On December 31, 2018, 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, 2018, 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 company declares a dividend, it creates a liability known as Dividends Payable, which is recorded as a credit to the Dividends Payable account. Therefore, the entry to record the declaration of the dividend would include a credit of $20,000 to Dividends Payable. Choices A and C are incorrect because they do not reflect the correct account to be credited or debited. Choice B is incorrect because it is not necessary to note in the financial statements that dividends are in arrears on preferred stock for the current year, as this information would be included in the notes to the financial statements.