Question

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.

Answer 1

The following journal entries are required on declaration date:

Dr Retained earnings ($10*20000) $200,000

Cr Common stock distributable dividend($2*20000) $40000

Cr Paid=in share capital in excess of par value of $2 $160000

While on distribution date the entries required are:

Dr Common stock distributable dividend $40000

Cr Common stock $40000

Step-by-step explanation:

First of all, the stock dividend of 20% translates to 20000 shares (100000 shares *20%)

At the declaration date the following entries are required:

Dr Retained earnings ($10*20000) $200,000

Cr Common stock distributable dividend($2*20000) $40000

Cr Paid-in share capital in excess of par value of $2

($10-$2=$8*20000 shares) $160000

Upon distribution of the stock dividend, the stock dividend in dividends distributable account needs to be reclassified to common stock account as follows

Dr Common stock distributable dividend $40000

Cr Common stock $40000