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Chapter 15: Q13E. (page 815)

(Stock Split and Stock Dividend) The common stock of Alexander Hamilton Inc. is currently selling at \(120 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is \)10; book value is $70 per share. Nine million shares are issued and outstanding.

Instructions

Prepare the necessary journal entries assuming the following

  1. The board votes a 2-for-1 stock split.
  2. The board votes a 100% stock dividend.
  3. Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.

Short Answer

Expert verified

Total Common Stock Dividend Distribution is $90,000,000.

Step by step solution

01

Meaning of Common Stock

The term common stock refers to securities that allow individual owners to participate in a corporation and win a portion of its profits. Stock options provide individuals with the ability to elect the board of directors of a company, as well as vote on corporate policy.

02

Explaining when the board voted a 2-for-1 stock split

No entry should be made, simply a memorandum note indicating the number of shares has increased to 18 million,and par value has been reduced from $10 to $5 per share.

03

Preparing Journal Entries

S.no.

Particular

Debit $

Credit $

(b)

Retained Earnings

90,000,000

Common Stock Dividend

Distribution

90,000,000

To record the issue of stock.

Common Stock Dividend Distribution

90,000,000

Common Stock

90,000,000

To record issue of stock.

04

Explaining the difference between accounting and the securities market.

Stock dividends and splits serve the same function with regard to the securities markets. Both techniques allow the board of directors to increase the number of sharesand reduce share prices into a desired 鈥渢rading range.鈥�

The 20%-25% rule reasonably views large stock dividends as substantive stock splits for accounting purposes. In this case, it is necessary to capitalize par value with a stock dividend because the number of shares is increased, and the par value remains the same. Earnings are capitalized for purely procedural reasons

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Most popular questions from this chapter

(Preferred Stock Dividends) Cajun Company has outstanding 2,500 shares of \(100 par, 6% preferred stock and 15,000 shares of \)10 par value common. The following schedule shows the amount of dividends paid out over the last 4 years.

Instructions

Allocate the dividends to each type of stock under assumptions (a) and (b). Express your answers in per share amounts using the format shown below

Assumptions

(a)

Preferred, noncumulative

And nonparticipating

(b)

Preferred, cumulative, and fully participating

Year

Paid-out

Preferred

Common

Preferred

Common

2012

\(13,000

2013

\)26,000

2014

\(57,000

2015

\)76,000

(Recording the Issuances of Common Stock) During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock.

Jan. 10 Issued 80,000 shares for cash at \(6 per share.

Mar. 1 Issued 5,000 shares to attorneys in payment of a bill for

\)35,000 for services rendered in helping the company to

incorporate.

July 1 Issued 30,000 shares for cash at \(8 per share.

Sept. 1 Issued 60,000 shares for cash at \)10 per share.

Instructions

  1. Prepare the journal entries for these transactions, assuming that the common stock has a par value of \(5 per share.
  2. Prepare the journal entries for these transactions, assuming that the common stock is no-par with a stated value of \)3 per share.

(Analysis of Equity Data and Equity Section Preparation) For a recent 2-year period, the balance sheet of Santana Dotson Company showed the following stockholders鈥� equity data on December 31 (in millions).

2017

2016

Additional paid-in capital

\( 931

\) 817

Common stock

545

540

Retained earnings

7,167

5,226

Treasury stock

1,564

918

Total stockholders鈥� equity

\(7,079

\)5,665

Common stock shares issued

218

216

Common stock shares authorized

500

500

Treasury stock shares

34

27

Instructions

  1. Answer the following questions
  2. What is the par value of the common stock?
  3. What is the cost per share of treasury stock on December 31, 2017, and on December 31, 2016?
  4. Prepare the stockholders鈥� equity section on December 31, 2017.

Hinges Corporation issued 500 shares of \(100 par value preferred stock for \)61,500. Prepare Hinges journal entry.

Kellogg Company is the world鈥檚 leading producer of ready-to-eat cereal products. In recent years, the company has taken numerous steps aimed at improving its profitability and earnings per share. Presented below are some basic facts for Kellogg.

(in millions)

2014

2013

Net sales

\(14,580

\)14,792

Net income

632

1,807

Total assets

15,153

15,474

Total liabilities

12,302

11,867

Common stock, $0.25 par value

105

105

Capital in excess of par value

678

626

Retained earnings

6,689

6,749

Treasury stock, at cost

3,470

2,999

Number of shares outstanding (in millions)

358

363

Instructions

  1. What are some of the reasons that management purchases its own stock?
  2. Explain how earnings per share might be affected by treasury stock transactions.
  3. Calculate the debt to assets ratio for 2013 and 2014, and discuss the implications of the change.
See all solutions

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