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Mustang Corporation had 100,000 shares of $2 par value common stock outstanding. On December 31, 2018,...

Mustang Corporation had 100,000 shares of $2 par value common stock outstanding. On December 31, 2018, the company's board of directors declares a 20 percent stock dividend. This stock dividend will be distributed on January 20, 2019 to the stockholders of record on January 15, 2019. The market price of the company's stock is $10 per share on December 31, 2018.

Complete the necessary journal entry to record the declaration of the stock dividend by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns. If there are multiple debits or multiple credits, list the account titles in alphabetical order.

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Expert Solution

Date Journal entry Debit Credit
31-Dec-18 Retained Earning (20000 x $10 market value) 200000
Common stock dividend distributable (20000 stock dividend x $2 Par value) 40000
Paid up capital in excess of Par (20000 x ($10 -$2)) 160000
(Being 20000 stock dividend declared on 31-Dec-2018 to be distributed on 20-Jan-2019 to the stockholder on record on 15-Jan-2019)
When the 20000 shares are distributed to shareholder the following Journal entry is made
20-Jan-19 Common stock dividend distributable (20000 stock dividend x $2 Par value) 40000
Common stock 40000
(Being common stock issued in lew of dividend to the shareholders.)
Working Notes:
Total Number of shares 100000
Value per share $2
The market value of stock $10
Stock Dividend declared 20%
Total Number of new stock to be issued to the existing shareholder (100000 * 20%) = 20000 shares 20000

A stock dividend does not involve cash. By stock dividend even though the total stockholder equity remains the same, the stock dividend require to transfer the journal entry to transfer the amount from the retained earnings section of the balance sheet to the paid-up capital section of the balance sheet.

ekkarill92 answered 1 year ago
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