CMA Study Group

Exam 1 Additional Practice Question

  • 1.  Exam 1 Additional Practice Question

    Posted 20 days ago
    Hi, I am currently studying to hopefully take Part 1 in September and need a bit of help with the following question, the answer is A but there is no explanation.

    A publicly-traded company has 100,000 outstanding shares of common stock, with a par value of
    $5. The company uses U.S. GAAP to prepare its financial statements. The company recently
    declared a 5% stock dividend. On the date the stock dividend was declared, the company's stock
    was trading at $25 per share. On the date of declaration, the company's

    a. additional paid-in capital will increase.
    b. retained earnings will increase.
    c. total shareholders' equity will decrease.
    d. outstanding shares will decrease.

    TIA

    ------------------------------
    Carla Loera
    Student
    Laredo TX
    United States
    ------------------------------


  • 2.  RE: Exam 1 Additional Practice Question

    Posted 19 days ago
    Hello Carla,

    Hope you are safe & doing well in CMA study

    To solve this question, it is better to know how the transaction should be recorded in accounting books (Journal Entry).

    5% stock dividend is a small amount (less than 20-25%) >>> Use the fair value method
    100,000 share x 5% = 5,000 share of stock dividend
    5,000 shares x $25 = $125,000 Market (fair) value of stock dividends >>> Reduce retained earnings a/c
    5,000 shares x $5 = $25,000 Par value of stock dividends >>> Increase common stock a/c
    $125,000 - $25,000 = $100,000 Excess of Par value >>> Increase additional paid-in capital a/c

    Journal Entry:
          Dr      Retained Earnings                           $125,000
                    Cr      Common stock                                             $25,000
                    Cr      Additional paid-in capital                         $100,000
    (Combined entry for both of declaration & distribution of stock dividend)

    Hope this will be helpful

    Wish you best of luck, success, safe & healthy condition

    Kind regards

    ------------------------------
    Samer Ahmad, FMVA, SCA
    Kuwait
    ------------------------------



  • 3.  RE: Exam 1 Additional Practice Question

    Posted 19 days ago
    Thank you so much for your help!

    ------------------------------
    Carla Loera
    Student
    Laredo TX
    United States
    ------------------------------