On January 31,Village Bank had 500,000 shares of $3 par value common stock outstanding.On that date,the company declared a 10% stock dividend when the market price of the stock was $62 per share.The immediate effect of this dividend upon Village Bank was:

Question

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A stock dividend does not involve a cash payout, so option A can be eliminated. The par value of the common stock remains the same, and the only change is in the number of outstanding shares. Therefore, option D can also be eliminated. The stock dividend is paid out of retained earnings, so option C is partially correct, but it does not reflect the correct amount. To calculate the reduction in retained earnings, we multiply the number of shares outstanding (500,000) by the percentage of the dividend (10%) and by the par value per share ($3). This gives us a reduction of $1,500,000 in retained earnings. However, since the market price of the stock is also given, we can calculate the value of the additional shares issued. The value of the 10% stock dividend is ($62 x 500,000 x 10%) = $3,100,000. This amount is transferred from retained earnings to paid-in capital. Therefore, the correct answer is option B - a reduction in retained earnings of $3,100,000.

On January 31,Village Bank Had 500,000 Shares of $3 Par