Question

Sanchez Company issued 700,000 shares of common stock, $1 par, for $9 cash per share on December 31, 20X5. Prepare the journal entry.

Sanchez Company declared and paid a cash dividend of $.60 per share on December 31, 20X6. Prepare the journal entry. Assume only the 700,000 shares from requirement 1 are outstanding.

Sanchez Company had retained earnings of $7 million by December 31, 20X9. The market value of the common shares was $30 each. A common stock dividend of 2% was declared, and shares were issued on December 31, 20X9. Prior to the stock dividend 700,000 shares were outstanding. Prepare the journal entry. Also present a tabulation that compares the stockholders’ equity section before and after the declaration and issuance of the stock dividend. Also include at the bottom of the tabulation the effects on the overall market value of the stock, the total shares outstanding, and the number of shares and percentage of ownership of an individual owner who originally bought 10,000 shares.

What journal entries would be made by the investor who bought 10,000 original-issue shares of Sanchez Company common stock and held this investment throughout the time covered in requirements 1, 2, and 3?

Refer to requirement 4. Suppose the investor sold 2,000 shares for $33 each the day after receiving the stock dividend. Prepare the investor’s journal entry for the sale of the shares.

Answer 1

31-Dec-15	Cash (700000*$9)	6300000
	Additional paid-in capital-Common stock		5600000
	Common stock, $1 par		700000
	(To record issue of common stock shares)
31-Dec-16	Cash Dividends (700000*$0.6)	420000
	Dividends payable		420000
	(To record declaration of dividends)
	Dividends payable	420000
	Cash		420000
	(To record payment of dividends)
	Retained earnings	420000
	Cash Dividends		420000
	(To close dividends account)
31-Dec-19	Retained earnings
	Stock dividend distributable (700000*2%*30)	420000
	(To record the decision to give stock dividends)
	Stock dividend distributable	420000
	Additional paid-in capital-Common stock (14000*29)		406000
	Common stock, $1 par (700000*2%*1)		14000
	(To record issue of shares against stock dividend)
	Equity section before stock dividend:
	Common stock, $1 par, 700000 shares issued and outstanding	700000
	Additional paid-in capital-Common stock	5600000
	Retained earnings	7000000
	Total equity before the stock dividend	13300000
	Equity section after stock dividend:
	Common stock, $1 par, 714000 shares issued and outstanding	714000
	Additional paid-in capital-Common stock	6006000
	Retained earnings	6580000
	Total equity before the stock dividend	13300000
	INDIVIDUAL OWNER:
		Before stock dividend	After stock dividend
	Total number of shares outstanding	700000	714000
	Overall market value (700000*$30)	$ 21,000,000	$   21,000,000
	Market price per share	$30.00	$              29.41
	Number of shares with the individual	10000	10200
	% of ownership (# shares held/Total # shares outstanding)	1.43%	1.43%
	The total market value of shares held by the individual	$300,000	$300,000
	JOURNAL ENTRY FOR THE INDIVIDUAL STOCKHOLDER:
31-Dec-15	Equity investments (10000*$9)	90000
	Cash		90000
	(To record purchase of shares)
31-Dec-16	Cash (10000*$0.60)	6000
	Dividend income		6000
	(To record receipt of dividend)
31-Dec-19	No entry need to record stock dividends. The only number of shares increases.
1-Jan-20	Cash (2000*$33)	66000
	Equity investments (2000*9)		18000
	Gain on sale of investments		48000
	(To record sale of shares)