Question

Question 4 (20 marks)

Multigrain Health Foods Inc. is authorized to issue 5,000,000 common shares. In its initial public offering during 2010, it issued 350,000 common shares for $6.00 per share. Over the next year Multigrain’ share price increased, and the company issued 300,000 additional shares at an average price of $8.

During the next seven years, from 2010 to 2016, It earned a net income of $920,000 and declared and paid cash dividends of $90,000. A 10% stock dividend was distributed to the shareholders in 2016 on the shares outstanding. The market price was $12 per share when the stock dividend was distributed. At December 31, 2016, the company has total assets of $11,350,000 and total liabilities of $6,020,000.

Required:

Show the computation of the total shareholder’s equity at December 31, 2016. Present a detailed computation of each element of shareholder’s equity. (you are required to provide the breakdown of C/S and S/E).

Answer 1

Statement of Shareholder's Equity Common stock, $1Par Paid in capital in Retained excess of par Earnings Total Shareholders Equity 650000 3850000 Particulars Opening Balance Issued Shares for cash Net Income Cash dividends Stock Dividends Closing Balance 920000 (90000) (780000) 50000 4500000 920000 (90000) 0 5330000 65000 715000 715000 4565000 Note - It is assumed that the par value of share is $1

Working Note -1 Shares Issued for Cash - Particulars Price at which shares were Face Value @ Paid in capital in issued $1/Share (In $) excess of par (In $) No. of shares Issued Year 2010 2011 350000 300000 $6/Share $8/Share 350000 300000 1750000 2100000 Total on December 2016 650000 650000 3850000

Working Note -2 Calculation of Retained Earnings - Net Income during 7 years Less - Dividend Paid Less - Stock Dividend Paid $920,000 ($90,000) ($780,000) =(35000+30000)*12 $50,000

Working Note -3 Stock Dividend Payment- No. of outsatnding shares as on 2016 = 300000+350000 = 650000 Stock Dividend to be distributed @10% = (300000+350000)*10% = 65000 Note - At the time of distribution of stock dividend the market price of the shares were $12/Share Stock dividends are recorded by moving amounts from retained earnings to paid-in capital. A small stock dividend i.e less than 25% is accounted for at market price. While a large stock dividend i.e which is more than 25%, is accounted for at par value. Because in the given case stock dividend is small stock dividend. Hence we will account for it at market price by debiting retained earnings. I.e. Retained Earnings Dr. To Common Stock To Additional Paid -in-capital 780000 (65000*12) 65000 (65000*1) 715000