Odessa Corporation had 20,000 shares of $2 par value common stock outstanding on July 1.On that day,the board of directors declared a 10% stock dividend when the market value of each share was $9.The stock dividend is to be distributed on July 20 to stockholders of record on July 10.The entry to record the dividend declaration is:
A)Debit Retained Earnings $18,000; credit Common Stock Dividend Distributable $18,000.
B)Debit Retained Earnings $18,000; credit Common Stock Dividends Distributable $4,000; credit Paid-In Capital in Excess of Par Value,Common Stock $14,000.
C)Debit Retained Earnings $18,000; credit Common Stock $4,000; credit Paid-In Capital in Excess of Par Value,Common Stock $14,000.
D)Debit Retained Earnings $18,000; credit Common Stock $18,000.
E)No entry is made until the stock is issued.

Question

Quizplus · Accepted Answer

A 10% stock dividend means that the company will issue an additional 2,000 shares (10% x 20,000) to the stockholders. The market value of each share is $9, so the total value of the dividend is $18,000 (2,000 x $9). The entry to record the declaration of the dividend includes a debit to Retained Earnings for $18,000 (to decrease equity), a credit to Common Stock Dividends Distributable for $4,000 (to increase current liabilities), and a credit to Paid-In Capital in Excess of Par Value, Common Stock for $14,000 (to increase equity). This is because the common stock dividend distributable account only reflects the par value of the additional shares to be issued, while the excess value is credited to paid-in capital. Therefore, the correct answer is B.

Odessa Corporation Had 20,000 Shares of $2 Par Value Common