Question

EXERCISE 12.7 Cash Dividends, Stock Dividends, and Stock Splits HiTech Manufacturing Company has 1.000.000 shares of Si par value capital stock outstand: January 1. The following equity transactions occurred during the current year: Apr. 30 Distributed additional shares of capital stock in a 2-for-1 stock split. Market price arket price of stock was $35 per share. June 1 Declared a cash dividend of 50.60 per share. July Paid the 80.60 cash dividend to stockholders. Aug 1 Declared a 5 percent stock dividend. Market price of stock was S19 per share. Sept. 10 Issued shares resulting from the 5 percent stock dividend declared on August 1. a. Prepare journal entries to record the above transactions b. Compute the number of shares of capital stock outstanding at year-end. c. What is the par value per share of HiTech Manufacturing stock at the end of the year? d. Determine the effect of each of the following on total stockholders' equity: stock split, decla ration and payment of a cash dividend, declaration and distribution of a stock dividend. (Your answers should be either increase, decrease, or no effect.)

Answer 1

a.	Date	Account titles and explanation						Debit	Credit
	Apr 30.	No entry
	June 1.	Cash dividend					(Note:1)	1200000
		Dividend payable							1200000
		(Cash dividend declared)
	July 1.	Dividend payable						1200000
		Cash							1200000
		(Cash dividend paid)
	Aug 1.	Stock dividend				(2000000*5%*19)		1900000
		Common stock dividend distributable				(2000000*5%*0.5)			50000
		Paid in capital in excess of par-Common stock							1850000
		(Stock dividend declared)
	Sept 10.	Common stock dividend distributable						50000
		Common stock							50000
		(Stock dividend issued)
	Note:1
	Dividend is declared on capital stock outstanding
	2 for 1 stock split means 2 shares for 1 share
	Hence,the capital stock outstanding will double and par value will be half.
	Par value=1*0.50=$ 0.50
	Capital stock outstanding=1000000*2=2000000
	Dividend=2000000*0.60=$ 1200000
b.	Shares of capital stock outstanding:
						Shares
	Beginning balance					1000000
	Stock split					1000000
	Stock dividend				(2000000*5%)	100000
	Total					2100000
	Shares of capital stock outstanding=2100000
c.	2 for 1 stock split means 2 shares for 1 share
	Hence,the capital stock outstanding will double and par value will be half.
	Par value=1*0.50=$ 0.50
d.	Event					Effect on total stockholder's equity
	Stock split					No effect
	Declaration and payment of a cash dividend					Decrease
	Declaration and distribution of a stock dividend					No effect