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Chapter 13: Q16RQ (page 707)

What is the effect on the accounting equation when a stock dividend is declared?

What is the effect on the accounting equation when a stock dividend is distributed?

Short Answer

Expert verified

Retained earnings

Common stock

Paid-in capital in excess of par

Stock dividend declared

No effect

No effect

No effect

Stock dividend distributed

Small Stock dividend

Decreases

Increases

Increases

Large stock dividend

Decreases

Increases

No effect

Step by step solution

01

Introduction to topic

A stock dividend, a method utilized by corporate to distribute wealth to stockholders, is a dividend payment made in the form of shares instead than cash.

02

Effect of stock dividend declared and distribution on accounting equation

When a stock dividend is declared it does not create a liability as there is no change to the accounting equation. The creation of stockholders' equity does, however, changes. After dividend distribution, the accounting equation remains the same, but the stockholder's equity will just be arranged again.

For a small stock dividend:

Retained earnings decrease and Common stock with Paid-in capital in excess of par increase.

For a large stock dividend:

Retained earnings decrease and Common stock increases.

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Most popular questions from this chapter

Journalizing issuance of stock

Steller Systems completed the following stock issuance transactions:

May 19 Issued 1,700 shares of \(3 par value common stock for cash of \)10.50 per share.

Jun. 3 Issued 300 shares of \(9, no-par preferred stock for \)15,000 cash.

11 Received equipment with a market value of \(68,000 in exchange for 5,000 shares of the \)3 par value common stock.

Requirements

2. How much paid-in capital did these transactions generate for Steller Systems?

Computing dividends on preferred and common stock and journalizing

The following elements of stockholders鈥� equity are from the balance sheet of Sneed Marketing Corp. at December 31, 2017:

800,000

Preferred Stock鈥�4%, \(2 Par Value; 80,000 shares

authorized, 55,000 shares issued and outstanding

Paid-In Capital:

\) 110,000

Stockholders鈥� Equity

Common Stock鈥擻(0.10 Par Value; 8,750,000 shares

authorized, 8,000,000 shares issued and outstanding

Sneed paid no preferred dividends in 2017.

Requirements

1. Compute the dividends to the preferred and common shareholders for 2018 if total dividends are \)185,000 and assuming the preferred stock is noncumulative. Assume no changes in preferred and common stock in 2018.

Computing dividends on preferred and common stock and journalizing

Northern Communications has the following stockholders鈥� equity on December 31,

2018:

Preferred Stock鈥�5%, \(11 Par Value; 150,000 shares authorized, 20,000 shares issued and outstanding

Paid-In Capital:

\) 220,000

760,000

Stockholders鈥� Equity

Paid-In Capital in Excess of Par鈥擟ommon 680,000

Total Paid-In Capital 1,660,000

Retained Earnings 200,000

Total Stockholders鈥� Equity \( 1,860,000

Common Stock鈥擻)2 Par Value; 575,000 shares

authorized, 380,000 shares issued and outstanding

Requirements

2. Record the journal entries for 2018, assuming that Northern Communications declared the dividend on December 1 for stockholders of record on December 10. Northern Communications paid the dividend on December 20.

Vollmer, Inc. had reported the following balances:

December 31, 2019 December 31, 2018

Net Income \( 80,000 \) 60,000

Preferred Dividends 2,000 5,000

Total Stockholders鈥� Equity 340,000 310,000

Stockholders鈥� Equity attributable to Preferred Stock 20,000 20,000

Number of Common Shares Outstanding 10,000 14,000

11. Compute Vollmer鈥檚 earnings per share for 2019.

12. Compute Vollmer鈥檚 price/earnings ratio for 2019, assuming the market price is $40 per share.

13. Compute Vollmer鈥檚 rate of return on common stockholders鈥� equity for 2019.

Match the accounting terminology to the definitions.

1. Factoring receivables a. A monetary claim against a business or an individual.

2. Debtor b. The party to a transaction who takes on an obligation/payable.

3. Accounts receivable c. Using receivables as security (collateral) for a loan.

4. Maturity date d. The right to receive cash in the future from customers for goods sold or for services provided.

5. Receivable e. The date when a note is due.

6. Pledging receivables f. Selling receivables to a finance company or bank.
See all solutions

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