Declared and paid $15,000 cash dividends to shareholders.

Question

BlackTom AI · Accepted Answer

The question presents a scenario where cash dividends of $15,000 were declared and paid to shareholders, and asks you to choose the correct journal entry.
Option 1: 'Dr. Dividends Expense 
     
   15,000

Cr. Cash 
     
   15,000'
This option treats dividends as an expense and directly reduces cash. In proper accounting, dividends are not an expense of the period; they reduce equity (retained earnings) and are recorded as a liability when declared, not as an expense on the income statement. Paying cash immediately after declaration would involve settling a liability rather than expensing it. Therefore, this entry misclassifies the nature of dividends and uses Cash to credit, which would only be correct if the dividend had already been declared as a liability.

Option 2: 'Dr. Dividends Expense 
     
   15,000

Cr. Dividends Payable 
     
   15,000'
Here again dividends are shown as an expense (which is inappropriate for dividends). Debiting a dividends expense and crediting dividends payable suggests recognition of an expense and a payable, which does not align with the standard treatment of cash dividends—dividends reduce equity and are not recognized as an expense on the income statement. The correct handling would separate declaration (increasing a dividends liability or reducing retained earnings) from payment (settling the liability with cash).

Option 3: 'Dr. Net Income 
     
   15,000

Cr. Cash 
     
   15,000'
This option debits Net Income for the dividend amount, which is conceptually flawed. Net income is an bottom-line measure for the period, not an account that is directly debited to reflect a cash distribution to owners. Debiting Net Income would imply reducing earnings on the income statement, which is inconsistent with how dividends interact with the accounting equation and equity. Additionally, crediting Cash implies cash outflow without acknowledging a corresponding reduction in equity or a liability.

Option 4: 'None of the above.'
This option would be the appropriate choice if none of the presented entries correctly records declaration and payment of cash dividends. The standard treatment requires two events: first, declaration of the dividend (debit Retained Earnings or Debit Dividends (a contra-equity/dividend) and Credit Dividends Payable for the amount), and second, payment of the dividend (Debit Dividends Payable and Credit Cash). The entries shown in Options 1–3 either misclassify dividends as expenses or misstate the payable/impact on cash, so they do not reflect the proper accounting for declared and paid cash dividends.

Declared and paid $15,000 cash dividends to shareholders.

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