Rick Co. had 30 million shares of $1 par common stock outstanding at January 1, 2009. In October, 2009, Rick Co.'s Board of Directors declared and distributed a 1% common stock dividend when the market value of its common stock was $60 per share. In recording this transaction, Rick would:

Question

Quizplus · Accepted Answer

When a company issues a stock dividend, it transfers a portion of its retained earnings to its common stock account. In this case, the market value of the stock dividend is $60 per share, which means that the company is distributing $18 million worth of stock (300,000 shares x $60 per share). Therefore, the correct journal entry to record this transaction is to debit retained earnings for $18 million. None of the other choices are correct because paid-in capital and common stock are not affected by a stock dividend distribution.

Rick Co Had 30 Million Shares of $1 Par Common Stock