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19 October, 01:09

If a firm has retained earnings of $2.7 million, a common shares account of $4.7 million, and additional paid-in capital of $9.4 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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  1. 19 October, 03:55
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    Change in retained earnings = $1.02 million (Decrease)

    Change in common shares account = $5.17 million (Increase)

    Change in additional paid-in capital = $10.61 million (Increase)

    Explanation:

    Given:

    Retained earnings = $2.7 million

    Common shares account = $4.7 million

    Additional paid-in capital = $9.4 million

    Stock dividend = 10%

    Find:

    Changes in account.

    Computation:

    1. Change in retained earnings

    Change in retained earnings = Retained earnings - (Retained earnings - Common shares account - Additional paid-in capital) Stock dividend

    Change in retained earnings = $2.7 million - ($2.7 million - $4.7 million - $9.4 million) 10%

    Change in retained earnings = $2.7 million - 1.68 million

    Change in retained earnings = $1.02 million (Decrease)

    2. Change in common shares account

    Change in common shares account = Common shares account (1+Stock dividend)

    Change in common shares account = $4.7 million (1+10%)

    Change in common shares account = $5.17 million (Increase)

    3. Change in additional paid-in capital

    Change in additional paid-in capital = Additional paid-in capital + (Additional paid-in capital + Retained earnings) Stock dividend

    Change in additional paid-in capital = $9.4 million + ($9.4 million + $2.7 million) 10%

    Change in additional paid-in capital = $9.4 million + 1.21 million

    Change in additional paid-in capital = $10.61 million (Increase)
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