Question

Mustang Corporation had 100,000 shares of $2 par value common stock outstanding. On December 31, 2015, the company's board of directors declares a 20 percent stock dividend. This stock dividend will be distributed on January 20, 2016 to the stockholders of record on January 15, 2016. The market price of the company's stock is $10 per share on December 31, 2015. Complete the necessary journal entry to record the declaration of the stock dividend by selecting the account names and dollar amounts from the drop-down menus. If there are multiple debits or multiple credits, enter the account titles in alphabetical order.

Answer 1

Answer:

The necessary journal entry to record the declaration of the stock dividend is as followed:

31st December 2015

Dr Retained Earnings                                            200,000

Cr Common Stock Dividend Distributable          40,000

Cr Additional Paid-in capital - Common stock    160,000

( to record 20% stock dividend declaration)

Explanation:

As stock dividend is declared to be at 20%, this is a small stock dividend.

As at Dec 31st 2015, 100,00 shares is outstanding, the number of stock to be distributed under the form of dividend is: 100,000 x 20% = 20,000 stocks;

Thus:

Retain Earnings account will be decreased ( Debited) by the amount equal to Market price per stock at declaration x  the number of stock to be distributed = 10 x 20,000 = $200,000.

Common stock account will be increased ( Credited) by the amount equal to Par value per stock x the number of stock to be distributed = 2 x 20,000 = $40,000.

The differences between Debit Retained Earnings and Cr Common stock will go into Cr Additional Paid-in capital - Common stock $160,000 ( $200,00 - $40,000).