Q33. Stock dividend
(1) On January 25, 20×2, Entity A declared a 5% stock dividend on 800,000 shares of common stock. Par value of common stock is $1 per share. Fair market value of common stock is $9 per share on January 25, 20×2.
(2) On February 25, 20×2, Entity A issued 40,000 shares of common stock for the stock dividend declared on January 25, 20×2.
Prepare journal entries to record these transactions.
A33. When a stock dividend is declared, it decreases retained earnings.
(1) When stock dividends are declared
| Debit | Credit | |
| Retained earnings (or stock dividend) | 360,000 | |
| Common stock dividends distributable | 40,000 | |
| Additional paid-in capital | 320,000 |
[Note]
1. Decrease in retained earnings (equity): debit
2. Increase in common stock dividends distributable (equity): credit
3. Increase in additional paid-in capital (equity): credit
4. Number of shares to be distributed = 800,000 shares x 5% = 40,000 shares
5. Fair market value of shares to be distributed = 40,000 shares x $9 = $360,000
6. Par value of shares to be distributed = 40,000 shares x $1 = $40,000
7. Additional paid-in capital = Fair market value – Par value
= $360,000 – $40,000 = $320,000
(2) When shares are issued for stock dividends
On February 25, 20×2, Entity A issued 40,000 shares of common stock for the stock dividend declared on January 25, 20×2.
| Debit | Credit | |
| Common stock dividends distributable | 40,000 | |
| Common stock | 40,000 |
[Note]
1. Decrease in common stock dividends distributable (equity): debit
2. Increase in common stock (equity): credit