Chapter 14, Problem 4QP

Summary Introduction

To calculate: The new shares.

Introduction:

Stock dividend:

Distribution of dividend in the form of additional shares is termed as stock dividend. Stock dividend is also termed as ‘Scrip dividend’.

Answer to Problem 4QP

New number of shares is 3,500.

Explanation of Solution

Given information:

O 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 $35,000, capital surplus of $149,000, retained earnings of $565,000 and total owners equity of $749,000.

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 $35,000 at par value of $1.

Therefore, the share value is,

$\begin{array}{c}\text{Share value}=\frac{\text{Common stock}}{\text{Par value}}\\ =\frac{\$35,000}{\$1}\\ =35,000\end{array}$

Hence, the existing shares are 35,000.

Note: The Company declares 10% of stock dividend.

Compute the new number of shares outstanding:

$\begin{array}{c}\text{New number of outstanding shares}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Existing shares}\\ \times \text{Percentage of stock dividend}\end{array}\right)\\ +\text{Existing shares}\end{array}\right]\\ =\left(35,000\times 0.10\right)+35,000\\ =3,500+35,000\\ =38,500\end{array}$

Hence, the new number of outstanding shares is 38,500.

Compute the number of new shares:

$\begin{array}{c}\text{New shares}=\text{New number of outstanding shares }-\text{Outstanding shares}\\ =38\text{,500}-35\text{,000}\\ =3,500\end{array}$

Hence, the new numbers of shares are 3,500.

Summary Introduction

To discuss: The changes in equity account.

Explanation of Solution

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

Compute the change in value of common stock:

$\begin{array}{c}\text{New common stock}=\left(\frac{\text{New number of outstanding stock}\times \text{Existing common stock}}{\text{Existing shares}}\right)\\ =\left(\frac{38,500\times \$35,000}{\$35,000}\right)\\ =\text{\$38,500}\end{array}$

Hence, the new common stock is $38,500.

Compute the change in value of capital surplus:

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

$\begin{array}{c}\text{Total capital surplus on new share}=\text{Capital surplus}\times \text{New number of shares}\\ =\text{\$41}\times 3,500\\ =\text{\$143,500}\end{array}$

Hence, the new capital surplus is $143,500.

Compute the total owner’s equity:

Particulars	Amount ($)
Common stock($2 par value)	$38,500
Capital surplus $\left(\$143,500+149,000\right)$	$292,500
Retained earnings(b/f)	$418,000
Total Owner's equity	$749,000

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

Summary Introduction

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

Explanation of Solution

Given information:

F Company sells the shares at the rate of $42 and issued 10% stock dividend. The owner’s total equity shows common stock ($1 par value) of $35,000, capital surplus of $149,000, retained earnings of $565,000 and total owners equity of $749,000.

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 F Company, when it declares 25% stock dividend:

$\begin{array}{c}\text{Additional stocks}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Existing shares}\\ \times \text{Percentage of stock dividend}\end{array}\right)\\ +\text{Existing shares}\end{array}\right]\\ =\left(35,000\times 0.25\right)+35,000\\ =8,750+35,000\\ =43,750\end{array}$

Hence, the new number of outstanding shares is 43,750.

New shares:

$\begin{array}{c}\text{New number of shares}=\text{Outstanding shares }-\text{New number of outstanding shares}\\ =\text{43,750}-\text{35,000}\\ =\text{8,750}\end{array}$

Hence, the new number of share is 8,750.

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

Compute the change in value of common stock:

$\begin{array}{c}\text{New common stock}=\left(\frac{\text{New outstanding stock}\times \text{Existing common stock}}{\text{Existing shares}}\right)\\ =\frac{43,750\times 35,000}{\$35,000}\\ =\text{\$43,750}\end{array}$

Hence, the new common stock is $43,750.

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

$\begin{array}{c}\text{Total capital surplus on new share}=\text{Capital surplus}\times \text{New shares}\\ =\text{\$41}\times 8,750\\ =\text{\$358,750}\end{array}$

Hence, the new capital surplus is $358,750.

Compute the total owner’s equity:

Particulars	Amount ($)
Common stock($1par value)	$43,750
Capital surplus $\$358,750+149,000$	$507,750
Retained earnings(b/f)	$148,900
Total Owner's equity	$749,000

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

Hence, the total owner’s equity is $749,000.