On June 1, a board of directors declared a $3 per share cash dividend, payable on June 30 to all common stockholders of record on June 15. The company has 10,000 shares of common stock authorized, 1,000 shares issued, and 200 shares in the treasury. The entry to record the dividend declaration increases

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First, let's calculate the total dividend obligation. The company has 1,000 shares issued, but there are 200 shares in the treasury. Treasury shares are shares that were issued and then repurchased by the company; they do not receive dividends and are not included in the calculation of dividends payable. Therefore, the dividend will be paid only on the 800 shares that are issued and outstanding (1,000 issued shares - 200 treasury shares).
Total dividend obligation = Dividend per share x Number of outstanding shares
Total dividend obligation = $3/share x 800 shares
Total dividend obligation = $2,400
Now, let's determine the correct accounting entry. When a dividend is declared, it does not affect an asset account because the cash has not yet been paid out. It also does not affect an expense account because dividends are not considered an expense; they are a distribution of earnings to shareholders. Instead, the declaration of a dividend increases a liability account called "Dividends Payable" because it represents an obligation to pay the shareholders in the future.
Therefore, the correct entry to record the dividend declaration is:
- Debit "Retained Earnings" or "Dividends" (a reduction in stockholders' equity) for $2,400
- Credit "Dividends Payable" (an increase in liabilities) for $2,400
The correct answer to the question is:
a. a liability account by $2,400.
This entry reflects the company's commitment to pay $2,400 in dividends to its shareholders, which is a liability until the payment date. The retained earnings account, which is part of stockholders' equity, is reduced because dividends are a distribution of a company's earnings to its shareholders.

On June 1, a Board of Directors Declared a $3