Chapter 18, Problem 18.5P

Shareholders’ equity transactions; statement of shareholders’ equity

• LO18–6 through LO18–8

Listed below are the transactions that affected the shareholders’ equity of Branch-Rickie Corporation during the period 2018–2020. At December 31, 2017, the corporation’s accounts included:

	($ in thousands)
Common stock, 105 million shares at $1 par	$105,000
Paid-in capital—excess of par	630,000
Retained earnings	970,000

a. November 1, 2018, the board of directors declared a cash dividend of $0.80 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.

b. On March 1, 2019, the board of directors declared a property dividend consisting of corporate bonds of Warner Corporation that Branch-Rickie was holding as an investment. The bonds had a fair value of $1.6 million, but were purchased two years previously for $1.3 million. Because they were intended to be held to maturity, the bonds had not been previously written up. The property dividend was payable to shareholders of record March 13, to be distributed April 5.

c. On July 12, 2019, the corporation declared and distributed a 5% common stock dividend (when the market value of the common stock was $21 per share). Cash was paid in lieu of fractional shares representing 250,000 equivalent whole shares.

d. On November 1, 2019, the board of directors declared a cash dividend of $0.80 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.

e. On January 15, 2020, the board of directors declared and distributed a 3-for-2 stock split effected in the form of a 50% stock dividend when the market value of the common stock was $22 per share.

f. On November 1, 2020, the board of directors declared a cash dividend of $0.65 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.

Required:

1. Prepare the journal entries that Branch-Rickie recorded during the three-year period for these transactions.

2. Prepare comparative statements of shareholders’ equity for Branch-Rickie for the three-year period ($ in 000s). Net income was $330 million, $395 million, and $455 million for 2018, 2019, and 2020, respectively.

To determine

Transactions related to shareholders’ equity

Stockholders’ equity: Stockholders’ equity is the remains of the assets after the owners pay off all the liabilities of the business. Therefore, shareholders’ equity is also referred to as net assets.

To Journalize: The transactions related to shareholders’ equity for the period 2018 to 2020.

Explanation of Solution

Transaction (a)

Declaration date: The date on which the board of directors of a corporation announces officially to distribute the dividends to its shareholders is referred as declaration date.

November 1, 2018–Declaration Date:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
November	1	Retained Earnings		84,000,000
		Cash Dividends Payable			84,000,000
		(To record declaration of dividends)

Table (1)

Working Notes:

Compute the amount of dividends payable.

$\begin{array}{c}\text{Dividend payable = Number of shares}\times \text{Dividend per share}\\ \text{= 105,000,000 shares}\times \text{\$0}\text{.80}\\ \text{= \$84,000,000}\end{array}$

Date of record: The date on which the company verifies the ownership of shares of the shareholders entitled to receive the dividends declared, is referred as date of record. No entry is recorded on this date.

November 15, 2018–Date of Record:

Do not record any entry for the transaction occurred on date of record for the following reasons:

• The dividends will not be paid for those who buy the stock after the date of record.
• The company does not record any transactions on the date of record.
• The ownership of shares alone is verified.

Payment date: The date on which the company pays or sends the cash dividend checks to the stockholders is known as payment date.

December 1, 2018–Payment Date:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
December	1	Cash Dividends Payable		84,000,000
		Cash			84,000,000
		(To record payment of dividends)

Table (2)

Transaction (b)

Property dividend: Distribution of non-cash assets in the form of dividend is referred to as property dividend. It is otherwise known as dividend in kind.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2019		Investment in W Bonds		300,000
March	1	Gain on Appreciation of Investment			300,000
		(To record gain on appreciated value of investment)

Table (3)

Working Notes:

Compute the gain (loss) on investment.

$\begin{array}{c}\text{Gain (loss) on investment = Fair value–Book value}\\ \text{=\$1,600,000–\$1,300,000}\\ \text{=\$300,000}\end{array}$

March 1, 2019–Declaration Date:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2019
March	1	Retained Earnings		1,600,000
		Property Dividends Payable			1,600,000
		(To record declaration of dividends)

Table (4)

March 13, 2019–Date of Record:

Do not record any entry for the transaction occurred on date of record.

April 5, 2019–Payment Date:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2019
April	5	Property Dividends Payable		1,600,000
		Investment in Company G Stock			1,600,000
		(To record payment of property dividends)

Table (5)

Transaction (c)

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2019
July	12	Retained Earnings		110,250,000
		Common Stock			5,000,000
		Paid-in Capital in Excess of Par			100,000,000
		Cash			5,250,000
		(To record distribution of stock dividend)

Table (6)

Working Notes:

Compute stock dividends amount.

$\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{ Stock dividend percentage}\end{array}\right\}\\ \text{= 105,000,000 shares × }\frac{5}{\text{100}}\\ \text{= 5,250,000 shares}\end{array}$ (1)

$\begin{array}{c}\text{Stock dividends = }\left\{\begin{array}{l}\text{Stock dividend shares }\times \\ \text{Market value per share}\end{array}\right\}\\ \text{= 5,250,000 shares × \$21}\\ \text{= \$110,250,000}\end{array}$

Note: Refer to Equation (1) for value and computation of stock dividend shares.

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = }\left\{\begin{array}{l}\left(\begin{array}{l}\text{Stock dividend shares–}\\ \text{Fractional share right shares }\end{array}\right)\times \\ \text{Par value of stock}\end{array}\right\}\\ \text{= }\left(\text{5,250,000 shares–250,000 shares}\right)\text{ × \$1}\\ \text{= \$5,000,000}\end{array}$

Note: Refer to Equation (1) for value and computation of stock dividend shares.

Compute excess of par value of shares.

$\begin{array}{c}\text{Excess of par value = Market price –Par value}\\ \text{=\$21–\$1}\\ \text{=\$20}\end{array}$ (2)

Compute paid-in capital in excess value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital }\\ \text{in excess value}\end{array}\}\text{ = }\left(\begin{array}{l}\left(\begin{array}{l}\text{Stock dividend shares –}\\ \text{Fractional shares}\end{array}\right)\times \\ \text{Excess of par value}\end{array}\right)\\ \text{= }\left(\begin{array}{l}\text{5,250,000 shares – }\\ \text{250,000 shares}\end{array}\right)\times \$20\\ \text{= \$100,000,000}\end{array}$

Note: Refer to Equations (1) and (2) for value and computation of stock dividend shares and excess of par value of share.

Compute cash paid by company in lieu of fractional shares.

$\begin{array}{c}\text{Cash paid = Number of fractional shares }\times \text{ Market price}\\ \text{= 250,000 shares×\$21}\\ \text{= \$5,250,000}\end{array}$

Transaction (d)

November 1, 2019–Declaration Date:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2019
November	1	Retained Earnings		88,000,000
		Cash Dividends Payable			88,000,000
		(To record declaration of cash dividends)

Table (7)

Working Notes:

Compute the amount of dividends payable.

$\begin{array}{c}\text{Dividend payable = Number of shares outstanding}\times \text{Dividend per share}\\ \text{= }\left(\text{105,000,000 shares +5,000,0000}\right)\times \text{\$0}\text{.80}\\ \text{= \$88,000,000}\end{array}$

November 15, 2019–Date of Record:

Do not record any entry for the transaction occurred on date of record.

December 1, 2019–Payment Date:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2019
December	1	Cash Dividends Payable		88,000,000
		Cash			88,000,000
		(To record payment of cash dividends)

Table (8)

Transaction (e):

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2020
January	15	Retained Earnings		55,000,000
		Common Stock			55,000,000
		(To record distribution of stock dividend)

Table (9)

Working Notes:

Compute stock dividends amount.

$\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{ Stock dividend percentage}\end{array}\right\}\\ \text{=}\left(\begin{array}{l}\text{ 105,000,000 shares +}\\ \text{5,000,000 shares }\end{array}\right)\text{× }\frac{50}{\text{100}}\\ \text{= 55,000,000 shares}\end{array}$

Transaction (f):

November 1, 2020–Declaration Date:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2020
November	1	Retained Earnings		107,250,000
		Cash Dividends Payable			107,250,000
		(To record declaration of cash dividends)

Table (10)

Working Notes:

Compute the amount of dividends payable.

$\begin{array}{c}\text{Dividend payable = Number of shares}\times \text{Dividend per share}\\ \text{= }\left\{\begin{array}{l}\text{105,000,000 shares + }\\ \text{5,000,000 shares +}\\ \text{55,000,000 shares}\end{array}\right\}\times \text{\$0}\text{.65}\\ \text{= \$107,250,000}\end{array}$

November 15, 2020–Date of Record:

Do not record any entry for the transaction occurred on date of record.

December 1, 2020–Payment Date:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2020
December	1	Cash Dividends Payable		107,250,000
		Cash			107,250,000
		(To record payment of cash dividends)

Table (11)

To determine

To Prepare: The comparative statements of shareholders’ equity for Corporation BR.

Explanation of Solution

Prepare comparative statement of shareholders’ equity for 2018 to 2020 for Corporation BR.

Corporation BR
Statement of Shareholders’ Equity
For the Years Ended December 31, 2018, 2019, and 2020
(Amounts in Thousands)
Particulars	Common Stock	Additional Paid-in Capital	Retained Earnings	Total Shareholders’ Equity
January 1, 2018	$105,000	$630,000	$970,000	$1,705,000
Net income			330,000	330,000
Cash dividends			(84,000)	(84,000)
December 31, 2018	$105,000	$630,000	$1,216,000	$1,951,000
Property dividends			(1,600)	(1,600)
Common stock dividend	5,000	100,000	(110,250)	(5,250)
Net income			395,000	395,000
Cash dividends			(88,000)	(88,000)
December 31, 2019	$110,000	$730,000	$1,411,150	$2,251,150
Stock split as stock dividend	55,000	(55,000)
Net income			455,000	455,000
Cash dividends			(107,250)	(107,250)
December 31, 2020	$165,000	$675,000	$1,758,900	$2,598,900

Table (12)

Note: Refer to requirement 1 for computations of values.