Hutter Corporation declared a $0.50 per share cash dividend on its common shares. The company has 23,000 shares authorized, 10,800 shares issued, and 9,200 shares of common stock outstanding. The journal entry to record the dividend declaration is:
A. Debit Common Dividends Payable $5,400; Credit Cash $5,400
B. Debit Common Dividends Payable $4,600; Credit Cash $4,600
C. Debit Retained Earnings $4,600; Credit Common Dividends Payable $4,600
D. Debit Retained Earnings $5,400; Credit Common Dividends Payable $5,400
E. Debit Retained Earnings $11,500; Credit Common Dividends Payable $11,500
The correct answer and explanation is:
The correct answer is:
C. Debit Retained Earnings $4,600; Credit Common Dividends Payable $4,600
Explanation:
When a company declares a dividend, it creates a liability because it now owes a payment to its shareholders. The declaration does not involve an immediate cash payment, but it reduces retained earnings and increases the liability under “Common Dividends Payable.”
To calculate the total dividend amount: Total Dividend=Outstanding Shares×Dividend per Share\text{Total Dividend} = \text{Outstanding Shares} \times \text{Dividend per Share} =9,200×0.50= 9,200 \times 0.50 =4,600= 4,600
- Retained Earnings is debited for $4,600 because the company is distributing profits to shareholders.
- Common Dividends Payable is credited for $4,600 to reflect the liability that the company now owes.
Why the Other Answers Are Incorrect:
- A and B: These options incorrectly use “Common Dividends Payable” as a debit instead of a credit.
- D: Uses the incorrect number of shares (10,800 issued shares instead of 9,200 outstanding shares).
- E: Incorrectly multiplies all authorized shares (23,000) instead of just the outstanding shares.
Key Accounting Concepts:
- Authorized shares refer to the maximum shares a company can issue.
- Issued shares are those the company has sold.
- Outstanding shares are issued shares minus treasury shares (shares the company has repurchased). Only outstanding shares receive dividends.
Since dividends are not paid on treasury shares, the correct calculation only includes the 9,200 outstanding shares.
This journal entry accurately reflects the company’s financial position, ensuring that retained earnings decrease while recognizing the dividend liability.
Here is the generated image of an accountant recording a dividend declaration in a financial journal, featuring a workspace with financial documents, a ledger book, a calculator, and a laptop displaying the journal entry. Let me know if you need any modifications!
