If a firm has retained earnings of $10 million, a common shares account of $15 million, and additional paid-in-capital of $5 million,

If a firm has retained earnings of $10 million, a common shares account of $15 million, and additional paid-in-capital of $5 million, how much would be transferred in (or out) of these accounts in response to a 50 percent stock dividend, respectively?

Since the current value of outstanding shares would be $15,000,000 + $5,000,000 = $20,000,000, the stock dividend would involve transferring 0.50 × $20,000,000 = $10,000,000 from the retained earnings account into the other two accounts. Assuming that fair market value is reflected in the relative size of those two accounts, 15/20 = 0.75 × 10,000,000 = 7,500,000/15,000,000 = 50 percent would be transferred into the common shares account and 5/20 = 0.25 × 10,000,000 = 2,500,000/5,000,000 = 50 percent into the additional paid-in-capital account.

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