Clayton Co. owned 30,000 common shares of Dayton Corporation purchased in 2008 for $540,000. On September 20, 2011, Clayton declared a property dividend of 1 share of Dayton for every 5 shares of Clayton stock held by a stockholder. On that date, there were 50,000 common shares of Clayton outstanding, and the market value of Dayton shares was $30 per share. The entry to record the declaration of the property dividend would include a debit to Retained Earnings of

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When a company declares a property dividend, it is distributing its assets rather than its earnings. Therefore, the dividend is recorded at the fair market value of the property. In this case, the fair market value of Dayton shares is $30 per share, and Clayton held 30,000 shares. Thus, the total value of the property dividend is $900,000 ($30 per share x 30,000 shares).

To record the declaration of the property dividend, Clayton would make the following journal entry:

Retained Earnings     $300,000
Property Dividend Payable     $900,000

The credit to Property Dividend Payable represents the liability that Clayton has to its shareholders for the dividend. The debit to Retained Earnings reduces the amount of earnings that the company has retained in the business. In this case, the debit to Retained Earnings is $300,000, which represents the fair market value of the property dividend allocated to the 30,000 shares of Clayton that Clayton owns.