A company with 100,000 authorized shares of $4 par common stock issued 40,000 shares at $8. Subsequently, the company declared a 4% stock dividend on a date when the market price was $12 per share. What is the amount transferred from the retained earnings account to paid-in capital accounts as a result of the stock dividend?

Question

BlackTom AI · Accepted Answer

To analyze this stock dividend scenario, I’ll break down the key details and then evaluate each option.
First, note that the company has 40,000 shares issued. A 4% stock dividend on 40,000 shares means 0.04 × 40,000 = 1,600 new shares will be issued.
Next, determine the accounting effect. A stock dividend is issued at market value, so the amount transferred from Retained Earnings equals the market value of the new shares issued: 1,600 shares × $12 per share = $19,200.
Now, evaluate each answer choice:
- $48,800: This would imply a much higher transfer than the market value of the dividend. It does not match 1,600 shares × $12, so this is incorrect.
- $32,000: This corresponds to 1,600 shares × $20 per share, which isn’t the given market price. Since the market price is $12, this option misapplies the value, so it’s incorrect.
- $12,800: This equals 1,600 × $8, or could represent using par value only, but the stock dividend uses market value for the Retained Earnings transfer, not just par value. Therefore this is incorrect.
- $19,200: This precisely matches 1,600 new shares × $12 market price, the standard method for recognizing a stock dividend’s impact on Retained Earnings and contributed capital. This aligns with a debit to Retained Earnings for the total market value and credits to Common Stock at par plus Additional Paid-In Capital for the remainder.
In summary, the only amount that corresponds to the market-value calculation required for a stock dividend of 4% on 40,000 shares at a $12 market price is $19,200, making the other options inconsistent with the standard accounting treatment.

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