How are entries recorded for the declaration and payment of cash dividends.
A Corportation has 50,000 shares of common stock outstanding. It declares a $2 per share cash d ividend on November 1 to stockholders of record on d=december 1. The dividend is paid on December 31 Prepare the entries on the appropriate dates the declaration and payment of the cash dividend
To record the declaration and payment of cash dividends, you would need to make journal entries on three different dates - the date of declaration, the date of record, and the date of payment. Let's go through each entry:
1. Date of Declaration (November 1):
The first entry is made to record the declaration of the cash dividend. The following journal entry should be recorded:
Date: November 1
Debit: Retained earnings (or Dividends declared) - $100,000 (50,000 shares x $2 per share)
Credit: Dividends payable - $100,000
Explanation: Debiting the retained earnings (or Dividends declared) account reduces the equity of the company, while crediting the Dividends payable account represents a liability that the company has towards its shareholders.
2. Date of Record (December 1):
This entry is made to establish the eligible shareholders for the dividend payment. No actual cash or dividend payable is recorded at this stage. The journal entry would be as follows:
Date: December 1
No journal entry is required.
Explanation: On the date of record, no actual entry is recorded because it is only used for informational purposes. It is used to determine which shareholders are entitled to receive the dividend on the payment date.
3. Date of Payment (December 31):
The final entry is made when the dividend is paid to the shareholders. The following journal entry should be recorded:
Date: December 31
Debit: Dividends payable - $100,000
Credit: Cash - $100,000
Explanation: Debiting the Dividends payable account reduces the liability created in the declaration stage, while crediting the Cash account represents the outflow of cash for the dividend payment.
These journal entries correctly record the declaration and payment of the cash dividend in the company's financial records.