Question

Indigo Corporation has outstanding 2,972,000 shares of common stock with a par value of $10 each. The balance in its Retained Earnings account at January 1, 2020, was $24,230,000, and it then had Paid-in Capital in Excess of Par—Common Stock of $4,994,000. During 2020, the company’s net income was $4,694,000. A cash dividend of $0.60 a share was declared on May 5, 2020, and was paid June 30, 2020, and a 6% stock dividend was declared on November 30, 2020, and distributed to stockholders of record at the close of business on December 31, 2020. You have been asked to advise on the proper accounting treatment of the stock dividend.

The existing stock of the company is quoted on a national stock exchange. The market price of the stock has been as follows.

October 31, 2020		$32
November 30, 2020		$36
December 31, 2020		$39

(a and b)

(a)		Prepare the journal entry to record (1) the declaration and (2) payment of the cash dividend.
(b)		Prepare the journal entry to record (1) the declaration and (2) distribution of the stock dividend.

Answer 1

	Date	Account title and explanation	Debit	Credit
(a) (1)	May 5	Cash dividend (2,972,000 shares x $0.60)	1,783,200
		Cash dividend payable		1,783,200
		(to record the declaration of cash dividend)
(a) (2)	Jun. 30	Cash dividend payable	1,783,200
		Cash		1,783,200
		(to record the payment of cash dividend)
(b) (1)	Nov. 30	Stock dividend (2,972,000 x 6% x $36)	6,419,520
		Stock dividend distributable (2,972,000 x 6% x $10)		1,783,200
		Paid in capital in excess of par-Common stock		4,636,320
		(to record the declaration of stock dividend)
(b) (2)	Dec. 31	Stock dividend distributable	1,783,200
		Common stock		1,783,200
		(to record the distribution of stock dividend)