Chapter 14, Problem 4QP

a)

Summary Introduction

To calculate: The new shares.

Introduction:

A unit of ownership in various investments which fetches an equal distribution is termed as shares.

Answer to Problem 4QP

New number of shares is 4,500.

Explanation of Solution

Given information:

T Company sells the shares at the rate of $42 per share and declared 10% stock dividend. The owner’s total equity shows common stock ($1 par value) of $45,000, capital surplus of $125,000, retained earnings of $580,000 and total owners equity of $750,000.

Formulae:

The formula to calculate the new shares:

$\text{New number of shares}=\text{Number of outstanding shares}-\text{New outstanding shares}$

The formula to calculate the new number of outstanding shares:

$\text{New number of outstanding shares}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Existing shares}\\ \times \text{Percentage of stock dividend}\end{array}\right)\\ +\text{Existing shares}\end{array}\right]$

Compute the new number of shares of F Company:

The common stock is $45,000 at par value of $1.

Therefore, the share value is,

$\begin{array}{c}\text{Share value}=\frac{\text{Common stock}}{\text{Par value}}\\ =\frac{\$45,000}{\$1}\\ =45,000\end{array}$

Hence, the existing shares are 45,000.

Note: The Company declares 10% of stock dividend.

$\begin{array}{c}\text{New number of outstanding shares}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Existing shares}\\ \times \text{Percentage of stock dividend}\end{array}\right)\\ +\text{Existing shares}\end{array}\right]\\ =\left(45,000\times 0.10\right)+45,000\\ =4,500+45,000\\ =49,500\end{array}$

Hence, the new number of outstanding shares is 49,500.

Compute the number of new shares:

$\begin{array}{c}\text{New shares}=\text{New number of outstanding shares }-\text{Outstanding shares}\\ =49\text{,500}-45\text{,000}\\ =4,500\end{array}$

Hence, the new numbers of shares are 4,500.

Summary Introduction

To discuss: The changes in equity account.

Introduction:

A unit of ownership in various investments which fetches an equal distribution is termed as shares.

Explanation of Solution

Given information:

T Company sells the shares at the rate of $42 per share and declared 10% stock dividend. The owner’s total equity shows common stock ($1 par value) of $45,000, capital surplus of $125,000, retained earnings of $580,000 and total owners equity of $750,000. (Refer above part) New number of outstanding stock is 49,500. New number of shares is 4,500.

Compute the change in values of total owner’s equity:

Compute the change in value of common stock:

$\begin{array}{c}\text{New common stock}=\left(\frac{\text{New number of outstanding stock}\times \text{Existing common stock}}{\text{Existing shares}}\right)\\ =\left(\frac{49,500\times \$45,000}{\$45,000}\right)\\ =\text{\$49,500}\end{array}$

Hence, the new common stock is $49,500.

Compute the change in value of capital surplus:

Note: The new share par value is $1, so the capital surplus is $\$42-\$1=\$41$.

$\begin{array}{c}\text{Total capital surplus on new share}=\text{Capital surplus}\times \text{New number of shares}\\ =\text{\$41}\times 4,500\\ =\text{\$184,500}\end{array}$

Hence, the new capital surplus is $184,500.

Compute the total owner’s equity:

Particulars	Amount
	($)
Common stock ($1 par value)	$49,500
Capital surplus	$309,500
($184,500+$125,000)
Retained earnings (b/f)	$391,000
Total Owner's equity	$750,000

Note: Retained earnings will remain as balancing figure in the owner’s equity.

Hence, the total owner’s equity is $750,000.

b)

Summary Introduction

To calculate: Total owner’s equity, when the company declares 25% stock dividend.

Introduction:

A unit of ownership in various investments which fetches an equal distribution is termed as shares.

Explanation of Solution

Given information:

T Company sells the shares at the rate of $42 per share and declared 10% stock dividend. The owner’s total equity shows common stock ($1 par value) of $45,000, capital surplus of $125,000, retained earnings of $580,000 and total owners equity of $750,000. (Refer above part) New number of outstanding stock is 49,500. New number of shares is 4,500.

Formulae:

The formula to calculate the new number of shares:

$\text{New number of }\text{shares}=\text{Outstanding shares}-\text{New number of outstanding shares}$

The formula to calculate the new number of outstanding shares:

$\text{New outstanding shares}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Existing shares}\\ \times \text{Percentage of stock dividend}\end{array}\right)\\ +\text{Existing shares}\end{array}\right]$

Compute the new number of shares of T Incorporation, when it declares 25% stock dividend:

$\begin{array}{c}\text{Additional stocks}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Existing shares}\\ \times \text{Percentage of stock dividend}\end{array}\right)\\ +\text{Existing shares}\end{array}\right]\\ =\left(45,000\times 0.25\right)+45,000\\ =11,250+45,000\\ =56,250\end{array}$

Hence, the new number of outstanding shares is 56,250.

New shares:

$\begin{array}{c}\text{New number of shares}=\text{Outstanding shares }-\text{New number of outstanding shares}\\ =56,250-4\text{5,000}\\ =\text{11,250}\end{array}$

Hence, the new number of share is 11,250.

Compute the change in values of total owner’s equity:

Compute the change in value of common stock:

$\begin{array}{c}\text{New common stock}=\left(\frac{\text{New outstanding stock}\times \text{Existing common stock}}{\text{Existing shares}}\right)\\ =\frac{56,250\times 45,000}{\$45,000}\\ =\text{\$56,250}\end{array}$

Hence, the new common stock is $56,250.

Note: The new share par value is $1, so the capital surplus is $\$42-\$1=\$41$.

$\begin{array}{c}\text{Total capital surplus on new share}=\text{Capital surplus}\times \text{New shares}\\ =\text{\$41}\times 11,250\\ =\text{\$461,250}\end{array}$

Hence, the new capital surplus is $461,250.

Compute the total owner’s equity:

Particulars	Amount
	($)
Common stock ( $1par value)	$56,250
Capital surplus	$586,250
($461,250+$125,000)
Retained earnings	$107,500
(b/f)
Total Owner's equity	$750,000

Note: Retained earnings will remain as balancing figure in the owner’s equity.

Hence, the total owner’s equity is $750,000.