Question

Problem 15-08

Sweet Company provides you with the following condensed balance sheet information:

Assets
Current assets				$ 43,100
Equity investments				65,400
Equipment (net)				262,700
Intangibles				65,300
Total assets				$436,500
Liabilities and Stockholders’ Equity
Current and long-term liabilities				$108,500
Stockholders’ equity
Common stock ($5 par)		$ 20,200
Paid-in capital in excess of par		117,700
Retained earnings		190,100		328,000
Total liabilities and stockholders’ equity				$436,500

For each of the following transactions, indicate the dollar impact (if any) on the following five items: (1) total assets, (2) common stock, (3) paid-in capital in excess of par, (4) retained earnings, and (5) stockholders’ equity. (Each situation is independent.)
(a) Sweet declares and pays a $0.55 per share cash dividend.

(1)		Total assets		decreaseincreaseno effect		$
(2)		Common stock		decreaseincreaseno effect		$
(3)		Paid-in capital in excess of par		decreaseincreaseno effect		$
(4)		Retained earnings		decreaseincreaseno effect		$
(5)		Total stockholders’ equity		decreaseincreaseno effect		$

(b) Sweet declares and issues a 10% stock dividend when the market price of the stock is $14 per share.

(1)		Total assets		decreaseincreaseno effect		$
(2)		Common stock		decreaseincreaseno effect		$
(3)		Paid-in capital in excess of par		decreaseincreaseno effect		$
(4)		Retained earnings		decreaseincreaseno effect		$
(5)		Total stockholders’ equity		decreaseincreaseno effect		$

(c) Sweet declares and issues a 30% stock dividend when the market price of the stock is $14 per share.

(1)		Total assets		decreaseincreaseno effect		$
(2)		Common stock		decreaseincreaseno effect		$
(3)		Paid-in capital in excess of par		decreaseincreaseno effect		$
(4)		Retained earnings		decreaseincreaseno effect		$
(5)		Total stockholders’ equity		decreaseincreaseno effect		$

(d) Sweet declares and distributes a property dividend. Sweet gives one share of its equity investment (ABC stock) for every two shares of Sweet Company stock held. Sweet owns 10,900 shares of ABC. ABC is selling for $10 per share on the date the property dividend is declared.

(1)		Total assets		decreaseincreaseno effect		$
(2)		Common stock		decreaseincreaseno effect		$
(3)		Paid-in capital in excess of par		decreaseincreaseno effect		$
(4)		Retained earnings		decreaseincreaseno effect		$
(5)		Total stockholders’ equity		decreaseincreaseno effect		$

(e) Sweet declares a 2-for-1 stock split and issues new shares.

(1)		Total assets		decreaseincreaseno effect		$
(2)		Common stock		decreaseincreaseno effect		$
(3)		Paid-in capital in excess of par		decreaseincreaseno effect		$
(4)		Retained earnings		decreaseincreaseno effect		$
(5)		Total stockholders’ equity		decreaseincreaseno effect		$

Answer 1

Number of common shares = $20200/5 = 4040 shares

(a) Sweet declares and pays a $0.55 per share cash dividend.
Cash Dividend = $0.55 x 4040 = $2222

1	Total assets	Decrease	$                2,222
2	Common stock	No effect
3	Paid-in capital in excess of par	No effect
4	Retained earnings	Decrease	$                2,222
5	Total stockholders’ equity	Decrease	$                2,222

(b) Sweet declares and issues a 10% stock dividend when the market price of the stock is $14 per share.
Stock Dividend = 4040 x 10% x $14 = $5656,
Common Stock = 4040 x 10% x $5 = $2020, Excess Capital = 4040 x 10% x $9 = $3636

1	Total assets	No effect
2	Common stock	Increase	$                2,020
3	Paid-in capital in excess of par	Increase	$                3,636
4	Retained earnings	Decrease	$                5,656
5	Total stockholders’ equity	No effect

(c) Sweet declares and issues a 30% stock dividend when the market price of the stock is $14 per share.
Stock Dividend = 4040 x 30% x $5 = $6060,
Common Stock = 4040 x 30% x $5 = $6060

1	Total assets	No effect
2	Common stock	Increase	$                6,060
3	Paid-in capital in excess of par	No effect
4	Retained earnings	Decrease	$                6,060
5	Total stockholders’ equity	No effect

(d) Sweet declares and distributes a property dividend. Sweet gives one share of its equity investment (ABC stock) for every two shares of Sweet Company stock held. Sweet owns 10,900 shares of ABC. ABC is selling for $10 per share on the date the property dividend is declared.
Number of ABC Stock distributed = 4040/2 = 2020 shares
Acquisition value of ABC Stock = $65400 / 10900 i.e.$6 per share
Gain on disposal of investment = 2020 x (10-6) = $8080

1	Total assets	Decrease	$              12,120
2	Common stock	No effect
3	Paid-in capital in excess of par	No effect
4	Retained earnings	Decrease	$              12,120
5	Total stockholders’ equity	Decrease	$              12,120

(e) Sweet declares a 2-for-1 stock split and issues new shares.

1	Total assets	No effect
2	Common stock	No effect
3	Paid-in capital in excess of par	No effect
4	Retained earnings	No effect
5	Total stockholders’ equity	No effect