Exercise 7, Liquidating Dividend:

a. On 6/17, Year 6, the board of directors of a corporation declares a cash dividend equal to $700,000 for shareholders of record on 7/23, Year 6, payable on 8/19, Year 6. However, as of 6/17, Year 6, the retained earnings account has a credit balance of $500,000. The retained earnings account can only absorb a dividend equal to its credit balance and cannot be reduced to a deficit (i.e., debit balance) as a result of a dividend.

6/17/Yr 6

7/23/Yr 6

8/19/Yr 6

b. On 6/17, Year 6, the board of directors of a corporation declares a cash dividend equal to $700,000 for shareholders of record on 7/23, Year 6, payable on 8/19, Year 6. However, as of 6/17, Year 6, the retained earnings account has a credit balance of $0 (zero). The retained earnings account can only absorb a dividend equal to its credit balance and cannot be reduced to a deficit (i.e., debit balance) as a result of a dividend.

6/17/Yr 6

7/23/Yr 6

8/19/Yr 6