Questions: A company with 100,000 authorized shares of 4 par common stock issued 50,000 shares at 9. Subsequently, the company declared a 2% stock dividend on a date when the market price was 10 a share. The effect of the declaration and issuance of the stock dividend is to a. increase retained earnings, decrease common stock, and decrease paid-in capital b. decrease retained earnings, increase common stock, and increase paid-in capital c. decrease retained earnings, increase common stock, and decrease paid-in capital d. increase retained earnings, decrease common stock, and increase paid-in capital

A company with 100,000 authorized shares of 4 par common stock issued 50,000 shares at 9. Subsequently, the company declared a 2% stock dividend on a date when the market price was 10 a share. The effect of the declaration and issuance of the stock dividend is to
a. increase retained earnings, decrease common stock, and decrease paid-in capital
b. decrease retained earnings, increase common stock, and increase paid-in capital
c. decrease retained earnings, increase common stock, and decrease paid-in capital
d. increase retained earnings, decrease common stock, and increase paid-in capital

Transcript text: A company with 100,000 authorized shares of $\$ 4$ par common stock issued 50,000 shares at $\$ 9$. Subsequently, the company declared a $2 \%$ stock dividend on a date when the market price was $\$ 10$ a share. The effect of the declaration and issuance of the stock dividend is to a. increase retained earnings, decrease common stock, and decrease paid-in capital b. decrease retained earnings, increase common stock, and increase paid-in capital c. decrease retained earnings, increase common stock, and decrease paid-in capital d. increase retained earnings, decrease common stock, and increase paid-in capital

Solution

Solution Steps

To solve this problem, we need to understand the impact of a stock dividend on the company's financial statements. Specifically, we need to determine how the stock dividend affects retained earnings, common stock, and paid-in capital.

Stock Dividend Declaration: When a stock dividend is declared, the company transfers a portion of retained earnings to common stock and additional paid-in capital.
Calculation of Stock Dividend: Calculate the number of shares to be issued as a stock dividend (2% of 50,000 shares).
Effect on Financial Statements:
- Retained earnings will decrease by the market value of the stock dividend.
- Common stock will increase by the par value of the new shares issued.
- Additional paid-in capital will increase by the difference between the market value and the par value of the new shares.

Step 1: Calculate the Number of Shares Issued as Stock Dividend

The company declared a $2\%$ stock dividend on 50,000 issued shares. The number of shares to be issued as a stock dividend is calculated as: \[ \text{Stock Dividend Shares} = 50,000 \times \frac{2}{100} = 1,000 \text{ shares} \]

Step 2: Calculate the Decrease in Retained Earnings

The decrease in retained earnings is the market value of the stock dividend shares: \[ \text{Retained Earnings Decrease} = 1,000 \times 10 = 10,000 \]

Step 3: Calculate the Increase in Common Stock

The increase in common stock is the par value of the new shares issued: \[ \text{Common Stock Increase} = 1,000 \times 4 = 4,000 \]

Step 4: Calculate the Increase in Paid-in Capital

The increase in paid-in capital is the difference between the market value and the par value of the new shares: \[ \text{Paid-in Capital Increase} = 1,000 \times (10 - 4) = 1,000 \times 6 = 6,000 \]