On 1 June 2022, Linh Do Accounting Company declared a $50 000 cash dividend to be distributed to its ordinary shareholders of record on June 15, 2022. The dividend will be paid on 15 July 2022. The required journal entry on 1 June includes a:

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BlackTom AI · Accepted Answer

We start by identifying what happens on the declaration date of a cash dividend. At declaration, a company commits to distributing cash to shareholders, which reduces retained earnings and creates a liability to pay the dividend.
Option 1: '$50 000 credit to cash' would prematurely show cash leaving the company. The cash payment occurs later on the payment date, not at declaration, so this entry is incorrect.
Option 2: '$50 000 credit to ordinary share capital' would imply an impact on share capital, which does not change when declaring a dividend. Dividends affect retained earnings and a liability, not share capital, so this is incorrect.
Option 3: '$50 000 debit to retained earnings' correctly reflects the reduction of retained earnings to recognize the distribution of profits to shareholders. It also creates a liability (Dividends Payable) to be settled when the cash is paid. This aligns with standard accounting treatment for cash dividends on declaration date.
Option 4: '$50 000 debit to dividends payable' would decrease a liability that has not yet been established. Since dividends payable is the liability created by the declaration, debiting it would undo the liability rather than recording the declaration itself, making this option incorrect.
In summary, the only entry that matches the bookkeeping event of declaring a cash dividend is a debit to retained earnings for the amount of the dividend, paired with a credit to Dividends Payable (which is not shown as a separate option but explains the accompanying liability). The other options misstate cash flow timing, affect wrong accounts, or invert the nature of the liability.

BACC012 Online Quiz- Week 8 | LA008

On 1 June 2022, Linh Do Accounting Company declared a $50 000 cash dividend to be distributed to its ordinary shareholders of record on June 15, 2022. The dividend will be paid on 15 July 2022. The required journal entry on 1 June includes a:

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