68. Val's Marina Supply has 3,500 shares of stock outstanding with a par value of $1.00...

68. Val's Marina Supply has 3,500 shares of stock outstanding with a par value of $1.00 per share and a market value of $19 per share. The balance sheet shows $3,500 in the common stock account, $24,000 in the capital in excess of par account, and $31,400 in the retained earnings account. The firm just announced a 100 percent stock dividend. What is the value of the capital in excess of par account after the dividend? A. $0 B. $20,500 C. $24,000 D. $55,500 E. $87,000 The capital in excess of par account will remain at $24,000 as it does not change with a large stock dividend.

why capital in excess of par account does not change with a large stock dividend????

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Expert Solution

The announcement of a stock dividend that amounts to 100% of the shares outstanding is an example of a large stock dividend. In case of large stock dividends, the newly issued shares under the dividend are valued at the par value. In this case, a 100% stock dividend would imply issuance of 3500 new shares at $1 per share. The $ 3500 worth of extra value generated is deducted from the firm's retained earnings and credited to the par value account. The capital in excess of par account is left untouched primarily because the dividend payout is a large stock dividend. In case of a small stock dividend (which issues extra shares to the tune of 20-25% of total shares outstanding) the newly issued shares are valued at the stock's fair value (would be equal to the stock's market value of $ 19 in this case). The par value portion of this new issuance proceeds will be credited to the common stock and the remaining to the capital in excess of par account. The entire new issuance proceeds will be deducted from the firm's retained earnings account.

Large Stock Dividend Scenario: Issue of 3500 new shares at par value of $ 1 per share

	Pre-Dividend	Post-Dividend
Common Stock	$ 3500	$ 7000
Capital in Excess of Par	$ 24000	$ 24000
Retained Earnings	$ 31400	$ 27900
Stockholder's Equity (Total)	$ 58900	$ 58900

jeff jeffy answered 1 year ago

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