Question

Stock dividend Firm

   Columbia Paper has the following​ stockholders' equity account. The​ firm's common stock has a current market price of

​$35per share.

      

Preferred stock	​$110,000
Common stock ​(12000shares at​ $33 ​par)	36,000
​Paid-in capital in excess of par	384,000
Retained earnings	80,000
Total​ stockholders' equity	$610,000

a.  Show the effects on Columbia of a15​%stock dividend.

b.  In light of your answers to part a​,

discuss the effects of stock dividend on​ stockholders' equity.

Answer 1

Answer a.

Number of shares issued as dividend = 15% * 12,000
Number of shares issued as dividend = 1,800

Increase in common stock = Number of shares issued as dividend * Par value per share
Increase in common stock = 1,800 * $3.00
Increase in common stock = $5,400

Decrease in retained earnings = Number of shares issued as dividend * Market price per share
Decrease in retained earnings = 1,800 * $35.00
Decrease in retained earnings = $63,000

Increase in paid-in capital in excess of par = Decrease in retained earnings - Increase in common stock
Increase in paid-in capital in excess of par = $63,000 - $5,400
Increase in paid-in capital in excess of par = $57,600

Answer b.

A stock dividend redistributes retained earnings into common stock and paid-in capital accounts.