Question

Bosley Corporation began business on January 2, 2015. At that time, it issued 1,000,000 shares at a par value of $5 per share. The common shares sold for $8 per share. It did not issue any preferred stock.

1. Using the financial transactions template record the following transactions:

(a) The initial stock sale on January 2, 2015.

(b) On June 15, 2015, Bosley issued an additional 50,000 shares of common when the stock price was $11.50 per share.

(c) On December 10, 2015, Bosley repurchased 150,000 shares of common when the stock price was $7 per share.

2. On June 30, 2016, Bosley paid a cash dividend of $0.30 per share. Record this payment using the financial transactions template. Assume no change to shares outstanding since December 10, 2015. Ignore the balance of retained earnings – assume there is enough to pay the dividend.

3. On January 6, 2017, Bosley announced at 2-for-1 stock split when its shares were trading for $20 per share. Using the financial transactions template record the effect of this stock split. If you are an investor in Bosley, what is the direct effect of this stock split on the total dollar value of your investment?

4. Cash dividends, stock dividends, and share repurchases are all considered ways to “pay back” shareholders. Assuming no difference in the size of the pay back, if you are an investor (in any company), which one of these transactions would you prefer? State specific advantages and disadvantages (to an investor) of each transaction when giving your answer.

Answer 1

Journal Entries in the books of Bosley Corporation
Date	Particulars		Debit	Credit
02-01-2015	Cash A/c	Dr	$80,00,000
	Share Capital A/C			$50,00,000
	Securities Premium A/C			$30,00,000
	Being 1000000 shares of $5 each issued at $8
15-05-2015	Cash A/c	Dr	$5,75,000
	Share Capital A/C			$2,50,000
	Securities Premium A/C			$3,25,000
	Being 50000 shares of $5 each issued at $11.5
10-12-2015	Share Capital A/C	Dr	$7,50,000
	Reserves and surplus/Retained Earnings	Dr	$3,00,000
	Cash A/C			$10,50,000
	Being 150000 shares were purchased from the market at $7 each
30-06-2016	Reserves and surplus/Retained Earnings	Dr	$2,70,000
	Cash A/C			$2,70,000
	Being dividend paid at $0.3 per each share
06-01-2017	Share Capital A/C (Face Value of $5 each )	Dr	$45,00,000
	Share Capital A/C (Face Value of $2.5 each )			$45,00,000
	Being shares of face value $5 each divided into two shares

S.No	Particulars	Amount
1	Initial Investment made in the company	$20
2	Number of shares held initially	1
3	Dollar Value of Investment per ( Before Share Split )(1*2)	$20
4	Number shares held after share split	2
5	Investment per share after share split	$10
6	Dollar Value of Investment per ( After Share Split )(4*5)	$20

Although the number of shares outstanding increases during a stock split, the total dollar value of the shares remains the same compared to pre-split amounts, because the split does not add any real value. When a stock split is implemented, the price of shares adjusts automatically in the markets.

For investor: Cash Dividend vs Stock Dividend vs Share Repurchase

For an investor, the cash dividend is a better option why because it represents definite cash flows every year. Those funds give an option for reinvestment. At first cash, dividend takes an overriding position on stock dividend why because a dividend payment represents a definite return in the current timeframe that will be taxed, whereas a buyback represents an uncertain future return on which tax is deferred until the shares are sold.