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

Which of the following is the appropriate journal entry for the declaration of cash dividends?

Debit Dividends Expense; Credit Cash

Debit Dividends Payable; Credit Cash

Debit Retained Earnings; Credit Dividends Payable

Debit Cash; Credit Retained Earnings

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Verified step by step guidance

Understand the concept of declaring cash dividends: When a company declares cash dividends, it is committing to pay a portion of its retained earnings to shareholders. This creates a liability called 'Dividends Payable' until the payment is made.

Identify the accounts involved: Declaring dividends affects 'Retained Earnings' (a component of equity) 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 appropriate journal entry: The declaration of cash dividends requires a debit to 'Retained Earnings' to decrease equity and a credit to 'Dividends Payable' to increase liabilities.

Review why other options are incorrect: For example, 'Debit Dividends Expense; Credit Cash' is incorrect because dividends are not considered an expense; they are a distribution of retained earnings. Similarly, 'Debit Dividends Payable; Credit Cash' is incorrect because this entry is used when dividends are paid, not declared.

Apply the correct journal entry format: The journal entry for declaring cash dividends is: Debit Retained Earnings; Credit Dividends Payable. This reflects the reduction in equity and the creation of a liability.