Question

3. a) Big Auto Part Inc. is authorized to issue 5,000,000 common shares. In its initial public offering during 2015, Big Parts issued 500,000 common shares for $7.00 per share. Over the next year, Big Auto Part's share price increased and the company issued 400,000 more shares at an average price of $8.50 During the five years from 2015 through 2019, Big Auto Part earned net income of $920,000 and declared and paid cash dividends of $140,000. A 10% stock dividend was distributed to the shareholders in 2015 on the shares outstanding. The market price was $8.00 per share when the stock dividend was distributed. At December 31, 2019, the company has total assets of $14,500,000 and total liabilities of $6.820.000. Requirement: Show the computation of Big Auto Part's total shareholders' equity at December 31, 2019. Present a detailed computation of each element of shareholders' equity.

Answer 1

Computation of number of shares, stock dividend, value of stock dividend

            Number of shares                   = 500000+400000 = 900000

            Stock dividend                        = 10%*900000 = 90000 shares

            Value of stock dividend         = 90000*8 = 72000

Computation of big auto part’s total shareholder’s equity December 31, 2019

Particulars	amount
Common stock capital
500000 shares at $7 each	3500000
400000 share at $8.5 each	3400000
Add: stock dividend 90000 shares at $8 each	720000
A =	7620000
big auto part inc retained earnings
Net income	920000
Less: cash dividend	140000
	780000
Less: stock dividend (90000 shares@ $8 each)	720000
B =	60000

            Big auto part’s total shareholder’s equity December 31, 2019 = (A+B)

                        = 7620000+60000 = 7680000