Question

The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $4 per share.

Common stock (60,000 shares at $2 par)	$	120,000
Capital in excess of par		120,000
Retained earnings		220,000
Total equity	$	460,000

The firm intends to first declare a 10 percent stock dividend and then pay a 20-cent cash dividend (which also causes a reduction of retained earnings).

Show the capital section of the balance sheet after the first transaction and then after the second transaction. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
  

Answer 1

First transaction

The company declares stock dividend, i.e., it will distribute shares (bonus shares) as dividends.

Share to be distributed = 10% x 60000 = 6000

Common stock (66000 shares at $2 par)	$132,000
Capital in excess of par [$120,000 + 6000 x ($4 - $2)]	$132,000
Retained earnings ($220000 - 6000 x $4)	$196,000
Total equity	$460,000

Second transaction

This time company distributes a 20% cash dividend which reduces cash and retained earnings.

Common stock (66000 shares at $2 par)	$132,000
Capital in excess of par	$132,000
Retaines earnings [ $196000 - ($0.20 x 66000) ]	$182,800
Total equity	$446,800