On January 31, 2009, Village Bank had 500,000 shares of $2 par value common stock outstanding. On that date, the company declared a 14% stock dividend when the market price of the stock was $37 per share. The immediate effect of this dividend upon Village Bank was:

Question

Quizplus · Accepted Answer

A stock dividend does not result in a reduction of cash, so option A is incorrect. A stock dividend transfers a portion of retained earnings into additional shares of stock. Thus, option C is incorrect as it underestimates the reduction in retained earnings. Option D is incorrect as there is no liability to stockholders incurred by a stock dividend. Therefore, the correct answer is B, a reduction in retained earnings of $2,590,000.

On January 31, 2009, Village Bank Had 500,000 Shares of $2