Available-for-sale securities can generate dividend revenue, similar to trading securities. For instance, on December 10th of Year 1, XYZ Company declared and paid a dividend of $1 per share. If an investor owns 500 shares, the total dividend received would be calculated as follows:
Dividend Revenue = Number of Shares × Dividend per Share = 500 shares × $1/share = $500.
This dividend is received in cash, leading to a journal entry where cash is debited for $500, reflecting the increase in cash assets. The corresponding credit is recorded as dividend revenue, which is reported on the income statement. It is important to note that this revenue is classified as non-operating income, as it does not stem from the core business operations. Instead, it appears at the bottom of the income statement, separate from operating revenues.
Additionally, only unrealized gains or losses from changes in the fair value of available-for-sale securities are included in other comprehensive income, which is distinct from regular income. The comprehensive income statement combines net income with these unrealized gains and losses, providing a broader view of financial performance.
In summary, receiving $500 in cash from dividends increases both assets and revenue, which in turn boosts equity through an increase in net income. This process mirrors the treatment of dividend revenue from trading securities, reinforcing the understanding of how different types of securities impact financial statements.