Question

Before preparing financial statements for the current year, the chief accountant for Cullumber Ltd. provided the following information regarding the accounting for dividends and stock splits:

1.
Cullumber has 20,400, $4 noncumulative preferred shares issued. It paid the preferred shareholders the quarterly dividend, and recorded it as a debit to Dividends Expense and a credit to Cash.
2.
A 5% stock dividend (1,000 shares) was declared on the common shares when the fair value per share was $12. To record the declaration, Retained Earnings was debited and Dividends Payable was credited. The shares have not been issued yet.
3.
The company declared a 2-for-1 stock split on its 20,400, $4 noncumulative preferred shares. The average per share amount of the preferred shares before the split was $70. The split was recorded as a debit to Retained Earnings of $1,428,000 and a credit to Preferred Shares of $1,428,000.

Determine if each of the above transactions was recorded correctly and, if not, prepare the correct entry. 

Answer 1

Requirement 1:

Sl No.	Account title and explanation	Debit	Credit
1	Cash Dividend	$             -
	Cash		$             -
	[Being cash dividend paid]

a) Debit side entry is incorrect, instead of dividend expense we have to use cash dividend or dividend or dividend payable accounts ( based on situation)

Requirement 2:

Sl No.	Account title and explanation	Debit	Credit
2	Retained Earnings	$    12,000
	Common Stock Dividend Distributable		$    12,000
	[Being Stock Dividend Declared]

a) Credit side entry is incorrect, instead of dividend payable we have to use Common Stock Dividend Distributable Account.

Requirement 3:

Sl No.	Account title and explanation	Debit	Credit
3	No Entry	$             -
			$             -

a) No Entry is required for stock split.