Ellis Company has 1,000,000 shares of common stock authorized with a par value of $3 per share of which 600,000 shares are outstanding. Ellis authorized a stock dividend when the market value was $8 per share, entitling its stockholders to one additional share for each share held. The par value of the stock was not changed. Assuming the declaration is not recorded separately, what entry, if any, should Ellis make to record distribution of the stock dividend?

Question

Quizplus · Accepted Answer

When a stock dividend is issued, the total number of shares outstanding increases while the total value remains the same. In this case, the market value was $8 per share, so the total value of the outstanding shares was $4.8 million (600,000 shares x $8 per share). Therefore, to distribute a stock dividend of one additional share for each share held, the total number of shares outstanding would increase from 600,000 to 1,200,000. Since no additional value is being generated, the total value of the outstanding shares would remain at $4.8 million.

Option A is incorrect because it records a gain on stock dividends, which is not necessary since there is no additional value being generated. Option C is incorrect because it records paid-in capital from stock dividends, which is also not necessary since the issuance of a stock dividend does not generate any additional paid-in capital. Option D is incorrect because a memorandum entry is simply a note for record-keeping and does not actually record the transaction.

Therefore, the correct entry to record distribution of the stock dividend would be to debit retained earnings for the total value of the additional shares issued (600,000 shares x $3 par value per share = $1,800,000) and credit common stock for the same amount, since the par value of the stock was not changed. This is recorded in Option B.

Ellis Company Has 1,000,000 Shares of Common Stock Authorized with a Par