Question

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

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Answer 1

1. Complete the table to reflect the correct number of shares in the company after the stock dividend is distributed.
	Number of Shares
Shares Autthorised	4,50,000
Shares issued	349800
Shares outstanding	334800

2. Complete the necessary journal entries in order to account for the declaration and distribution of stock dividend.
Date	Name of the Account	Debit	Credit
Feb-01	Retained Earnings A/c (310,000 * 8% * $9)	223200
	To Common Stock Dividend Distributable		49600
	(310,000 * 8% * $2)
	To Paid up Capital in excess of par		173600
	(310,000 *8% * $7)
	(For stock dividend declared)
Mar-01	Common Stock Dividend Distributable	49600
	To Common Stock		173600
	(For dividend distributed)

3.

Particulars	Balance before the stock dividend	Balance after the stock dividend
Common Stock	$620,000 (310,000 * $2)	$669,600 (334,800*$2)
Paid-in Capital in excess of par common StocK	$1,550,000 (310,000 * $5)	$1,723,600 ($1,550,000+$173,600)
Retained Earnings	$3,000,000	$2,776,800
Treasury Stock	($60,000)	($60,000)
Total Stockholders' Equity	$5,110,000	$5,110,000

4	How Much per share did Cheerios Inc., pay for the Treasury Stock?
	Treasury stock is not entitled to dividend payments. Since only shares owned by the issuing company itself are considered treasury stock.
	Therefore the answer is the company would not pay for the treasury Stock.

5	What effect does a stock dividend have on the compnay's total assets? Defend your answer.
	A stock dividend does not involve cash. Rather, it is the distribution of more shares of the corporation's stock. since the corporation is the same before and after the stock dividend, the total market value of the corporation remains the same. The total amount of stockholders' equity remains the same. Therefore there will no effect on the Company's total assets.

6	Red Owned 12,400 Shares of Cheerios Inc., or 4% of the total shares outstanding. After the stock dividend, Red would own ....Shares and it represents... Percent of the new total shares outstanding
		Before Stock Dividend	After Stock Dividend
	Number of shares	12400 Shares	13392 Shares (12,400 + 12,400*8%)
	Percentage of holding (Percentage will remain same before and after stock dividend)	4%	4%
		(12,400/310000 * 100)	(13,392/334800 * 100)