East Corp., a calendar-year company, had sufficient retained earnings in 20X3 as a basis for dividends, but was temporarily short of cash. East declared a dividend of $100,000 on April 1, 20X3 and issued promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1, 20X3, had a maturity date of March 31, 20X4 and an interest rate of 10%. How should East account for the scrip dividend and related interest?

A. Debit retained earnings for $110,000 on April 1, 20X3.

B. Debit retained earnings for $110,000 on March 31, 20X4.

C. Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $10,000 on March 31, 20X4.

D. Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $7,500 on December 31, 20X3.

Question

Farrell

Business

4 November, 16:19

East Corp., a calendar-year company, had sufficient retained earnings in 20X3 as a basis for dividends, but was temporarily short of cash. East declared a dividend of $100,000 on April 1, 20X3 and issued promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1, 20X3, had a maturity date of March 31, 20X4 and an interest rate of 10%. How should East account for the scrip dividend and related interest?

A. Debit retained earnings for $110,000 on April 1, 20X3.

B. Debit retained earnings for $110,000 on March 31, 20X4.

C. Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $10,000 on March 31, 20X4.

D. Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $7,500 on December 31, 20X3.

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Answers (1)

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Ian · Answer 1

D. Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $7,500 on December 31, 20X3.

Explanation:

As East declared a dividend of $100,000 on April 1, 20X3, the journal entry to record the transaction -

Retained earnings debit $100,000

Dividend payable credit $100,000

As east issued promissory notes and the maturity date of March 31, 20X4, an interest rate of 10% arose. Seance the physical year ended in December 2004, the interest rate was accrued for December 2004 (9 months). The journal entry is

Interest expense debit $7,500 (Note - 1)

Interest payable credit $7,500

Calculation: $100,000 * 10% * (9 : 12)

Calculation: $10,000 * (9 : 12) = $7,500

Therefore, option D is correct.