Question

Dividends and Stock Splits

On January 1, 2017, Frederiksen Inc.'s Stockholders' Equity category appeared as follows:

Preferred stock, $80 par value, 7%, 3,000 shares       issued and outstanding	$240,000
Common stock, $10 par value, 15,000 shares       issued and outstanding	150,000
Additional paid-in capital—Preferred	60,000
Additional paid-in capital—Common	225,000
Total contributed capital	$675,000
Retained earnings	2,100,000
Total stockholders’ equity	$2,775,000

The preferred stock is noncumulative and nonparticipating. During 2017, the following transactions occurred:

On March 1, declared a cash dividend of $16,800 on preferred stock. Paid the dividend on April 1.

On June 1, declared a 5% stock dividend on common stock. The current market price of the common stock was $18. The stock was issued on July 1.

On September 1, declared a cash dividend of $0.50 per share on the common stock; paid the dividend on October 1.

On December 1, issued a 2-for-1 stock split of common stock when the stock was selling for $50 per share.

Required:

1. Explain each transaction’s effect on the stockholders’ equity accounts and the total stockholders’ equity.

Transaction	Effect on total stockholders' equity
On March 1, declared a cash dividend of $16,800 on preferred stock
Paid the dividend on April 1
On June 1, declared a 5% stock dividend on common stock
The stock was issued on July 1
On September 1, declared a cash dividend of $0.50 per share on the common stock
Paid the dividend on October 1
On December 1, issued a 2-for-1 stock split of common stock, when the stock was selling for $50 per share

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Incorrect

2. Develop the Stockholders' Equity category of the December 31, 2017, balance sheet. Assume that the net income for the year was $650,000.

Frederiksen's Inc.
Partial Balance Sheet
December 31, 2017
Stockholders' equity
Preferred stock, $80 par, 7%, 3,000 shares issued and outstanding	$
Common stock, $5 par, 31,500 shares issued and outstanding
Additional paid-in capital-preferred stock
Additional paid-in capital-common stock
Total contributed capital	$
Retained earnings
Total stockholders' equity	$

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Partially correct

3. Which of the following statements is incorrect?
The value of the shares issued in the large stock dividend is added to the Retained Earnings account and deducted from the Capital Stock account.

Answer 1

1

Transaction	Effect on total
	stockholders' equity
On March 1, declared a cash dividend of $16,800 on preferred stock	Retained Earnings and total stockholders’ equity decrease
Paid the dividend on April 1	Total stockholders’ equity remains unchanged.
On June 1, declared a 5% stock dividend on common stock	Both the Common Stock increases and the related APIC increase by 5%. So, Common Stock increases by $7,500 (15,000 × 5% ×$10). Additional Paid-in Capital—Common Stock increases by$6,000 (15,000 × 5% × 8) (as the current market value of a share is$18). Retained Earnings decrease by $13,500. Total stockholders’ equity does not change. Retained earnings have been transferred into share capital.
The stock was issued on July 1	Common Stock Distributable decreases and common stock increases by $7,500
On September 1, declared a cash dividend of $0.50 per share on the common stock	Retained Earnings and total stockholders’ equity decrease by $7,875 [(15,000 + 750) × $0.50].
Paid the dividend on October 1	Total stockholders’ equity does not change.
On December 1, issued a 2-for-1 stock split of common stock, when the stock was selling for $50 per share	The par value of common stock changes from $10 to $5 as the number of shares issued and outstanding doubles from 15,750 to 31,500, but the total par value does not change. The total stockholders’ equity also does not change

2

FREDERIKSEN’S INC.
PARTIAL BALANCE SHEET
31-Dec-08
Stockholders’ Equity
Preferred stock, $80 par, 7%, 3,000 shares issued
and outstanding	240000
Common stock, $5 par, 31,500 shares* issued and
outstanding	157500
Additional paid-in capital—preferred stock	60000
Additional paid-in capital—common stock	231,000
Total Contributed Capital	688500
Retained earnings	2,711,825
Total Stockholders’ Equity	3400325

Working notes for the above answer is as under

W.N-1

Calculation for Common stock, $5 par, 31,500 shares

=15,000 + 750 stock dividend × 2 stock split

= 31,500.

W.N-2

Additional paid-in capital—common stock

=$225,000 + $6,000 stock dividend

= $231,000.

W.M-3

Retained earning balance

=$2,100,000 – $16,800 cash dividend – $13,500 stock dividend – $7,875 cash dividend + $650,000 net income

= $2,711,825.

_____________________________________________________________

3

A stock dividend results in the capitalization of part of the Retained Earnings account. The value of the shares issued in the stock dividend is deducted from the Retained Earnings account and added to the Capital Stock account (and the Additional Paid-in Capital account for small stock dividends).