Q33E_1 - Horngren'S Financial And Managerial Accounting

Question

Determining the effect of stock dividends, stock splits, and treasury stock transactions

Many types of transactions may affect stockholders’ equity. Identify the effects of the following transactions on total stockholders’ equity. Each transaction is independent.

a. A 10% stock dividend. Before the dividend, 540,000 shares of \(1 par value common stock were outstanding; market value was \)9 per share at the time of the dividend.

Step-by-Step Solution

Answer

No effect of stock dividend will occur on Total Shareholders’ Equity.

Step 1: Basic Introduction

$\begin{array}{rcl}\mathbf{StockDividend}& \mathbf{=}& \mathbf{NumberofShares}\mathbf{\times }\mathbf{StockDividendRate}\\ & \mathbf{=}& \mathbf{540}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\\ & \mathbf{=}& \mathbf{54}\mathbf{,}\mathbf{000}\\ & & \end{array}$

Stock dividend 54,000 shares (540,000 * 10%)

$\begin{array}{rcl}\mathbf{RetainedEarnings}& \mathbf{=}& \mathbf{StockDividend}\mathbf{\times }\mathbf{MarketValuePerShare}\\ & \mathbf{=}& \mathbf{54}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{9}\\ & \mathbf{=}& \mathbf{\$}\mathbf{486}\mathbf{,}\mathbf{000}\\ & & \end{array}$

$\begin{array}{rcl}\mathbf{CommonStock}& \mathbf{=}& \mathbf{StockDividend}\mathbf{\times }\mathbf{ParValuePerShare}\\ & \mathbf{=}& \mathbf{54}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{1}\\ & \mathbf{=}& \mathbf{\$}\mathbf{54}\mathbf{,}\mathbf{000}\\ & & \end{array}$

$\begin{array}{rcl}\mathbf{PaidinCapitalinExcessofPar}& \mathbf{=}& \mathbf{StockDividend}\mathbf{\times }\left(\mathbf{MarketPricePerShare}\mathbf{-}\mathbf{ParValuePerShare}\right)\\ & \mathbf{=}& \mathbf{54}\mathbf{,}\mathbf{000}\mathbf{\times }\left(\mathbf{\$}\mathbf{9}\mathbf{-}\mathbf{\$}\mathbf{1}\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{432}\mathbf{,}\mathbf{000}\\ & & \end{array}$

Step 2: The effect of stock dividends, stock splits, and treasury stock transactions

Stock dividend will make no difference in the total amount of shareholders’ equity. The retained earnings will be reduced; common stock and paid-in capital in excess of par- common stock will be increased with the same amount.