Question

Sanders Corporation has the following shares outstanding: 6,000 shares of $50 par value, six percent 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 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. Prepare the journal entry for the declaration of the cash dividends.

Answer 1

For the declaration of cash dividends by Sanders Corporation, the journal entry debits Retained Earnings for $106,000 and credits Dividends Payable for the same amount, reflecting the company's liability to pay the dividends.

Step-by-step explanation:

When Sanders Corporation declares its cash dividends, the journal entry would debit the retained earnings account for the total amount of the dividends and credit dividends payable. The total cash dividends are the sum of dividends for preferred and common stock. Here is the computation:

• Preferred stock dividend = 6,000 shares × $3 = $18,000
• Common stock dividend = 40,000 shares × $2.20 = $88,000
• Total cash dividends = $18,000 (preferred) + $88,000 (common) = $106,000

The journal entry is as follows:

• Retained Earnings: Debit $106,000
• Dividends Payable: Credit $106,000

This entry reflects the company's obligation to pay the declared dividends.