A firm has retained earnings of $10 million, a common shares account of $1 million, and additional paid-in-capital of $4 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?

Question

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A 10% stock dividend increases the common shares account by 10% of its original amount ($1 million), which is $100,000. This amount is transferred from retained earnings, reducing it by $500,000, and the additional paid-in-capital increases by $400,000 to reflect the fair market value.

A Firm Has Retained Earnings of $10 Million, a Common