Question

Downtown Bancshares has 40,000 shares of $8 par common stock outstanding. Suppose Downtown declares and distributes a 16% stock dividend when the market value of its stock is $20 per share.
1. Journalize Downtown's declaration and distribution of the stock dividend on May 11. An explanation is not required.
2. What was the overall effect of the stock dividend on Downtown's total assets? On total liabilities?

Answer 1

Answer and Explanation:

1. The journal entry is shown below:

Retained earnings Dr (40,000 shares × 16% × $20) $128,000

         To Common stock   (40,000 shares × 16% × $8) $51,200

         To Paid in capital in excess of par value - common stock $76,800

(Being the declaration and the stock distribution is recorded)

2. Since the retained earnings is debited which reduced the equity by $128,000 but at the same time it also increased the equity via common stock and paid in capital by $128,000 so the overall effect should be NIL or zero

Also the assets and liabilities remains unaffected