Use the following information to answer the question(s) 20 & 21 below. Hernandez

Question

Use the following information to answer the question(s) 20 & 21 below.
Hernandez Corporation has 60,000 shares of $10 par value common stock outstanding. The following transactions occurred during the year:
Mar. 17 Declared a 10 percent stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17.
On March 30 distributed the stock dividend.

20. The entry to record the transaction of March 17 would include a

[A] credit to Common Stock Distributable for $60,000.

[B] debit to Common Stock Distributable for $60,000.

[C] credit to Retained Earnings for $18,000.

[D] credit to Cash for $78,000.

21. The entry to record the transaction of March 30 would include a

[A] debit to Common Stock Distributable for $60,000.

[B] debit to Retained Earnings for $18,000.

[C] credit to Paid-in Capital in Excess of Par Value, Common for $18,000.

[D] credit to Cash for $60,000.


please show me details ............

Explanation / Answer

A stock dividend is when the company gives stockholder's more stock instead of a cash dividend. This reduces retained earnings. You use the market value of the stock at the time to figure out how much you are giving out. Since the market value will be higher than the par value, the excess will go in paid-in capital in Excess of Par Value.

So for the March 17th transaction

A 10% stock dividend means you will give out

Outstanding shares X 10% amount of stock

60,000 X .1 = 6,000 shares of stock.

So the cost of this stock will be

the par value part of $10 X 6,000 = $60,000

and the excess part that is the market value - par value

$13 - $10 = $3                    $3 X 6,000 = $18,000

$60,000 + $18,000 = $78,000

So the entry will look like

Retained Earnings      $78,000 (Debit)

Common Stock Distributable     $60,000 (credit)

Paid-in Capital in Excess of Par Value, Common   $18,000 (credit)

So the answer to 20. is A

For the March 30 entry we simply debit common stock distributable and credit common stock, since we gave out more stock.

Common Stock Distributable $60,000 (debit)

Common Stock $60,000 (credit)

So the answer to 21. is A

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