Question

Castillo Services paid K. Castillo, the sole shareholder of Castillo Services, $6,200 in dividends during the current year. The entry to close the dividends account at the end of the year is:

Multiple Choice
a) Debit Dividends $6,200, credit Cash, $6,200
b) Debit Retained earmings $6,200, credit Salary Expense $6,200
c) Debit Retained earnings $6,200; credit Dividends $6,200
d) Debit Dividends $6,200; credit Retained earnings $6,200
e) Debit Income Summary $6,200; credit Retained earnings $6.200

Answer 1

The correct closing entry to record the payment of dividends at the end of the year is to debit Dividends for $6,200 and credit Retained earnings for $6,200, as dividends decrease the company's retained earnings.

Step-by-step explanation:

The entry to close the dividends account at the end of the year when Castillo Services paid K. Castillo, the sole shareholder, $6,200 in dividends is:

d) Debit Dividends $6,200; credit Retained earnings $6,200.

This is because dividends are a distribution of profits to shareholders, and therefore they reduce the company's retained earnings, which is the accumulated net income that has been retained for reinvestment in the business rather than distributed to shareholders. When recording the closing entry, the Dividends account is debited, which decreases this temporary account balance to zero, and the Retained Earnings account is credited to acknowledge the reduction in the equity of the company resulting from the dividend payment.