When a company pays $2,500 dividends to its stockholders,the transaction should be recorded as:

Question

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When a company pays dividends to its stockholders, it is reducing its cash balance and transferring those funds to the shareholders. Therefore, the transaction should be recorded as a debit to Dividends (which is an expense account) and a credit to Cash. Option A is incorrect because it credits Dividends instead of Cash. Option B is incorrect because it debits Retained Earnings, which is not affected by dividend payments.

When a Company Pays $2,500 Dividends to Its Stockholders,the Transaction