On June 1, 2010, Sterling Corporation had 40,000 shares of $10 par value common stock outstanding. On June 2, 2010, Sterling declared a 40 percent stock dividend to be distributed on July 5, 2010, to shareholders of record on June 15, 2010. What amount of retained earnings should be transferred to contributed capital because of this dividend?

Question

Quizplus · Accepted Answer

A stock dividend is a distribution of additional shares of stock to existing shareholders. As per the question, Sterling Corporation declared a 40% stock dividend which means for every 10 shares held by shareholders, they will receive an additional 4 shares. Thus, the number of dividend shares will be 40% of 40,000 shares, which is 16,000 shares. The par value per share is $10, therefore, the amount of retained earnings to be transferred to contributed capital is $10 x 16,000 shares = $160,000. Hence, the correct answer is B. None of the other options mentioned are relevant in this context.

On June 1, 2010, Sterling Corporation Had 40,000 Shares of $10