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Chapter 15: Question 23Q (page 810)

Describe the accounting entry for a stock dividend, if any. Describe the accounting entry for a stock split, if any.

Short Answer

Expert verified

The journal entry to record the declaration of the dividend includes a debit to retained earnings (a stockholders' equity account) and a credit to cash dividendspayable.

Step by step solution

01

Meaning of Stock Dividend

A stock dividend is an increase in the number of shares issued by a firm, with the new shares being distributed to current owners.

Existing shareholders are paid a pro-rata share of these new shares. These are usually paid infractions and per share.

02

Meaning of Stock Split

When a corporation splits its stock, it raises the number of outstanding sharesto increase its liquidity.

Although the number of outstanding shares grows by a certain multiple, the share price falls in proportion to that multiple because the firm is not more valuable due to the split.

03

Describing Accounting Entry for Stock Dividend and Stock Split

When a stock dividend is paid, an amount equal to the fair value of each share (if the dividend is less than 20-25 percent)or the par value of each share is transferred from retained earnings to paid-in capital (if the dividend is greater than 20-25 percent).

A stock split does not necessitate formal journal entries, but a remark in the ledger accounts to show that the par value of the shares has changed would be useful.

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Most popular questions from this chapter

Indicate how each of the following accounts should be classified in the Equity section.

  1. Share Capital鈥擮rdinary.
  2. (b) Retained Earnings.
  3. Share Premium鈥擮rdinary.
  4. Treasury Shares.
  5. Share Premium鈥擳reasury
  6. Share Capital鈥擯reference
  7. Accumulated Other Comprehensive Income.

(Stock Dividend, Cash Dividend, and Treasury Stock) Mask Company has 30,000 shares of \(10 par value common stock authorized and 20,000 shares issued and outstanding. On August 15, 2017, Mask purchased 1,000 shares of treasury stock for \)18 per share. Mask uses the cost method to account for treasury stock. On September 14, 2017, Mask sold 500 shares of the treasury stock for \(20 per share.

In October 2017, Mask declared and distributed 1,950 shares as a stock dividend from unissued shares when the market price of the common stock was \)21 per share.

On December 20, 2017, Mask declared a $1 per share cash dividend, payable on January 10, 2018, to shareholders of record on December 31, 2017.

Instructions

  1. How should Mask account for the purchase and sale of the treasury stock, and how should the treasury stock be presented in the balance sheet on December 31, 2017?
  2. How should Mask account for the stock dividend, and how would it affect the stockholders鈥� equity at December 31, 2017? Why?
  3. How should Mask account for the cash dividend, and how would it affect the balance sheet at December 31, 2017? Why?

For what reasons might a company restrict a portion of its retained earnings?

Faith Evans Corporation is a regional company which is an SEC registrant. The corporation鈥檚 securities are thinly traded on NASDAQ. Faith Evans Corp. has issued 10,000 units. Each unit consists of a \(500 par, 12% subordinated debenture and 10 shares of \)5 par common stock. The units were sold to outside investors for cash at \(880 per unit. Prior to this sale, the 2-week ask price of common stock was \)40 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.

Instructions

  1. Prepare the journal entry to record Evans鈥� transaction, under the following conditions.
  2. Employing the incremental method.
  3. Employing the proportional method, assuming the recent price quote on the common stock reflects fair value.
  4. Briefly explain which method is, in your opinion, the better method.

(Preemptive Rights and Dilution of Ownership) Wallace Computer Company is a small, closely-held corporation. Eighty percent of the stock is held by Derek Wallace, president. Of the remainder, 10% is held by members of his family and 10% by Kathy Baker, a former officer who is now retired. The balance sheet of the company at June 30, 2017, was substantially as shown below.

Asset

Current assets \(22,000

Equipment (net) 450,000

\)472,000

Liabilities and Stockholders鈥� Equity

Current liabilities \(50,000

Common stock 250,000

Retained earnings 172,000

\)472,000

Additional authorized common stock of \(300,000 par value had never been issued. To strengthen the cash position of the company, Wallace issued common stock with a par value of \)100,000 to himself at par for cash. At the next stockholders鈥� meeting, Baker objected and claimed that her interests had been injured.

Instructions

  1. Which stockholder鈥檚 right was ignored in the issue of shares to Derek Wallace?
  2. How may the damage to Baker鈥檚 interests be repaired most simply?
  3. If Derek Wallace offered Baker a personal cash settlement and they agreed to employ you as an impartial arbitrator to determine the amount, what settlement would you propose? Present your calculations with sufficient explanation to satisfy both parties.
See all solutions

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