Question

For each of the following statements regarding dividends, indicate whether it is true or false.

1. Cash and stock dividends reduce retained earnings.

2. Dividends payable is recorded at the time a cash dividend is declared.

3. The date of record refers to the date a cash dividend is paid to stockholders.

4. Stock dividends are a mechanism to keep the market price of stock affordable

Short answer

(1) True

(2) True

(3) False

(4) True

Step-by-step solution

Step 1:Cash and stock dividends reduce retained earnings

In Both cases,retained earnings account is debited, hence it will decrease retained earnings balance.

Step 2:Dividends payable is recorded at the time a cash dividend is declared

At the time of dividend declared by the Board, Provision is made in books for the payment of dividend.

Step 3:Date of record refers to the date a cash dividend is paid to stockholders

Record date specifies the eligible stockholder, and no entry is posted on that date.

Stock dividends are a mechanism to keep the market price of stock affordable

Due to stock dividend the price of the share declines and number of the shares get increased, which result in decrease in Price of stock, and finally result in increased affordability.