If a firm has retained earnings of $20 million, a common shares account of $40 million, and additional paid-in-capital of $10 million, how much would be transferred in (or out) of these accounts in response to a 30 percent stock dividend, respectively?
Since the current value of outstanding shares would be $40,000,000 + $10,000,000 = $50,000,000, the stock dividend would involve transferring 0.30 × $50,000,000 = $15,000,000 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, 40/50 = 0.8 × 15,000,000 = 12,000,000/40,000,000 = 30 percent would be transferred into the common shares account and 10/50 = 0.2 × 15,000,000 = 3,000,000/10,000,000 = 30 percent into the additional paid-in-capital account.
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