Earnhart Corporation has outstanding 3,000,000 shares of common stock with a par value of $10 each. The balance in its Retained Earnings account at January 1, 2025, was $24,000,000, and it then had Paid-in Capital in Excess of Par—Common Stock of $5,000,000. During 2025, the company’s net income was $4,700,000. A cash dividend of $0.60 a share was declared on May 5, 2025, and was paid June 30, 2025, and a 6% stock dividend was declared on November 30, 2025, and distributed to stockholders of record at the close of business on December 31, 2025. You have been asked to advise on the proper accounting treatment of the stock dividend.

The existing stock of the company is quoted on a national stock exchange. The market price of the stock has been as follows.

Instructions

a. Prepare the journal entry to record the declaration and payment of the cash dividend.

b. Prepare the journal entry to record the declaration and distribution of the stock dividend.

c. Prepare the stockholders’ equity section (including schedules of retained earnings and additional paid-in capital) of the balance sheet of Earnhart Corporation for the year 2025 on the basis of the foregoing information. Draft a note to the financial statements setting forth the basis of the accounting for the stock dividend, and add separately appropriate comments or explanations regarding the basis chosen.

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