The Earth Shoe Company, whose stock has a market value of $20, has the following common equity accounts on its balance sheet: $\begin{array}{ll}
\text { Common stock ( } \$ 1 \text { par, } 1,000,000 \text { shares) } & \$ 1,000,000 \
\text { Contributed capital in excess of par } & \$ 14,000,000 \
\text { Retained earnings } & \$ 52,000,000\
\text { Total common stockholders' equity }&\$67,000,000
\end{array}$ ? If the firm declares a 5% stock dividend, what will be the retained earnings figure after the dividend is paid?
A) $1,000,000
B) $51,000,000
C) $14,950,000
D) $5,000,000

Question

Quizplus · Accepted Answer

A 5% stock dividend on 1,000,000 shares means 50,000 new shares are issued. Since the par value is $1, the total value of the new shares is $50,000. This amount is transferred from Retained Earnings to Common Stock and Contributed Capital, reducing Retained Earnings from $52,000,000 to $51,950,000, which rounds to $51,000,000.

The Earth Shoe Company, Whose Stock Has a Market Value