Chapter 11, Problem 6E

1.

To determine

To prepare: Journal entry for dividend declaration and its distribution.

Explanation of Solution

Declared a cash dividend payable:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Feb 5	Retained earnings		480,000
	Common Stock Dividend payable			480,000
	(Being dividend is declared and it became a liability )
Table (1)

• Retained earnings are a part of equity. Since, dividend is being paid, it reduced equity. Hence debit Retained Earnings account
• Common stock dividend payable is a liability. Since, dividend is an expense but not paid yet, it increases liability. Hence, credit common stock dividend payable account.

Dividend paid which was declared on Feb 5.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Feb 28	Common Stock Dividend payable		480,000
	Common Stock			120,000
	Paid in capital in excess of par, common stock			360,000
	(Being dividend is paid )
Table (2)

• Common stock dividend payable is a liability. Since, dividend is paid, it decreases liability. Hence, debit common stock dividend payable account.
• Common stock is equity. Since, shares is issued, it increases equity. Hence, credit common stock account.
• Paid in capital in excess of par value, common stock is part of a shareholder’s fund. Since, shares is issued above par value, it increases equity. Hence, credit paid in capital in excess of par value, common stock.

Working Notes:

Calculation for common stock,

$\begin{array}{c}\text{Common}\text{Stock}=\text{Number}\text{of}\text{Shares}\times \text{Face}\text{value}\\ =12,000\times \$10\\ =\$120,000\end{array}$

Calculation For paid in excess of par value,

$\begin{array}{c}\text{Paid}\text{in}\text{excess}\text{of}\text{par}\text{value}=\text{Total}\text{Cash}-\text{Common}\text{Stock}\\ =\$480,000-\$120,000\\ =\$360,000\end{array}$

2.

To determine

To compute: Book value of common stock and total stockholder’s equity before and after stock dividend.

Explanation of Solution

Before Dividend:

Given,
Total stockholder’s equity is $1,575,000.
Preferred stock is $0.
Total number of outstanding shares is 60,000.

Formula to calculate book value per share is,

$\text{Book}\text{value}\text{of}\text{share}=\frac{\text{Total}\text{stockholder's}\text{equity-preferred}\text{stock}}{\text{Total}\text{number}\text{of}\text{outstanding}\text{shares}}$

Substituting, $1,575,000 for total stockholder’s equity, $0 for preferred stock and 60,000 for total number of outstanding shares in the above formula.

$\begin{array}{c}\text{Book}\text{Value}\text{of}\text{Share}=\frac{\$1,575,000-\$0}{60,000}\\ =26.25\end{array}$

Hence, the book value of share is 26.25.

Total book value of the investor.

Given,
Number of shares is 800.
Book value of share is $26.25.

Formula to calculate book value of investor is,

$\text{Book}\text{value}\text{of}\text{share}=\text{Number}\text{of}\text{Shares}\times \text{Book}\text{value}\text{of}\text{Share}$

Substitute, 800 for number of shares and $26.25 for book value per share in the above formula.

$\begin{array}{c}\text{Book}\text{value}\text{of}\text{share}=800\times \$26.25\\ =\$21,000\end{array}$

Hence, book value of investor is $21,000.

After Dividend:

Book value of share after stock dividend.

Given info,
Total stockholder’s equity is $1,575,000.
Preferred stock is $0.
Total number of outstanding shares is 72,000.

Formula for calculating book value per share is,

$\text{Total}\text{Book}\text{value}\text{of}\text{share}=\frac{\text{Total}\text{stockholder's}\text{equity-preferred}\text{stock}}{\text{Total}\text{number}\text{of}\text{outstanding}\text{shares}}$

Substituting, $1,575,000 for total stockholder’s equity, $0 for preferred stock and 72,000 for total number of outstanding shares in the above formula.

$\begin{array}{c}\text{Total}\text{Book}\text{Value}\text{of}\text{Share}=\frac{\$1,575,000-\$0}{72,000}\\ =21.875\end{array}$

Hence, the book value of share is 21.875.

Total book value of the investor:

Given,
Number of shares is 960.
Book value of share is $21.875.

Formula to calculate book value of investor,

$\text{Total}\text{Book}\text{value}\text{of}\text{share}=\text{Number}\text{of}\text{Shares}\times \text{Book}\text{value}\text{of}\text{Share}$

Substitute, 960 for number of shares and $21.875 for book value per share in the above formula.

$\begin{array}{c}\text{Total}\text{Book}\text{value}\text{of}\text{share}=960\times \$21.875\\ =\$21,000\end{array}$

Hence, book value of investor is $21,000.

3.

To determine

To compute: Market value of the investor’s share before and after stock dividend.

Explanation of Solution

Total market value of share before stock dividend:

Given,
Number of shares is 800.
Market value of each share is $40.

Formula to calculate book value of investor is,

$\text{Market Value of Share}=\text{Number}\text{of}\text{Shares}\times \text{Market}\text{Value}\text{of}\text{Each}\text{Share}$

Substitute, 800 for number of shares and $40 for market value of each share in the above formula,

$\begin{array}{c}\text{Market Value of Share}=800\times \$40\\ =\$32,000\end{array}$

Hence, the market value of share is 26.25.

Total market value of share after stock dividend.

Given,
Number of shares is 960.
Market value of each share is $33.40.

Formula to calculate book value of investor is,

$\text{Market Value of Share}=\text{Number}\text{of}\text{Shares}\times \text{Market}\text{Value}\text{of}\text{Each}\text{Share}$

Substitute, 960 for number of shares and $33.40 for market value of each share in the above formula,

$\begin{array}{c}\text{Market Value of Share}=960\times \$33.40\\ =\$32,064\end{array}$

Hence, the market value of share is 32,064.