Question

In: Accounting

ECE Corporation had the following shareholder’s accounts before the declaration of dividend. Ordinary share capital, P5...

ECE Corporation had the following shareholder’s accounts before the declaration of dividend.

Ordinary share capital, P5 par (authorized, 500,000 shares) 1,500,000

Share premium 1,560,000

Retained earnings 1,210,000

Market value of the ordinary share on this date is P40 per share. The company declared and distributed 10% share dividend. How much is the share premium after issuance of bonus shares?

Please answer immediately.

Expert Solution

A stock dividend is a dividend payment to shareholders that is made in shares rather than as cash. The stock dividend has the advantage of rewarding shareholders without reducing the company's cash balance. It increases the share capital of the company but not it's net assets.

When a stock dividend is issued, the total value of equity remains the same from both the investor's perspective and the company's perspective. However, all stock dividends require a journal entry for the company issuing the dividend. This entry transfers the value of the issued stock from the retained earnings account to the paid-in capital account.

The amount transferred between the two accounts depends on whether the dividend is a small stock dividend or a large stock dividend. A stock dividend is considered small if the shares issued are less than 25% of the total value of shares outstanding before the dividend. A journal entry for a small stock dividend transfers the market value of the issued shares from retained earnings to paid-in capital.

In the given questio the share issued is less than 25% that is 10% therefore it is a small stock dividend.

Total number of shares before bonus issue

= $1,500,000/$5

= 300,000 Shares.

Bonus shares to be issued

= 300,000*10%

=30,000 Shares.

Increase in share capital

= 30,000 * $40

=$1,200,000

Amount to be offset from share premium account

= 30,000 * $40

=$1,200,000

The share premium after issuance of bonus shares

= $1,560,000 - $1,200,000

= $360,000.

ekkarill92 answered 2 years ago

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