Ma's Fried Chicken has 21,000 shares of stock outstanding with a par value of $1 per share and a market value of $41 per share. The balance sheet shows $121,000 in the capital in excess of par account and $204,000 in the retained earnings account. The firm just announced a 5 percent stock dividend. What will be the total owners' equity after the dividend?
A) $354,000
B) $298,000
C) $346,000
D) $321,000
E) $325,000

Question

Quizplus · Accepted Answer

Since Ma's Fried Chicken announced a 5 percent stock dividend, the number of shares outstanding will increase by 5 percent, or 1,050 shares (21,000 x .05 = 1,050). The par value of the shares remains $1 per share, so the par value of the additional shares is $1,050. The capital in excess of par account will increase by the market value per share (since this represents the amount above and beyond par value that shareholders are willing to pay for the stock), which is $41 per share, times the number of additional shares, which equals $43,050 ($41 x 1,050 = $43,050). The retained earnings account will decrease by the same amount. Therefore, the new total owners' equity will be $346,000 ($121,000 + $43,050 + $204,000 = $346,050).

Ma's Fried Chicken Has 21,000 Shares of Stock Outstanding with a Par