Bridge Corporation decides to issue a 15% stock dividend on 20,000 outstanding shares of $10 stated value common stock.The distribution is made at the time the market value of the stock is $50 a share.How will this transaction affect the company's equity accounts?

Question

Quizplus · Accepted Answer

The transaction will increase the number of outstanding shares from 20,000 to 23,000 (20,000 x 15% = 3,000 additional shares). The total stated value of the common stock will remain the same at $200,000 (20,000 shares x $10 stated value per share). The market value of the stock will decrease from $50 to approximately $43 (since the additional shares dilute the value of each share). As a result of the stock dividend, the following changes will occur in the equity accounts:

- Common Stock will increase by $30,000 (3,000 shares x $10 stated value per share) 
- Additional Paid-In Capital will increase by $320,000 (3,000 shares x $43 market value per share - $30,000 stated value) 
- Retained Earnings will decrease by $30,000 (since the distribution of additional shares represents a transfer of equity from retained earnings to common stock and additional paid-in capital).

Bridge Corporation Decides to Issue a 15% Stock Dividend on 20,000