Question

Dividends Stock Splits

1) The board of directors voted for a 2:1 stock split. Prior to the split, the company had 50,000 shares of $10 par common stock. What is the effect of the stock split? If a journal entry is required, then include in your answer.

2) Create the journal entry if ABC Company declares and pays a property dividend payable in bonds of DEF Company (bonds are being held to maturity and are carried on ABC’s books at book value of $40,000, but their market value is $48,000)

NOTE: Small stock dividends are treated differently than large stock dividends. A small dividend is less than 20 to 25% of the previously outstanding shares. You can research this treatment in your old intermediate textbook or the web.

3) ABC Company declares and issues a 10% stock dividend. On the date of declaration, the stock is selling for $20. The corporation has 20,000 shares issues and outstanding before the stock dividends. It is $10 par stock. Show the journal entries.

4) Same as 3) above except ABC declares and issues a 40% stock dividend.

5) Describe what happens on each of the three following important dividend dates in words and illustrating any necessary journal entry.

              Date of declaration

              Date of record

              Date of payment

Answer 1

1) The 2:1 stock split will result in 2 shares of common stock being issued for every share of common stock held. The effect of this would be that the number of shares of common shares will increase from 50,000 to 100,000 and the par value of each share will decrease from $10 to $5. There will be no effect on the total shareholders' equity and no journal entry is required but only a memo entry to reduce the par value of stock.

2)

Account Titles and Explanation	Debit	Credit
Investment in Bonds of DEF Company	8000
Gain on appreciation ($48000 - $40000)		8000
(To record investment at fair value)
Retained earnings	48000
Dividends payable		48000
(To record the declaration of property dividend)
Dividends payable	48000
Investment in Bonds of DEF Company		48000
(To record distribution of property dividend)

3)

Account Titles and Explanation	Debit	Credit
Retained earnings (10% x 20000 x $20)	40000
Common stock dividend distributable		40000
(To record the declaration of stock dividends)
Common stock dividend distributable	40000
Common stock (10% x 20000 x $10)		20000
Paid-in capital in excess of par - common stock		20000
(To record the distribution of dividends)

In case of a small stock dividend of less than 20% to 25%, the market value of the shares being issued is transferred from the retained earnings to the paid-in capital.

4)

Account Titles and Explanation	Debit	Credit
Retained earnings (40% x 20000 x $10)	80000
Common stock dividend distributable		80000
(To record the declaration of stock dividends)
Common stock dividend distributable	80000
Common stock		80000
(To record the distribution of dividends)

In case of a large stock dividend, the par value of the shares being issued is transferred from the retained earnings to the paid-in capital section of stockholders' equity.

Per HOMEWORKLIB RULES the first 4 parts have been answered. Please post the remaining separately. Thank you.