Question

Rick Co. had 30 million shares of $1 par common stock outstanding at January 1, 2018. In October 2018, Rick Co.'s Board of Directors declared and distributed a 1% common stock dividend when the market value of its common stock was $60 per share. In recording this transaction, Rick would:
A. Debit retained earnings for $18 million.
B. Credit paid-in capital - excess of par for $18 million.
C. Credit common stock for $18 million.
D. None of the above is correct.

Answer 1

Answer:

A. Debit retained earnings for $18 million.

Explanation:

Before recording the journal entry, first we have to determine the dividend shares which are shown below:

= Number of shares × par value of share × common stock dividend percentage

= 30 million shares × $1 × 1%

= 0.30 million shares

Now the journal entry would be

Retained earnings Dr $18 million       (0.30 million shares × $60)

    To Common Stock $0.30 million       (0.30 million shares × $1

    To  Additional Paid-in Capital in excess of par - Common Stock $17.7 million

(Being the dividend is declared and the remaining balance is credited to the additional paid-in capital account)