Question

On October 1, 2021, Ca Corporation declared and issued a 10% stock dividend. Before this date, Ca had 80,000 shares of $5 par common stock outstanding. The market value of Ca Corporation on the date of declaration was $10 per share.
Required:

1. As a result of this dividend, Chief's retained earnings will ___________.

MULTIPLE CHOICE

a. decrease by $80,000

b. not change

c. decrease by $40,000

d. increase by $80,000

Answer 1

Answer:

The correct answer is Option A.

Explanation:

The overall effect this declaration would has on the retained earnings would be determined using the current market value, meanwhile the effect on common stock would determined using the par value.

Stock dividend declared = 10% x 80,000 shares x $10 = $80,000

The effect on common stock will be = 10% x 80,000 shares x $5 = $40,000

So, paid in capital in excess of par value common stock is $80,000 - $40,000 = $40,000.

Necessary accounting entries

Debit Retained earnings $80,000

Credit Common stock $40,000

Credit paid in capital in excess of par value common stock $40,000

(To record declaration of 10% stock dividend)