Accounting for Cash and Share Dividends

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Questions and Answers

What occurs on the date of declaration in relation to cash dividends?

Shareholders receive their dividends.

The board declares the dividend. (correct)

Dividends payable is reduced.

The dividend is paid out to shareholders.

What is the outcome for shareholders on the date of record?

They need to hold shares to qualify for dividends. (correct)

They receive dividends immediately.

They must sell their shares to receive dividends.

They lose their right to dividends.

Which accounting entries are made on the date of declaration?

Retained earnings are debited and dividends payable is debited. (correct)

Retained earnings are debited and dividends payable is credited.

Dividends paid are recorded as an expense.

Cash is credited and dividends payable is debited.

What must take place on the date of payment for dividends?

The actual payment of the dividend to shareholders is recorded. Signup and view all the answers

What indicates the recording of a liability on the date of declaration of a dividend?

The dividends payable account is increased. Signup and view all the answers

What is the total amount of dividends payable for 250,000 shares at a rate of $0.08 per share?

$20,000 Signup and view all the answers

What is the effect of a cash dividend on total shareholders' equity?

Decreases total shareholders' equity Signup and view all the answers

What does a distribution of additional shares to shareholders signify?

No change in total shareholders' equity Signup and view all the answers

What journal entry would be made when crediting preferred stock for a dividend payment of $20,000?

Debit Dividends Payable $20,000, Credit Preferred Stock $20,000 Signup and view all the answers

Which of the following statements about dividends is correct?

Dividends are distributions of retained earnings. Signup and view all the answers

What amount of cash dividends was declared by the board of directors?

$20,000 Signup and view all the answers

How much is the cash dividend per share?

$0.08 Signup and view all the answers

Which accounts will be affected on July 15 when the dividend is paid?

Dividends Payable and Cash Signup and view all the answers

What is the total number of shares for which the dividend was declared?

250,000 shares Signup and view all the answers

What is the correct journal entry on June 1 upon declaration of dividends?

Debit Retained Earnings $20,000, Credit Dividends Payable $20,000 Signup and view all the answers

What happens to retained earnings when dividends are declared?

They decrease by the amount declared Signup and view all the answers

Which financial statement reflects the dividends declared by the company?

Statement of Changes in Equity Signup and view all the answers

When will the dividend payment actually take place?

July 15, 2006 Signup and view all the answers

What is the primary effect of issuing share dividends on a company's financial statements?

Increases share capital and decreases retained earnings Signup and view all the answers

Which of the following accurately describes share dividends?

They are distributed at fair value free to shareholders. Signup and view all the answers

What is one reason companies issue share dividends?

To conserve cash while continuing to issue dividends Signup and view all the answers

What happens during the date of declaration for share dividends?

A liability is recorded and retained earnings are decreased. Signup and view all the answers

Which of the following is NOT a reason to issue share dividends?

To provide immediate cash liquidity to shareholders Signup and view all the answers

How do share dividends affect the marketability of shares?

They may increase marketability by reducing share price. Signup and view all the answers

What is recorded in the company's financial books at the time of share dividend payment?

The share dividend liability is settled. Signup and view all the answers

What effect do share dividends have on a company's retained earnings account?

Decrease retained earnings and increase share capital. Signup and view all the answers

What is the journal entry to record the cash received from the rights shares issued at $2.50 each for 44,000 shares?

Cash: $110,000, Share Capital: $110,000 Signup and view all the answers

How many ordinary shares would be reflected in the shareholders' equity after the rights share issuance?

264,000 ordinary shares Signup and view all the answers

What typically characterizes the issue price of rights shares compared to the market price?

Usually cheaper than market price Signup and view all the answers

Which of the following is NOT a characteristic of a rights share issue?

Given as a free share Signup and view all the answers

What is one critical distinction between a rights issue and a bonus issue?

Rights issue involves an issue price, bonus issue does not Signup and view all the answers

In preparing journal entries for rights shares, what is the correct accounting treatment for cash received?

Debit Cash and Credit Share Capital Signup and view all the answers

Which statement best summarizes the purpose of a rights issue?

To raise capital from existing shareholders at a discount Signup and view all the answers

What is the effect of recording rights shares on the balance sheet under shareholders' equity?

It increases both share capital and total assets Signup and view all the answers

Study Notes

Cash Dividends

When a company declares a cash dividend, the following entries occur:
- A debit to Retained Earnings, decreasing owners’ equity
- A credit to Dividends Payable, increasing liabilities

Cash Dividend Dates

Declaration Date: The date the Board of Directors approves the dividend payment.
Record Date: The date shareholders of record are determined. Shareholders owning shares on this date are eligible to receive the dividend.
Payment Date: The date the company actually distributes the cash dividend to shareholders. This results in a debit to Dividends Payable and a credit to Cash.

A distribution of additional shares of the company's stock to shareholders.
Does not affect total shareholders’ equity.
Shareholders retain their percentage of ownership of the company.
Share dividends do not transfer the company's assets to the shareholders.
Distributed free to the shareholders at fair value.

Conserving cash: Allows companies to continue paying dividends without cash payment.
Reducing market price: Decreases the market price per share and increases marketability.
Adjusting capital structure: Corrects the company's capital structure, where retained earnings have grown too large.
Preventing takeovers: Makes it more difficult for an outside company to acquire enough shares to gain control.

Declaration Date: The Board of Directors declares and approves the share dividend.
Record Date: Shareholders of record on this date are eligible to receive the share dividend.
Payment Date: The company records the issue of the share dividend to shareholders.

Rights Issue

A company issues shares to existing shareholders at a discounted price.
Gives shareholders the right to purchase new shares.
This can be used to raise capital.
The issue price is typically lower than the market price of the shares.

Journal Entries for Rights Shares

When rights shares are issued, a journal entry needs to be recorded:
- A debit to Cash
- A credit to Share Capital

Shareholders’ Equity after Rights Shares

The Shareholders’ equity account will reflect the issuance of the new shares, increasing both the issued and paid-up capital.

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Description

This quiz covers the accounting principles related to cash and share dividends, including their declaration, record, and payment dates. Understand the impact of these dividends on owners' equity and liabilities, as well as the implications of share dividends on shareholders' ownership. Test your knowledge on these important financial concepts.