Question

A corporation declared a stock dividend on November 1 and issued 9,000 shares of stock to its stockholders. Prior to the dividend, the balance in Retained Earnings was $850,000, the number of shares of $5 par value stock issued and outstanding was 60,000, and the market value of the stock was $12. This stock dividend will cause total stockholders' equity to:

a. decrease by $63,000.

b. remain unchanged.

c. increase by $45,000.

d. decrease by $108,000.

Answer 1

b. remain unchanged.

Step-by-step explanation:

The computation is shown below:

The Decrease in retained earnings would be

= 9,000 shares × $12

= $108,000

Increase in common stock is

= 9,000 shares × $5

= $45,000

Therefore the Paid up capital in excess of par is

= $108,000 - $45,000

= $63,000

Now

Effect on stockholder’s equity is

= -$108,000 + $45,000 + $63,000

= $0

hence, the correct option is b.