When a corporation declares a cash dividend, which of the following is true?

Question

Quizplus · Accepted Answer

Here's why:
When a corporation declares a cash dividend, it is committing to pay a certain amount of money to its shareholders. The declaration of a dividend results in the creation of a liability for the company because it now owes this money to its shareholders. The entry to record the declaration of a dividend involves a debit to Retained Earnings (which is a component of stockholders' equity) and a credit to Dividends Payable (a liability account). This means that the company's stockholders' equity decreases by the amount of the dividend declared, as the company is effectively distributing a portion of its earnings to shareholders.
The other options are incorrect in the context of the declaration of a dividend:
a. Cash decreases - This is not true at the time of declaration. Cash decreases only when the dividend is actually paid out to shareholders, not when it is declared.
b. Liabilities decrease - This is incorrect because liabilities actually increase due to the creation of the Dividends Payable account at the time of declaration.
d. No entry is necessary - This is incorrect because an accounting entry is required to record the declaration of the dividend, which affects both stockholders' equity and liabilities.
In summary, upon the declaration of a cash dividend, stockholders' equity decreases as a result of the decrease in Retained Earnings, and a liability (Dividends Payable) is created, which will be settled when the cash is paid out to shareholders.

When a Corporation Declares a Cash Dividend, Which of the Following