Q10SE_1 - Horngren'S Financial And Managerial Accounting

Question

Question: Journalizing a large stock dividend

Nelly, Inc. had 320,000 shares of \(2 par value common stock issued and outstanding as of December 15, 2018. The company is authorized to issue 1,300,000 common shares. On December 15, 2018, Nelly declared a 40% stock dividend when the market value for Nelly’s common stock was \)7 per share. The stock was issued on Dec. 30.

Requirements

1. Journalize the declaration and distribution of the stock dividend.

Step-by-Step Solution

Answer

Answer

Retained earnings will be debited by $896,000, stock dividend distributable credited by $256,000 and paid-in capital in excess of par will be credited by $640,000.

Stock dividend distributable will be debited and common stock will be credited with $256,000.

Step 1: Basic calculation

$$\begin{gathered} \mathbf{RetainedEarnings}\mathbf{=}\mathbf{NumberofShares}\mathbf{\times }\mathbf{ValuePerShare}\mathbf{\times }\mathbf{StockDividendRate} \\ \mathbf{=}\mathbf{320}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{7}\mathbf{\times }\mathbf{40}\mathbf{\%} \\ \mathbf{=}\mathbf{\$}\mathbf{896}\mathbf{,}\mathbf{000} \\ \mathit{S}\mathit{t}\mathit{o}\mathit{c}\mathit{k}\mathit{D}\mathit{i}\mathit{v}\mathit{i}\mathit{d}\mathit{e}\mathit{n}\mathit{d}\mathit{D}\mathit{i}\mathit{s}\mathit{t}\mathit{r}\mathit{i}\mathit{b}\mathit{u}\mathit{t}\mathit{a}\mathit{b}\mathit{l}\mathit{e}\mathbf{=}\mathbf{NumberofShares}\mathbf{\times }\mathbf{ParValuePerShare}\mathbf{\times }\mathbf{StockDividendRate} \\ \mathbf{=}\mathbf{320}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{2}\mathbf{\times }\mathbf{40}\mathbf{\%} \\ \mathbf{=}\mathbf{\$}\mathbf{256}\mathbf{,}\mathbf{000} \end{gathered}$$

Step 2: Journals entry of declaration and distribution of dividend

Date	Transaction	Debit	Credit
Dec15	Retained earnings	$896,000
	Stock dividend distributable		$256,000
	Paid-in capital in excess of par		$640,000
	To record stock dividend declared
Dec 30	Stock dividend distributable	$256,000
	Common stock		$256,000
	To record dividend distribution