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Chapter 13: Q12RQ (page 707)

What is the effect on the accounting equation when cash dividends are declared?

What is the effect on the accounting equation when cash dividends are paid?

Short Answer

Expert verified

Dividend declared- Current liability increases and Stockholder's Equity decreases - Dividends Payable is credited and Retained Earnings are debited.

Dividend paid- Current assets and current liabilities are decreased- Cash is credited and Dividend payable is debited.

Step by step solution

01

Introduction to the topic  

The dividend is the distribution of earnings by the business organization to the owners of the business organization. The dividend is paid to preferred and common stockholders.

02

Effect of dividend declaration and payment on accounting equation-

When the dividend is declared, it increases the current liability and decreases the stockholders鈥� equity, whereas when a dividend is paid, the Current assets and current liabilities are reduced.

It is better understood with the tabular presentation shown below:


Assets =
Liabilities +
Stockholders鈥� equity
Dividend declared

Dividends Payable

-

Increase

-

Retained Earnings

-

-

Decrease

Dividend Paid

Cash

Decrease

-

-

Dividends Payable

-

Decrease

-

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Most popular questions from this chapter

What is treasury stock? What type of account is Treasury Stock, and what is the account鈥檚 normal balance?

Where and how is treasury stock reported on the balance sheet?

What are the three relevant dates involving cash dividends? Describe each.

Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders鈥� equity

The balance sheet of Goldstein Management Consulting, Inc. at December 31, 2017, reported the following stockholders鈥� equity:

Common Stock鈥擻(10 Par Value; 350,000 shares

authorized, 32,000 shares issued and outstanding

Paid-In Capital:

160,000

\) 320,000

650,000

Retained Earnings

Total Stockholders鈥� Equity \( 810,000

Stockholders鈥� Equity

Paid-In Capital in Excess of Par鈥擟ommon 330,000

Total Paid-In Capital

During 2018, Goldstein completed the following selected transactions:

Feb. 6 Declared a 15% stock dividend on common stock. The market value of

Goldstein鈥檚 stock was \)25 per share.

15 Distributed the stock dividend.

Jul. 29 Purchased 2,300 shares of treasury stock at \(25 per share.

Nov. 27 Declared a \)0.10 per share cash dividend on the common stock outstanding.

Requirements

2. Prepare a retained earnings statement for the year ended December 31, 2018. Assume Goldstein鈥檚 net income for the year was $90,000.

Journalizing stock issuance and cash dividends and preparing the stockholders鈥� equity section of the balance sheet

C-Mobile Wireless needed additional capital to expand, so the business incorporated. The charter from the state of Georgia authorizes C-Mobile to issue 120,000 shares of 9%, \(150 par value cumulative preferred stock, and 140,000 shares of \)3 par value common stock. During the first month, C-Mobile completed the following transactions:

Oct. 2 Issued 18,000 shares of common stock for a building with a market value of \(260,000.

6 Issued 650 shares of preferred stock for \)160 per share.

9 Issued 14,000 shares of common stock for cash of \(84,000.

10 Declared a \)13,000 cash dividend for stockholders of record on Oct. 20. Use a separate Dividends Payable account for preferred and common stock.

25 Paid the cash dividend.

Requirements

1. Record the transactions in the general journal.

2. Prepare the stockholders鈥� equity section of C-Mobile鈥檚 balance sheet at October 31, 2018. Assume C-Mobile鈥檚 net income for the month was $95,000.
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