Question

Problem No.4 Warrior Corp., a calendar-year company, had sufficient retained earnings in 2020 as a basis for dividends, but was temporarily short of cash. Warrior declared a dividend of P100,000 on April 1, 2020, and issued promissory notes to its shareholders in lieu of cash. The notes, which were dated April 1, 2020, had a maturity date of March 31, 2021, and a 10% interest rate. Requirements: 1. Journal entry to record the declaration of the dividend on April 1, 2020. 2. Journal entry to accrue the interest on December 31, 2020. 3. Journal entry to settle the dividend on March 31, 2021. Notes:

Answer 1

In the current case, Warrior Corp has sufficient retained earnings but not enough liquidity for distribution of dividend in cash. In such a case, Warrior Corp has elected to issue a 1 year promissory note. This is known as "Scrip dividend".

Journal entries for same are as follows :

1. Journal Entry to record declaration of the dividend on April 1, 2020
S. No.	Particulars	Debit	Credit
1	Retained Earnings a/c ..Dr	1,00,000
	To Scrip dividend payable a/c		1,00,000
2. Journal entry to accrue interest on December 31, 2020
S. No.	Particulars	Debit	Credit
2	Interest expense a/c ..Dr	7,500
	To Interest Payable a/c		7,500
Calculation of interest expense for year ending December 31, 2020
Interest rate = 10%
Period = 9 months from April 1, 2020 to December 31, 2020
Amount on which interest is to be paid = 100,000
Hence, interest amount = 100,000*10%*(9/12) = 7,500
3. Journal entry to settle the dividend on March 31, 2021
S. No.	Particulars	Debit	Credit
3	Interest expense a/c ..Dr	2,500
	Interest payable a/c ..Dr	7,500
	Scrip dividend payable a/c ..Dr	1,00,000
	To Cash a/c		1,10,000

Note : Interest expense of 2,500 in the 3rd entry above represents interest for 3 months from the period January 1, 2021 to March 31, 2021 calculated as : 100,000*10%*(3/12) = 2,500.