A company declares a 10% stock dividend when the market price is $50 and par value is $10. There are 100,000 shares outstanding. What is the effect on Retained Earnings?

Answer options:

Decrease by $100,000

No change

Decrease by $500,000

Decrease by $400,000

How to approach this question

Is it a Small (<20-25%) or Large (>25%) stock dividend? 10% is Small. Rule: Capitalize Retained Earnings at Market Price.

Full Answer

C.Decrease by $500,000✓ Correct

10% is a small stock dividend. Record at Fair Market Value.<br/>Shares issued = 100,000 * 10% = 10,000.<br/>Debit Retained Earnings: 10,000 * $50 = $500,000.<br/>Credit Common Stock: 10,000 * $10 = $100,000.<br/>Credit APIC: $400,000.

Common mistakes

Using par value (rule for Large stock dividends).

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