Happy Holidays,Inc.has 100,000 shares of common stock issued and outstanding,with a par value of $0.01 per share.It declared a 15% common stock dividend; market value is $12 per share.Which of the following is the correct journal entry to record the transaction?

Question

Quizplus · Accepted Answer

When a company declares a stock dividend, it transfers a portion of retained earnings to the common stock dividend distributable account. In this case, the stock dividend is 15%, which means for every 100 shares outstanding, the company will distribute 15 additional shares. Therefore, the company will issue 15,000 new shares (100,000 x 15%).

To record the transaction, the Retained Earnings account needs to be reduced by the market value of the shares issued as dividends. Thus, debit Retained Earnings $180,000 (15,000 x $12) and credit Common Stock Dividend Distributable $150 (15,000 x $0.01), which means the company has set aside $150 for the additional shares to be distributed. Then, the remaining amount, $179,850 (15,000 x $11.99), represents the increase in additional paid-in capital as a result of the stock dividend. Thus, credit Paid-In Capital in Excess of Par-Common $179,850.