The Michael Company's stockholders' equity accounts have the following balances as of December 31, 2014:
On January 2, 2015, the board of directors of Michael declared a 10% stock dividend to be distributed on February 15, 2015. The market price of Michael Company's common stock was $75 per share on January 2, 2015. On the date of declaration, the retained earnings account should be decreased by

Question

The Michael Company's stockholders' equity accounts have the following balances as of December 31, 2014:  
On January 2, 2015, the board of directors of Michael declared a 10% stock dividend to be distributed on February 15, 2015. The market price of Michael Company's common stock was $75 per share on January 2, 2015. On the date of declaration, the retained earnings account should be decreased by

Quizplus · Accepted Answer

When a stock dividend is declared, the company transfers a portion of retained earnings to the paid-in capital accounts. The amount transferred is equal to the fair market value of the additional shares issued. In this case, the fair market value of the stock dividend is 10% of the outstanding shares on the date of declaration (10,000 shares x $75 per share = $750,000) so the transfer to the paid-in capital accounts is $75,000 (10% x $750,000). The remaining amount ($675,000) is transferred from retained earnings to the common stock account. Therefore, the balance in retained earnings would be decreased by $172,500 ($75,000 + $97,500), and the answer is C.

The Michael Company's Stockholders' Equity Accounts Have the Following Balances