Gilligan Corporation was established on February 15, Year 1. Gilligan is authorized to issue 500,000 shares of $6.00 par value common stock. As of December 30, Year 1, Gilligan's stockholders' equity accounts report the following balances: On December 31, Year 1, Gilligan decides to issue a 5% stock dividend. At the time of issue, the market price of the stock was $22 per share.How will the issuance of the stock dividend affect the financial statements?

Question

Gilligan Corporation was established on February 15, Year 1. Gilligan is authorized to issue 500,000 shares of $6.00 par value common stock. As of December 30, Year 1, Gilligan's stockholders' equity accounts report the following balances:  On December 31, Year 1, Gilligan decides to issue a 5% stock dividend. At the time of issue, the market price of the stock was $22 per share.How will the issuance of the stock dividend affect the financial statements?

Quizplus · Accepted Answer

When a stock dividend is issued, the total number of shares outstanding increases, but the total value of the company remains the same. Therefore, the common stock account is increased by the value of the additional shares issued, or ($6.00 x 500,000) x 0.05 = $60,500. The additional paid-in capital resulting from the stock dividend is the difference between the market price per share and the par value per share, or ($22.00 - $6.00) x 500,000 x 0.05 = $44,000. The retained earnings account is decreased by the total value of the stock dividend, or ($22.00 x 500,000 x 0.05) = $55,000. Therefore, the answer is D.

Gilligan Corporation Was Established on February 15, Year 1