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

Nikhil Pratap · Accepted Answer

Final Answer : C, Explanation :  When a company declares a stock dividend, it transfers a portion of its retained earnings to its common stock account. This increases the number of outstanding shares and reduces the value of each individual share, but it does not involve any cash payments.The entry to record a stock dividend involves debiting Retained Earnings for the total value of the dividend and crediting Common Stock Dividend Distributable for the par value of the additional shares that will be issued. Any remaining value should be credited to Paid-In Capital in Excess of Par Value, Common Stock.In this case, the company had 50,000 shares of $20 par value common stock outstanding, for a total value of $1,000,000. A 10% stock dividend would increase the number of shares by 5,000 and reduce the value of each share to $24.30 ($1,215,000 total value divided by 50,000 + 5,000 shares). The total value of the stock dividend is $135,000 ($27 market value times 5,000 shares).The correct entry to record the dividend declaration would be:Debit Retained Earnings $135,000Credit Common Stock Dividend Distributable $100,000Credit Paid-In Capital in Excess of Par Value, Common Stock $35,000Option C is the only answer choice that correctly reflects this entry. Option A is incorrect because it does not account for the excess value of the stock dividend. Option B is incorrect because no cash payment is being made. Option D is incorrect because it does not account for the excess value of the stock dividend. Option E is incorrect because an entry is required to record the declaration of a stock dividend.

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