D is corrent. The requirement is to determine how the declaration and subsequent issuance of a 10% stock dividend would affect the issuer’s common stock and additional paid-in capital accounts. The issuance of a stock dividend of 20-25% or less requires that the market value of the stock be transferred from retained earnings.| Retained earnings | (fair market value) | |
| Common stock | | (par value) |
| Additional paid-in capital | | (excess) |
A is incorrect because it assumes a stock split. A stock split requires no journal entry since the dollar values of the common stock and additional paid-in capital accounts do not change; only the numbers of shares change (recorded by a memorandum entry only).
B is incorrect. Refer to the correct answer explanation.
D is incorrect because it assumes a 20-25% or larger stock dividend which requires the par value of the stock (not market value) to be transferred from retained earnings to common stock. This answer would be correct for a 10% stock dividend if market value equaled par value; however, the problem states that market value exceeds par value. 
