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ACCA Applied Knowledge · Financial Accounting · Capital structure and finance costs

Delta plc has 5,000,000 6% irredeemable preference shares of $1 each, classified as equity, and 8,000,000 equity shares of $1 each. Preference dividends for the year of $300,000 were paid, and equity dividends of $0.05 per share were paid. Which journal correctly records the equity dividend payment?

Debit retained earnings and credit bank with $400,000. The equity dividend is 8,000,000 shares times $0.05. Dividends on equity-classified shares are a distribution of profit, not a finance cost, and the preference dividend is a separate amount that should not be included.

  1. ADr Retained earnings $400,000, Cr Bank $400,000Correct
  2. BDr Finance costs $400,000, Cr Bank $400,000
  3. CDr Retained earnings $700,000, Cr Bank $700,000
  4. DDr Dividend payable $400,000, Cr Retained earnings $400,000

Explanation

Equity dividend = 8,000,000 x $0.05 = $400,000. Paid dividends on equity are debited to retained earnings and credited to bank. The $700,000 option wrongly adds the preference dividend, which is a separate payment, and finance costs apply only to liability-classified shares.

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