On June 30, 2014, Stephans Company showed the following data on the equity section of their balance sheet:
$\begin{array}{|l|r|r|}
\hline \text { Stockholders' equity } & & \
\hline \text { Common stock, } \$ 1 \text { par } & 100,000 \text { shares authorized } &\$40,000 \
\hline & 40,000 \text { shares issued } & \
\hline \text { Paid-in capital in excess of par } & & 260,000 \
\hline \text { Retained earnings } & & 940,000 \
\hline \text { Total stockholder's equity } & & \$ 1,240,000 \
\hline
\end{array}$
On July 1, 2014, Stephans distributed a 5% stock dividend. The market value of the stock at that time was $13 per share.
- Following this transaction, the total shareholders' equity would go down by $26,000.

Question

On June 30, 2014, Stephans Company showed the following data on the equity section of their balance sheet:
 $\begin{array}{|l|r|r|}
\hline \text { Stockholders' equity } & & \
\hline \text { Common stock, } \$ 1 \text { par } & 100,000 \text { shares authorized } &\$40,000 \
\hline & 40,000 \text { shares issued } & \
\hline \text { Paid-in capital in excess of par } & & 260,000 \
\hline \text { Retained earnings } & & 940,000 \
\hline \text { Total stockholder's equity } & & \$ 1,240,000 \
\hline
\end{array}$ 
On July 1, 2014, Stephans distributed a 5% stock dividend. The market value of the stock at that time was $13 per share.
- Following this transaction, the total shareholders' equity would go down by $26,000.

Quizplus · Accepted Answer

The total shareholders' equity would not go down by $26,000 after the stock dividend. Instead, the total shareholders' equity would remain the same, but the composition of the equity section would change with more shares being issued and the retained earnings being decreased to reflect the value of the stock dividends. The new equity section would look something like this:

Common stock (100,000 shares x $10 par value) = $1,000,000
Additional paid-in capital = $520,000 ($260,000 from the stock dividend)
Retained earnings = $2,226,000 ($2,252,000 before the stock dividend, decreased by $26,000 to reflect the value of the stock dividend)

Total shareholders' equity = $3,746,000 (same as before the stock dividend)

On June 30, 2014, Stephans Company Showed the Following Data