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13 July, 14:46

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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  1. 13 July, 15:02
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    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.
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