Question

On December 31, 2002, the equity section of spitz Company revealed the following data

Common Stock authorized    30000 shares

issued and outstanding 9000 shares $90000

APIC-Common    $116000

Treasury Stock 2000 Shares    $10000

Total Equity    $750000

On March 30, 2003 Spitz declared a 40% stock dividend when the FMV of the stock was $29 per share. For the 3 months ended March 31, 2003. Spitz sustained a net loss of 32000. The balance of Spitz retained earning as of March 31, 2003 should be

A. 554000

B. 449600

C.486000

D. 518000

E. None of the above

Answer 1

For large stock dividends (Usually more than 20 - 25%) the value assigned to dividend is par value. Hence, when 40% stock dividend will be issued on march 30, 2003, par value of shares issued will be debited to retained earnings.

Stock dividend = 40%

Number of shares to be issued in stock dividend = 9,000 x 40%

= 3,600

Par value of 1 common share = $10

Hence, amount to be debited to retained earnings = 3,600 x 10

= $36,000

Retained earning, beginning = Total equity - Par value of common shares issued - APIC, common + Treasury stock

= 75,000 - 90,000 - 116,000 + 10,000

= $554,000

Statement of retained earnings

Retained earnings, beginning	554,000
Stock dividend	-36,000
Net loss	-32,000
Retained earnings March 31, 2003	$486,000

Retained earning as of March 31, 2003 = $486,000

Correct option is (C)