Question

On June 1, the board of directors of Big, Inc. declare a 20% stock dividend. On this date, there were 10,000 shares of $1 par value stock issued and outstanding and the market value was $5 per share. The entry to record this transaction would include a (debit/credit) to Retained Earnings in the amount of $ .

Answer 1

The answer is Debit to Retained Earnings of $10,000.

Step-by-step explanation:

Retained earnings simply put, is an accumulation of net income or loss over years minus dividend payouts (cash or stock).

The value of the stock in the company prior to the stock dividend payment was $1 x 10,000 units = $10,000

Meanwhile the market value increased to $5/share, the value now becomes $5 x 10,000 units = $50,000

20% stock dividend translates to 0.2 x $50,000 = $10,000

So, appropriate entries would be:

Debit Retained earnings $10,000

Credit Common stock $10,000

(To record stock dividend payment)