A company declares a cash dividend of ₹1 per share on its 20,000 shares of ₹10 each. It has a reserves and surplus of ₹500,000. Prepare the journal entries for the declaration of dividend and for the payment of dividend. Also state the amount that will be transferred to the reserves and surplus account.
Answer
Dividend Payable ₹20,000; Reserves & Surplus ₹20,000; Bank ₹20,000
The correct answer is Dividend Payable ₹20,000; Reserves & Surplus ₹20,000; Bank ₹20,000 — Thus ₹20,000 is transferred from Reserves & Surplus to Dividend Payable on declaration and subsequently to Bank on payment.
Step-by-step solution
- Dividend amount per share = ₹1; total dividend = 20,000 × ₹1 = ₹20,000.
- Declaration entry: Dr. Reserves & Surplus ₹20,000, Cr. Dividend Payable ₹20,000.
- Payment entry: Dr. Dividend Payable ₹20,000, Cr. Bank ₹20,000.
- Thus ₹20,000 is transferred from Reserves & Surplus to Dividend Payable on declaration and subsequently to Bank on payment.
Common mistake: Omitting the Reserves & Surplus credit on declaration
Concept tested: Declaration and payment of dividend
Published · How this solution was prepared and checked
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