Question

A corporation declares and distributes a 20% stock dividend at a time when there are 10,000 shares outstanding (before the dividend). The common stock has a par value of $1/share and a market value of $20/share. What will be the debit made to retained earnings to record this stock dividend?

Answer 1

Answer:

$40,000

Explanation:

Stock dividend is the payment of dividend to stockholder in the form of stock/shares of the company. Stock are issued at the market price and the value of the dividend is transferred from the retained earning to the add-in-capital accounts.

Dividend Value = 10,000 x 20% = 2,000 shares

Value is calculated using market value of the stock

Value of Dividend = 2,000 x $20 = $40,000

Par Value of Stocks = $1 x 2,000 = $2,000

Add-in-capital excess of par common stock = ($20-$1) x 2,000 = $38,000

Journal Entry will be as follow

Dr. Retained Earning                                   $40,000

Cr. Common stock                                       $2,000

Cr. Add-in-Capital excess of par common $38,000