Anchor Company has 1,000,000 shares of common stock with a par value of $5.Additional paid-in capital totals $5,000,000 and retained earnings is $8,000,000.The directors declare a 10% stock dividend when the market value is $15.The reduction of retained earnings as a result of the declaration will be:
A)$0.
B)$500,000.
C)$800,000.
D)$1,000,000.
E)$1,500,000.

Question

Quizplus · Accepted Answer

For a stock dividend, the reduction in retained earnings is based on the current market value of the shares being distributed, not their par value. With a 10% stock dividend on 1,000,000 shares, 100,000 new shares are issued. At a market value of $15 per share, the total value of the stock dividend is 100,000 shares * $15/share = $1,500,000. This amount is what will be deducted from retained earnings.

Anchor Company Has 1,000,000 Shares of Common Stock with a Par