Global Corporation had 50,000 shares of $20 par value common stock outstanding on July 1.Later that day the board of directors declared a 10% stock dividend when the market value of each share was $27.The entry to record the dividend declaration is:
A)Debit Retained Earnings $135,000; credit Common Stock Dividend Distributable $135,000.
B)Debit Retained Earnings $135,000; credit Cash $135,000.
C)Debit Retained Earnings $135,000; credit Common Stock Dividend Distributable $100,000; credit Paid-In Capital in Excess of Par Value,Common Stock $35,000.
D)Debit Retained Earnings $100,000; credit Common Stock Dividend Distributable $100,000.
E)No entry is made until the stock is issued.

Question

Quizplus · Accepted Answer

The declaration of a stock dividend requires transfer of a portion of retained earnings to common stock and the creation of a liability for the common stock dividend distributable. The amount transferred to common stock is based on the par value of the new shares issued, while any excess of the market value (in this case $7/share) is recorded as a credit to paid-in capital in excess of par value. Therefore, the correct entry is to debit Retained Earnings $135,000, credit Common Stock Dividend Distributable $100,000, credit Paid-In Capital in Excess of Par Value, Common Stock $35,000.

Global Corporation Had 50,000 Shares of $20 Par Value Common