Chapter 13, Problem 8E

The stockholders’ equity section of TVX Company on February 4 follows.

On February 5, the directors declare a 20% stock dividend distributable on February 28 to the February 15 stockholders of record. The stock’s market value is $40 per share on February 5 before the stock dividend.

1. 1. Prepare entries to record both the dividend declaration and its distribution.
2. 2. Prepare the stockholders’ equity section after the stock dividend is distributed. (Assume no other changes to equity.)

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)

• 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)

• 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.

To determine

Prepare the stockholders’ equity section after the stock dividend is distributed.

Explanation of Solution

Prepare the stockholders’ equity section after the stock dividend is distributed.

Company TVX
Balance Sheet (Partial)
As of February 28
Particulars	Amount ($)
Paid-in Capital:
Common stock, $10 par value, 150,000 shares authorized,         72,000 shares issued and outstanding	$720,000
Paid-in capital in excess of par value, common stock	785,000
Total paid-in capital	$1,505,000
Retained earnings	70,000
Total stockholders’ equity	$1,575,000

Table (3)

Compute total number of shares issued and outstanding.

$\begin{array}{c}\begin{array}{l}\text{Total number of shares}\\ \text{issued and outstanding}\end{array}\}=\left[\begin{array}{l}\text{Number of shares outstanding before stock dividend +}\\ \text{Stock dividend shares}\end{array}\right]\\ =60,000+12,000\\ =72,000\text{ shares}\end{array}$

Compute common stock value.

$\begin{array}{c}\text{Common stock value = }\left[\begin{array}{l}\text{Common stock value before stock dividend +}\\ \text{Increase in Common stock value during}\\ \text{stock dividend distribution}\end{array}\right]\\ =\$600,000+\$120,000\\ =\$720,000\end{array}$

Compute Paid-in capital in excess of par value, common stock.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in excess}\\ \text{of par value, common stock}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Paid-in capital in excess of par value,}\\ \text{common stock before stock dividend+}\\ \text{Increase in Paid-in capital in excess of par value during}\\ \text{stock dividend distribution}\end{array}\right]\\ =\$425,000+\$360,000\\ =\$785,000\end{array}$

Compute total number of shares issued and outstanding.

Particulars	Amount ($)
Retained earnings before stock dividend	$550,000
Less: Stock dividend issue	480,000
Retained earnings after stock dividend issue	$70,000

Table (4)