Pealand Company has 50,000 shares of common stock outstanding and 2,000 shares of preferred stock outstanding....

Pealand Company has 50,000 shares of common stock outstanding and 2,000 shares of preferred stock outstanding. The common stock is $1.00 par value. The preffered stock has a $100 par value, a 5% dividend rate, and is noncumulative. On October 31, 2015, the company declares dividends of $0.25 per share for common. Provide the journal entry for the declaration of dividends.

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Expert Solution

It is given that the preffered stock is noncumulative and dividends are declared for common stock. It is deemed that, dividends are even declared for noncumulative preferred stock, as equity shareholders can get a right to claim dividend only after payment of dividend to preference shareholders.

Preference dividend = $100 x 5% = $5

Equity Dividend = $0.25 x 2,000 = $500

The journal entry when dividends are declared is as follows:

Since dividend is declared and not yet paid, Dividend Payable is created as a liability for dividend liability.

We may even debit Retained earnings instead of the Dividends account as it is the source of payment of dividend.

When actual payment is made in respect to dividend, there would be an outflow of cash too.

ekkarill92 answered 1 year ago

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