COMMON DIVIDENDS. At December 31, 19x0, Skelton Food Products’

stockholders’ equity included retained earnings of $20,470 and 60,000 outstanding shares of $2 par common stock. In May 19x1, Skelton declared and paid a cash dividend of $.30 per share.

REQUIRED:

1. What is the effect of the cash dividend on Skelton’s retained earnings?

2. Skelton’s controller has asked you to indicate whether Skelton could legally declare and pay a 4% stock dividend on December 31, 19x1. The market price of Skelton’s stock is $5 per share. The controller informs you that Skelton expects net income for the year to be $15,000.