ExpertHard1 markMultiple Choice
CPA · Question 32 · Area 2: Select Accounts
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?
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:
A.
Decrease by $100,000
B.
No change
C.
Decrease by $500,000
D.
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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