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A corporation pays $1,000 of dividends to its shareholders. What is the correct journal entry on the payment date?
ADebit Retained Earnings $1,000; credit Cash $1,000
BDebit Cash Dividends $1,000; credit Retained Earnings $1,000
CDebit Cash $1,000; credit Cash Dividends $1,000
DDebit Cash Dividends $1,000; credit Cash $1,000
Answer & Solution
Correct answer: D. Debit Cash Dividends $1,000; credit Cash $1,000
1. Paying dividends reduces cash, so Cash is credited $1,000.
2. Retained Earnings is reserved for closing entries, so the Cash Dividends account is used instead of a direct debit to Retained Earnings.
3. Cash Dividends, a contra equity account, increases and is debited $1,000.
4. Option A debits Retained Earnings directly, which is avoided at payment; options C and D have wrong directions or accounts.
5. Therefore debit Cash Dividends $1,000 and credit Cash $1,000.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §1.5.4 "Balance Sheet Account Transactions", p.39_
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