On November 1, 2015, Oster Company declared a dividend of $3.00 per share. Oster Company has 20,000 shares of common stock outstanding and no preferred stock. Which of the following is the journal entry needed to record the declaration of dividends?
A)Debit Dividends Payable-Common $60,000 and credit Retained Earnings $60,000.
B)Debit Retained Earnings $60,000 and credit Cash $60,000.
C)Debit Retained Earnings $60,000 and credit Dividends Payable-Common $60,000.
D)Debit Cash $60,000 and credit Dividends Payable-Common $60,000.

Question

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When a company declares a dividend, it is considered a liability until it is paid. Therefore, the appropriate journal entry is to debit Retained Earnings and credit Dividends Payable-Common. Choice A is incorrect because it reverses the accounts. Choice B is incorrect because it assumes the dividend has already been paid. Choice D is incorrect because it fails to account for the liability created by the dividend declaration.

On November 1, 2015, Oster Company Declared a Dividend of $3.00