Final answer:
Chief Corporation's retained earnings will decrease as a result of the 10% stock dividend. The decrease in retained earnings is due to the transfer from retained earnings to the paid-in capital account. The overall equity remains the same, but its composition is altered.
Step-by-step explanation:
When Chief Corporation declared and issued a 10% stock dividend on October 1, 2011, and with 80,000 shares of $5 par common stock outstanding, the market value being $10 per share, the following occurred: Chief's retained earnings will decrease. A stock dividend results in a transfer from the retained earnings account to the paid-in capital account within the shareholders' equity section of the balance sheet.
The formula to calculate the decrease in retained earnings is (Number of Shares * Stock Dividend Percentage * Market Value per Share). In Chief's case, it would be (80,000 * 10% * $10), which equals $80,000. This amount is transferred out of the retained earnings account to reflect the new shares issued to shareholders.
The issuance of a stock dividend does not result in an inflow of cash or any other form of assets to the company; instead, it reallocates part of the company's retained earnings to common stock and additional paid-in capital accounts. Therefore, the overall equity of the company remains unchanged, but the composition of equity shifts from retained earnings to contributed capital.