Mocha Company earned net income of $ 95 comma 000 during the year ended December 31, 2018. On December 15, Mocha declared the annual cash dividend on its 5 % preferred stock (par value, $ 108 comma 000 ) and a $0.75 per share cash dividend on its common stock (42 comma 000 shares). Mocha then paid the dividends on January 4, 2019.

Requirements

a. Journalize for Java the entry declaring the cash dividends on December 15, 2018.

b. Journalize for Java the entry paying the cash dividends on January 4, 2019.

a) Debit Retained Earnings with $139,500

Credit Dividends Payable Account: Preferred Stock $108,000

Credit Dividends Payable Account : Common Stock $31,500

Being Dividends declared on December 15, 2018.

b) Debit Dividends Payable Account: Preferred Stock $108,000

Debit Dividends Payable Account: Common Stock $31,500

Credit Cash Account $139,500

Being Cash payments for dividends on January 4, 2019.

NB: Common stock dividends = $0.75 of 42,000 common stock outstanding, i. e. $31,500.

Explanation:

Cash Dividends are declared by the Board of Directors as returns or distributions to shareholders from earnings. They are made for their investments in the company as a form of compensation.

When cash dividends are declared, the entries required are to reduce the amount of the retained earnings while creating a dividends payable account.

When the cash dividends are paid, the dividends payable account is debited and cash account is credited to show the effect of the settlement.