Question

The JEM Company has been in operation for over 40 years and has 20,000 shares of $100 par-value common stock authorized, of which 12,000 shares have been issued. THe market value of the stock throughout 2014 until late Dcember, was $107.50 per share. On Sept. 1. 2014, the board of directors declared a 20% (small) stock dividend, distributable in October. The accounts showed the following balances immediately prior to the declaration of the dividend:

Common Stock = $1,200,000

Additional contributed capital = $90,000

Retained Earnings (includes net income earned through August 31) = $700,000

When distributed in October, the stock dividend included fractional share warramts for 600 shares. On December 15, 90% of the warrants were exercised; the remaining warrants were not exercised until 2015.

Given that the JEM Company reacquired 1,800 shares of its own stock for $106 per share on December 20, 2014, and that the company had no more net income for the period September through December, what is the unappropriated, retained earnings amount and how do you calculate it? Please show steps. Thanks

Answer 1

Authorized Shares = 20000, Issued Share = 12000 and Face Value = $ 100 per share

Paid In Capital (also referred to as common stock in this case) = $ 1200000

Additional Paid-In (Contributed) Capital = $ 90000

Retained Earnings = $ 700000

The company issues a stock dividend of 20% classified as a small stock dividend. Since. the dividend issue is small (and not large) in nature, journal entry recording transfer of value of the newly issued stock (owing to the stock dividend) from retained earnings to paid-in capital should be made at the stock's current market value.

Stock's Current Market Value = $ 107.5 per share and Stock Dividends Issued = 20% of Issued Share

Stock Dividends Value = 0.2 x 12000 x 107.5 = $ 258000

This stock dividend value is transferred from the Retained Earnings head to Common Equity head.

Therefore, Common Equity = 1200000 + 258000 = $ 1458000

Additional Paid-In Capital = $ 90000 and Retained Earnings = 700000 - 258000 = $ 442000

Number of new stock issued under dividend = 0.2 x 12000 = 2400

The stock dividend of 2400 new shares had fractional warrants for 600 further new shares. As 90% of the warrant or 2400 x 0.9 = 2160 warrants have been exercised by 15th Decembe, number of new stocks issued as a result of the warrants exercised = Warrants Exercised x 0.25 = 2160 x 0.25 = 540 new common shares.

These new shares of 540 in numbers are also issued at the existing market price (of $ 107.5) as the actual warrant exercise price is not mentioned. This results in an increment in the common equity's value by an amount equal to the warrant-driven new share issue's market value.

Therefore, Common Equity = $ 1458000 + 540 x 107.5 = $ 1458000 + 58050 = $ 1516050

Additional Contributed Capital = $ 90000 and Retained Earnings = $ 442000

Total Number of Shares Outstanding Now = Initial Number + Stock Dividend + Warrant-driven share issue

= 12000 + 2400 + 540

= 14940

Further, the company repurchases 1800 common stocks at a rate of $ 106 per share. This amount is again appropriated from the retained earnings head.

Stock Repurchase Value = 1800 x 106 = $ 190800 and Number of Remaining Outstanding Shares = 14940 - 1800 = 13140

Therefore, Common Equity = 13140 x 107.5 = $ 1412550, Additional Contributed Capital = $ 90000 and Retained Earnings = 442000 - 190800 = $ 251200

Therefore, Unapproriated Retained Earnings = $ 251200