Question

In February 2011, Despot declared cash dividends of $12 million to be paid in April of that year. What effect did the April transaction have on Despot's accounts?

A) Decrease in cash and increase in retained earnings
B) Increase in cash and decrease in retained earnings
C) Increase in liabilities and decrease in assets
D) Decrease in liabilities and increase in assets

Answer 1

The payment of dividends by Despot in April resulted in a decrease in cash and a decrease in liabilities, reflecting the cash outflow and the settlement of the dividend liability.

Step-by-step explanation:

When Despot declared cash dividends of $12 million in February 2011 to be paid in April, the payment of these dividends in April had the following effect on Despot's accounts: There was a decrease in cash because the company paid out money to its shareholders, and there was a decrease in liabilities because the previously declared dividend created a liability that was eliminated once the payment was made.

Therefore, the correct answer to the question is, '(D) Decrease in liabilities and increase in assets.' It's important to note that there is no effect on retained earnings at the time of the payment of dividends; retained earnings would have been reduced when the dividends were declared.