Question 1

When does a corporation record an increase in Dividends Payable?

Accepted Answer

On the declaration date,the company's board of directors formally approves the dividend,thereby creating a legal liability for the corporation.The dividend is accounted for by increasing Dividends Payable and increasing a temporary account called Dividends.

Question 2

Hazelnut Corporation had 40,000 shares of $4 par value common stock outstanding on January 1.On January 20,the company purchased 4,000 of its stock for $16 per share.On July 3,the company reissued 2,000 of the shares at $20 per share.Hazelnut uses the cost method to account for its treasury stock.Assume the company paid a dividend of $5 per share on August 3.What is the total amount of the dividends that would be paid to the common stockholders?

Accepted Answer

Dividends are paid only on outstanding shares.There are 38,000 shares outstanding on August 3 (40,000 − 4,000 + 2,000),so the amount of dividends paid equals $190,000 (or $5 per share × 38,000 outstanding shares).

Question 3

On the declaration date,the company:

Accepted Answer

On the declaration date,the company's board of directors formally approves the dividend,thereby creating a legal liability for the corporation.That liability is recorded with a debit to Dividends and a credit to Dividends Payable.

Question 4

Which of the following statements about when cash dividends can be paid is not correct?

Accepted Answer

State laws often restrict dividends to the balance in Retained Earnings.A company may be further restricted by clauses in its loan agreements that require an even larger minimum balance in Retained Earnings.If the company were to violate such a loan covenant,a lender could require renegotiation of the loan and possibly demand its immediate repayment.

Question 5

On February 16,Hawthorne Co.declares a $0.68 dividend to be paid on April 5.Hawthorne has 1,900,000 shares of common stock issued and outstanding.The entry recorded by the company on February 16 includes a debit to:

Accepted Answer

The entry to record the declaration of the dividend on February 16 includes a debit to Dividends and a credit to Dividends Payable for $1,292,000 (1,900,000 shares × $0.68 per share).

Question 6

On the date of record for a dividend,the company:

Accepted Answer

The record date (or date of record)is the cut-off date for determining the specific stockholders to be paid the dividend.No journal entry is recorded on this date.

Question 7

Which of the following below correctly states the sequence of dates related to dividends on common stock?

Accepted Answer

The declaration date marks the official approval of the dividend by the board of directors and the date the company becomes liable for paying the dividend to shareholders.This date precedes the date of record,at which time the corporation finalizes its list of shareholders.The date of record is followed by the date of payment where dividends are disbursed to shareholders.

Question 8

Walter Co.declared a cash dividend.On the payment date of the dividend,its:

Accepted Answer

The payment of a dividend will decrease Cash,an asset,and Dividends Payable,a liability.

Question 9

Typically,a profitable company that pays little or no dividends:

Accepted Answer

Some investors prefer to buy stocks that pay little or no dividends (called a growth investment)because companies that reinvest the majority of their earnings tend to increase their future earnings potential,along with their stock price.

Question 10

Palomino Enterprises reissued 2,000 shares of its treasury stock for $20,000.Prior to the reissuance,the Treasury Stock balance was $24,000,which included the $16,000 cost of the 2,000 shares reissued.After recording this transaction:

Accepted Answer

The stock reissue would be recorded with a debit to Cash for $20,000,a credit to Treasury Stock for $16,000 (or 2,000 shares × cost of $8 per share),and a credit to Additional Paid-in Capital for $4,000 (or $20,000 − $16,000).
Ending balance of treasury stock = Beginning balance − Cost of shares reissued
= $24,000 − $16,000 = $8,000

Question 11

Which of the following would be the best investment?

Accepted Answer

Investors acquire common stock because they expect a return on their investment.This return can come in two forms: dividends and increases in stock price.Some investors prefer to buy stocks that pay little or no dividends (called a growth investment)because companies that reinvest the majority of their earnings tend to increase their future earnings potential,along with their stock price.Rather than wait for growth in stock value,other investors,such as retired people who need a steady income,prefer to receive their return in the form of dividends.These people often seek stocks that consistently pay dividends (called an income investment).

Question 12

Typically,a profitable company that pays relatively high dividends:

Accepted Answer

Rather than wait for growth in stock value,other investors,such as retired people who need a steady income,prefer to receive their return in the form of dividends.These people often seek stocks that consistently pay dividends (called an income investment).

Question 13

Mapleleaf Industries declared a $0.80 per share cash dividend.The company has 200,000 shares authorized,90,000 shares issued,and 84,000 shares of common stock outstanding.What is the journal entry to record the dividend declaration?

Accepted Answer

The journal entry to record the dividend declaration includes a debit to Dividends and credit Dividends Payable for $67,200 (or 84,000 shares outstanding × dividend rate of $0.80 per share).

Question 14

On the payment date for a cash dividend,the company:

Accepted Answer

The payment date is the date on which cash is disbursed to pay the dividend liability owed to each stockholder.The payment of dividends is recorded with a debit to Dividends Payable and a credit to Cash.

Question 15

Dividends Payable is recorded as a credit on the:

Accepted Answer

On the declaration date,the company's board of directors formally approves the dividend,thereby creating a legal liability for the corporation.The dividend is accounted for by increasing Dividends Payable with a credit and increasing a temporary account called Dividends with a debit.

Question 16

Nova,Inc.is considering declaring a $100,000 cash dividend.Nova has a cash balance of $20,000 and Retained Earnings balance of $100,000.Nova should:

Accepted Answer

Although Nova has accumulated a sufficient amount of Retained Earnings to cover the amount of the dividend,it does not have sufficient cash to pay the dividend.Nova only has $20,000 of cash and should not declare a cash dividend of $100,000.

Question 17

On February 16,Hawthorne Co.declares a $1.36 dividend to be paid on April 5.There are 1,900,000 shares of common stock issued and outstanding.The entry recorded by the company on April 5 includes a debit to:

Accepted Answer

The entry to record the payment of the dividend on April 5 includes a debit to Dividends Payable and a credit to Cash for $2,584,000 (1,900,000 shares × $1.36 per share).

Question 18

Lenders will sometimes impose dividend restrictions to:

Accepted Answer

A lender imposes dividend restrictions because it doesn't want to lend money to a corporation and then have the corporation pay it out in dividends to stockholders.

Question 19

The combined effect of the declaration and payment of a cash dividend on a company's financial statements is to:

Accepted Answer

When the dividend is declared,the stockholders' equity account,Dividends,is debited and the liability account,Dividends Payable,is credited.When the dividend is paid,the liability account,Dividends Payable,is debited and the asset account,Cash,is credited.The net effect of these entries is a decrease in assets and a decrease in stockholders' equity.

Question 20

Which of the following statements about the declaration and payment of cash dividends is correct?

Accepted Answer

When the dividend is declared,the stockholders' equity account,Dividends,is debited and the liability account,Dividends Payable,is credited.When the dividend is paid,the liability account,Dividends Payable,is debited and the asset account,Cash,is credited.
As a result,the declaration and payment of dividends reduce the amount of cash available to invest in assets.Dividends,a temporary account,is closed into (and decreases)Retained Earnings at each accounting year-end.Dividends are paid only on outstanding shares.

Quiz 11: Stockholders Equity