When a corporation issues a stock dividend, which of the following is true?

Question

Quizplus · Accepted Answer

Here's why: A stock dividend involves the distribution of additional shares of the corporation's own stock to its shareholders. When a stock dividend is declared and issued, the company transfers a portion of its retained earnings to the paid-in capital section of stockholders' equity. Although the number of shares outstanding increases, the overall value of the stockholders' equity does not change because the company is not receiving any new assets; it is merely reallocating its equity.
To elaborate on the other options:
a. Cash decreases: This is not true for a stock dividend. Cash decreases when a cash dividend is paid, not when a stock dividend is issued.
c. Total stockholders' equity decreases: This is incorrect because the issuance of a stock dividend does not decrease the total stockholders' equity. It simply reallocates amounts within the equity section of the balance sheet.
d. Retained earnings is increased: This is also incorrect. When a stock dividend is issued, retained earnings actually decrease because the value of the dividend is transferred from retained earnings to the paid-in capital accounts. However, the total stockholders' equity remains unchanged by this internal transaction.

When a Corporation Issues a Stock Dividend, Which of the Following