A firm has retained earnings of $6 million, a common shares account of $3 million, and additional paid-in-capital of $6 million, and the firm just paid a 10 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. What are the new levels in each account?

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Quizplus · Accepted Answer

A 10 percent stock dividend would not reduce the total equity but would reallocate it among the accounts. The total equity before the dividend is $15 million ($6 million in retained earnings + $3 million in common shares + $6 million in additional paid-in capital). A 10 percent stock dividend on $15 million is $1.5 million. This amount is transferred from retained earnings to common shares and additional paid-in capital, increasing those accounts by 10 percent each ($3 million * 10% = $300,000 and $6 million * 10% = $600,000, respectively), resulting in new balances of $5.1 million in retained earnings, $3.3 million in common shares, and $6.6 million in additional paid-in capital.

A Firm Has Retained Earnings of $6 Million, a Common