Hello,

I have been struggling with the following problem for the last several hours and can't figure it out :confused:.

Problem:
The Board of Directors declared a $1.75 per share dividend on the 3,000 shares of $75 par value common stock outstanding. The dividends will be payable on January 31, 2010 to all stockholders of record as of January 25, 2010.

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Since the BOD is only DECLARING the dividends, I believe the journal entry Dr. Dividends Declared [5,250] and Cr. Dividends Payable [5,250]. However, what do I do with the $75 par value common stock? Do I include that in the journal entry? If so, would it be Dr. Dividends Declared [5,250], Dr. Retained Earnings [225,000], and Cr. Dividends Payable [230,250]. What's right? :eek:

Since the BOD is only DECLARING the dividends, I believe the journal entry Dr. Dividends Declared [5,250] and Cr. Dividends Payable [5,250].

That's correct.


However, what do I do with the $75 par value common stock?

Absolutely nothing. The $75 has nothing to do with dividends. It's "legal capital." The common stock account must be recorded at $75 per share when it is issued, but is not related at all to the dividends being paid. (Meaning you'll use that number only when you issue stock.) The dividend was $1.75, period.


Do I include that in the journal entry? If so, would it be Dr. Dividends Declared [5,250], Dr. Retained Earnings [225,000], and Cr. Dividends Payable [230,250].

Even if that $75 were anything to do with dividends, this entry wouldn't make sense. Dividends come out of retained earnings. Books do this two different ways. One is to debit the dividend account (contra equity) and close out the dividends to retained earnings at the end of the year. The other is to take them directly out of retained earnings. You're trying to do a combination of the two, like some comes out directly and some gets closed out later - that would never happen.