Choco-Delite Cookies Company (Choco) declared a $1,600,000 cash dividend on December 15, Year 2, payable to all stockholders on record the following month. On December 31, Year 2, the company completed a two-for-one stock split (Note: Prior to the split there were 2 million common shares outstanding with a par value of $2). If Choco had net income of $3,000,000 for year 2, what is the net journal entry impact on the company's retained earnings account for December, assuming that Choco posts journal entries on a monthly basis and that temporary accounts are closed at year-end?

The net journal entry impact on company's retained earnings is $1400,000 credit.

Explanation:

When the dividends were declared on December 15, the following entries apply:

Dr Dividends $1600000

Cr Dividends payable $1600000

However, upon closing the dividends to retained earnings the below journal entries apply:

Dr Retained earnings $1600000

Cr Dividends $1600000

It is noteworthy that the stock-split does not impact the dividends or retained earnings of $3m in anyway.

Since, journal entries for temporary accounts are closed to retained earnings, invariably the net income of $3m in year 2 must also be shown in retained earnings using journal.

Dr Income statement $3000000

Cr Retained earnings $3000000

From the above, a debit of $1600000 and credit entry of $3000000 in retained earnings gives a credit balance of $1400000