Question

Norris Company has the following capital structure: Common stock, $2 par, 200,000 shares issued and outstanding...

Norris Company has the following capital structure: Common stock, $2 par, 200,000 shares issued and outstanding

On October 1, 2020, the company declared a 50% common stock dividend when the market price of the common stock was $10 per share. The stock dividend will be distributed on October 15, 2020, to stockholders on record on October 10, 2020.

Upon declaration of the stock dividend, Norris Company would record:

A.

A debit to Retained Earnings for $200,000
B.

A credit to Dividends Payable for $200,000
C.

A credit to Paid-in Capital in Excess of Par—Common Stock for $800,000
D.

A debit to Retained Earnings for $1,000,000
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Answer #1

Answer is option A - A debit to Retained Earnings for $ 200,000

When large stock dividend is distributed i.e. more than 25%, the stock dividend is recorded at par value of common stock.

The given case is a large stock dividend. Hence, the below entry would be posted for stock dividend distribution.

DR. Retained Earnings (100,000 Shares * $ 2) _______ $ 200,000

Cr. Stock Dividend Distributable _____________________$ 200,000

Stock dividend shares = Existing shares outsanding 200,000 * 50% = 100,000

Stock dividned = 100,000 * $ 2 par value of common stock

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