Chapter 10, Problem 86PSB

To determine

(a)

Introduction:

Dividend is the amount that is paid to the stockholders’ periodically as a return on their investment in the company. Dividend can be made in two forms i.e. Cash Dividend and Stock Dividend.

To prepare:

Journal Entries for cash dividend and calculate value of retained earnings as well total assets.

Answer to Problem 86PSB

After paying Cash dividend,

Retained Earnings = $389,000

Total Assets = $3,850,000

Journal Entries

Date	Particulars	Debit ($)	Credit ($)
December 31	Retained Earnings Dr. Dividends Payable (Declaration of cash dividend.)	22,000	22,000
December 31	Dividends Payable Dr. Cash (Payment of declared dividend.)	22,000	22,000

Explanation of Solution

Given:

Total Assets is equal to $3,872,000, common stock selling at $23 as on 31^st December 2019 and following equity statement:

Particulars	$
Common stock, $5 par, 10,000 shares issued and outstanding	95,000
(+) Additional Paid-in capital − common stock	162,000
Total Capital Stock	257,000
Retained Earnings	411,000
Total Stockholders’ equity	668,000

There are two types of dividend i.e. Stock and Cash Dividend.

1. The first effect of both the dividends (cash or stock) is on Retained Earnings of the company. The dividend payable amount reduces the balance in retained earnings.
2. The second effect of the dividend (cash or stock) is on the account through which they are paid.
3. If cash dividend is paid then the second effect is on cash account as cash in the company decreases.
4. If stock dividend is paid then the second effect is on common stock and additional paid in capital account as new shares are issued as dividends which further increase the balance of these accounts.

Before Cash Dividend was paid,

Retained Earnings = $411,000

Total Assets = $3,872,000

After payment of Cash Dividend of $22,000,

Retained Earnings = $411,000 - $22,000

Retained Earnings = $389,000

Total Assets = $3,872,000 - $22,000

Total Assets = $3,850,000.

To determine

(b)

Introduction:

Dividend is the amount that is paid to the stockholders’ periodically as a return on their investment in the company. Dividend can be made in two forms i.e. Cash Dividend and Stock Dividend.

To prepare:

Journal Entry for stock dividend and calculate value of retained earnings as well total assets.

Answer to Problem 86PSB

After paying Stock dividend,

Retained Earnings = $383,400

Total Assets (will remain same) = $3,872,000

Journal Entries

Date	Particulars	Debit ($)	Credit ($)
December 31	Retained Earnings Dr. Common Stock Additional Paid-in Capital (Declaration of cash dividend.)	27,600	6,000 21,600

Explanation of Solution

Given:

Total Assets is equal to $3,872,000, common stock selling at $23 as on 31^st December 2019 and following equity statement:

Particulars	$
Common stock, $5 par, 10,000 shares issued and outstanding	95,000
(+) Additional Paid-in capital − common stock	162,000
Total Capital Stock	257,000
Retained Earnings	411,000
Total Stockholders’ equity	668,000

There are two types of dividend i.e. Stock and Cash Dividend.

1. The first effect of both the dividends (cash or stock) is on Retained Earnings of the company. The dividend payable amount reduces the balance in retained earnings.
2. The second effect of the dividend (cash or stock) is on the account through which they are paid.
3. If cash dividend is paid then the second effect is on cash account as cash in the company decreases.
4. If stock dividend is paid then the second effect is on common stock and additional paid in capital account as new shares are issued as dividends which further increase the balance of these accounts.

No. of shares outstanding = 10,000

Stock Dividend = 12%

Stock Dividend = 1,200 shares

Total Par value of stock dividend = $\text{Stock Dividend × Par value}$

Total Par value of stock dividend = $\text{1,200 × \$5}$

Total Par value of stock dividend = $6,000

Total Market value of stock dividend = $\text{Stock Dividend × Stock Price}$

Total Market value of stock dividend = $\text{1,200 × \$23}$

Total Market value of stock dividend = $27,600

Additional Paid in capital = $27,600 - $6,000

Additional Paid in capital = $21,600

Before Stock Dividend was paid,

Retained Earnings = $411,000

Total Assets = $3,872,000

After payment of Stock Dividend,

Retained Earnings = $411,000 - $$27,600

Retained Earnings = $383,400

Total Assets (will remain same) = $3,872,000.

To determine

(c)

Introduction:

In stock split, shares outstanding increases by given ratio and the price of stock decreases by the same ratio wherein the total stockholders’ equity remains unchanged.

To state:

Whether journal entry will be recorded for stock split and the value of retained earnings as well total assets.

Answer to Problem 86PSB

After Stock-split,

Retained Earnings = $411,000

Total Assets = $3,872,000

Stock split doesn’t affect the Total assets as well retained earnings. Thus, they remain same. It only affects no. of shares outstanding and price per share (still stockholders’ equity remains unchanged).

Since there is no actual change in stockholders’ equity or balance sheet as a whole, hence no journal entry is required for stock split.

Explanation of Solution

Given:

Total Assets is equal to $3,872,000, common stock selling at $23 as on 31^st December 2019 and following equity statement:

Particulars	$
Common stock, $5 par, 10,000 shares issued and outstanding	95,000
(+) Additional Paid-in capital − common stock	162,000
Total Capital Stock	257,000
Retained Earnings	411,000
Total Stockholders’ equity	668,000

Before stock split,

No. of shares outstanding = 10,000

Par Value = $5

After stock split,

Stock Split ratio = 2-for-1

No. of shares outstanding = $\text{10,000 × 2}$

No. of shares outstanding = 20,000

Par Value = $\frac{\$5}{2}$

Par Value = $2.5

Before Stock-split,

Retained Earnings = $411,000

Total Assets = $3,872,000

Shareholders’ equity = $\text{No}\text{. of shares outstanding × Par value}$

Shareholders’ equity = $\text{10,000 × \$5}$

Shareholders’ equity = $50,000

After Stock-split,

Retained Earnings = $411,000

Total Assets = $3,872,000

Shareholders’ equity = $\text{No}\text{. of shares outstanding × Par value}$

Shareholders’ equity = $\text{20,000 × \$2}\text{.5}$

Shareholders’ equity = $50,000.