Question

The equity sections for Atticus Group at the beginning of the year (January 1) and end of the year (December 31) follow. Stockholders' Equity (January 1) Common stock-$6 par value, 100,000 shares authorized, 40,000 shares issued and outstanding Paid-in capital in excess of par value, common stock Retained earnings Total stockholders' equity $240,000 200,000 340,000 $ 780,000 Stockholders' Equity (December 31) Common stock-$6 par value, 100,000 shares authorized, 47,000 shares issued, 5,000 shares in treasury Paid-in capital in excess of par value, common stock Retained earnings ($40,000 restricted by treasury stock) $282,000 256,000 Less cost of treasury stock Total stockholders' equity 978,000 (40,000) $938,000 The following transactions and events affected its equity during the year. Jan. 5 Declared a $0.50 per share cash dividend, date of record January 10. Mar. 20 Purchased treasury stock for cash. Apr. 5 Declared a $0.50 per share cash dividend, date of record April 10. July 5 Declared a $0.50 per share cash dividend, date of record July 10. July 31 Declared a 202 stock dividend when the stock's market value was $14 per share. Aug. 14 Issued the stock dividend that was declared on July 31. Oct. 5 Declared a $0.50 per share cash dividend, date of record October 10. 3. What is the amount of retained earnings transferred to paid-in capital accounts (capitalized) for the stock dividend? Capitalization amount

Answer 1

3) Stock dividends refers to declaring dividend by a company to existing shareholders by way of additional shares instead of paying cash. When a firm declares stock dividend, it must utilize balance in retained earnings account that satisfies the value of stock dividend calculated by multiplying number of shares outstanding by percentage of stock dividend by issue price per share. In the given case, Number of shares outstanding when stock dividend was declared Stock dividend percentage Issue price per share (= Market value) Value of stock dividend declared Less: Par value of stock dividend declared Amount of retained earnings transferred to PIC account for stock dividend 35,000 (40,000 - 5,000 --> Reduced by treasury stock] 20% $14 $98,000 (35000 shares x 20% $14] $42,000 (35000 shares x 20% x $6] $56,000 ($98000 - $42000] 4) Cost of treasury stock reported on shareholders' equity section Number of treasury stocks purchased Per share cost of the treasury stock purchased $40,000 5,000 $8.00 [$40000 / 5000 shares] 5) Retained earnings, December 31 Add: Cash dividend declared on Jan. 5 Add: Cash dividend declared on Apr. 5 Add: Cash dividend declared on Jul. 5 Add: Stock dividend declared on Jul. 31 Add: Cash dividend declared on Oct. 5 Less: Retained earnings, January 1 Net income earned for the year $440,000 $20,000 [40000 shares x $0.5] $17,500 (35000 shares x $0.5] $17,500 (35000 shares x $0.5] $98,000 (35000 shares x 20% ~ $14] $21,000 [42000 shares x $0.5] $340,000 $274,000 NOTE: Cash dividend is payable on number of shares outstanding as on date of cash dividends. Accordingly, amount of cash dividend on each date on # of shares outstanding is calculated. When dividends were declared, balance in retained earnings would have decreased and so they are added back to calculate net income for the year.