Principles of Accounting

[lhodgdon]

Thanks snazzlefrag and Kiwi Lover for the help. I got it figured out now. The thing that was holding me up was I didn't read the questions close enough (note to self for the exam). One question is about a cash dividend and the other is a stock dividend. All the Accounting books I consulted said the same thing about the cash dividend. I sent an email to the Instant Cert webmaster, so they can look into that question and possibly correct it.

Lynette

Hi lhodgson,

I agree with Kiwi Lover!

There are two important dates involved with dividends: The Declaration Date, and the Payment Date. There are also two types of Dividends: Stock Dividends (preferred), and Cash Dividends (common).

The question and answer for question 1 are correct.



On the Declaration Date of "Stock" Dividends on preferred stock (question 1), the Liability is recorded as follows:

Retained Earnings $15000 (decrease: Debit)
Paid-in-Capital _____________$15000 (Increase: Credit)

--
However, I think the inclusion of CASH in the answer to the second question is a mistake. Cash is only credited (decreased) when dividends are actually PAID, not when they are merely DECLARED.

In the text colored red below, it seems that IC got it right. Therefore, I must assume that "Cash" in the answer is a mistake, and it should be "Declared Dividends" instead.



On the Declaration Date of "Cash" dividends on common stock (question 2), the Liability is recorded as follows:

Retained Earnings $5000 (decrease: Debit)
Declared Dividends _____________$5000 (Increase: Credit)

--
The Cash account only comes into play when cash dividends are actually PAID.

Hope that helps,
Snazzlefrag