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 the common stock dividend and declaration?
A) Retained earnings decreased $32,000.
B) Capital in excess of par remained the same.
C)Additional Paid in capital increased $128,000.
D)Total stockholders' equity remained the same.

Question

Quizplus · Accepted Answer

A common stock dividend does not affect the total stockholders' equity; it only transfers amounts within equity accounts. Retained earnings decrease by the market value of the shares distributed, and common stock and additional paid-in capital increase by the same amount. Therefore, additional paid-in capital should increase by the difference between the market value and par value of the shares distributed, not $128,000.

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