Exercise-12 (Computation of cash paid for dividends)

Exercise-12 (a):

The John Trading Center declared a $15,000 dividend during the year 2017. The dividends payable at the start and end of the year were $3,000 and $5,000 respectively. Determine the amount of cash paid for dividends by John Trading Center during the year 2017.

Solution

Cash paid for dividends can be determined by analyzing T-account for dividend payable.

*Cash paid for dividend is the balancing figure: $3,000 + $15,000 – $5,000 = $13,000

Exercise-12 (b):

The Washington Company declared and paid cash dividends for 2017 and 2016 as shown below:

Required: On the basis of above information, what amount the company would report in its statement of cash flows for the year 2017 and 2018?

Solution:

We report only those amounts in the statement of cash flows that are actually paid or received in cash or cash equivalents. The declaration of dividends reduces the balance in retained earnings account but has nothing to do with the statement of cash flows because it does not involve any outflow of cash.

The dividends amounting to $200,000 declared in 2016 was paid in 2017. This payment would be reported in the financing activities section of the statement of cash flows for the year 2017.

The dividends amounting to $160,000 declared in 2017 was paid in 2018. This payment would be reported in the financing activities section of the statement of cash flows for the year 2018.

Exercise-12 (c):

The Peterson corporation earned a net income of $15,500 for the year 2017. It also provides you the following information about dividends payable and retained earnings accounts at the end of the year 2016 and 2017.

  • Dividends payable on December 31, 2016: $2,500
  • Dividends payable on December 31, 2017: $4,000
  • Retained earnings on December 31, 2016: $45,500
  • Retained earnings on December 31, 2017: $52,000

Required: Compute cash paid for dividends during the year 2017. How Peterson Corporation would report this payment on its statement of cash flows for the year 2017?

Solution

The cash paid for dividends can be computed by preparing T-accounts for retained earnings and dividends payable.

*Dividends declared is the balance figure: $45,400 + $15,500 – $52,000

*Cash dividends paid is the balance figure: $2,500 + $9,000 – $4,000

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