Question

On January 31, 2018, Village Bank had 480,000 shares of $2 par value common stock outstanding. On that date, the company declared a 9% stock dividend when the market price of the stock was $42 per share. The immediate effect of this dividend upon Village Bank was:

• A reduction in cash of $1,814,400.

• A reduction in retained earnings of $1,814,400.

• A reduction in retained earnings of $86,400.

• A liability to the stockholders of $86,400.

Answer 1

Number of outstanding share = 480,000

Stock dividend rate = 9%

Number of common share issued in stock dividend = Number of outstanding share x Stock dividend rate

= 480,000 x 9%

= 43,200

Market price per share = $42

Par value per share = $2

Due to stock dividend :

(i) Retained earnings will be debited by = Number of common share issued in stock dividend x Market price per share

= 43,200 x 42

= $1,814,400

(ii) Common stock will be credited by = Number of common share issued in stock dividend x Par value per share

= 43,200 x 2

= $86,400

Paid in capital in excess of par- Common will be credited by = Number of common share issued in stock dividend x ( Market price per share- Par value per share)

= 43,200 x (42-2)

= 43,200 x 40

= $1,728,000

The immediate effect of this dividend upon Village Bank was:   A reduction in retained earnings of $1,814,400.

2nd option is correct.