Chapter 11, Problem 5E

1.

a.

To determine

Compute the amount of retained earnings after the stock dividend shares are issued.

Explanation of Solution

Stock dividends: Stock dividends are the number of shares issued by a company to the existing shareholders in a proportion equal to the number of shares owned by each shareholder, based on a stock dividend percentage.

Compute the amount of retained earnings after the stock dividend shares are issued.

Step 1: Compute number of stock dividend shares.

$\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{ Stock dividend percentage}\end{array}\right\}\\ \text{= 50,000 shares × 50\%}\\ \text{= 25,000 shares}\end{array}$ (1)

Step 2: Compute stock dividends amount.

$\begin{array}{c}\text{Stock dividends = Stock dividend shares }\times \text{ Par value per share}\\ \text{= 25,000 shares × \$10}\\ \text{= \$250,000}\end{array}$ (2)

Note: Refer to Equation (1) for value and computation of stock dividend shares.

Step 3: Compute retained earnings value after stock dividend issue.

Particulars	Amount ($)
Retained earnings before stock dividend	$660,000
Less: Stock dividend issue	250,000
Retained earnings after stock dividend issue	$410,000

Table (1)

Conclusion

Thus, the amount of retained earnings after the stock dividend was $410,000.

b.

To determine

Compute the amount of stockholders’ equity after the stock dividend shares are issued.

Explanation of Solution

Compute the amount of stockholders’ equity after the stock dividend shares are issued.

Corporation S
Balance Sheet (Partial)
June 30, 2017
Particulars	Amount ($)
Paid-in Capital:
Common stock, $10 par value, 120,000 shares         authorized, 75,000 shares issued and outstanding	$750,000
Paid-in capital in excess of par value	200,000
Total paid-in capital	$950,000
Retained earnings	410,000
Total stockholders’ equity	$1,360,000

Table (2)

Conclusion

Thus, the amount of stockholders’ equity after the stock dividend is $1,360,000.

c.

To determine

Compute the number of outstanding shares after the stock dividend issue.

Explanation of Solution

Outstanding stock: The total number of shares that are authorized and issued by a public company, and are held by the stockholders or investors are referred to as outstanding stock.

Compute the number of outstanding shares after the stock dividend issue.

Particulars	Number of Shares
Issued and outstanding shares before stock dividend issue	50,000 shares
Stock dividend shares	25,000 shares
Outstanding number of shares after stock dividend issue	75,000 shares

Table (3)

Conclusion

Thus, the number of outstanding shares after the stock dividend issue are 75,000 shares.

2.

a.

To determine

Compute the amount of retained earnings after the stock split.

Explanation of Solution

Stock split: Stock split is the increase in number of shares due to splitting or decreasing par value of each share.

The amount of stock split neither increase nor decrease any of the capital accounts, but reduce the par value of shares and increase the number of shares. So, there would be no effect on retained earnings.

b.

To determine

Compute the amount of stockholders’ equity after the stock split.

Explanation of Solution

Compute the amount of stockholders’ equity after the stock split.

Corporation S
Balance Sheet (Partial)
June 30, 2017
Particulars	Amount ($)
Paid-in Capital:
Common stock, $6.67 par value, 180,000 shares         authorized, 75,000 shares issued and outstanding	$500,000
Paid-in capital in excess of par value	200,000
Total paid-in capital	$700,000
Retained earnings	660,000
Total stockholders’ equity	$1,360,000

Table (4)

Working Notes:

Compute authorized number of shares after stock-split.

$\begin{array}{c}\begin{array}{l}\text{Total number of shares }\\ \text{after stock-split}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Total number of shares }\\ \text{authorized × Stock split}\end{array}\right)\\ \text{= 120,000 shares × }\frac{3}{2}\\ \text{= 180,000 shares}\end{array}$              

Compute outstanding number of shares after stock-split.

$\begin{array}{c}\begin{array}{l}\text{Total number of shares }\\ \text{after stock-split}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Total number of shares }\\ \text{outstanding × Stock split}\end{array}\right)\\ \text{= 50,000 shares × }\frac{3}{2}\\ \text{= 75,000 shares}\end{array}$ (2)

Compute the par value of shares after stock split.

$\begin{array}{c}\text{Par value of shares after stock split = }\frac{\text{Par value before stock split}}{\text{Stock split rate}}\\ \text{= }\frac{\text{\$10}}{\frac{3}{2}}\\ =\$10\times \frac{2}{3}\\ \text{= \$6}\text{.67}\end{array}$   (3)

Compute common stock value due to stock split.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of outstanding shares after stock split}\times \\ \text{Par value of stock}\end{array}\right\}\\ \text{= 75,000 shares × \$6}\text{.67}\\ \text{= \$500,000}\end{array}$

Note: Refer to Equations (2) and (3) for value and computation of number of shares after stock split and par value of stock after stock split.

Conclusion

Thus, the amount of stockholders’ equity after the stock split is $1,360,000.

c.

To determine

Compute the number of outstanding shares after the stock split.

Explanation of Solution

Compute the number of outstanding shares after the stock split.

Particulars	Number of Shares
Issued and outstanding shares before stock split	50,000 shares
Increase in number of shares after stock split	25,000 shares
Outstanding number of shares after stock split	75,000 shares

Table (5)

Conclusion

Thus, the number of outstanding shares after the stock split are 75,000 shares.

3.

To determine

Describe the difference between a large stock dividend and stock split in a shareholder’s point of view.

Explanation of Solution

Difference to a shareholder: There will be no difference for a shareholder if he receives either the stock dividend or stock split because the stockholder receives an increase in the number of shares for the proportion of shares owned.