Question

Stock Dividends
The owners' equity accounts for Octagon International are shown here:

Common stock ($1 par value) $ 25,000
Capital surplus 135,000
Retained earnings 487,600
Total owners' equity $647,600

a. If the company's stock currently sells for $39 per share and a 10 percent stock dividend is declared, how many new shares will be distributed? Show how the equity accounts would change.

b. If the company declared a 25 percent stock dividend, how would the accounts change?

Show all the steps and don't round off calculations.

Answer 1

Before stock dividend:

Number of shares outstanding = Common stock / Par value per share
Number of shares outstanding = $25,000 / $1.00
Number of shares outstanding = 25,000

Answer a.

Number of shares issued as dividend = 10% * 25,000
Number of shares issued as dividend = 2,500

Increase in common stock = Number of shares issued as dividend * Par value per share
Increase in common stock = 2,500 * $1.00
Increase in common stock = $2,500

Decrease in retained earnings = Number of shares issued as dividend * Market price per share
Decrease in retained earnings = 2,500 * $39.00
Decrease in retained earnings = $97,500

Increase in capital surplus = Decrease in retained earnings - Increase in common stock
Increase in capital surplus = $97,500 - $2,500
Increase in capital surplus = $95,000

Answer b.

Number of shares issued as dividend = 25% * 25,000
Number of shares issued as dividend = 6,250

Increase in common stock = Number of shares issued as dividend * Par value per share
Increase in common stock = 6,250 * $1.00
Increase in common stock = $6,250

Decrease in retained earnings = Number of shares issued as dividend * Market price per share
Decrease in retained earnings = 6,250 * $39.00
Decrease in retained earnings = $243,750

Increase in capital surplus = Decrease in retained earnings - Increase in common stock
Increase in capital surplus = $243,750 - $6,250
Increase in capital surplus = $237,500