Question

Problem 5: Stock dividends (12 pts) On January 1, 2019, Las Polamas Inc. had the following account balances in its shareholders equity accounts. Common stock. $0.01 par, 1,000,000 shares issued $10,000 Paid-in capital-excess of par, common 6,990,000 Retained earnings 4,000,000 During 2019, Las Polamas Inc. had several transactions relating to common stock. March 8: Declared and distributed an 8% stock dividend on outstanding common stock. The fair value of the common stock is $8 per share on this date. A 5-for-4 stock split was declared and distributed on outstanding common stock and effected in the form of a 25% stock dividend. The fair value of the stock was $7.50 on this date. Aug. 15: Required: a. Prepare journal entries to record the above two transactions (10 pts). March 8: swall stock and end Retained Earnings Common Stock Pic-Excus of Por Aug 15 Paid in Capital Excess of far Common Glock b. Show the balance of common stock and paid-in capital-excess of par on December 31, 2019 (2 pts)

Answer 1

a) Stock dividends refer to dividends declared and distributed by the management to firm's existing shareholders but by way of additional common shares instead of paying by cash. As a result, firm's retained earnings will come down by an amount equals to number shares outstanding multiplied by market value per share as on the date of declaring the stock dividend. Similarly, firm's Common stock account will be increased by an amount equal to #of common shares declared as stock dividends multiplied by par value per share. Difference between market value of the stock dividends declared and par value of common shares will be added to "Additional Paid-in-Capital" account. Account Titles Debit Credit Date Retained Earnings $640,000 [1,000,000 shares x 8% x $8] [1,000,000 shares x 8% x $0.01] [Balancing figure -> $640000 $800] Mar. 8 $800 $639,200 Common Stock Paid-in-Capital in excess of Par When 5-for-4 stock split was done, 5 shares would have been issued for every 4 existing share. As the the existing # of shares before stock split was 1,080,000, there would be 1,080,000 x (5/4) = 1,350,000 shares outstanding after the stock split. That is, Number of shares outstanding before stock split Stocks offerred per one share held 1,080,000 [5/ 4 [1080000 x (5/4)] 1.25 Number of shares outstanding after stock split 1,350,000 Stock dividend declared % 25% Market value per share $7.50 $2,531,250 [1350000 shares x 25% x $7.50] Market value of stock dividends declard and distributed $10,800 [1080000 shares x $0.01] [As calculated above] [$10800 1350000 shares] Par value of common shares outstanding before stock-split Number of shares outstanding after stock split 1,350,000 $0.008 Par value per common stock after stock split

Journal entry to record 25% stock dividend after 5-for-4 stock split should be: Account Titles Debit Credit Date Retained Earnings $2,531,250 [1350000 shares x 25% x $7.50] [1350000 shares x 25% x $0.008] [Balancing figure --> $2531250 $2700] Aug. 15 $2,700 $2,528,550 Common Stock Paid-in-Capital in excess of Par $10,000 $800 b) Common Stock's initial balance Add: Increase in Common Stock via Mar. 8's stock dividend $2,700 Add: Increase in Common Stock via Aug. 15's stock dividend $13,500 Balance in Common Stock account at the end Paid-in-Capital's initial balance Add: Increase in Paid-in-Capital via Mar. 8's stock dividend $6,990,000 $639,200 $2,528,550 $10,157,750 Add: Increase in Paid-in-Capital via Aug. 15's stock dividend Balance in Paid-in-Capital account at the end