Lawrenceville Co.reported the following:
Common stock, $3 par, 10,000 shares authorized, 5,000 shares issued and outstanding

What is the effect of a 10% stock dividend if the market price of the common stock is $30 per share when the dividend is declared?

Question

Lawrenceville Co.reported the following: ​
Common stock, $3 par, 10,000 shares authorized, 5,000 shares issued and outstanding
​
What is the effect of a 10% stock dividend if the market price of the common stock is $30 per share when the dividend is declared?

Quizplus · Accepted Answer

A stock dividend is a distribution of additional shares of stock to existing stockholders. In a 10% stock dividend, Lawrenceville Co. would issue 500 additional shares of common stock to its existing shareholders (10% of 5,000 shares). The market value of the shares at the time of the dividend declaration is not relevant to determining the accounting entries.

When a stock dividend is declared, the journal entry transfers an amount from retained earnings to the contributed capital accounts (in this case, additional paid-in capital). The total amount transferred equals the par value of the shares issued in the dividend.

In this case, the par value of the additional shares is $3 x 500 = $1,500. Therefore, the entry would be: 
Debit: Retained earnings - $1,500 
Credit: Common stock - $1,500 
Credit: Additional paid-in capital - $13,500 (the remaining amount to balance the entry)

This entry reflects the fact that the company has distributed additional shares without receiving any cash, but the total value of the stockholders' equity accounts remains the same.

Lawrenceville Co.reported the Following: ​

Lawrenceville Co.reported the Following: