Question

A company with 100,000 authorized shares of $4 par common stock issued 50,000 shares at $9 per share.  Subsequently, the company declared and issued a 10% stock dividend. The market price of the shares is $20 per share.

53. What is the effect of the dividend on Paid in Capital?   

a. Paid-in Capital decreased

b. Paid-in Capital increased

c. Paid-in Capital remained the same

d. None of the above

54. Refer to the previous question. By what amount did Paid in Capital change, if at all? ( If the account balance or amount did not change, state your answer as "$0")

55. What is the effect of the dividend on the number of shares outstanding?

a. The number decreased

b. The number increased

c. The number remained the same

d. None of the above

56. Refer to the previous question. By what amount did the number of shares change, if at all? (If the account or amount did not change, state your answer as "$0")

57. What is the effect of the dividend on total equity and total assets?

a. Total equity decreased, and total assets decreased

b. Total equity decreased, and total assets increased

c. Total equity increased, and total assets decreased

d. Total equity increased, and total assets increased

e. None of the above

Answer 1

53. Stock dividend increases the paid in capital and decreases the retained earnings.

Therefore, the correct answer is b. Paid-in capital increased.

54. 10% stock dividend would be 5,000 common shares (50,000 shares issued × 10%). Journal entry to record this declaration and issuance of common stock is:

Debit to retained earnings (5,000 shares × $20 market price per share) $100,000

Credit to common stock (5,000 shares × $4 par value per share) $20,000

Credit to Additional paid in capital in excess of par ($100,000 - $20,000) $80,000

Thus, the amount of change in paid in capital, due to distribution of stock dividend is $100,000 (change in common stock of $20,000 + Change in Additional paid in capital in excess of par of $80,000).

55. Effect of dividend increases the number of shares outstanding by 5,000 shares.

Therefore, the correct answer is b. The number increased.

56. 10% stock dividend would be 5,000 common shares (50,000 shares issued × 10%). Thus, the 10% stock dividend increase the number of shares by 5,000.

57. Dividend will effect only the stockholders' equity account. However, as discussed in Question No. 54, it will decrease the retained earnings account by $100,000 and increase the paid in capital account (common stock of $20,000 + Additional paid in capital in excess of par of $80,000) by $100,000. Both retained earnings and paid in capital is the components of stockholders' equity. Decrease of $100,000 on side and increase of $100,000 on another side of the stockholders' equity account, have zero effect on total equity.

Therefore, this transaction does not have any effect on total equity as well total asset.

Correct answer is e. None of the above.