Question

On July 1, Davidson Corporation had the following capital structure Common stock ($3 par value) Additional paid-in capital Retained earnings Treasury stock S 660,000 1,040,000 850,000 Required Complete the table below for each of the two following independent cases: (Round "Par value per share" answers to 2 decimal places.) Case 1: The board of directors declared and issued a 40 percent stock dividend when the stock was selling at $5 per share Case 2: The board of directors announced a 6-for-5 stock split (i.e., a 20 percent increase in the number of shares). The market price prior to the split was $5 per share Before Dividend and Split After Stock Dividend After Stock Split Items Common stock account Par value per share Shares outstanding Additional paid-in capital Retained earnings Total stockholders' equity 3.00 $1,040,000 850,000

Answer 1

Items	Before Dividend and Split	After Stock dividend [Refer working note 2]	After Stock Split
a. Common stock account	$612,000	$856,800	$612,000
		[$612,000 + $244,800*]
b. Par value per share	$3	$3	$1.5
			[Refer working note 3]
c. Shares outstanding        (a / b)	204000	285600	408000
d. Additional Paid in capital	$1,040,000	$1,203,200	$1,040,000
		[$1,040,000 + $163,200**]
e. Retained earnings	$850,000	$442,000	$850,000
		[$850,000 - $408,000***]
Total stockholders equity   [a + d + e]	$2,502,000	$2,502,000	$2,502,000

.

.

.

Working note 1 - Computation of the number of shares outstanding before dividend and split
a. Total par value of the common stock	$612,000
b. Par value per share	$3
c. Number of shares outstanding                        (a / b)	204000

.

.

Working note 2 - Computation of amount of increase in par value of common stock and additional paid-in capital due to stock divided
a. Number of shares outstanding                                        [refer working note 1]	204000
b. Percentage of the stock dividend	40%
c. Stock dividend        (In number of shares)            (a x b)	81600
d. Selling price per share / Market price per share	$5
f. Stock dividend***           (In value)                               (c x d)	$408,000
g. Par value per share	$3
h. Increase in common stock due to the stock dividend* (c x g)	$244,800
i. Increase in additional paid-in capital due to stock divided**      [c x ($5 - $3)]	$163,200

.

.