A company declares a 40% stock dividend when there were 4 million common shares outstanding with a $1 par value. The current market price is $20 per common share. Which of the following will be the effect of the stock dividend?
A) Retained earnings will decrease by $1.6 million and contributed capital will increase by $1.6 million.
B) Contributed capital will decrease by $1.6 million and retained earnings will increase by $1.6 million.
C)Retained earnings will decrease by $32 million and contributed capital will increase by $32 million.
D)Contributed capital will decrease by $32 million and retained earnings will increase by $32 million.

Question

Quizplus · Accepted Answer

A 40% stock dividend on 4 million shares results in 1.6 million new shares (40% of 4 million). The par value is $1, so retained earnings decrease by $1.6 million, and contributed capital increases by $1.6 million.

A Company Declares a 40% Stock Dividend When There Were