Question

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

Answer 1

The declaration of cash dividends will decrease retained earnings and create dividend liability accounts. The payment of cash dividends will increase the dividend liability accounts and decrease the company's cash account.

The declaration of cash dividends by Sanders Corporation will have the following financial statement effects:

• Preferred Stock Dividends Declared:

The company will decrease its retained earnings by $3.00 per share multiplied by the number of preferred shares outstanding.

This will be recorded as a debit to Retained Earnings and a credit to Preferred Stock Dividends Declared.

• Common Stock Dividends Declared:

The company will decrease its retained earnings by $2.20 per share multiplied by the number of common shares outstanding.

This will be recorded as a debit to Retained Earnings and a credit to Common Stock Dividends Declared.

The payment of cash dividends by Sanders Corporation will have the following financial statement effects:

• Preferred Stock Dividends Payable:

The company will increase a liability account called Preferred Stock Dividends Payable by the total amount of preferred stock dividends declared.

This will be recorded as a debit to Preferred Stock Dividends Payable and a credit to Preferred Stock Dividends Declared.

• Common Stock Dividends Payable:

The company will increase a liability account called Common Stock Dividends Payable by the total amount of common stock dividends declared.

This will be recorded as a debit to Common Stock Dividends Payable and a credit to Common Stock Dividends Declared.

• Cash:

The company will decrease its cash account by the total amount of dividends paid.

This will be recorded as a debit to Preferred Stock Dividends Payable and a credit to Cash.