Question

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

Common stock ($.50 par value) $ 35,000

Capital surplus 320,000

Retained earnings 708,120

Total owners’ equity $ 1,063,120

a-1 If the company's stock currently sells for $20 per share and a 15 percent stock dividend is declared, how many new shares will be distributed? (Do not round intermediate calculations.)

a-2 Show how the equity accounts would change. (Do not round intermediate calculations.)

b-1 If instead the company declared a 25 percent stock dividend, how many new shares will be distributed? (Do not round intermediate calculations.)

b-2 Show how the equity accounts would change. (Do not round intermediate calculations.)

Answer 1

--> Common stock: 35,000 at 0.5 par value
Therefore, the total number of stocks outstanding is 35,000 * 0.5 = 70,000
--> Capital surplus: 320,000
--> Retained earning: 708,120
--> Total owner's equity: 1,063,120

Effect of a stock dividend on equity = no change in the owner's equity number. The amount is simply reduced from retained earnings and added in paid-in capital and common stock.
The common stock column is added with the amount equal to new stock issues * par value, whereas, the remaining amount would go into the paid-in capital account.

Case a:
Stock price = $20
Stock dividend = 15%
a-1) Number of new shares issues = total shares outstanding * stock dividend percent = 70,000 * 15% = 10,500 shares.
a-2) Equity account treatment =
amount to be deducted from the retained earnings account = number of new shares issues * share price = 10,500 * 20 = $210,000
amount to be added in common stock = number of new shares * par value = 10,500 * 0.5 = $5,250
amount to be added in paid-in capital = amount deducted from retained earnings - amount added in common stock = 210,000 - 5,250 = $204,750

Case b:
Stock price = $20
Stock dividend = 25%
b-1) Number of new shares issues = total shares outstanding * stock dividend percent = 70,000 * 25% = 17,500 shares.
b-2) Equity account treatment =
amount to be deducted from the retained earnings account = number of new shares issues * share price = 17,500 * 20 = $350,000
amount to be added in common stock = number of new shares * par value = 17,500 * 0.5 = $8,750
amount to be added in paid-in capital = amount deducted from retained earnings - amount added in common stock = 350,000 - 8,750 = $341,250