Question

Lotoya Davis Corporation has 10 million shares o common stock issued and outstanding. On June 1, the board of directors voted an 80 cents per share cash dividend to stockholders of record as of June 14, payable June 30.

 

Instructions

1. Prepare the journal entry for each of the dates above assuming the dividend represents a distribution of earnings.
2. How would the entry differ if the dividend were a liquidating dividend?

Answer 1

Part A)

On the date of declaration:

In case of cash dividend declared by the company, it will utilize the balance available in its retained earnings to account for such dividends. As such, the retained earnings account is debited and a liability in the form of dividend payable is created. The journal entry is given below:

Date	Account Titles	Debit	Credit
June 1	Retained Earnings (10,000,000*.80)	$8,000,000
	Dividends Payable		$8,000,000

_________

On the date of record:

No, journal entry is required

_________

On the date of payment:

Payment of dividend would result in an outflow of cash. Therefore, cash account will get credited with the amount of dividend paid by the company.

Date	Account Titles	Debit	Credit
June 30	Dividends Payable	$8,000,000
	Cash		$8,000,000

______________

Part B)

If the amount of dividend declared by the company is a liquidating dividend, only the first journal entry change as we will debit the "Additional-Paid-In Capital" in place of "Retained Earnings". The journal entry would be as follows:

Date	Account Titles	Debit	Credit
June 1	Additional Paid in Capital (10,000,000*.80)	$8,000,000
	Cash		$8,000,000

Rest of the journal entries would be same as in Part A).