Dolanski Company declares and distributes a 40% common stock dividend when it has 50,000 shares of $10 par common stock outstanding. The market price per share is $ 40 at the date of declaration. Which journal entry is prepared?

A. debit Retained Earnings $ 800,000, credit Paidminusin Capital in Excess of Parlong dashCommon $500,000
B. debit Retained Earnings $ 200,000 and credit Common Stock $ 200,000
C. debit Retained Earnings $ 800,000, credit Common Stock $ 200,000 and credit Paidminusin Capital in Excess of Parlong dashCommon $ 600,000
D. debit Retained Earnings $ 800,000 and credit Common Stock $ 800,000

B) debit Retained Earnings $ 200,000 and credit Common Stock $ 200,000

Explanation:

The dividends will increase the common stock account and decrease retained earnings. Dividends are always paid with retained earnings.

Since this is a large stock dividend (40% of new stocks are going to be issued), the transaction must be recorded at par value.

The total dividends declared = 50,000 shares x $10 x 40% = $200,000

The journal entry should be:

Dr Retained earnings 200,000

    Cr Common stock 200,000

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