Question

can you please explain as well?

CH13 Graded Written Homework Problem 1 In some cases, companies elect to pay dividends to stockholders in the form of additional shares of stock instead of cash. A stock dividend is normally declared only on common stock and issued to common stockholders. An analysis of Cheerios, Inc.'s common stock is as follows: Shares authorized Shares issued Shares outstanding Number of Common Shares 450,000 325,000 310,000 On February 1, Cheerios, Inc. declared a 8% stock dividend for its common stockholders. The stock dividend will be distributed on March 1 for holders of record on February 16. Cheerios, Inc.'s common stock has a par value of $2 per share. Complete the table to reflect the correct number of common shares in the company after the stock dividend is distributed. (Hint: Remember, the number of shares declared (and distributed) are calculated using outstanding shares because only outstanding shares receive dividends.) Number of Common Shares Shares authorized Shares issued Shares outstanding

Answer 1

The total amount of stockholders' equity remains the same, a stock dividend requires a journal entry to transfer an amount from the retained earnings section of the balance sheet to the paid-in capital section of the balance sheet.

On the declaration date of a small stock dividend, a journal entry is made to transfer the market value of the shares being issued from retained earnings to the paid-in capital section of stockholders' equity.

Stock dividends have no impact on the cash position of a company and only impact the shareholders' equity section of the balance sheet. If the number of shares outstanding is increased by less than 20% to 25%, the stock dividend is considered to be a small one

Feb1	8% Stock dividend issued on common stock
	Shares Outstanding	310000	=310000*8%=24800

The following entry is made on the declaration date: February 1

Feb 1	Retained Earnings	(24800*12)	223200
	Common Stock Dividend Distributable(Par Value @ 2)			49600
	Paid-in Capital in Excess of Par			173600

When the 24800 shares are distributed to the stockholders, the following journal entry is made:

Common Stock Dividend Distributable(Par Value @ 2)	49600
Common Stock		49600

	No of Common Shares
Shares Authorized	450000
Shares Issued	325000
Shares Outstanding	334800(310000+24800)

	Balance before the stock dividend	Balance after the stock dividend
Common Stock	310000	334800
Paid In Capital in excess of Par - Common Stock		173600
Retained Earnings	3000000	2776800	(3000000-223200)
Treasury Stock	-60000	-60000
Total Stock Holders Equity	3250000	3225200

The stockholders' equity can be calculated from the balance sheet by subtracting a company's liabilities from its total assets. Although stock splits and stock dividends affect the way shares are allocated and the company share price, stock dividends do not affect stockholder equity.

Stock dividends have no effect on the total amount of stockholders' equity or on net assets. They merely decrease retained earnings and increase paid-in capital by an equal amount. Immediately after the distribution of a stock dividend, each share of similar stock has a lower book value per share.

Red would own after stock dividend

12400*4% = 496

12400+496 = 12896

Total % of shares of the new total shares outstanding

=12896/334800 *100

= 3.86 %