ExpertMedium1 markMultiple Choice
CPA · Question 34 · Area II: Balance Sheet Accounts
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?
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:
A.
Decrease by $100,000
B.
No change
C.
Decrease by $500,000
D.
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
C
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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