Fashion Company reported the following:
Common stock, $3 par, 10,000 shares authorized, 5,000 shares issued and outstanding
What is the effect of a 10% stock dividend if the market price of the common stock is $30 per share when the dividend is declared?

Question

Quizplus · Accepted Answer

A stock dividend transfers a portion of retained earnings to the contributed capital accounts. In this case, the company issues 500 additional shares (10% of 5,000 shares) to stockholders, so retained earnings will be reduced by $15,000 (500 shares x $30 per share). This amount will be transferred to the contributed capital accounts as additional paid-in capital. Therefore, option A is the correct answer. Option B and C are not correct because the company is not paying cash or receiving cash. Option D is not correct because a stock dividend does have an effect on stockholders' equity accounts.

Fashion Company Reported the Following