Chapter 11, Problem 11.11P

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
Retained earnings	800,000
Treasury stock	0
Cash flows from financing activities	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	$	$	$

To determine

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:

$\begin{array}{c}\text{Shares}\text{outstanding}\text{before}\text{any}\text{dividend=}\frac{\text{Common}\text{stock}\text{account}\text{before}\text{any}\text{dividend}}{\text{Par}\text{value}\text{}\text{of}\text{per}\text{share}\text{before}\text{any}\text{dividend }}\\ \text{=}\frac{\text{\$60,000}}{\text{\$0}\text{.10}}\\ \text{=}\text{\$600,000}\end{array}$ (1)

Calculate retained earnings after cash dividend:

$\begin{array}{c}\begin{array}{l}\text{Retained}\text{earnings}\\ \text{after}\text{cash}\text{dividend}\end{array})\text{= }\left[\begin{array}{l}\left(\text{Retained}\text{earnings}\text{before}\text{any}\text{dividend}-\text{Value}\text{of}\text{cash}\text{dividend}\right)\\ \text{×Shares}\text{outstanding}\text{before}\text{any}\text{dividend}\end{array}\right]\\ \text{=}\text{\$800,000}-\text{\$0}\text{.02×\$600,000}\\ \text{=}\text{\$788,000}\end{array}$ (2)

Calculate cash flows from financing activities after cash dividend:

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{flows}\text{from}\text{financing}\\ \text{activities}\text{after}\text{cash}\text{dividend}\end{array})\text{= }\left[\begin{array}{l}\left(\begin{array}{l}\text{Cash}\text{flow}\text{from}\text{financing}\text{activities}\text{before}\text{any}\text{dividend}\\ -\text{Value}\text{of}\text{cash}\text{dividend}\end{array}\right)\\ \text{×Shares}\text{outstanding}\text{before}\text{any}\text{dividend}\end{array}\right]\\ \text{=}\text{\$19,000}-\text{\$0}\text{.02×\$600,000}\\ \text{=}\text{\$7,000}\end{array}$ (3)

To determine

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:

$\begin{array}{c}\begin{array}{l}\text{Common}\text{stock}\text{account}\\ \text{after}\text{stock}\text{dividend}\end{array})\text{=}\left(\begin{array}{l}\text{Par}\text{value}\text{of}\text{per}\text{share}\\ \text{×Shares}\text{outstanding}\text{after}\text{stock}\text{dividend}\end{array}\right)\\ \text{=}\text{\$0}\text{.10×\$1,200,000 (5)}\\ \text{=}\text{\$120,000}\end{array}$ (4)

Calculate the value of shares outstanding after stock dividend:

$\begin{array}{c}\text{Shares}\text{outstanding}\text{after}\text{stock}\text{dividend}\text{=}\left(\begin{array}{l}\text{Shares}\text{outstanding}\text{before}\text{any}\text{dividend×}\\ \text{2-for-1Stock}\text{split}\end{array}\right)\\ \text{=}\text{\$600,000×2}\\ \text{=}\text{\$1,200,000}\end{array}$ (5)

Calculate the value of retained earnings after stock dividend:

$\begin{array}{c}\begin{array}{l}\text{Retained}\text{earnings}\\ \text{after}\text{stock}\text{dividend}\end{array})\text{=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Retained}\text{earnings}\text{before}\text{any}\text{dividends}-\\ \text{Par}\text{valueof}\text{per}\text{share}\end{array}\right)\\ \text{×Shares}\text{outstanding}\text{before}\text{any}\text{dividend}\end{array}\right]\\ \text{=}\text{\$800,000}-\text{\$0}\text{.10×\$600,000}\\ \text{=}\text{\$740,000}\end{array}$ (6)

To determine

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:

$\begin{array}{c}\text{Par}\text{value}\text{per}\text{share}\text{after}\text{stock}\text{split}\text{=}\frac{\text{Par}\text{value}\text{per}\text{share}}{\text{2-for-1}\text{stock}\text{split}}\\ \text{=}\frac{\text{\$0}\text{.10}}{\text{2}}\\ \text{=}\text{\$0}\text{.05}\end{array}$ (7)