Question

The owners’ equity accounts for Overby International are shown here:
  

Common stock ($1 par value) $ 40,000
Capital surplus 188,000
Retained earnings 620,000
Total owners’ equity $ 848,000

   
a. Assume the company's stock currently sells for $43 per share and a stock dividend of 15 percent is declared.
  
How many new shares will be distributed? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
  
New shares issued            
  
Show the new balance for each equity account. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)
  

Common stock $
Capital surplus
Retained earnings
Total owners’ equity $

  
b. Now assume that instead the company declares a stock dividend of 20 percent.

How many new shares will be distributed? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

New shares issued            

Show the new balance for each equity account. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

Common stock $
Capital surplus
Retained earnings
Total owners’ equity $

Answer 1

a) Current No. of shares = Common stock / Par value = $40,000 / $1 = 40,000 shares

No. of shares to be distributed = No. of shares x Stock dividend = 40,000 x 15% = 6,000

b) The common stock account will increase by the par value of new shares and difference between the market price and par value, i.e., premium on shares will be added to the capital surplus account. Finally, retained earnings will be reduced by the market value of shares. Effectively, their is no change in Total owners' equity.

Common Stock (46,000 shares @ $1 par value)	$46,000
Capital Surplus [ 188,000 + 6,000 x ($43 - $1) ]	$440,000
Retained Earnings [ $620,000 - (6,000 x $43) ]	$362,000
Total Owners' Equity	$848,000

c) New shares issued = 40,000 x 20% = 8,000

Common Stock (48,000 shares @ $1 par value)	$48,000
Capital Surplus [ 188,000 + 8,000 x ($43 - $1) ]	$524,000
Retained Earnings [ $620,000 - (8,000 x $43) ]	$276,000
Total Owners' Equity	$848,000