Question

The Monroe Corporation has 100,000 common shares issued and outstanding. This stock was issued several years ago at a price above the $10 per share par value. During the current year, the board of directors declared a 30 percent stock dividend so that 30,000 new shares were issued to the stockholders when the price of the stock was $30 per share. As a result of this dividend, what reduction was recorded in the reported amount of retained earnings ?

__$600,000

__$900,000

__$300,000

__-0-

Answer 1

WORKING NOTES:
		CALCULATION OF TOTAL VALUE OF DIVIDEND IS PAID
		Numer of Common Shares outstanding =	1,00,000	Shares
		Stock Dividend Declared = 100,000 Shares X 30%	30,000	Shares
		Market Value of 1 Shares on date of declaration	$                             30	Per Shares
		Total value of dividend = 30,000 Shares $ 30 =	$                 9,00,000
		Par value of the 15,000 shares = 30,000 Shares X $ 10	$                 3,00,000
		Addittinal paid in capital in excess of par (Balance )	$                 6,00,000
SOLUTION :	Journal Entry for declaration and payment of stock dividend is as below,
		Account Title and explanation	Debit	Credit
		Retained Earnings	$9,00,000
		Common Stock dividend distributable		$3,00,000
		Paid in Capital in Excess of par		$6,00,000
		(To record the stock dividend declaration)
	It means retaiend earnings is debited with $ 900,000
Answer = Option 2 = $ 900,000