Smith Company has 800,000 shares authorized and 250,000 shares issued and outstanding of its $2 par value common stock. The stock is currently selling for $10 per share. If Smith Company declared and issued a 5% stock dividend, what journal entry would the company make?

retained earnings 40,000 debit

common stock 8,000 credit

additional paid-in Common Stock 32,000 credit

Explanation:

shares issued:

800,000 shares x 5% = 4,000 new shares

face value of the shares

4,000 x $2 = 8,000

market value 4,000 x $10 = 40,000

additional paid-in 40,000 - 8,000 = 32,000

we decrease retained earnings and increase the euqity account to balance.

Retained Earnings - - $25,000 (Debit)

Common Stock - - $25,000 (Credit)

Paid In Capital - - $210,000 (Credit)

Explanation:

Given

Authorised Shares = $800,000

Issued Shares = $250,000

Stock Selling Price = $10 per share

Outstanding Stock = $2

Stock Dividend = 5%

The journal entries are as follows:

Retained Earnings

Common Stock

Paid In Capital

The journal entries is calculated as follows:

Calculating Retained Earnings

Retained Earnings = (Outstanding Stock/Stock Selling Price) * Issued Shares

Retained Earnings = ($2/$20) * $250,000

Retained Earnings = (1/10) * $250,000

Retained Earnings = $25,000

Common Stock is also calculated the same way:

Calculating Common Stock

Common Stock = (Outstanding Stock/Stock Selling Price) * Issued Shares

Common Stock = ($2/$20) * $250,000

Common Stock = (1/10) * $250,000

Common Stock = $25,000

Lastly, Paid In Capital is calculated as follows:

Paid In Capital = Issued Shares - Stock Dividend * Authorised Shares

Paid In Capital = $250,000 - 5% * $800,000

Paid In Capital = $250,000 - $40,000

Paid In Capital = $210,000