Question

On January 31, Village Bank had 500,000 shares of $3 par value common stock outstanding. On that date, the company declared a 10% stock dividend when the market price of the stock was $62 per share. The immediate effect of this dividend upon Village Bank was?

Answer 1

Answer:

Retained earnings decrease by $3,100,000

Explanation:

When a corporation announces stock dividend, it does not effect the corporation's total equity or its assets. However, retained earnings are reduced by the amount with paid in capital increased by the same amount.

In this case,

Village bank's outstanding shares = 500,000

Stock dividend percent = 10%

Stock dividend = 0.1 × 500,000 = 50,000 shares

Market value = $62 per share

Stock dividend = 50,000 × 62 = $3,100,000

Therefore, stock dividend of $3,100,000 will decrease village bank's retained earnings by $3,100,000.