Question

Morris Company has the following capital structure: Common stock, $2 par, 100,000 shares issued and outstanding

On October 1, 2020, the company declared a 5% common stock dividend when the market price of the common stock was $10 per share. The stock dividend will be distributed on October 15, 2020, to stockholders on record on October 10, 2020.

Upon declaration of the stock dividend, Norris Company would record:

	A.	A debit to Retained Earnings for $200,000
	B.	A credit to Dividends Payable for $100,000
	C.	A credit to Paid-in Capital in Excess of Par—Common Stock for $10,000
	D.	A debit to Retained Earnings for $50,000

Answer 1

Sometimes, the company may pay stock dividend instead of cash dividend. On the declaration date of stock dividend, the retained earnings account is debited by total market value of stock and stock dividend distributable account is credited by total par value of stock and paid in capital in excess of par value is credited by difference between market value and par value of stock.

Stock dividend = 100,000 shares x 5%

Stock dividend = 5,000 shares.

Market value = $ 10 per share.

So the journal entry will be,

Date	Accounts	Debit	Credit
Oct 1	Retained earnings Dr	$ 50,000
	To Stock dividend distributable Cr		$ 10,000
	To paid in capital in excess of par		$ 40,000

Retained earnings = 5,000 x $ 10

Retained earnings = $ 50,000.

Par value of share = $ 2 per share.

Stock dividend distributable = 5,000 x $ 2

Stock dividend distributable = $ 10,000.

Paid in capital in excess of par = 5,000 x $ 8

Paid in capital in excess of par = $ 40,000.

Hence, option D is the correct answer.

SUMMARY:

Retained earnings account is debited by $ 50,000.

Hence, option D is the correct answer.