On June 30, 2014, when Ermler Co.'s stock was selling at $65 per share, its capital accounts were as follows: If a 100% stock dividend were declared and distributed, capital stock would be

Question

On June 30, 2014, when Ermler Co.'s stock was selling at $65 per share, its capital accounts were as follows:  If a 100% stock dividend were declared and distributed, capital stock would be

Quizplus · Accepted Answer

If a 100% stock dividend is declared and distributed, it means that the number of shares will double. Therefore, if Ermler Co. had 38,000 shares outstanding before the dividend, it will have 76,000 shares outstanding after the dividend.

The total par value of the stock before the dividend was $1,000,000 (38,000 shares x $26 par value). After the dividend, the total par value of the stock will be $2,000,000 (76,000 shares x $26 par value).

The additional paid-in capital before the dividend was $1,200,000. After the dividend, the additional paid-in capital will not change, since no new cash is received.

Therefore, the total capital accounts after the dividend will be:
Common stock: $2,000,000
Additional paid-in capital: $1,200,000
Total: $3,200,000

Therefore, the correct answer is C. The capital stock after the dividend would be $2,000,000 and additional paid-in capital would remain at $1,200,000, making the total capital accounts $3,200,000.

On June 30, 2014, When Ermler Co