Question

On January 1, Soft Corporation had 80,000 shares of $10 par value common stock outstanding. On June 17, the company declared a 10% stock dividend to stockholders of record on June 20. Market value of the stock was $15 on June 17. The entry to record the transaction of June 17 would include a

A) debit to Stock Dividends for $120,000.
B) credit to Cash for $120,000.
C) credit to Common Stock Dividends Distributable for $120,000.
D) credit to Common Stock Dividends Distributable for $40,000.

Answer 1

Proper accounting for a 10% stock dividend by Soft Corporation would include a debit to Stock Dividends for the total market value of new shares distributed and a credit to Common Stock Dividends Distributable for the total par value of new shares, with the remainder to additional paid-in capital.

Step-by-step explanation:

When Soft Corporation declares a 10% stock dividend, it is essentially creating and distributing additional shares to current shareholders. This will not involve a cash transaction, so no credit to Cash occurs. Since there are 80,000 shares outstanding and a 10% stock dividend is declared, 8,000 new shares are to be distributed. The entry on June 17 to record the transaction of a stock dividend when the market value is $15 would include a debit to Stock Dividends for the market value of the new shares (8,000 shares at $15 each = $120,000) and a credit to Common Stock Dividends Distributable for the par value of the new shares (8,000 shares at $10 each = $80,000) and the remainder to Paid-in Capital in Excess of Par Value Common Stock (or similar account). Therefore, the correct journal entry would include a credit to Common Stock Dividends Distributable for $80,000 and the remainder ($40,000) to additional paid-in capital.