The annual report for Sneer Corporation disclosed that the company declared and paid preferred dividends in the amount of $120,000 in the current year. It also declared and paid dividends on common stock in the amount of $2.20 per share. During the current year, Sneer had 1 million common shares authorized; 320,000 shares had been issued; and 118,000 shares were in treasury stock. The opening balance in Retained Earnings was $820,000 and Net Income for the current year was $320,000. Required: Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock. Using the information given above, prepare a statement of retained earnings for the year ended December 31. Prepare a journal entry to close the dividends account.

Answer and Explanation:

The journal entries are shown below:

1 Cash Dividend Dr $120,000

To Dividend Payable $120,000

(Being the dividend is declared)

2 Dividend Payable Dr $120,000

To Cash $120,000

(Being the dividend is paid)

3 Cash Dividend Dr [ (320,000 - 118,000) * $2.20] $444,400

To Dividend Payable $444,400

(Being the dividend is declared)

4 Dividend Payable Dr $444,400

To Cash $444,400

(Being the dividend is paid)

Now the preparation of the retained earning statement is presented below:

Sneer Corporation

Retained Earning statement

For the year ended December 31

Beginning balance of retained earning $820,000

Add: Net income $320,000

Less: Cash Dividend paid - $564,400 ($120,000 + $444,400)

Ending balance of retained earning $575,600

And, the journal entry to close the dividend account is

Retained Earnings Dr ($120,000 + $444,400) $564,400

To Cash Dividends $564,400

(Being the closing entry for dividend is closed)