On June 1, 2011, Patriot Corporation declared a stock dividend entitling its stockholders to one additional share for each share held. At the time the dividend was declared, the market value of the stock was $10 per share and the par value was $5 per share. On this date Patriot had 1,000,000 shares of common stock authorized of which 600,000 shares were outstanding. Assuming the par value of the stock was not changed, what entry should Patriot make to record this transaction?

Question

Quizplus · Accepted Answer

When a company declares a stock dividend, it transfers a portion of its retained earnings to common stock dividend distributable account. In this case, the dividend payable is not recorded since it is not a liability until the dividend is paid.

The entry to record the stock dividend would be:
Retained Earnings.............. 3,000,000 
Common Stock Dividend Distributable 3,000,000

This entry transfers $3,000,000 from retained earnings to common stock dividend distributable account. The transaction does not affect the amount of capital in the company, which is why choice A and B are not correct. Choice D is incorrect because there is a transaction that needs to be recorded.

On June 1, 2011, Patriot Corporation Declared a Stock Dividend