Multiple Choice
When Yum Brands distributes dividends to its common stockholders for the first time, which of the following statements is correct?
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12. Stockholders' Equity
Dividends and Dividend Preferences
Multiple Choice
Which of the following journal entries correctly records the declaration of a cash dividend payable to common stockholders?
A
Debit Dividends Payable; Credit Cash
B
Debit Cash; Credit Retained Earnings
C
Debit Retained Earnings; Credit Dividends Payable
D
Debit Common Stock; Credit Dividends Payable
Verified step by step guidance1
Understand the concept: When a company declares a cash dividend, it is recognizing a liability to pay the dividend to its shareholders. This reduces Retained Earnings (a part of equity) and creates a liability called Dividends Payable.
Step 1: Identify the accounts involved. The declaration of a dividend affects two accounts: Retained Earnings (decreased) and Dividends Payable (increased).
Step 2: Determine the type of accounts. Retained Earnings is an equity account, and Dividends Payable is a liability account.
Step 3: Apply the rules of debit and credit. A decrease in equity (Retained Earnings) is recorded as a debit, and an increase in liabilities (Dividends Payable) is recorded as a credit.
Step 4: Write the journal entry. Debit Retained Earnings and Credit Dividends Payable to record the declaration of the cash dividend.
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