Chapter 13, Problem 13.10EX

(a)

To determine

Stock Dividends:  It refers to the payment of the dividend to its shareholders by the corporation in the form of shares rather than cash is referred as stock dividend.

Stockholders’ equity: It refers to the amount of capital that includes the amount of investment by the stockholders, earnings generated from the normal business operations, and less any dividends paid to the stockholders.

Retained earnings: It refers to the amount of earnings that are not paid as dividends to the stockholders. Retained earnings are kept by the corporation for reinvestments, payment of debts, and future growth.

To Journalize: The entries to record the declaration and issuance of stock dividends.

Explanation of Solution

Record the declaration and issuance of stock dividends.

Transaction Number	Account Titles and Explanation	Debit ($)	Credit ($)
1	Stock Dividends                               (2)	130,000
	Common Stock Dividends     Distributable                                (3)		40,000
	Paid-in Capital in excess of Par     Value-Common stock                  (4)		90,000
	(To record the declaration of stock dividends)
2	Stock Dividends Distributable         (3)	40,000
	Common Stock		40,000
	(To record the distribution of stock dividends)

Table (1)

Compute the number of stock dividends shares declared.

$\begin{array}{c}\text{Number of stock dividends shares declared = }\left\{\begin{array}{l}\text{Number of shares issued}\times \\ \text{Stock dividend percentage}\end{array}\right\}\\ \text{= 500,000 shares × 2\%}\\ \text{= 10,000 shares}\end{array}$                            (1)

Compute the stock dividends amount payable to common stockholders.

$\begin{array}{c}\text{Stock dividends =}\left[\begin{array}{l}\text{ Number of stock dividends shares}\\ \text{declared}\times \text{ Market value per share}\end{array}\right]\\ \text{= }10,000\text{ shares }\left(1\right)\text{ × \$13}\\ \text{= \$130,000}\end{array}$                   (2)

Compute stock dividends distributable value.

$\begin{array}{c}\begin{array}{l}\text{Stock dividends}\\ \text{distributable value}\end{array}\}\text{ =}\left[\begin{array}{l}\text{ Number of stock dividends shares}\\ \text{declared}\times \text{ Par value per share}\end{array}\right]\\ \text{= }10,000\text{ shares}\left(1\right)\text{× \$4}\\ \text{= \$40,000}\end{array}$                               (3)

Compute paid-in capital in excess of par value-common stock.

$\begin{array}{c}\text{Paid-in capital = Stock dividends –}\text{Stock dividend distributable value}\\ \text{= \$130,000}\left(2\right)\text{ – \$40,000}\left(3\right)\\ \text{= \$90,000}\end{array}$    (4)

Transaction 1: Declared 2% of stock dividends.

• Stock Dividends is a contra-stockholders’ equity account which decreases the stockholders’ equity amount. Therefore, debit Stock Dividends account with $130,000.
• Common Stock Dividends Distributable is a stockholders’ equity account and the amount has increased due to the declaration of stock dividends. Therefore, credit Common Stock Dividends Distributable account with $40,000.
• Paid-in Capital in Excess of Par Value is a stockholders’ equity account and the amount has increased due to increase in capital excess of common stock value. Therefore, credit Paid-in Capital in Excess of Par Value account with $90,000.

Transaction 2: Distribution of stock dividends declared.

• Common Stock Dividends Distributable is a stockholders’ equity account and the amount has decreased due to transfer of Common Stock Dividends Distributable amount to Common Stock account. Therefore, debit Common Stock Dividends Distributable account with $40,000.
• Common Stock is stockholders’ equity account and the amount has increased. Therefore, credit Common Stock account with $40,000.

(b)

To determine

(1) Total paid-in capital, (2) total retained earnings, and (3) total stockholders’ equity amount before the declaration of the stock dividends.

Explanation of Solution

(1)

Determine total paid-in capital amount before the declaration of the stock dividends.

$\begin{array}{c}\begin{array}{l}\text{Total paid-in capital amount}\\ \text{before the declaration}\\ \text{of the stock dividends}\end{array}\}=\left[\begin{array}{l}\text{Common stock value +}\\ \text{Paid in capital in excess of}\\ \text{par - common stock}\end{array}\right]\\ =\$2,000,000+\$1,000,000\\ =\$3,000,000\end{array}$

Hence, the total paid-in capital amount before the declaration of the stock dividends is $3,000,000.

(2)

Determine total retained earnings amount before the declaration of the stock dividends.

It is given that SL Company’s retained earnings before the declaration of the stock dividends is $33,500,000.

Hence, the total retained earnings amount before the declaration of the stock dividends is $33,500,000.

(3)

Determine total stockholders’ equity amount before the declaration of the stock dividends.

$\begin{array}{c}\begin{array}{l}\text{Total stockholders’ equity}\\ \text{amount before the declaration}\\ \text{of the stock dividends}\end{array}\}=\left[\begin{array}{l}\text{Total paid in capital +}\\ \text{Retained earnings}\end{array}\right]\\ =\$3,000,000+\$33,500,000\\ =\$36,500,000\end{array}$

Hence, the total stockholders’ equityamount before the declaration of the stock dividends is $36,500,000.

(c)

To determine

(1) Total paid-in capital, (2) total retained earnings, and (3) total stockholders’ equity amount after the declaration of the stock dividends.

Explanation of Solution

(1)

Determine total paid-in capital amount after the declaration of the stock dividends.

$\begin{array}{c}\begin{array}{l}\text{Total paid-in capital amount}\\ \text{after the declaration}\\ \text{of the stock dividends}\end{array}\}=\left[\begin{array}{l}\left[\begin{array}{l}\text{Common stock value before declaration}\\ \text{of the stock dividends +}\text{}\text{}\text{Value of Common stock}\\ \text{distributed as stock dividends}\end{array}\right]\\ \left[\begin{array}{l}\text{Paid in capital in excess of par - common stock}\\ \text{before declaration of the stock dividends +Increase}\\ \text{in Paid in capital in excess of par - common stock}\\ \text{at the time of declaring stock dividends }\end{array}\right]\end{array}\right]\\ =\left[\begin{array}{l}\left[\$2,000,000+\$40,000\left(3\right)\right]+\\ \left[\$1,000,000+\$90,000\left(4\right)\right]\end{array}\right]\\ =\$2,040,000+\$1,090,000\\ =\$3,130,000\end{array}$

Hence, the total paid-in capital amount after the declaration of the stock dividends is $3,130,000.

(2)

Determine total retained earnings amount after the declaration of the stock dividends.

$\begin{array}{c}\begin{array}{l}\text{Total retained earnings}\\ \text{amount after the declaration}\\ \text{of the stock dividends}\end{array}\}=\left[\begin{array}{l}\text{Retained earnings before}\\ \text{declaration of the stock dividends}-\\ \text{Stock dividends}\end{array}\right]\\ =\$33,500,000-\$130,000\left(2\right)\\ =\$33,370,000\end{array}$

Hence, the total retained earnings amount after the declaration of the stock dividends is $33,370,000.

(3)

Determine total stockholders’ equity amount after the declaration of the stock dividends.

$\begin{array}{c}\begin{array}{l}\text{Total stockholders’ equity}\\ \text{amount after the declaration}\\ \text{of the stock dividends}\end{array}\}=\left[\begin{array}{l}\text{Total paid in capital after the declaration}\\ \text{of the stock dividends}\text{+}\\ \text{Retained earnings}\text{after the declaration}\\ \text{of the stock dividends}\end{array}\right]\\ =\$3,130,000+\$33,370,000\\ =\$36,500,000\end{array}$

Hence, the total stockholders’ equityamount after the declaration of the stock dividends is $36,500,000.