Question

P15-8B (L07,8) (Dividends and Splits) Wellington Company provides you with the following condensed balance sheet information.

Assets                                                                                                                  Liabilities and Stockholders’ Equity

Current assets                              $ 78,000                                                         Current and long-term liabilities                                    $120,000

Equity investments (Liquid Co                                                          Stockholders’ equity

Stock;40,000 shares at cost)          124,000                                                        Common stock ($1 par)              $ 41,000

Equipment (net)                             189,000                                                        Paid-in capital in excess of par 189,000

Intangibles                                         90,000                                                        Retained earnings                        131,000      361,000

Total assets                $481,000                                                        Total liabilities and

stockholders’ equity                     $481,000

Instructions

For each transaction below, indicate the dollar impact (if any) on the following five items: (1) total assets, (2) common stock, (3) paid-in capital in excess of par, (4) retained earnings, and (5) stockholders’ equity. (Each situation is independent.)

(a) Wellington declares and pays a $0.25 per share cash dividend.

(b) Wellington declares and issues a 15% stock dividend when the market price of the stock is $8 per share.

(c) Wellington declares and issues a 40% stock dividend when the market price of the stock is $7 per share.

(d) Wellington declares and distributes a property dividend. Wellington gives one share of Liquid Co. stock for every four shares of Wellington Company stock held. Liquid Co. is selling for $3.50 per share on the date the property dividend is declared.

(e) Wellington declares a 1-for-2 reverse stock split and issues new shares.

Answer 1

Impact On	Total assets	Common stock	Paid-in capital in excess of par	Retained earnings	Total stockholders’ equity
(a) Wellington declares and pays a $0.25 per share cash dividend.	Decrease $10,250 [($41,000 / $1 X $.25]	No Effect	No Effect	Decrease 10,250	Decrease 10,250
(b) Wellington declares and issues a 15% stock dividend when the market price of the stock is $8 per share.	No Effect	Increase $6150 [41,000 shares x 15% x $1)	Increase $43,050 [41,000 shares x 15% x ($8 -$1)	Decrease 49200 [41,000 x 15% x $8)	No Effect
(c) Wellington declares and issues a 40% stock dividend when the market price of the stock is $7 per share.	No Effect	Increase $16,400 [41,000 shares x 40% x $1)	No Effect	Decrease 16,400	No Effect	Large stock dividend =  Greater than 20-25% of the outstanding stock is issued at par value
(d) Wellington declares and distributes a property dividend. Wellington gives one share of Liquid Co. stock for every four shares of Wellington Company stock held. Liquid Co. is selling for $3.50 per share on the date the property dividend is declared.	Decrease $31,000 [$4,000 gain less $35,000 dividend]	No Effect	No Effect	Decrease $31,000 [$4,000 gain less $35,000 dividend]	Decrease $31,000
(e) Wellington declares a 1-for-2 reverse stock split and issues new shares.	No Effect	No Effect	No Effect	No Effect	No Effect
working notes (d)
journal entries	Debit	Credit
Investments in Liquid Stock ($3.50 – $124000/40000) X 40000/4.	4000					3.1
Gain on Appreciation of Securities		4000
(To record increase in value of securities to be issued)
Retained Earnings ($3.50 X 40,000/4)	35000
Investments in Liquid stock		35000
(To record distribution of property dividend)