Question

cash dividends sanders corporation has the following shares outstanding: 6,000 shares of $50 par value, 6% preferred stock and 40,000 shares of $1 par value common stock. the company has $328,000 of retained earnings. at year-end, the company declares its regular $3.00 per share cash dividend on the preferred stock and a $2.20 per share cash dividend on the common stock. three weeks later, the company pays the dividends. a. determine the financial statement effect of the declaration of the cash dividends. b. determine the financial statement effect of the payment of the cash dividends balance sheet income statement assets

Answer 1

The declaration of cash dividends by Sanders Corporation would result in a decrease in retained earnings and an increase in dividends payable on the balance sheet, without affecting the income statement. Upon payment, cash and dividends payable both decrease.

Step-by-step explanation:

The student's question revolves around the declaration and payment of cash dividends by Sanders Corporation. When a company declares dividends, current liabilities on the balance sheet increase because dividends payable become an obligation. Specifically, the company would record a liability for the amount of the dividends declared. Similarly, retained earnings would decrease because that is the source of the dividend payment. So, upon the declaration of dividends:

• Retained Earnings decrease by total dividends declared.
• Dividends Payable (a liability) increase by the same amount.

There is no immediate effect on the income statement because dividends are not an expense but a distribution of earnings.

Upon payment of the dividends:

• Assets, specifically Cash, decrease by the total dividends paid.
• Dividends Payable decreases by the same amount, as the liability is settled.

Overall, the declaration and payment of dividends affect shareholders' equity and current liabilities, but have no impact on the company's income statement.