Question

During 2018, EFG Company has the following selected transactions occurred in the order given. Please prepare the necessary journal entries to record these transactions for sub-questions 1-8, and answer in short essays or bullet points for sub-question 9. If there is no journal entry necessary, write “no entry needed”.

Questions:

1. On March 1, EFG company issued 2,000 shares of common stock (par value $1 per share) at the initial public offering. The market price was $15. Prepare the necessary journal entry to record the stock issuance. (1 point)

2. On April 1, the company declared the dividend of $1 per share to be paid on April 20, 2018. (1 point)

3. On April 10, 2018, the company records the shareholders who will receive the dividends. (1 point)

4. On April 20, 2018, the company paid the dividend to its shareholders. (1 point)

5. On September 1, 2018, the company issued 50% stock dividend to each share. (2 points)

6. On October 1, 2018, the company announced a stock split of 2-for-1. (1 point)

7. On Nov. 1, 2018, the company repurchased 1000 shares from the market, paying $6000 cash in total. (1 point)

8. On Nov. 15, 2018, the company reissued 500 shares to the market at $8 per share. (1 point)

9. What are the primary differences and similarities between stock split and stock dividends? Name at least three similarities and three differences. (3 points)

Answer 1

Journal Entry

1.

On March 1

Cash a/c $30,000

To Common Stock a/c $2,000

To Paid in capital - Common stock a/c $28,000

(2,000 common stock issued at $15 each)

2.

On April 1

Cash dividend a/c $2,000

To Dividend Payable a/c $2,000

(Dividend at $1 per share declared)

3.

April 10 - No entry

4.

April 20

Dividend payable a/c $2,000

To Cash a/c $2,000

(Declared dividend is distributed)

5.

September 1

Stock Dividend a/c $1,000

To Stock dividend payable a/c $1,000

(50% stock dividend announced. 50% of $2,000)

Stock Dividend Payable a/c $1,000

To Common Stock a/c $1,000

(Stock dividend shares now accounted)

6.

October 1

Stock split of 2 for 1 announced.

Existing stock = $3,000 shares

New shares after split = $6,000 shares

Memo entry needs to be passed.

Memo entry will be without any debit or credit amounts. It will state that the company now has 6,000 shares of $0.5 par value

7.

Nov 1

Treasury shares a/c $6,000

To Cash a/c $6,000

(1,000 shares with par value $0.5 purchased using cash of $6,000)

8.

Nov 15

Cash a/c $4,000

To Treasury stock a/c $3,000

To Paid in capital - Treasury stock a/c $1,000

(500 treasury stocks sold at $8 per share, the resultant gain transferred to Paid in capital Treasury stock account)

9.

Similarities between Stock split and stock dividend

A. Both these are non cash benefits to existing share holders.

B. Both will result in increase of number of shares.

C. Both will give share holder an option for liquidity. I.e., if they want to hold the shares they can. Other wise they can sell the new shares they got and get the cash. The company will not force dividends in to the share holders.

Difference between Stock Dividend and Stock split

A. Stock split is just division of shares, but stock dividend is issuing new shares as dividend.

B. Some amount from reserves is transferred in case of stock dividend. No entry is required for Stock split

C. In stock split there will be no increase in amount of comon equity but in Stock dividend there is increase in common equity amount.