A firm has retained earnings of $11 million, a common shares account of $2 million, and additional paid-in-capital of $6 million, and the firm just paid a 15 percent stock dividend. Assume that fair market value is reflected in the relative size of both the common shares account and the additional paid-in-capital account. Which of the following statements is correct?

Question

Quizplus · Accepted Answer

A stock dividend redistributes a portion of the company's retained earnings to the common shares account and possibly additional paid-in-capital, depending on how the dividend is accounted for. In this case, a 15% stock dividend on a $2 million common shares account would increase it by $300,000 (15% of $2 million), which matches statement B. The remaining increase, which would be allocated to additional paid-in-capital, accounts for the $900,000, making statement C correct. The total increase in common shares and additional paid-in-capital ($1.2 million) would be deducted from retained earnings, validating statement A. Therefore, all statements are correct.

A Firm Has Retained Earnings of $11 Million, a Common