Question

The board of directors of Western Ltd declared a cash dividend of $1.50 per share on 42 000 shares of ordinary shares on 15 July, 2014. The dividend is to be paid on 15 August, 2014, to shareholders of record on 31 July, 2014.

The effects of the journal entry to record the payment of the dividend on 15 August, 2014, are to:

increase shareholders’ equity and increase liabilities.

increase shareholders’ equity and decrease assets.

decrease liabilities and decrease assets.

decrease shareholders’ equity and decrease liabilities.

Answer 1

Answer is Option 3 Decrease Liabilities and decrease assets as far as only payment part of Journal entry is concerned

Dividend will decrease Shareholder's Equity . Dividends paid are reduced from Shareholders equity.

So the first two options that it will increase Shareholders equity is not appropriate

on 15th July 2014 when dividend is declared the Journal Entry will be

Shareholder's Equity/Retained Earnings $ 63000

To Dividend Payable $ 63000

(So Shareholders equity is reduced by debiting the same and Dividend payable is created as a liability)

Dividend When declared becomes a Liability Until paid

on 15th Aug 2014 When Dividend is paid the Journal Entry will be

Payment Entry

Dividend Payable $ 63000

To Cash $ 63000

(being Dividend payable paid in cash)

So this payment entry has an effect of reducing liabilities created on 15th July 2014(Dividend payable) and Reducing Assets (Cash)

So in this payment entry there is a decrease of liability(Dividend Payable) and decrease of Asset (cash)

Alternatively when looked from a broader perspective Dividend reduces the Shareholders equity and Dividend once paid decreases the liability of the company to pay dividend when declared

But The Effects of Journal Entry to record payment (as asked in question regarding payment part alone ) will just decrease liabilities and decrease assets