A Company with 100,000 Authorized Shares of $4 Par Common

question 71

Multiple Choice

A company with 100,000 authorized shares of $4 par common stock issued 50,000 shares at $9. Subsequently, the company declared a 2% stock dividend on a date when the market price was $10 a share. The effect of the declaration and issuance of the stock dividend is to

• A) decrease retained earnings, increase common stock, and increase paid-in capital
• B) increase retained earnings, decrease common stock, and decrease paid-in capital
• C) increase retained earnings, decrease common stock, and increase paid-in capital
• D) decrease retained earnings, increase common stock, and decrease paid-in capital

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Definitions:

Perfect Complements

Goods that are used together in fixed proportions due to the nature of their consumption or utility.

Income Effect

The change in an individual's or economy's consumption patterns due to a change in real income.

Substitution Effect

The economic principle that as the price of one good increases, consumers will replace it with a cheaper alternative, holding utility constant.

Price Change

A variation in the cost of goods or services over time, which can result from factors like supply and demand, inflation, or market dynamics.