The stockholders\' equity of Howell Company at July 31, 2010 is presented below:

Question

The stockholders' equity of Howell Company at July 31, 2010 is presented below:
Common stock, par value $20, authorized 400,000 shares;

issued and outstanding 160,000 shares $3,200,000
Paid-in capital in excess of par 160,000
Retained earnings 650,000

Total $4,010,000

On August 1, 2010, the board of directors of Howell declared a 15% stock dividend on common stock, to be distributed on September 15th. The market price of Howell's common stock was $35 on August 1, 2010, and $38 on September 15, 2010. What is the amount of the debit to retained earnings as a result of the declaration and distribution of this stock dividend?

a. $800,000.
b. $840,000.
c. $912,000.
d. $600,000.

Explanation / Answer

b. $840,000. Stock dividend = 15%* No of shares issued*MKt Price on date of declaration of Stock div = 15%*160,000*$35 = $840,000 Also note that Stock dividends are recorded by moving amounts from retained earnings to the paid-in capital accounts. The amount to move depends on the size of the distribution: (1) a small stock dividend (generally less than 20-25% of the existing shares outstanding) is accounted for at market price on the date of declaration, and (2) a large stock dividend (generally over the 20-25% range) is accounted for at par value.

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