Answer to Question #197653 in Accounting for Milan

Question

A company has 10,000 shares of common stock issued and 2,000 shares of treasury stock. The

par value of the stock is $10 per share. On January 1, year 1, the company declared a 5%

dividend to be paid in cash on June 30, year 1. What journal entry should the company record

on the declaration date?

A. Debit retained earnings for $4,000 and credit dividends payable for $4,000.

B. Debit dividends expense for $4,000 and credit dividends payable for $4,000.

C. Debit dividends expense for $5,000 and credit dividends payable for $5,000.

D. Debit retained earnings for $5,000 and credit dividends payable for $5,000.

Answer 1

Solution:

The correct answer is A. Debit retained earnings for $4,000 and credit dividends payable for $4,000.

When dividends are declared by the company prior to actual cash payment, the retained earnings account is debited and dividends payable account is credited on declaration date.

The total cash dividend to be paid is based on the number of shares outstanding, which is the total shares issued less treasury stock.

Outstanding shares = 10,000 – 2,000 = 8,000 shares

The cash dividend declared = $(8000 \times10)\times 5\% =\$ 4,000$

The journal entry to record the declaration of the cash dividends involves a decrease (debit) to Retained Earnings account and an increase (credit) to Dividends Payable account. This will be shown as follows:

Date    Account Debit Credit

Jan 1  Retained

Earnings 4,000

Dividends

Payable                           4,000

       (To record the declaration of cash dividend)