Concept explainers
Recording and Comparing Cash Dividends, Stock Dividends, and Stock Splits
On January 1, Biofuel Corporation had the following capital structure:
Common stock ($0.10 par value) | $ 60,000 |
Additional paid-in capital | 1,900,000 |
800,000 | |
0 | |
19,000 |
Required:
Complete the table below for each of the three following independent eases:
Case 1: The board of directors declared a cash dividend of $0.02 per share.
Case 2: The board of directors declared and issued a 100 percent stock dividend when the stock was selling at $10 per share.
Case 3: The board of directors announced a 2-for-1 stock split. The market price prior to the split was $10 per share.
Items | Before Any Dividends | After Cash Dividend | After Stock Dividend | After Stock Split |
Common stock account | $60,000 | $ | $ | $ |
Par per share | $0.10 | $ | $ | $ |
Shares outstanding | # | # | # | # |
Additional paid-in capital | $1,900,000 | $ | $ | $ |
Retained earnings | $800,000 | $ | $ | $ |
Total stockholders’ equity | $ | $ | $ | $ |
Cash flows from financing activities | $19,000 | $ | $ | $ |
Case: 1
Compute the table below if the board of directors declared a cash dividend of $0.02 per share
Explanation of Solution
Dividends:
Dividends are the rewards to the stockholders for investing their money in the company. Payment of dividend depends upon the decision of the management.
Following is the table that shows the Comparative results (after cash dividends).
Particulars | Before any Dividend | After Cash Dividend |
Common stock account | $60,000 | $60,000 |
Par per share | $0.10 | $0.10 |
Shares outstanding |
$600,000 (1) | $600,000 |
Additional paid- in capital | $ 1,900,000 | $ 1,900,000 |
Retained earnings | $ 800,000 | $ 788,000 (2) |
Total stockholder’s equity | $2,760,000 | $2,748,000 |
Cash flows from financing activities | $19,000 |
$7,000 (3) |
Table (1)
Working notes:
Calculate shares outstanding before any dividend:
Calculate retained earnings after cash dividend:
Calculate cash flows from financing activities after cash dividend:
Case: 2
Complete the table below if the board of directors declared and issued a 100 percent stock dividend when the stock was selling at $10 per share.
Explanation of Solution
Stock dividend:
Stock dividend is the payment made in the form of additional shares to the existing shareholders of the company instead of making cash payment with respect to the ownership of shares exercised by the shareholders.
Following is the table that shows the Comparative results (after stock dividend).
Particulars | Before any Dividend | After Cash Dividend | After Stock Dividend |
Common stock account | $60,000 | $60,000 | $120,000 (4) |
Par per share | $0.10 | $0.10 | $0.10 |
Shares outstanding |
600,000 (1) | 600,000 | 1,200,000 (5) |
Additional paid-in capital | $ 1,900,000 | $ 1,900,000 | $1,900,000 |
Retained earnings | $ 800,000 | $ 788,000 (2) | $ 740,000 (6) |
Total stockholders’ equity | $2,760,000 | $2,748,000 | $2,760,000 |
Cash flows from financing activities | $19,000 | $7,000 (3) | $19,000 |
Table (2)
Working notes:
Calculate the value of common stock account after stock dividend:
Calculate the value of shares outstanding after stock dividend:
Calculate the value of retained earnings after stock dividend:
Case: 3
Complete the table below if the board of directors announced a 2-for-1 stock split and the market price prior to the split was $10 per share.
Explanation of Solution
Stock Splits:
It is a method of increasing the total number of outstanding shares thereby, reducing the market price of each share, however, keeping the corporation’s total market value constant.
Following is the table that shows the Comparative results (after stock split).
Particulars | Before any Dividend | After Cash Dividend | After Stock Dividend | After Stock Split |
Common stock account | $60,000 | $60,000 | $120,000 (4) | $60,000 |
Par per share | $0.10 | $0.10 | $0.10 | $0.05 (7) |
Shares outstanding |
600,000 (1) | 600,000 |
1,200,000 (5) | 1,200,000 (5) |
Additional paid-in capital | $ 1,900,000 | $ 1,900,000 | $1,900,000 | $1,900,000 |
Retained earnings | $ 800,000 | $ 788,000 (2) | $ 740,000 (6) | $ 800,000 |
Total stockholders’ equity | $2,760,000 | $2,748,000 | $2,760,000 | $2,760,000 |
Cash flows from financing activities | $19,000 | $7,000 (3) | $19,000 | $19,000 |
Table (3)
Working note:
Calculate the par value of per share after stock split:
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