Question

Cheyenne Corporation has outstanding 358,000 shares of $10 par value common stock. The corporation declares a 100% stock dividend when the fair value of the stock is $62 per share. Prepare the journal entries for both the date of declaration and the date of distribution. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.)

Answer 1

While calculating amount of stock dividends, share price as at date of stock dividend shall be taken as share price. That is, market price per share at the time of distributing the stock dividend shall be taken into account for calculating amount of retained earnings required to declare such stock dividend. To the extent of par value of stock dividends shall be credited to common stock account. Difference between market price and par value of stock dividend shall be credited to additional- -paid-in-capital in excess of par account. Total value of stock dividend shall be debited to retained earnings account. As a result, balance in retained earnings account will be decreased by market value of stock dividend declared. On the other hand, balance in common stock account will be increased by par value of stock dividend. Simultaneously, balance in paid- -in-capital in excess of par account will be increased by difference between market value and par value of stock dividend. As a result, though stock dividend will decrease retained earnings by market value of stocks issued as dividends, equity will increase by same amount simultaneously. So, net effect of stock dividend will be zero on total shareholders' equity. In simple words, decrease in retained earnings will be set off by increase in shareholders' equity by same value.

However, when a corporation declares 100% stock dividend, market price per share as on the date of declaration of stock dividend shall be ignored. In other words, par value of the common stocks declared as stock dividend only shall be taken into account for recording it. If 100% stock dividend is declared, Retained Earnings account shall be debited Common Stock distributable account shall be credited by par value of such stock dividend. When stock dividend is distributed later on, the "Common Stock distributable' account shall be debited and Common Stock' account shall be credited by the same amount (par value of stock dividend). Journal Entries: Date Debit Credit Declare $3,580,000 Account Title and Explanation Retained Earnings Common Stock Dividend Distributable Common Stock Dividend Distributable Common Stock Date Distribute $3,580,000 (358,000 shares x $10] $3,580,000 Date $3,580,000 [Declaration date entry is reversed]