Mustang corporation had 100,000 shares of $2 par value common stock outstanding. on december 31, 2015, the company's board of directors declares a 20 percent stock dividend. this stock dividend will be distributed on january 20, 2016 to the stockholders of record on january 15, 2016. the market price of the company's stock is $10 per share on december 31, 2015. complete the necessary journal entry to record the declaration of the stock dividend by selecting the account names and dollar amounts from the drop-down menus. if there are multiple debits or multiple credits, enter the account titles in alphabetical order.

The necessary journal entry to record the declaration of the stock dividend is as followed:

31st December 2015

Dr Retained Earnings                                            200,000

Cr Common Stock Dividend Distributable          40,000

Cr Additional Paid-in capital - Common stock    160,000

( to record 20% stock dividend declaration)

Explanation:

As stock dividend is declared to be at 20%, this is a small stock dividend.

As at Dec 31st 2015, 100,00 shares is outstanding, the number of stock to be distributed under the form of dividend is: 100,000 x 20% = 20,000 stocks;

Thus:

Retain Earnings account will be decreased ( Debited) by the amount equal to Market price per stock at declaration x  the number of stock to be distributed = 10 x 20,000 = $200,000.

Common stock account will be increased ( Credited) by the amount equal to Par value per stock x the number of stock to be distributed = 2 x 20,000 = $40,000.

The differences between Debit Retained Earnings and Cr Common stock will go into Cr Additional Paid-in capital - Common stock $160,000 ( $200,00 - $40,000).

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