Principles of Accounting

[Kiwi Lover]

Ok, I’ve been studying for the Principles of Accounting test and today I came across a couple questions that are related, but they say the opposite things. I’m not sure if one of the answers are incorrect (InstantCert's material is incorrect, such as a typo) or if I'm just not understanding it. I'd appreciate if anyone could help. The first question is:

If an entity declares a stock dividend totaling $15,000, what account is credited? _______________
Answer: Additional Paid-in-Capital. The additional $15,000 represents an increase in the equity (capital) of the corporation. We know that any dividend decreases retained earnings therefore it is debited $15,000 and the stock dividend is recorded as an increase to the paid-in-capital account as a credit.

dr. Retained Earnings 15,000
cr. Additional Paid-in-Capital 15,000

The second question is:
If a dividend of $5000 is declared, using a comma to separate your answers, what account is debited and what account is credited? __________,__________
Answer: Retained Earnings, Cash.

dr. Retained Earnings 5000
cr. Declared Dividends 5000

The dividend liability is recorded on the day it is declared, not the day it is paid. When the dividend is paid, the cash account is credited and the liability Declared Dividends is debited.


I’m really confused about this one, because the questions appears to be asking the same thing, but it has different answers. Can anyone help? Thanks.

Hi lhodgdon,

I think I can help you on this one.

When a stock dividend is issued, it merely "rearranges" the existing equity on the books--it does not change the bottom line total equity balance. As far as I know, the CORRECT journal entry to record a stock dividend would be as follows:

Small Stock Dividend (10% stock dividend)

DEBIT Retained Earnings $2,000,000
CREDIT Common Stock $ 100,000
CREDIT Paid in Capital $1,900,000

To record issuance of a 10% stock dividend (1,000,000 shares x 10% x $20 per share)

Therefore, per the above example, the first question you posted was correct, in that you would DEBIT Retained Earnings and CREDIT Paid in Capital. The answer to the second question you posted does not seem to be correct to me, as no cash is involved when a stock dividend is issued.

I hope that makes sense! Please feel free to ask any other questions, and I'll do what I can to help!

JoAnne