Question

Problem 17-7 Stock Dividend Effects (LG17-6) If a firm has retained earnings of $2.7 million, a common shares account of $4.7 million, and additional patd-in capital of $9.4 million, how would these accounts change in response to a 10 percent stock dividend? Assume market value of equity is equal to book value of equity. (Enter your enswers in dollars not in millions. Input ell amounts as positive values. Indicate the direction of the effect by selecting "Increase, "decreese" or "no change" from the drop-down menu.) Retained earnings to Common stock to Additionsl paid-in capisal to ances

Answer 1

If a company pays stock dividends, the dividends reduce the company's retained earnings and increase the common stock account. Stock dividends do not result in asset changes of the balance sheet but rather affect only the equity side by reallocating part of the retained earnings to the common stock account. Retained Earnings Common Stock Additional Paidin Capital Stock Dividend Hence, Stock Dividend 2700000 4700000 9400000 10% 470000 Hence, Retained Earnings Common Stock Additional Paidin Capital 2230000 5170000 9400000 Therefore, Retained Earnings Common Stock Additional Paidin Capital 2230000 Decrease of 470000 2700000 to 5170000 Inrease of 470000 9400000 same 4700000 to 9400000 to