Question

the effect of a stock dividend is to:

multiple choice

decrease total assets and stockholders equity.

change the composition of stockholders equity.

decrease total assets and total liabilities.

increase the market value per share of common shares.

Explanation:

Analyze the nature of a stock dividend

A stock dividend is a distribution of additional shares of a corporation's own stock to its existing stockholders. Unlike a cash dividend, no cash or other assets are distributed to shareholders.

Evaluate the impact on the accounting equation

Because no assets are distributed and no liabilities are created, total assets, total liabilities, and total stockholders' equity remain completely unchanged.

Determine the effect on equity components

A stock dividend transfers a portion of retained earnings to contributed capital (common stock and additional paid-in capital). Therefore, the only effect is a change in the internal composition of stockholders' equity.

Answer:

• (A) decrease total assets and stockholders' equity.
• (B) change the composition of stockholders' equity. (Correct answer)
• (C) decrease total assets and total liabilities.
• (D) increase the market value per share of common shares.