On January 1, 2020, Bratislava Corporation had 110,000 no par value common shares outstanding, which had been issued at $ 5 each. On June 1, the corporation acquired 10,000 shares to be held in the treasury. On December 1, when the market price of the shares was $ 4, the corporation declared a 10% stock dividend to be issued to shareholders of record on December 16. What was the impact of the 10% stock dividend on the retained earnings account?

Question

Quizplus · Accepted Answer

Before the stock dividend:

Number of shares outstanding = 110,000
Total value of shares outstanding = 110,000 x $5 = $550,000

After the treasury stock purchase:
Number of shares outstanding = 100,000
Total value of shares outstanding = 100,000 x $5 = $500,000

After the 10% stock dividend:
Number of shares outstanding = 110,000 + (110,000 x 0.1) = 121,000
Total value of shares outstanding = 121,000 x $4 = $484,000

The total decrease in the value of shares outstanding (from $500,000 to $484,000) is $16,000. This amount is taken from retained earnings as a result of the stock dividend.

So, the impact of the stock dividend on the retained earnings account is:

Retained earnings decrease = $16,000

Thus, the correct answer is C.

On January 1, 2020, Bratislava Corporation Had 110,000 No Par