how to make "adjusting entry" in investment registers

Change the dividend transaction to "Return of Capital" transaction. (You may also want to check how you reported it for tax purposes - if as dividend income, depending on materiality you may want to see about adjusting your 2006 return, because you've already paid tax on it.)

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The difference may also be caused by brokerage or maintenance fees. Look at your 1099s and see if fees are listed. Usually they say "paid by company" but we know who really pays them!

The Return of Capital amount doesn't match a single dividend payment. I was hoping there was a way to do this which would reflect a year end recategorization event, rather than going in and fudging individual dividends to match the amount.

I did check the 2006 return and the amount was listed under "nondividend distributions", as it was on my 1099, so I reported it correctly. I'm confused why it wasn't in the list of return of principle on any statement I can find. Guess if I really want to know the nitty gritty, I'll have to bug my broker.

Thanks,

jo

It's definitely not a brokerage fee. It's clearly listed as a "non dividend distribution" tied into one specific closed end fund on my

jo

Thanks what he gets paid for. :0

jo

Hi, Jo.

Without knowing any of the details of the corporation involved, I can't be specific, of course. But many accounting determinations cannot be made until the corporation's year-end. Estimates are recorded periodically during the year and, sometimes, dividends are declared based on these estimates. When the books are closed after the year-end, the final calculations are made and it just might turn out that the profits were less than the dividends that had been paid out. If the company paid out $1 million in dividends, but only $900,000 profits were realized, then where did the other $100,000 come from? Must have been paid from borrowings or from capital that had been previously paid in by stockholders, rather than from earnings of the company. (In a regular corporation, the dividends might have been paid from prior years' accumulated earnings, but mutual funds are not supposed to have any earnings carried over from year to year; they are supposed to pay out everything each year.)

At any rate, some of the dividends that have already been paid and reported preliminarily as having come from profits, must have come from some source other than profits, that is, a return of capital. So an adjustment must be made, and it is very difficult, perhaps impossible, to assign it to any specific monthly dividend during the year. It's just an adjustment to the year's total dividends. Sometimes a determination is made that a prior year's profit was miscalculated and amended reports are issued - and the shareholders must file amended returns.

Since the shareholder is taxed only on the fund's profits, these additional amounts are not currently taxable to him/her, but reduces his/her basis in the shares held. When the shares are eventually sold, the gain will be larger because of the reduced basis. If the return of capital is so large that it exceeds the basis, then all such amounts received after the basis is reduced to zero are taxable gains.

I hope this "generic" explanation helps a little. But remember: I've been retired a long time. Check with your own CPA to be sure of the current rulings and accounting treatments.

RC

Great explanation for how this happens. Still not sure if there is a better way to get my Quicken files to match the cost basis other than picking, say, the last n dividend payments that collectively match the Return of Principal and changing their category. It's not as pretty as I'd like but I can't think of any other "adjusting" entry to make that would tie into the specific security's cost, can't you?

jo

Hi, Jo.

As I said, this is only a "generic" explanation. For specifics, we'd have to see the detailed explanation from the company's lawyers and accountants. In some cases, the return of capital would apply evenly over all dividends paid out by the company in the year; in other cases, only dividends paid after - or before - the date of a specific transaction might be affected. No way to tell from our perspective.

I probably would make as simple an entry as possible just as a "holding" adjustment, then wait for the official explanation from the company - and that might come well after year-end. When that finally comes and I understand what really happened, I'd delete the preliminary version and make the final entry. And hope I didn?t sell any of those shares in the meantime, because that would probably require me to delete and re-enter those sales, too.

Oh, I re-read your original post and see that this affected the 2006 year. By now, you should have the official explanation, or be able to find it at the company's website (under Investor Relations?), so you should be able to make the proper entry as of 12/31/06. If you mention the name of the company, we might be able to help find that explanation.

RC