Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

12. Stockholders' Equity

Dividends and Dividend Preferences

Financial Accounting

12. Stockholders' Equity

Dividends and Dividend Preferences

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Multiple Choice

On the date of dividend declaration, which of the following journal entries is recorded?

Debit Dividends Payable; Credit Cash

Debit Retained Earnings; Credit Dividends Payable

Debit Cash; Credit Retained Earnings

Debit Dividends Expense; Credit Retained Earnings

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Verified step by step guidance

Understand the concept of dividend declaration: When a company declares dividends, it is committing to distribute a portion of its retained earnings to shareholders. This declaration creates a liability for the company, as it owes the dividend amount to shareholders.

Identify the accounts involved: The declaration of dividends affects Retained Earnings (an equity account) and Dividends Payable (a liability account). Retained Earnings is reduced because the company is distributing profits, and Dividends Payable is increased to reflect the obligation to pay shareholders.

Determine the journal entry: The correct journal entry for dividend declaration is to debit Retained Earnings (to decrease equity) and credit Dividends Payable (to increase liabilities). This reflects the company's commitment to pay dividends.

Clarify why other options are incorrect: The option 'Debit Dividends Payable; Credit Cash' is incorrect because cash is not paid at the time of declaration, only at the time of payment. The option 'Debit Cash; Credit Retained Earnings' is incorrect because cash is not involved during declaration. The option 'Debit Dividends Expense; Credit Retained Earnings' is incorrect because dividends are not recorded as an expense; they are a distribution of retained earnings.

Summarize the correct journal entry: On the date of dividend declaration, the journal entry is 'Debit Retained Earnings; Credit Dividends Payable,' which accurately reflects the reduction in retained earnings and the creation of a liability.