Question

The board of directors of Benson Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2014. The dividend is to be paid on August 15, 2014, to stockholders of record on July 31, 2014. The correct entry to be recorded on August 15, 2014, will include aa. debit to Cash Dividends.b. credit to Cash Dividends.c. credit to Dividends Payable.d. debit to Dividends Payable.

Answer 1

Answer:

D. Debit to Dividends Payable.

Explanation:

The first thing we have to keep in mind is that dividends are liabilities, that is, they represent cash outflows for the corporation. In the example, we can distinguish two moments: the declaration of a cash dividend and its effective distribution. Next, we will analyze them from an accounting point of view:

• On July 15, 2014, Benson Company declared a cash dividend. In accounting terms, on that day the “Retained Earnings” account was debited. Remember that this account is the one that records the profits that the company has obtained to date. So, what was done was to subtract that part that is to be distributed among stockholders. This amount is then transferred to a current liability account called “Dividends Payable”. In this case, money was added, therefore, the account was credited.

• On August 15 dividends were distributed. That day, the "Dividends Payable" account was debited, or, in other words, its money was discounted, because it is now in the hands of shareholders.