On December 1 2017 Arthur Inc had 40000 shares of 10 par val

On December 1, 2017, Arthur, Inc. had 40,000 shares of $10 par value common stock issued and outstanding. The next day it declared a 50% stock dividend. The market value of the stock on that date was $9 per share. Which of the following is the correct journal entry to record this transaction?

A.debit Stock Dividends $200,000 and credit Common Stock Dividend Distributable $200,000

B.debit Common Stock $200,000 and credit Cash $200,000

C.debit Stock Dividends $360,000 and credit Cash $360,000

D.debit Stock Dividends $360,000, credit Common Stock $400,000, and credit Paid-In Capital in Excess of Par$40,000

Solution

Answer:

Option A i.e. Debit Stock Dividends $200,000 and Credit Common Stock Dividend Distributable $200,000

No. of Stock Issued and Outstanding = 40,000 Shares
Par Value of Common Stock = $10
Stock Dividend Declared = 50%
No. of Stock declared as Dividend = 40,000 * 50% = 20,000 Shares
Value of Stock Dividend Declared = 20,000 * $10 = $200,000

The Transaction can be recorded by Debiting the Expense i.e. Stock Dividend and Crediting the Liability i.e. Common Stock Dividend Distributable. Since, only the Dividend is declared there is no Outflow of Cash in Dividend declaration. Therefore, the Journal Entry to record the Transaction will be:

Stock Dividend (Dr)                     200,000
         Common Stock Dividend Distributable              200,000