Question

Entries for Stock Dividends

Advanced Life Co. is an HMO for businesses in the Albuquerque area. The following account balances appear on the balance sheet of Advanced Life Co.: Common stock (440,000 shares authorized; 6,000 shares issued), $125 par, $750,000; Paid-in capital in excess of par— common stock, $150,000; and Retained earnings, $6,750,000. The board of directors declared a 2% stock dividend when the market price of the stock was $151 a share. Advanced Life Co. reported no income or loss for the current year.

a1. Journalize the entry to record the declaration of the dividend, capitalizing an amount equal to market value. If an amount box does not require an entry, leave it blank.

a2. Journalize the entry to record the issuance of the stock certificates. If an amount box does not require an entry, leave it blank.

b. Determine the following amounts before the stock dividend was declared: (1) total paid-in capital, (2) total retained earnings, and (3) total stockholders' equity.

Total paid-in capital
Total retained earnings
Total stockholders' equity

c. Determine the following amounts after the stock dividend was declared and closing entries were recorded at the end of the year: (1) total paid-in capital, (2) total retained earnings, and (3) total stockholders' equity.

Total paid-in capital
Total retained earnings
Total stockholders' equity

Answer 1

Answer:

a1.

General Journal	Debit	Credit
Stock Dividends	18,120
Stock Dividends distributable		15,000
Paid-in Capital in Excess of Par - Common Stock		3,120
To record the declaration of the dividend

a2.

General Journal	Debit	Credit
Stock Dividends distributable	15,000
Common Stock		15,000
To record the issuance of the stock certificates

b.

Total paid-in capital	900,000
Total retained earnings	6,750,000
Total stockholders' equity	7,650,000

c.

Total paid-in capital	918,120
Total retained earnings	6,731,880
Total stockholders' equity	7,650,000

Calculation:

a.

Entry #a1:

Here we need to prepare the entry to record the declaration of the dividend, capitalizing an amount equal to market value.

For that we need to debit the Stock Dividends. We need to multiply the Common stock shares issued with the stock dividend % and then multiply it with the Market Price.

Stock Dividends =  Common stock shares issued x Stock dividend % x Market Price = 6000 x 2% x 151 = 18,120

Then we need to credit theStock Dividends distributable. We need to multiply the Common stock shares issued with the stock dividend % and then multiply it with the Par value.

Stock Dividends distributable = 6000 x 2% x 125 = 15,000

Then we need to credit the Paid-in Capital in Excess of Par - Common Stock.

Paid-in Capital in Excess of Par - Common Stock = 18,120 - 15,000 = 3,120

Entry #a2:

Here we need to prepare the entry to record the issuance of the stock certificates.

So we need to debit the Stock Dividends distributable, with 15,000 and credit the Common Stock as it goes out of the firm.

b.

Here we need to calculate the amounts before the stock dividend was declared: (1) total paid-in capital, (2) total retained earnings, and (3) total stockholders’ equity.

(1) total paid-in capital

To calculate the total paid-in capital, we need to take the total Common stock and then add it with the  Paid-in capital in excess of par.

Total paid-in capital =  Total Common stock +  Paid-in capital in excess of par = 750,000 + 150,000 = 900,000

(2) total retained earnings

The total retained earnings, before the declaring the stock dividend is provided in the question. It is 6,750,000

(3) total stockholders’ equity.

To calculate the total stockholders’ equity, we need to add the Total paid-in capital and retained earnings.

Total stockholders’ equity = Total paid-in capital + Retained earnings  =  900,000 + 6,750,000 = 7,650,000

c.

Here we need to calculate the amounts after the stock dividend was declared: (1) total paid-in capital, (2) total retained earnings, and (3) total stockholders’ equity.

(1) total paid-in capital

To calculate the total paid-in capital, we need to take the total Common stock and then add it with the  Paid-in capital in excess of par. Then we need to add the Stock Dividends distributable and Paid-in Capital in Excess of Par - Common Stock calculated in Journal entry #a1.

Total paid-in capital =  Total Common stock +  Paid-in capital in excess of par + Stock Dividends distributable + Paid-in Capital in Excess of Par - Common Stock = 750,000 + 150,000 + 15,000 + 3,120 = 918,120

(2) total retained earnings

The total retained earnings, after the declaring the stock dividend, we need to add the Stock Dividends to the Retained earnings is provided in the question.

Total retained earnings = 6,750,000 + 18,120 = 6,731,880

(3) total stockholders’ equity.

To calculate the total stockholders’ equity, we need to add the Total paid-in capital and retained earnings.

Total stockholders’ equity = Total paid-in capital + Retained earnings  =  918,120 + 6,731,880 = 7,650,000