Asked by Chance Walker on Jun 04, 2024
Verified
Assume a firm has declared a 20% stock dividend on its 1 million shares of outstanding $5 par value common stock. If the market value of the stock at the date of the stock dividend is $14 per share and the retained earnings account balance before the stock dividend was $7,600,000, what is the retained earnings account balance after the stock dividend?
A) $3,600,000
B) $1,960,240
C) $7,600,000
D) $4,800,000
Stock Dividend
A stock dividend is a payment made in the form of additional shares rather than cash, proportional to the number of shares already owned.
Market Value
Market value refers to the current price at which an asset or service can be bought or sold in the marketplace.
Retained Earnings
The portion of a company's profit that is held or retained and saved for future use, reinvestment in the business, or to pay debt.
- Comprehend the monetary consequences of issuing stock dividends on a corporation's accumulated profits.
Verified Answer
The par value of each share remains at $5, but the market value of each share is now $14. This means the total market value of the outstanding shares is now 1.2 million x $14 = $16.8 million.
The value of the stock dividend is therefore $14 x 200,000 = $2.8 million.
The retained earnings account balance will decrease by the value of the stock dividend because the firm is giving away a portion of its earnings to the shareholders. The new retained earnings account balance will be:
$7,600,000 - $2,800,000 = $4,800,000.
Therefore, the correct answer is D.
Learning Objectives
- Comprehend the monetary consequences of issuing stock dividends on a corporation's accumulated profits.
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