On January 1, 2014, Dodd, Inc., declared a 15% stock dividend on its common stock when the fair value of the common stock was $30 per share. Stockholders' equity before the stock dividend was declared consisted of:

Common stock, $10 par value, authorized 200,000 shares;
issued and outstanding 120,000 shares
$1,200,000

Additional paid-in capital on common stock
150,000

Retained earnings
700,000

Total stockholders' equity
$2,050,000

What was the effect on Dodd's retained earnings as a result of the above transaction?

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Dryomys Dryomys · Answer 1 · 2019-09-13T20:22:00+02:00

Answer: $540,000

Explanation:

Given that,

Fair value of the common stock = $30 per share

Common stock, $10 par value, authorized 200,000 shares;

issued and outstanding 120,000 shares = $1,200,000

Additional paid-in capital on common stock = $150,000

Retained earnings = $700,000

Total stockholders' equity = $2,050,000

Declared a dividend of 15%:

= 120,000 × $30 × 15%

= $540,000

Since, dividends are paid out Retained earnings. Therefore, retained earnings will decrease by an amount of $540,000.