If a firm has retained earnings of $2.4 million, a common shares account of $4.4 million, and additional paid-in capital of $8.8 million, how would these accounts change in response to a 10 percent stock dividend? Assume market value of equity is equal to book value of equity.

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abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2022-10-19T19:19:59+02:00

The accounts change in response to a 10 percent stock dividend assume market value of equity is equal to book value of equity by :

First step is to stock dividend using this formula

Stock dividend = Rate × ( Common shares account + Additional paid - in capital )

Let plug in the formula

Stock dividend = 10% × ( $4.4 million + $8.8 million )

Stock dividend = 10% × $13.2 million

Stock dividend = $1.32 million

The calculation above represents a reduction in the retained earnings account. Hence,

Retained Earnings :

Retained Earnings = $2.4 million - $1.32 million

Retained earnings = $1.08 million (decrease)

Common Shares :

Common Shares = $4.4 million × 110%

Common shares = $4.84 million ( increase )

Additional Paid-in Capital:

Additional Paid-in Capital = $8.8 million × 110%

Additional Paid-in Capital = $9.68 million ( increase )

Therefore retained earning decrease, common shares and additional paid in capital increase.

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