The following items appeared on the financial statements of Monroe, Inc. on December 31, Year 1: Common stock, $100 par, 80,000 shares authorized, 20,000 shares issued and outstanding$2,000,000 Retained earnings 1,370,000 On September 10, Year 2, when the market value of the Monroe stock was $140, the company declared and distributed an 8% stock dividend. Indicate whether each of the following statements is true or false._____ a) Retained earnings would increase by $224,000 as a result of the stock dividend._____ b) The balance in common stock would increase by $64,000 as a result of the stock dividend._____ c) Total paid-in capital would be $2,224,000 after the dividend had been distributed._____ d) Total equity would not be affected by the dividend._____ e) Cash flow from

Question

financing activities would increase by $224,000 as a result of the stock dividend.

What will be an ideal response?

Answer 1

a) This is false. Retained earnings would decrease by $224,000 (20,000 shares × 8% × $140 market value).
b) This is false. The balance in the common stock account would increase by $160,000 (20,000 shares × 8% × $100 par value)
c) This is true. Total paid-in capital would be $2,224,000 ($2,000,000 + $224,000)
d) This is true. Total equity is not affected by stock dividends because the value of the dividend is shifted from retained earnings to common stock and paid-in capital in excess of par value.
e) This is false. Cash flows are not affected by stock dividends.