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

Answer 1

Here's the table showing computation for stock dividend and appropriate journal entries:

Number of shares before stock dividend Stock dividend % on oustanding shares Number of shares Stock dividend in after stock shares dividend В A+C 450000 Shares authorized 450000 C=A*B NA Same as 24800 shares 24800 Shares Issued Shares oustanding 325000 310000 349800 334800 L 8% Date Dr/Cr Account Title Debit Credit Explanation 24800 shares @ $ 9 per share 223,200.00 01-Feb Dr Cr Retained Earnings Common stock dividend distributable a/c 223,200.00 (To record dividend declared) 16-Feb. No journal entry required. As note will be sent to all shareholders regarding 01-Mar Dr Common stock dividend distributable a/c 223,200.00 24800 shares @ $ Cr Common stock 49,600.00 2 per share 24800 shares @ $ CrAdditional paid in capital - Common stock 173,600.00 7 per share (to record dividend distributed to shareholders)

Here's the table showing stock holder equity balance before and after stock dividend (Only grey shaded column is answer to this question and other columns are provided for easy understanding)

Cherios pay for treasury stock $4 per share (i.e.) $ 60000 divided by 15000 shares (325000 issued shares minus 310000 outstanding shares)

Balance before stock dividend Number of shares Price per share Total 2.00 650,000.00 Common stock Paid in capital excess of par value Retained Earnings 325000 5.00 1,625,000.00 3,000,000.00 Balance after stock dividend Number of shares Price per share Total 2.00 699,600.00 349800 shares @ $2 per share 325000 shares @ $5 per share and stock 349800 1,798,600.00 dividend of 24800 shares @ $7 per share | 2,776,800.00 $ 3000000 minus $ 223200 stock dividend $ 600000/ (325000 shares - 310000 - 15000 4.00 -60,000.00 shares) 334800 5,215,000.00 4.00 Treasury stock Total stockholders equity - 15000 310000 -60,000.00 5,215,000.00

Distribution of stock dividend does not have any impact on asset side of balance sheet. Infact total liabilities will not affect, because it denotes the profit being shared to stockholders in the form of shares and only the number of outstanding shares will change. Common stock and paid in capital value increase and corresponding decrease exists in retained earnings. No other change in total assets and total liabilities.

If Tom Red owned 12,400 shares, after stock dividend Red would own 13,392 shares, which represents same 4% of the new total shares outstanding (since corresponding increase exists in total outstanding shares as well, no change exists per shareholder). Here's the table:

Number of shares Stock dividend % before stock on oustanding dividend shares Number of shares Stock dividend in after stock shares dividend 8% 310000 12400 C=A*B 24800 992 A+C 334800 13392 8% Shares oustanding Tom Red % of shares (Tom Red / Shares outstanding) 4% 4%