Question

On June 30, the board of directors of Sandals, Inc., declares and pays a 100% stock dividend on its 30,000, $1 par, common shares. The market price of Sandals common stock is $35 on June 30.

Answer 1

Answer:

The accounting entries is as follows:

Debit Retained Earnings($35 by 30,000 shares) $1,050,000

Credit: Common Shares Account at Par Value($1 by 30,000 shares)  $30,000

Credit Share Premium Account for Additional Paid in Capital ($34 by 30,000) = $1,020,000

Explanation:

A stock dividend is payment to shareholders by the company in the form of additional shares rather than dividend payment.  This is common where the company is short of liquid funds to effect payment of dividends to its shareholders. They are usually issues in the form of fractions of existing holdings. Stock dividend increases the overall share holdings of the shareholder.

For Stock Dividend, the accounting entry is to transfer from the Retained Earnings to the Share Account and Share Premium or Additional Capital account.

The Share account is credited with the par value of the additional shares issued while the difference between the par value and the market value is credited to the Share Premium account. The full amount of the stock dividend is likewise debited to the Retained Earnings account.