Dora Company declared and distributed a 10% stock dividend on 20,000 shares of issued and outstanding $5 par value common stock. The market price per share was $9 on the declaration date. Which of the following correctly describes the effect of accounting for the declaration and distribution of the stock dividend?
A)Retained earnings decreased $10,000.
B)Additional paid-in capital increased $8,000.
C)Common stock increased $1,000.
D)Retained earnings decreased $18,000.

Question

Quizplus · Accepted Answer

The stock dividend is 10% of 20,000 shares, which is 2,000 additional shares issued. The market value of the stock dividend is $9 per share, which means the total value of the dividend is $18,000 (2,000 shares x $9 per share). Since the par value of the common stock is $5 per share, the common stock increased by $10,000 (2,000 shares x $5 per share). However, the market value of the stock dividend is higher than the par value, so the additional paid-in capital increased by $8,000 ($18,000 total value of the dividend - $10,000 increase in common stock). Retained earnings are not affected by the declaration and distribution of a stock dividend, so option A and D are incorrect. Choice C is incorrect because the common stock increased by $10,000, not $1,000.

Dora Company Declared and Distributed a 10% Stock Dividend on 20,000