Distributing Corporate Earnings to Stockholders

Chapter 14, Section 1

Stockholders’ Equity Accounts Used by a Corporation

Capital Stock account is used to record the investment of all stockholders

Retained Earnings account is used to record a corporation’s earnings

Dividends account is used to record the distribution of a corporation’s earnings to stockholders(similar to Drawing account)

(3000) STOCKHOLDERS’ EQUITY3110 Capital Stock3120 Retained Earnings3130 Dividends3140 Income Summary

Declaring a Dividend

Dividends can only be distributed by formal action of a corporation’s board of directors. The board of directors is a group of persons

elected by the stockholders to manage a corporation.

Dividends are normally declared on one date and paid on a later date.

Once a dividend is declared, the corporation is obligated to pay the dividend—it becomes a liability until paid.

Declaring a DividendDecember 15. Hobby Shack’s board of directors declared a quarterly dividend of $2.00 per share; capital stock issued is 2,500 shares; total dividend, $5,000.00. Date of payment is January 15. Memorandum No. 79.

DebitNormal Balance

Dividends

5,000.00

CreditNormal Balance

Dividends Payable

5,000.00

What journal? General Journal

Declaring a Dividend

1

23

4

5 6

December 15. Hobby Shack’s board of directors declared a quarterly dividend of $2.00 per share; capital stock issued is 2,500 shares; total dividend, $5,000.00. Date of payment is January 15. Memorandum No. 79.

4. Write the debit amount.

3. Write the memorandum number.

2. Write the title of the account debited.

1. Write the date.

5. Write the title of the account credited.

6. Write the credit amount.

Paying a Dividend

1 2 3 4 5

January 15. Paid cash for quarterly dividend declared December 15, $5,000.00. Check No. 379.

1. Write the date.

2. Write the account title.

3. Write the check number.

4. Write the debit account.

5. Write the credit amount.

Terms Review

retained earnings dividends board of directors declaring a dividend

Problems

Work Together 14-1 (text pg. 408)

On Your Own 14-1 (text pg. 408)

Application 14-1 (text pg. 438)