A company with 100,000 authorized shares of $4 par common stock issued 50,000 shares at $9. Subsequently, the company declared a 2% stock dividend on a date when the market price was $10 per share. The effect of the declaration and issuance of the stock dividend is to
A) decrease retained earnings, increase common stock, and increase paid-in capital
B) increase retained earnings, decrease common stock, and decrease paid-in capital
C) increase retained earnings, decrease common stock, and increase paid-in capital
D) decrease retained earnings, increase common stock, and decrease paid-in capital

Question

Quizplus · Accepted Answer

The declaration and issuance of a stock dividend decrease retained earnings because the company is distributing its earnings to shareholders in the form of additional shares. This action increases common stock because more shares are being issued. It also increases paid-in capital beyond the par value of the shares issued as part of the dividend.

A Company with 100,000 Authorized Shares of $4 Par Common