Katie Company had 40,000 shares of $2 par value common stock outstanding prior to a 40% common stock dividend declaration and distribution.The market value of the common stock on the declaration date was $10.Which of the following statements incorrectly describes the effect of recording the common stock dividend?
A)Retained earnings decreased $32,000.
B)Additional paid-in capital remained the same.
C)Additional paid-in capital increased $128,000.
D)Total stockholders' equity remained the same.

Question

Quizplus · Accepted Answer

When a common stock dividend is declared and distributed, it does not affect the total stockholders' equity (choice D) because it is simply a reallocation of equity among shareholders. However, the retained earnings (choice A) would decrease by the amount of the dividend distributed, which in this case would be $80,000 (40% of 40,000 shares x $2 par value per share). The additional paid-in capital (choice C) would also decrease by this same amount, not increase. Therefore, choice C incorrectly describes the effect of recording the common stock dividend. Additional paid-in capital only increases when stock is initially issued for a price above its par value.

Katie Company Had 40,000 Shares of $2 Par Value Common