Multiple Choice
Which of the following best describes 'dividends in arrears' on cumulative preferred stock?
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12. Stockholders' Equity
Dividends and Dividend Preferences
Multiple Choice
Which of the following is the correct journal entry to record the declaration of a cash dividend of \$4 per share for a corporation with 1,000 shares outstanding?
A
Debit Dividends Payable \$4,000; Credit Cash \$4,000
B
Debit Retained Earnings \$1,000; Credit Dividends Payable \$1,000
C
Debit Retained Earnings \$4,000; Credit Dividends Payable \$4,000
D
Debit Cash \$4,000; Credit Retained Earnings \$4,000
Verified step by step guidance1
Step 1: Understand the concept of declaring a cash dividend. When a corporation declares a cash dividend, it is committing to pay a certain amount to its shareholders. This creates a liability (Dividends Payable) and reduces Retained Earnings, which represents the accumulated profits of the company.
Step 2: Calculate the total dividend amount. Multiply the dividend per share (\$4) by the number of shares outstanding (1,000). This gives the total dividend amount: \$4 × 1,000 = \$4,000.
Step 3: Determine the correct accounts to use. Declaring a dividend involves debiting Retained Earnings to reduce the company's equity and crediting Dividends Payable to record the liability.
Step 4: Write the journal entry. The journal entry for declaring the dividend is: Debit Retained Earnings \$4,000; Credit Dividends Payable \$4,000.
Step 5: Note that the other options provided are incorrect because they either involve the wrong accounts (e.g., Cash instead of Dividends Payable) or incorrect amounts (e.g., \$1,000 instead of \$4,000).
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