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arushi_13
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| Posted: 31 Jan 2009 at 17:12 | IP Logged
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Declaration and issuance of a stock dividend
a. increases the current ratio.
b. decreases the amount of working capital.
c. decreases total shareholders' equity.
d. has no effect on total assets, liabilities, or shareholders' equity.
I don't have the answer to it. But a similar Becker Q says that issuance of stock dividend reduces cash without reducing CL.
Please advice what is the right answer to the Q above and also how does a stock dividend reduce cash without reducing CL.
Thanks a lot for your help.
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amii
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| Posted: 31 Jan 2009 at 17:45 | IP Logged
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i think it would be d) .
entry :
Retained Earnings dr
Common stock cr
paid in cap cr
plz if someone can confirm.
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arushi_13
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| Posted: 31 Jan 2009 at 18:05 | IP Logged
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Thanks Amii:):)
The Q given in Becker and the solution I m pasting below..Please advice as to why the answer says that a stock dividend reduces cash without reducing CL.
Which of the following transactions would increase the current ratio and decrease net profit?
a. A federal income tax payment due from the previous year is paid.
b. A long-term bond is retired before maturity at a discount.
c. A stock dividend is declared.
d. Vacant land is sold for less than the net book value.
Explanation
Choice "d" is correct. The current ratio is current assets divided by current liabilities. The sale of land would increase cash and therefore current assets without increasing current liabilities. This would increase the current ratio. Furthermore, the sale of land at a loss would decrease net profit.
Choice "a" is incorrect. The payment of a tax payment would not decrease net profit because the expense was accrued last year.
Choice "b" is incorrect. The use of cash to retire a long-term bond would reduce current assets without reducing current liabilities. This would reduce the current ratio.
Choice "c" is incorrect. As above, this would reduce cash without reducing current liabilities.
Please advice.
Thanks for your help.
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amii
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| Posted: 31 Jan 2009 at 19:50 | IP Logged
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not sure Arushi. dont u think , this would be the entry.
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arushi_13
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| Posted: 31 Jan 2009 at 19:55 | IP Logged
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Surely I agree with u and this is the JE. But I am just confused why Becker says so. I think its just a mistake.
Thanks a lot for your help:)
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Topic: Stock dividend
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