When does a corporation record a liability related to dividends?

• A. On the date shareholders are identified (date of record)
• B. On the date the dividend is paid to shareholders
• C. On the date the board of directors declares the dividend
• D. At the end of the fiscal year

Answer: (C)

Verified step by step guidance

1. Understand the concept of dividends: Dividends are distributions of a corporation's earnings to its shareholders, typically in the form of cash or additional shares. Recording a liability for dividends involves recognizing the obligation to pay shareholders.
2. Learn about the key dates related to dividends: There are three important dates in the dividend process: (1) the declaration date, (2) the date of record, and (3) the payment date. Each has a specific accounting treatment.
3. Focus on the declaration date: The declaration date is when the board of directors formally announces the dividend and commits to paying it. At this point, the corporation incurs a legal obligation to pay the dividend, and a liability is recorded in the financial statements.
4. Understand why the liability is not recorded on other dates: On the date of record, shareholders eligible to receive the dividend are identified, but no liability is recorded because the obligation was already established on the declaration date. On the payment date, the liability is settled by paying the dividend, but no new liability is created.
5. Apply the accounting principle: On the declaration date, the corporation records the liability by debiting 'Retained Earnings' (to reduce equity) and crediting 'Dividends Payable' (to recognize the liability). This ensures the financial statements reflect the obligation to pay dividends.