Final answer:
The journal entry in question signifies a dividend payment to shareholders, where dividends payable is debited and cash is credited. This entry is made when the company actually distributes dividends, not when dividends are declared or set aside.
Step-by-step explanation:
The transaction that would cause the following journal entry, which is a debit to dividends payable by $500k and a credit to cash by $500k, is option 1: The business pays dividends to its shareholders. This journal entry reflects a dividend payment, where the company is reducing its liability (dividends payable) and also decreasing its cash balance because it is distributing cash to shareholders. Dividends represent a share of the company's earnings that are distributed to shareholders as a form of return on investment.
Option 2 relates to setting aside money for dividends, which would not affect the dividends payable or cash accounts until the actual payment date. Option 3, declaring dividends payable, would increase dividends payable but would not yet involve the cash account. The actual movement of cash to pay dividends, reflected in the given journal entry occurs only when dividends are paid, not simply declared or recorded.