Question

A recent annual report for Nordstrom Inc. disclosed that the company declared and paid dividends on common stock in the amount of $1.20 per share. During the year, Nordstrom had 1,000,000,000 authorized shares of common stock and 191,200,000 issued shares. There is no treasury stock. Required: Assume Nordstrom declared the entire dividend ($1.20 per share) on February 20 and subsequently paid the dividend on March 1. Prepare the journal entries to record the declaration and payment of dividends.

Answer 1

Answer:

Upon declaration;

Retained earnings   Dr  $229440000 ($1.20×191200000)

               Dividend payable   Cr $229440000

Upon payment of dividends;

Dividend payable   Dr  $229440000

                  Cash/Bank    Cr  $229440000

Explanation:

There are two things to remember when dealing with the treatment of dividends.

First of all, a dividend is proposed by the BOD (board of directors) usually in an AGM (annual general meeting), after the proposal is made a certain amount of dividend per share is agreed amoung the BOD and finally declared. Until the declaration of dividend no journal entry is made.

Secondly once it's declared the company liable to pay it records it as a liability. Remember dividend is only paid to issued shares (i.e shares held by shareholders) which in this case is 191200000.

So the first entry upon declaration is;

Retained earnings   Dr  $229440000 ($1.20×191200000)

               Dividend payable   Cr $229440000

We debit retained earnings because upon declaration we create a liability but it's not paid right now.

Upon payment of dividends;

Dividend payable   Dr  $229440000

                  Cash/Bank    Cr  $229440000

Upon payment (settlement of liability) we reduce liability and reduce cash.