Question

to set up a liability for the date of declaration of a stock dividend, a company debits cash and credits dividends payable. a)true b)false

Answer 1

It is false that a company debits cash and credits dividends payable when setting up a liability for a stock dividend. In truth, they debit retained earnings and credit common stock dividend distributable.

Step-by-step explanation:

The statement that to set up a liability for the date of declaration of a stock dividend, a company debits cash and credits dividends payable is False. When a corporation declares a stock dividend, it does not involve immediate cash transactions since the process involves issuing additional shares of stock to existing shareholders. Instead, the correct accounting entry should be a debit to retained earnings (which reflects the cost of the dividend based on the market value of the shares or the par value, depending on the size of the dividend) and a credit to common stock dividend distributable, which is a liability account. Upon distribution, the common stock dividend distributable account is debited and the common stock account is credited.