Question

Mocha Company earned net income of $ 95 comma 000 during the year ended December ​31, 2018. On December ​15, Mocha declared the annual cash dividend on its 5​% preferred stock​ (par value, $ 108 comma 000​) and a ​$0.75 per share cash dividend on its common stock (42 comma 000 ​shares). Mocha then paid the dividends on January ​4, 2019.
Requirements
a. Journalize for Java the entry declaring the cash dividends on December 15, 2018.
b. Journalize for Java the entry paying the cash dividends on January 4, 2019.

Answer 1

Answer:

a) Debit Retained Earnings with $139,500

Credit Dividends Payable Account: Preferred Stock $108,000

Credit Dividends Payable Account : Common Stock $31,500

Being Dividends declared on December 15, 2018.

b) Debit Dividends Payable Account: Preferred Stock $108,000

Debit Dividends Payable Account: Common Stock $31,500

Credit Cash Account $139,500

Being Cash payments for dividends on January 4, 2019.

NB: Common stock dividends = $0.75 of 42,000 common stock outstanding, i.e. $31,500.

Explanation:

Cash Dividends are declared by the Board of Directors as returns or distributions to shareholders from earnings.  They are made for their investments in the company as a form of compensation.

When cash dividends are declared, the entries required are to reduce the amount of the retained earnings while creating a dividends payable account.

When the cash dividends are paid, the dividends payable account is debited and cash account is credited to show the effect of the settlement.