Question

The following information is available for Ellis Corporation: Common Stock ($5 par) $1,000,000 Retained Earnings 400,000 A 10% stock dividend is declared and paid when the market value was $15 per share.

Instructions Compute each of the following after the stock dividend. (a) Total stockholders' equity. (b) Number of shares outstanding. (c) Book value per share.

Answer 1

Retained earnings balance = $400,000

$5 par value shares of common stock outstanding = 1,000,000/5

= 200,000

Current market value of 1 common stock = $15

Stock dividend declared = 10%

Hence, number of shares to be issued = 200,000 x 10%

= 20,000

Number of shares outstanding after stock dividend = 200,000 + 20,000

= 220,000

Hence, amount to be debited to retained earnings = 20,000 x 15

= $300,000

Amount to be credited to common stock = Number of shares to be issued x Par value per share

= 20,000 x 5

= $100,000

Amount to be credited to Paid in capital, in excess of par - common stock = Number of shares to be issued x (market value of 1 common stock - Par value per share)

= 20,000 x (15 - 5)

= $200,000

Due to stock dividend, composition of stockholders’ equity changes since a portion of retained earnings is transferred to paid in capital. Total stockholders’ equity does not change. Par or stated value per share remains the same. Number of outstanding shares increases but book value per share decreases.

	Before dividend	After dividend
Stockholders’ equity
Paid in capital:
Common stock, $10 par value	1,000,000	1,100,000
Paid in capital in excess of par value	0	200,000
Total paid in capital	1,000,000	1,300,000
Retained earnings	400,000	100,000
Total stockholders’ equity (i)	1,400,000	1,400,000
Number of outstanding shares (ii)	200,000	220,000
Book value per share (i)/(ii)	$7	$6.36

(a) Total stockholders' equity = $1,400,000

(b) Number of shares outstanding = 220,000

(c) Book value per share = $6.36