Question

Painting Schools Ltd had issued 77000 ordinary shares at $3 per share. When the retained earnings balance was $160000 and the market price of the shares was $5, Painting Schools distributed a dividend of $7700 to be satisfied by the issue of new shares valued at $5 per share. Later, Painting Schools declared and paid a 25 cents per share cash dividend.

1. Journalise both the declaration and payment of the share dividend.

2. Journalise both the declaration and payment of the cash dividend.

Answer 1

Solution.

Date	Account Title and Explanation	Debit	Credit
1. (a)	Retained Earnings	$7,700
	Common Stock Dividend Distributable (1,540 x $3)		$4,640
	Additional Paid in Capital-Common Stock (1,540 x $2		$3,080
	To record declaration of 1,540 stock dividend ($7,700/5)
1. (b)	Common Stock Dividend Distributable	$4,640
	Common Stock		$4,640
	To recod payment or issue of stock dividend (1,540 x $ 3)
2. (a)	Retained Earnings (78,540 x $ 0.25)	$19,635
	Dividend Payble		$19,635
	To record declaration of cash dividend on total O/S stock
2. (b)	Dividend Payble	$19,635
	Cash		$19,635
	To record payment of cash dividend on 78,540 outstanding
	stocks including 1,540 common stock issued as dividend

Note: Stock dividend is issued for $7,700 when Market Price is $5. This means that number of share issued are 1,540 ($7,700/$5). The existing number of share are 77,000 and stock dividend issued is 1,540 share. So, the company has issue 2% (1,540/77,000 x 100) stock dividend.The par value of common stock is $3, and Market value is $5. So, the stock dividend is issue at premium of $2 per common stock.

Later means after issue of stock dividend. After issue of stock dividend, the total number of share outstanding will be 78,540 (77,000+1,540).Therefore, cash dividend is issued on these share at 25 cent a dollar.