Final answer:
The Hancock Company would make a journal entry that debits Retained Earnings for $35,000 and credits Common Stock Dividend Distributable for $35,000 to issue a 5% stock dividend based on the book value of its common shares.
Step-by-step explanation:
When the Hancock Company declares and issues a 5% stock dividend, they need to make a journal entry to reflect the distribution of additional shares to existing shareholders. To calculate the stock dividend, Hancock Company would take 5% of the 350,000 common shares issued and outstanding, equalling 17,500 additional shares.
Since the shares are currently selling for $20 per share, the market value of the dividend is $350,000 (17,500 shares × $20). However, for the purpose of the journal entry, the company uses the book value of the shares which is $2 per share. Thus, the total value recorded for the dividend would be $35,000 (17,500 shares × $2).
The journal entry would look like this:
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- Debit Retained Earnings for $35,000.
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- Credit Common Stock Dividend Distributable for $35,000.
This action reflects that the company has committed to issuing the new shares, and it reduces retained earnings, which represents the company's profits that have not been distributed to shareholders and are not reserved for specific use, by the book value of the additional shares to be issued.