Question

XY Company had the following shareholder equity. Common shares outstanding. 10,000, average issue price, $115, current market price, $140. Shares sold on a stock subscription basis are not issued until the subscription price is collected in full. Recording a declaration of a 10 percent stock dividend in conformity with generally accepted accounting principles would change retained earnings: Multiple Choice 0 C ) On the basis of the market value of shares. 0 ) By 10 percent of its balance before the dividend. 0 C ) On the basis of an arbitrary value of shares 0 On the basis of the average paid in value of shares G

Answer 1

Number of shares outstanding = 10,000

Current market value of 1 common stock = $140

Stock dividend declared = 10%

Hence, number of shares to be issued = 10,000 x 10%

= 1,000

Hence, amount to be debited to retained earnings = Number of shares to be issued x Current market value of 1 common stock

= 1,000 x 140

= $140,000

Thus, due to stock dividend balance in retained earnings would fall, depending on the market price of shares.

First option is the correct option.

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