Final answer:
The correct effect of a 10% stock dividend by Lawrenceville Co. is that retained earnings decrease by $15,000, which is transferred to contributed capital accounts, allocated between common stock and additional paid-in capital.
Step-by-step explanation:
The effect of a 10% stock dividend declared by Lawrenceville Co. will be an increase in the number of shares and a transfer of retained earnings to contributed capital accounts. When the market price of the common stock is $30 per share, and the par value is $3, for every share owned, an additional 0.1 shares will be issued as the dividend. Since 5,000 shares are issued and outstanding, 500 new shares will be distributed to the stockholders as the stock dividend (5,000 x 10%).
The accounting entry for this transaction will debit retained earnings and credit common stock and additional paid-in capital. The amount debited to retained earnings will be the market value of the shares issued as a dividend, so 500 shares at $30 each would be $15,000. As par value is $3, the credit to common stock will be the par value of the new shares issued (500 x $3) equaling $1,500. The remaining $13,500 ($15,000 market value minus $1,500 par value) will be credited to additional paid-in capital.
Therefore, the correct answer to the question is d. Retained earnings in the amount of $15,000 is transferred to the contributed capital accounts.