Question

A small stock dividend:

	A.	Increases common stock account by the market price of each share issued.
	B.	Reduces retained earnings by the market price of each share issued.
	C.	Reduces cash by the total market value of the shares issued.
	D.	Does not affect the capital surplus account.

Answer 1

A small stock dividend:

Option B. Reduces retained earnings by the market price of each share issued.

A company is declaring 20% stock dividend whose par value is $1 and market value is $5. It has 100,000 outsatnding shares. In this case company will issue 20,000 additonal shares (100000*20%), whose value is $100,000 (20000*5). In accounting treatment, company will reduce its retained earning by $100,000 and add $20,000 to common stock and $80,000 in excess of par value to its common stock.

Becuase retained earnings are reduced by the market price, the correct option is Option B.