A company declares a 10% stock dividend when the stock 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

1. Determine size. < 20-25% = Small. > 25% = Large. 2. Small -> Use Fair Value. Large -> Use Par Value.

Full Answer

C.Decrease by $500,000✓ Correct

A 10% stock dividend is a small stock dividend. It is capitalized from Retained Earnings at the Fair Market Value of the shares issued. 10,000 shares * $50 = $500,000.

Common mistakes

Using Par Value for a small stock dividend.

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