On December 31, 2015, Stock, Inc. has 4,000 shares of 6% $100 par value cumulative preferred stock and 60,000 shares of $10 par value common stock outstanding. On December 31, 2015, the directors declare a $20,000 cash dividend. The entry to record the declaration of the dividend would include:

Question

Quizplus · Accepted Answer

When a dividend is declared, it creates a liability called Dividends Payable, which is recorded with a credit to Dividends Payable. Therefore, the entry to record the declaration of the $20,000 cash dividend would include a credit of $20,000 to Dividends Payable. Choice A is incorrect because it suggests an entry for a specific class of stock, while dividends are declared for all stockholders. Choice B is incorrect because it suggests a note disclosure rather than a journal entry. Choice C is incorrect because it suggests an entry that would reduce equity, which is not appropriate for a dividend declaration.