When a small stock dividend is declared, the amount debited to Retained Earnings should be the ...

Question:

When a small stock dividend is declared, the amount debited to Retained Earnings should be the

a. par value of the shares.

b. the book value of the shares.

c. the earnings per share.

d. the market value per share.

Stock Dividends:

When dividends are declared, regardless of whether it is stock, cash or property, the amount of the retained earnings is decreased. In case of stock dividends, the amount deducted in the retained earnings will be transferred to common stock and paid in capital or just to common stock.

Answer and Explanation:

Answer: d. the market value per share.

Stock dividends can be large or small, depending on the percentage of stock dividends declared. Stock dividend is considered as small if it is 20% or below, otherwise, it is a large stock dividend. In accounting for the small stock dividends, the market value of the shares declared as dividends will be the basis in valuing the stock dividends. The entire market value will be debited to the retained earnings account while the par value will be credited to common stock. Any difference between the par value and market value will be accounted as paid in capital in excess of par.


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Cash Dividends & Dividend Payment

from Finance 101: Principles of Finance

Chapter 16 / Lesson 1
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