CFA Question of the day from Schweser:
Company pays a 5% stock div when mv exceeds par value.
Effect on common stock and total s/e items will be:
Answer is easy, common stock will increase, retained earnings will decrease, so no change on total s/e.
Paid in capital increases by the difference between # shares issued (mv-par value)
Two questions:
They mention in the solution that b/c the stock div is less than 20% current mv can be used. What would we use if it was greater than 20%? Par value?
What would be the accounting treatment be if the mv was less than par value. Would we still add the new # of shares to common stock and then subtract the difference between mv and pv from contributed capital? Or just leave contributed capital alone? I am assuming it is the latter.
Thanks very much