For small stock dividends, by what amount are retained earnings reduced?

A. Par value of the stock

B. Par value of the dividend

C. Book value of the dividend

D. Market value of the dividend

Answer: D. Market value of the dividend

Explanation: Dividends (cash or stock), represent a return of profits to shareholders. As a result, they reduce the retained earnings account in the stockholders' equity section of the balance sheet. For small stock dividends, their retained earnings is reduced by the market value of the shares. The company calculates the total value of the dividend by multiplying the number of new shares to be distributed by the current market value of the shares. This is in contrast with that of large stock dividends whose retained earnings are reduced by the par value of the shares.