Rocco Corporation decides to issue a 7.5% stock dividend on 20,000 outstanding shares of $10 stated value common stock. The distribution is made at the time the market value of the stock is $50 a share. How will the entry to record this transaction affect the company's equity accounts?

Question

Quizplus · Accepted Answer

When a company issues a stock dividend, it issues additional shares of stock to its existing shareholders instead of distributing cash. The purpose of a stock dividend is to increase the number of outstanding shares while decreasing the market value per share, so the total value of the shares held by each shareholder remains the same.

In this case, Rocco Corporation is issuing a 7.5% stock dividend on 20,000 outstanding shares of $10 stated value common stock. This means that Rocco will issue an additional 1,500 shares of stock (7.5% of 20,000) to its existing shareholders.

The market value of the stock at the time of distribution is $50 a share, so the total value of the 1,500 new shares is $75,000 (1,500 shares x $50 per share).

To record the distribution of the stock dividend, the following entry would be made:

Retained Earnings (fair value of stock distributed)   $75,000
     Common Stock Dividend Distributable                          $15,000 
     Common Stock ($10 par value)                                 $15,000

The Retained Earnings account is debited for the fair value of the stock distributed ($75,000), and the Common Stock Dividend Distributable account is credited for the par value of the new shares issued ($15,000). The Common Stock account is also credited for the par value of the new shares issued ($15,000).

As a result of this entry, the company's equity accounts are affected in the following ways:

- Retained Earnings: decreased by the fair value of the stock distributed ($75,000)
- Common Stock Dividend Distributable: increased by the par value of the new shares issued ($15,000)
- Common Stock: increased by the par value of the new shares issued ($15,000)

Overall, the company's total equity remains the same before and after the stock dividend, but the composition of its equity changes. The number of outstanding shares increases, and the market value per share decreases, but the total value of the shares held by each shareholder remains the same.

Rocco Corporation Decides to Issue a 7