When a corporation pays a previously declared cash dividend, which of the following is true?

Question

Quizplus · Accepted Answer

Here's why: When a corporation declares a dividend, it records a liability on its balance sheet, specifically in an account often titled "Dividends Payable." This liability reflects the company's obligation to pay the declared dividends to its shareholders. At the time of declaration, the entry would typically involve a debit to Retained Earnings (which reduces stockholders' equity) and a credit to Dividends Payable (which increases liabilities).
Later, when the corporation actually pays out the cash dividend, it reduces its cash balance and eliminates the liability it recorded at the time of declaration. The journal entry to record the payment of the cash dividend would be a debit to Dividends Payable (thereby reducing the liability) and a credit to Cash (thereby reducing the asset).
Therefore, when the cash dividend is paid, cash decreases (which is not the answer since the question asks for what is true), and the liability that was previously recorded for dividends payable decreases, which is the correct answer. Stockholders' equity does not decrease at the time of payment because it already decreased when the dividend was declared. No entry is necessary is incorrect because an entry is required to reflect the payment of the dividend.

When a Corporation Pays a Previously Declared Cash Dividend, Which