Chapter 13, Problem 6E

1.

To determine

Prepare entries to record both the dividend declaration and its distribution.

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.

Prepare the journal entry to record the dividend declaration as follows:

Date	Account Titles	Debit ($)	Credit ($)
February 5	Retained earnings (1)	480,000
	Common stock dividend distributable (2)		120,000
	Paid in capital in Excess of par value,       Common stock (3)		360,000
	(To record the declaration of 20% common stock dividend)

Table (1)

To record the declaration of 20% common stock dividend:

• Stock dividend is a component of stockholder’s equity account. While issuing stock dividend retained earnings will decrease. Thus, debit retained earnings account to decrease the retained earnings balance.
• Common Stock dividend distributable is a liability account and it is increased. Therefore, credit Common Stock dividend distributable account.
• Paid in capital in Excess of par value, Common stock is a component of stockholder’s equity account and it is increased. Therefore, credit paid in capital in Excess of par value, Common stock account.

Working Notes:

Compute the number of shares to be issued as dividend.

$\begin{array}{c}\text{Shares to be issued as stock dividend=}\left(\begin{array}{l}\text{Number of shares issued}\times \text{Percent of }\\ \text{stock dividend distributable}\end{array}\right)\\ =60,000\text{shares}\times \text{20\%}\\ \text{=12,000}\text{shares}\end{array}$

Compute the decrease in retained earnings.

$\begin{array}{c}\text{Decrease in retained earnings = Number of shares to be issued}\times \text{Market value per share}\\ \text{= 12,000}\text{shares}\times \text{\$40}\\ \text{= \$480,000}\end{array}$ (1)

Compute common stock dividend distributable.

$\begin{array}{c}\left(\begin{array}{l}\text{Common stock dividend}\\ \text{distributable}\end{array}\right)\text{ = Number of shares to be issued }\times \text{ Par value per share}\\ \text{= 12,000 shares × \$10}\\ \text{= \$ 120,000}\end{array}$ (2)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Decrease in retained earnings –}\\ \text{Common stock dividend distributable}\end{array}\right\}\\ \text{= \$480,000 – \$120,000}\\ \text{= \$360,000}\end{array}$ (3)

Prepare the journal entry to record the dividend declaration as follows:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
February 28	Common stock Dividend Distributable (2)		120,000
	Common stock, $10 par value			120,000
	(To record common stock dividend distributed)

Table (2)

To record common stock dividend distributed:

• Common Stock dividend distributable is a liability account and it is decreased. Therefore, debit Common Stock dividend distributable account.
• Common Stock is a stockholders’ equity account and it is increased. Therefore, credit Common Stock account.

2.

To determine

Compute the book value per share and total book value of the shares immediately before and after the stock dividend of February 5.

Explanation of Solution

Compute the book value per share and total book value of the shares immediately before and after the stock dividend:

	Before	After
Total stockholders’ equity	$1,575,000	$1,575,000
Divided by: Issued and distributable shares	60,000 shares	72,000 shares
Book value per share	$26.250	$21.875
Multiply by: Shares owned	800 shares	960 shares
Total book value of shares	$21,000	$21,000

Table (3)

Working Note:

Compute the number of shares owned after stock dividend of February 5.

$\begin{array}{c}\left(\begin{array}{l}\text{Number of shares owned }\\ \text{after February 5}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of shares owned }\\ \text{before February 5}\times \text{120\%}\end{array}\right)\\ =800\text{shares}\times \text{120\%}\\ \text{=960}\text{shares}\end{array}$

Note: Stock issued (100%) + Stock dividend (20%) = 120%

3.

To determine

Compute the total market value of the investor’s shares in part 2 of February 5 and February 28.

Explanation of Solution

Compute the total market value of the investor’s shares in part 2 of February 5 and February 28:

	February 5	February 28
Market value per share	$40	$33.40
Multiply by: Shares owned	800 shares	960 shares
Total market value of shares owned	$32,000	$32,064

Table (4)

Hence, total market value of the investor’s shares in part 2 of February 5 and February 28 are $32,000 and $32,064, respectively.