Rocco Corporation decides to issue a 7.5% stock dividend on 20,000 outstanding shares of $10 stated value common stock. The distribution is made at the time the market value of the stock is $50 a share. How will the entry to record this transaction affect the company's stockholders' equity accounts?

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Quizplus · Accepted Answer

When a stock dividend is issued, the company transfers a portion of retained earnings to the common stock account. The amount transferred is equal to the fair market value of the shares issued. In this case, the fair market value of the shares is $50, so the company will transfer $750,000 ((7.5% x 20,000 shares) x $50) from retained earnings to common stock. This will increase common stock by $150,000 (7.5% x 20,000 shares x $10 stated value) and decrease retained earnings by $750,000. The total stockholders' equity does not change as a result of a stock dividend, but the composition of the equity changes, with more in common stock and less in retained earnings. Option C reflects this properly.

Rocco Corporation Decides to Issue a 7