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What overall effect does a stock dividend have on a corporation's equity section?
AIt moves value from share capital into retained earnings
BIt reduces total shareholders' equity by the dividend amount
CIt increases total assets and total shareholders' equity equally
DIt transfers value from retained earnings into paid-in capital
Answer & Solution
Correct answer: D. It transfers value from retained earnings into paid-in capital
1. A stock dividend distributes shares, not cash, so no assets leave the company.
2. Retained earnings is reduced (via the closed Stock Dividends account).
3. Share capital and share premium rise by the same total.
4. Total equity is unchanged; value simply shifts from retained earnings into paid-in capital.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §6.6 "Stock Dividends", p.254_
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