Question

At a company’s December 15 meeting, the board of directors declared a total of

$80,000 dividends payable to the common and preferred shareholders. The dividend is

payable on January 15 to shareholders of record on December 31. No journal entry has

been made to record this dividend. It is the company’s practice to keep dividends

payable to common and preferred shareholders in separate accounts.

There are 17,500 common shares with a balance of $349,197 at December 31, 20x5.

There are 3,000 preferred shares each bearing an annual dividend of $8. The balance in

the Preferred Shares account as at December 31, 20x5 is $200,000. The preferred

shares are cumulative and fully participating in dividends in excess of $2.50 per

common share. The preferred share dividends were last paid on December 31, 20x4.

Participation is based on the share balances at Dec 31, 20x5.

Required – Prepare the journal entry at December 31, 20x5 to record the declared

dividend.

Answer 1

In cumulative preferrence shares any unpaid dividend of previous years will be paid in the following year in which any dividend is announced or declared. Preference shares are given preference over the common stock while declaring the dividend.

Some companies do not pay the dividend on the same date when the declared the dividend therefore the journal entry to be passed on the day of the declarance of dividend will include a Credit to dividend payable as liability.

Therefore journal entry at December 2015 to record the declaration of dividend will be

Dividend/retained earnings Account debit 80,000

To Dividends payable account credit. 80,000

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