Question

Required information

[The following information applies to the questions displayed below.]

The equity sections from Atticus Group’s 2013 and 2014 year-end balance sheets follow.

  

Stockholders’ Equity (December 31, 2013)
Common stock—$4 par value, 50,000 shares     authorized, 35,000 shares issued and outstanding	$	140,000
Paid-in capital in excess of par value, common stock		100,000
Retained earnings		360,000
Total stockholders’ equity	$	600,000

Stockholders’ Equity (December 31, 2014)
Common stock—$4 par value, 50,000 shares     authorized, 41,000 shares issued, 5,000 shares in treasury	$	164,000
Paid-in capital in excess of par value, common stock		148,000
Retained earnings ($50,000 restricted by treasury stock)		400,000
		712,000
Less cost of treasury stock		(50,000	)
Total stockholders’ equity	$	662,000

The following transactions and events affected its equity during year 2014.

  

Jan.	5	Declared a $0.60 per share cash dividend, date of record January 10.
Mar.	20	Purchased treasury stock for cash.
Apr.	5	Declared a $0.60 per share cash dividend, date of record April 10.
July	5	Declared a $0.60 per share cash dividend, date of record July 10.
July	31	Declared a 20% stock dividend when the stock’s market value is $12 per share.
Aug.	14	Issued the stock dividend that was declared on July 31.
Oct.	5	Declared a $0.60 per share cash dividend, date of record October 10.

5.	How much net income did the company earn during year 2014?

Required information

[The following information applies to the questions displayed below.]

The equity sections from Atticus Group’s 2013 and 2014 year-end balance sheets follow.

  

Stockholders’ Equity (December 31, 2013)
Common stock—$4 par value, 50,000 shares     authorized, 35,000 shares issued and outstanding	$	140,000
Paid-in capital in excess of par value, common stock		100,000
Retained earnings		360,000
Total stockholders’ equity	$	600,000

Stockholders’ Equity (December 31, 2014)
Common stock—$4 par value, 50,000 shares     authorized, 41,000 shares issued, 5,000 shares in treasury	$	164,000
Paid-in capital in excess of par value, common stock		148,000
Retained earnings ($50,000 restricted by treasury stock)		400,000
		712,000
Less cost of treasury stock		(50,000	)
Total stockholders’ equity	$	662,000

The following transactions and events affected its equity during year 2014.

  

Jan.	5	Declared a $0.60 per share cash dividend, date of record January 10.
Mar.	20	Purchased treasury stock for cash.
Apr.	5	Declared a $0.60 per share cash dividend, date of record April 10.
July	5	Declared a $0.60 per share cash dividend, date of record July 10.
July	31	Declared a 20% stock dividend when the stock’s market value is $12 per share.
Aug.	14	Issued the stock dividend that was declared on July 31.
Oct.	5	Declared a $0.60 per share cash dividend, date of record October 10.

3.	What is the amount of the capitalization of retained earnings for the stock dividend?

Answer 1

5.   How much net income did the company earn during year 2014?

As a first step, let's calculate the total cash divided during the year. Please see the table below:

Please note that dividends are not paid on treasury shares. Paying dividend on treasury shares amount to a company paying dividend to itself, which is practically meaningless.

Date	DPS ($)	Nos. of shares	Total Dividend ($)
	D	N	D x N
10th Jan	0.6	35,000	21,000
10th Apr	0.6	30,000	18,000
10th July	0.6	30,000	18,000
5th Oct	0.6	36,000	21,600
Total Cash dividend			78,600

Total stock dividend paid = Share Price x Nos. of shares issued = 12 x 20% x 30,000 = 72,000

Retained earnings₂₀₁₄ = Retained earnings₂₀₁₃ + Net income during 2014 - cash dividends - stock dividends

Hence, 400,000 = 360,000 + Net income during 2014 - 78,600 - 72,000

Hence, net income during 2014 = 400,000 + 78,600 + 72,000 - 360,000 = $ 190,600

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3.   What is the amount of the capitalization of retained earnings for the stock dividend?

the capitalization of retained earnings for the stock dividend =Total stock dividend paid = Share Price x Nos. of shares issued = 12 x 20% x 30,000 = 72,000