If a firm has retained earnings of $10 million, a common shares account of $15 million, and additional paid-in-capital of $5 million, how much would be transferred in (or out) of these accounts in response to a 50 percent stock dividend, respectively?

Question

Quizplus · Accepted Answer

In a stock dividend, the total amount of equity remains the same, but it is redistributed among shareholders. In a 50 percent stock dividend, the number of shares outstanding will increase by 50 percent, meaning the firm will issue new shares to existing shareholders. 
Retained earnings and common shares account will not change in value, they will only be redistributed among shareholders. Therefore, the amounts transferred in and out of these accounts will be 0% and 50%, respectively. 
However, the additional paid-in-capital account will increase to reflect the additional value that the new shares will bring to the firm. Therefore, the amount transferred in this account will be +50%. Overall, the best choice is C.

If a Firm Has Retained Earnings of $10 Million, a Common