A Firm Has Retained Earnings of $10 Million, a Common

question 79

Multiple Choice

A firm has retained earnings of $10 million, a common shares account of $1 million, and additional paid-in-capital of $4 million, and the firm just paid a 10 percent stock dividend. Assume that fair market value is reflected in the relative size of both the common shares account and the additional paid-in-capital account. What are the new levels in each account?

• A) Retained earnings = $9,500,000; Common shares = $1,000,000; Additional paid-in-capital = $4,500,000
• B) Retained earnings = $9,500,000; Common shares = $1,500,000; Additional paid-in-capital = $4,000,000
• C) Retained earnings = $9,500,000; Common shares = $1,100,000; Additional paid-in-capital = $4,400,000
• D) Retained earnings = $10,000,000; Common shares = $1,000,000; Additional paid-in-capital = $4,000,000

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Definitions:

Cash Flow Hedge

A financial strategy to manage the risk of cash flow fluctuations due to changes in the value of underlying assets or liabilities.

Option Expense

The cost associated with granting options, such as stock options to employees, which is recognized as an expense over the vesting period.

Fair Value Hedge

A hedge that protects against changes in the fair value of an asset or liability or an unrecognized firm commitment.

Net Income

Net income is the total profit of a company after all expenses, taxes, and costs have been subtracted from total revenue.