If a firm has retained earnings of $23.3 million, a common shares account of $27

Question

If a firm has retained earnings of $23.3 million, a common shares account of $275.3 million, and additional paid-in capital of $100.3 million, how would these accounts change in response to a 20 percent stock dividend? Assume market value of equity is equal to book value of equity. (Enter your answers in dollars not in millions. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your final answers to the nearest whole dollar amount.Indicate the direction of the effect by selecting "increase" , "decrease" and "no change" from the dropdown menu.)

Retained earnings $

Common tock $

Additional paid-in capital $

Explanation / Answer

Current share value=275.3+100.3+23.3=398.9

Stock Dividend would mean transferring 20%*398.9=79.78 from retained earnings into other accounts

Hence, retained earnings would decrease by $79.78 million

Assuming fair market value reflected in relative size of 2 accounts-common stock and additional paid in capital, 275.3/(275.3+100)=0.733546 of 79.78=$ 58.52 million would be transferred to common stock account and 79.78-58.52=$21.26 million would be transferred to additional paid-in capital account..

Hence, common stock would increase by $58.52 million..

Addiitonal paid-in capital would increase by $21.26 million

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