Jalisco, Inc., had 300,000 shares issued and 250,000 shares outstanding of its $8 par value common stock and its Retained Earnings account balance was $750,000 on December 31, Year 1. On January 1, Year 2, the board of directors declared a 12% stock dividend to its common shareholders when the market value of the stock was $17 per share. Required:a) Determine the decrease in retained earnings as a result of the stock dividend.b) How many shares are outstanding after the stock dividend?
What will be an ideal response?
a) $510,000
Dividends apply to outstanding shares only.
Shares distributed as stock dividend = Outstanding shares of 250,000 × Stock dividend of 12% = 30,000 shares
Decrease in retained earnings = 30,000 Shares distributed as stock dividend × Market value of $17 per share = $510,000
b) 280,000
Shares outstanding after stock dividend = Share previously outstanding of 250,000 + Stock dividend of 30,000 shares = 280,000
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