The company with the common equity accounts shown here has declared a stock dividend of 20...

The company with the common equity accounts shown here has declared a stock dividend of 20 percent at a time when the market value of its stock is $30 per share.


Common stock ($1 par value)	$	460,000
Capital surplus		861,000
Retained earnings		3,870,800
Total owners' equity	$	5,191,800

What would be the number of shares outstanding, after the distribution of the stock dividend? (Do not round intermediate calculations.)

New shares outstanding

What would the equity accounts be after the stock dividend? (Do not round intermediate calculations.)


Common stock	$
Capital surplus
Retained earnings
Total owners' equity	$

Expert Solution

Stock Dividend

It is like cash dividend; here stock is paid instead of cash. Stock dividend will result in increase in outstanding shares and decrease in stock price.

In this problem, No: shares outstanding is 460000 @ $30 per share : 13800000

Total Market Value of equity: $13800000

As stock dividend is 20% every shareholder will receive 20% increae in stock and no of outstanding shares rises by 20%.

Total no: shares outstanding after declaration of dividend is 460000 + 460000*20%: 552000

As 92000 new shares are issued, common stock will be increased by this number of shares outstanding which will come to 552000

Common stock includes only the par value i.e market price is $30 per share, as par value is $ 1, the excess $29* 92000: 2668000 is added to capital surplus account. It will come to 861000+2668000: 3529000

Total Owners equity is unaffected as there is no cash transactions i.e no cash comes in or goes out.

Retained earnings will be reduced by 92000*30 =2760000 .It will come to 3870800-2760000: 1110800

Equity Account after stock dividend will be

Common Stcok ($1 par Value)	552000
Capital Surplus	3529000
Retained Earnings	1110800
Owners Equity	$ 5191800

jeff jeffy answered 2 years ago

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