disadvantage of paying dividends is a decrease in the company’s retained earnings, which could be used to cover unforeseen expenses and debt obligations.
This isn’t just an emergency fund, but it helps him do okay through the ups and downs of his other investments.
If they don’t return as well as he’d like for a quarter or two, things aren’t disastrous – he still has a lot of breathing room.
The Cost Method Investor Company purchases 20 percent of Investee Company’s common stock for 0,000 at the beginning of 20X1. Investment in XYZ Company Stock 100,000 Cash 100,000 Record purchase of XYZ Company stock.
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10% of ,000 Liquidating Dividends Illustrated On January 2, 20X1, Investor Company purchases 10 percent of Investee Company’s common stock.