A company originally issued 10,000 shares of $5 par value common stock at $9 per share. The board of directors declares an 8% stock dividend when the market price of the stock is $10 a share. Which of the following is included in the entry to record the declaration of a stock dividend?

Question

Quizplus · Accepted Answer

When a company declares a stock dividend, it transfers a portion of retained earnings to equity accounts (such as Common Stock and Additional Paid-In Capital) to reflect the increase in shares outstanding. The retained earnings transferred depends on the fair market value of the stock issued as a dividend. 
In this case, the fair market value of the stock is $10 per share, and the company issued an 8% stock dividend. This means the company issued 800 additional shares (10,000 shares x 8%), and the fair value of those shares is $8,000 (800 shares x $10). 
The entry to record the declaration of the stock dividend would be:
Retained Earnings  $8,000
Common Stock Dividend Distributable $8,000
(To record stock dividend declaration)
Therefore, choice D is correct as it shows that Retained Earnings is debited for $8,000, which represents the transfer of the fair value of the stock dividend to equity accounts.

A Company Originally Issued 10,000 Shares of $5 Par Value