Question

On June 30, 2020, Lynch Co. declared and issued a 15 percent stock dividend. Prior to this dividend, Lynch had 50,000 shares of $10 par value common stock issued and outstanding. The market value of Lynch Co.'s common stock on June 30, 2020, was $24 per share. As a result of this stock dividend, by what amount would Lynch's total stockholders' equity increase (decrease)? Group of answer choices

Answer 1

$75,000 decrease

Step-by-step explanation:

The total stockholders' equity decreases by the same amount of dividend distributed. This is so because distributions are made out of the Retained earnings which is a reserve set aside for stockholders and constitutes stockholders' equity.

So we have to calculate the value of dividend distributed. Dividends are calculated using book values instead of market value of stocks as follows :

Dividend = 50,000 x $10 x 15 % = $75,000