On October 15, 2016, a 5% stock dividend was declared and distributed. The marke

Question

On October 15, 2016, a 5% stock dividend was declared and distributed. The market value of the common stock on this date was $32 per share. On the date of declaration and payment, the company had 10 million shares of common stock outstanding. The par value of the common shares was $5.

Fractional share rights represented 100,000 shares. Cash was paid in lieu of issuing fractional share rights.

How will this additional information impact your answer to the previous question (The journal entry to record the declaration and distribution of the stock dividend will

C. Increase common stock by $16 million)?

D. Decrease retained earnings by $13.5 million B. Decrease retained earnings by $16 million A. Decrease retained earnings by $2.5 million

C. Increase common stock by $16 million)?

B. It depends on whether or not the cash payment for fractional shares changes the nature of the original stock dividend A. Retained earnings will further decrease by the amount of cash to be paid in lieu of issuing fractional shares C. My answer will not change

Explanation / Answer

The journal entry to record the declaration and distribution of the stock dividend will Decrease retained earnings by $16 million (10000000*5%*32) For fractional shares, retained earnings will be unaffected

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