Dora Company declared and distributed a 10% stock dividend on 20,000 shares of issued and outstanding $5 par value common stock. The market price per share was $9 on the declaration date and was $10 on the distribution date. Which of the following correctly describes the accounting for the declaration and distribution of the stock dividend?
A) Retained earnings decreased $20,000.
B) Capital in excess of par increased $10,000.
C)Common stock increased $18,000.
D)Retained earnings decreased $18,000.

Question

Quizplus · Accepted Answer

The accounting for a stock dividend involves transferring a portion of retained earnings to the common stock and additional paid-in capital accounts. The total amount transferred is equal to the fair market value of the additional shares issued. In this case, the fair market value of the stock dividend is 10% x 20,000 shares x $10 per share = $20,000. Therefore, the journal entry to record the stock dividend would include a debit to retained earnings for $20,000 and a credit to common stock for $10,000 (20,000 shares x $0.50 par value) and a credit to additional paid-in capital for $10,000. Option D correctly reflects the decrease in retained earnings due to the distribution of the stock dividend.

Dora Company Declared and Distributed a 10% Stock Dividend on 20,000