Question

Stayman Co. declared a 30% stock dividend. This transaction A) Increases total equity and retained earnings. B) Decreases total equity and retained earnings. C) Has no effect on total equity or retained earnings. D) Has no effect on total equity but decreases retained earnings.

Answer 1

D) Has no effect on total equity but decreases retained earnings.

Step-by-step explanation:

Dividends refer to the distribution of profits to the common stock holders.

This is basically an appropriation of profits.

When dividends are declared, then the retained earnings are reduced and a liability is created.

Announcing and declaring a dividend is a right to claim dividend by shareholders.

Thus, it do not affect the equity at all, but a liability is created and the moment dividend is paid liability is settled.