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$2,000,000Retained earnings1,370,000On 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 increases by $224,000 as a result of the stock dividend._____ b) The balance in the common stock account increases by $64,000 as a result of the stock dividend._____ c) Total paid-in capital will be $2,224,000 after the stock dividend had been distributed._____ d) Total stockholders' equity is not affected by the dividend._____ e) Cash flows from
financing activities increases by $224,000 as a result of the stock dividend.
What will be an ideal response?
a) F b) F c) T d) T e) F
a) This is false. Retained earnings decreases by $224,000 [or (20,000 shares × 8%) × Market value of $140 per share].
b) This is false. The balance in the common stock account increases by $160,000 [or (20,000 Outstanding shares × Stock dividend of 8%) × $100 par value].
c) This is true. Total paid-in capital will be $2,224,000 [or $2,000,000 + (20,000 Outstanding shares × Stock dividend of 8%) × $140 per share].
d) This is true. The stock dividend is an equity exchange transaction. Total stockholders' equity is not affected by stock dividends because it is accounted for as a transfer from retained earnings to paid-in capital.
e) This is false. The stock dividend is an equity exchange transaction. The statement of cash flows is not affected by a stock dividend.
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