Question

g. The stockholders’ equity of Gaffney Company at November 30, 2012, is presented below.

Common stock, par value $5, authorized 200,000 shares, 100,000 shares issued and outstanding

Paid-in capital in excess of par Retained earnings

$500,000

100,000

300,000

$900,000

On December 1, 2012, the board of directors of Gaffney Company declared a 5% stock dividend, to be distributed on December 20. The market price of the common stock was $10 on December 1 and $12 on December 20. What is the amount of the change to retained earnings as a result of the declaration and distribution of this stock dividend?

1. $0

2. $40,000

3. $50,000

4. $60,000 5.

None of the above.

Answer 1

Answer:- the correct answer is 3 that is $ 50,000

Explanations :-

Stock dividends have no effect on the total amount of stockholders’ equity or on net assets.

They merely decrease retained earnings and increase paid-in capital by an equal amount.

So no of Outstanding shares = 100,000 Shares

so 5 % stock dividend = 100,000 * 5/100 = 5000 shares as stock dividend and as we already know there will be no change in holding ratios and shareholder's equity.

Only 5000 shares * 10 = $ 50,000 to be reduced from retained earnings and will be transferred to shares issued and outstanding and paid in capital in excess of par.

and market value of stock will be the value as on the date of declaration of stock dividend. not as of the date of distribution.