Question

select all that apply

a stock dividend ______.

causes total stockholders equity to decrease.
causes retained earnings to decrease.
increases a stockholders percentage ownership in the corporation.
distributes additional shares of stock to existing stockholders on a pro rata basis.

Explanation:

Define stock dividends

A stock dividend is a distribution of additional shares of a corporation's own stock to its existing stockholders. Unlike cash dividends, no cash or other assets leave the company. Instead, a portion of Retained Earnings is reclassified (capitalized) into contributed capital accounts, such as Common Stock and Additional Paid-in Capital.

Analyze total stockholders' equity impact

Because a stock dividend merely transfers amounts within the stockholders' equity section (from Retained Earnings to contributed capital), the total stockholders' equity remains completely unchanged. Therefore, the statement "causes total stockholders' equity to decrease" is incorrect.

Analyze retained earnings impact

When a stock dividend is declared, Retained Earnings is debited (decreased) for the value of the distributed shares, and contributed capital accounts are credited (increased). Therefore, the statement "causes retained earnings to decrease" is correct.

Analyze ownership percentage impact

Since additional shares are distributed to all existing stockholders on a pro rata basis, every shareholder's relative proportion of outstanding shares remains exactly the same. Thus, a stock dividend does not increase an individual stockholder's percentage ownership in the corporation. The statement "increases a stockholders' percentage ownership in the corporation" is incorrect.

Analyze pro rata distribution

By definition, a stock dividend distributes additional shares of stock to existing stockholders on a pro rata basis (proportionate to their current holdings). Therefore, the statement "distributes additional shares of stock to existing stockholders on a pro rata basis" is correct.

Answer:

• causes total stockholders' equity to decrease.
• causes retained earnings to decrease. (Correct answer)
• increases a stockholders' percentage ownership in the corporation.
• distributes additional shares of stock to existing stockholders on a pro rata basis. (Correct answer)