Question

PB7.

LO 14.3Tent & Tarp Corporation is a manufacturer of outdoor camping equipment. The company was incorporated ten years ago. It is authorized to issue 50,000 shares of $10 par value 5% preferred stock. It is also authorized to issue 500,000 shares of $1 par value common stock. It has issued 5,000 common shares and none of the preferred shares. Tent & Tarp has the following transactions:

Mar. 1	Declares a cash dividend of $5 per share
Mar. 30	Pays the cash dividend
Jul. 10	Declares a property dividend of one 6-person camping tent per share of stock when the price per tent is $150.

Journalize these transactions.

Answer 1

To Journalise :

The transactions relating to declaration and payment of dividend

Introduction :

Profits of the company are distributed as dividend to stockholders of the company . Dividends can be distributed in the form of cash, Stock or property.

Explanation of solution :

1. Record liability for payment of dividend

Date	Account	Debit$	Credit$
1 Mar	Retained earnings (5000*$5)	25000
	Cash dividend payable		25000
	(To record declaration of cash dividend)

Notes:

• Retained earning is an equity account and is decreased by $25000. Therefore the retained earning account is debited with $25000.
• Cash dividend payable is a liability and it is increased by $25000. Therefore cash dividend payable is credited with $25000.

2. Record payment of dividend

Date	Account	Debit $	Credit $
30,Mar	Cash dividend payable (5000*$5)	25000
	Cash		25000
	(To record payment of cash dividend)

Notes:

• Cash dividend payable is a liability and it is decreased by $25000. Therefore , cash dividend payable is debited with $25000.
• Cash is an asset and is decreased by $25000. Therefore, Cash account is credited with $25000.

3.Declares a property dividend

The amount of the dividend is calculated by multiplying the number of shares by the market value of each tent:

5000 shares×$150=$750000

The declaration to record the property dividend is a decrease (debit) to Retained Earnings for the value of the dividend and an increase (credit) to Property Dividends Payable for the $750,000.

Date	Account	Debit $	Credit $
July 10	Rretained earnings	750000
	Property dividend payable		750000
	(To record the declaration of property dividend)

The journal entry to distribute the tents decreases both the Property Dividends Payable account (debit) and the Cash account (credit).