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Chapter 15: Question 21Q (page 774)

Dividends are sometimes said to have been paid “out of retained earnings.” What is the error, if any, in that statement?

Short Answer

Expert verified

Here the statement contains an error as the retained earning does not give surety for a dividend payment.

Step by step solution

01

Meaning of Dividend

Companies pay dividends in exchange for sharing profits with their shareholders. Dividends are treated as income for investors because a company provides investors with a return on their investment.

02

Error in the Statement

Paying dividends with cash is the way dividends are done. To be able to distribute profits legally, retained earnings must have a balance. However, this does not guarantee an ability to pay a dividendif the cash situation does not allow it.

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Most popular questions from this chapter

Indicate how each of the following accounts should be classified in the stockholders’ equity section.

  1. Common Stock.
  2. Retained Earnings.
  3. Paid-in Capital in Excess of Par—Common Stock.
  4. Treasury Stock.
  5. Paid-in Capital from Treasury Stock.
  6. Paid-in Capital in Excess of Stated Value—Common Stock.
  7. Preferred Stock.

Graves Mining Company declared, on April 20, a dividend of \(500,000 payable on June 1. Of this amount, \)125,000 is a return of capital. Prepare the April 20 and June 1 entries for Graves.

(Computation of Retained Earnings) The following information has been taken from the ledger accounts of Isaac Stern Corporation.

Total income since incorporation $317,000

Cash dividends paid 60,000

Total value of stock dividends distributed 30,000

Gains on treasury stock transactions 18,000

Unamortized discount on bonds payable 32,000

Instructions

Determine the current balance of retained earnings.

For what reasons might a corporation purchase its own stock?

(Cash Dividend and Liquidating Dividend) Lotoya Davis Corporation has 10 million shares of common stock issued and outstanding. On June 1, the board of directors voted an 80 cents per share cash dividend to stockholders of record as of June 14, payable June 3

Instructions

  1. Prepare the journal entry for each of the dates above, assuming the dividend represents a distribution of earnings.
  2. How would the entry differ if the dividend were a liquidating dividend?
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