Asked by Yasmin Neves on May 23, 2024
Verified
Davidson Company has 10,000,000 common shares issued and 500,000 shares of treasury stock.The stock's par value is $2 per share and its current market price is $25 per share.Which of the following is correct when a 15% stock dividend is declared and distributed?
A) Retained earnings will decrease $37.5 million.
B) Retained earnings will decrease $35.625 million.
C) Retained earnings will decrease $3 million.
D) Retained earnings will decrease $2.85 million.
Treasury Stock
Shares that were once in circulation but have been bought back by the issuing company, reducing the amount of outstanding stock on the open market.
Common Shares
Equity securities that represent ownership in a company; holders may vote on corporate matters and receive dividends.
Stock Dividend
A dividend payment made in shares of stock rather than cash, allowing shareholders to increase their shareholding without directly purchasing additional shares.
- Grasp the consequences stock dividends have on common stock, retained earnings, and additional paid-in capital.
- Grasp the concept of stock splits and their effects on par value and number of shares.
Verified Answer
JB
Julius BullardMay 24, 2024
Final Answer :
B
Explanation :
First, calculate the number of new shares that will be issued:
10,000,000 x 15% = 1,500,000 new shares
Next, add the new shares to the number of existing shares:
10,000,000 + 1,500,000 = 11,500,000 total shares
Subtract the treasury stock from the total shares to get the number of outstanding shares:
11,500,000 - 500,000 = 11,000,000 outstanding shares
The par value of the stock remains the same at $2 per share, so the total par value of the stock is:
11,000,000 x $2 = $22,000,000
The dividend is paid in stock, so the retained earnings do not decrease. However, the company's additional paid-in capital account will increase. The amount of the increase is equal to the par value of the new shares issued:
1,500,000 x $2 = $3,000,000
Therefore, the correct answer is B, retained earnings will decrease $35.625 million.
10,000,000 x 15% = 1,500,000 new shares
Next, add the new shares to the number of existing shares:
10,000,000 + 1,500,000 = 11,500,000 total shares
Subtract the treasury stock from the total shares to get the number of outstanding shares:
11,500,000 - 500,000 = 11,000,000 outstanding shares
The par value of the stock remains the same at $2 per share, so the total par value of the stock is:
11,000,000 x $2 = $22,000,000
The dividend is paid in stock, so the retained earnings do not decrease. However, the company's additional paid-in capital account will increase. The amount of the increase is equal to the par value of the new shares issued:
1,500,000 x $2 = $3,000,000
Therefore, the correct answer is B, retained earnings will decrease $35.625 million.
Learning Objectives
- Grasp the consequences stock dividends have on common stock, retained earnings, and additional paid-in capital.
- Grasp the concept of stock splits and their effects on par value and number of shares.