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).
