Question

The owners’ equity accounts for Hexagon International are shown here:

  

Common stock ($.50 par value)	$	42,500
Capital surplus		345,000
Retained earnings		758,120
Total owners’ equity	$	1,145,620

  

a-1.	If the company's stock currently sells for $20 per share and a 15 percent stock dividend is declared, how many new shares will be distributed? (Do not round intermediate calculations.)

  

New shares issued

  

a-2.	Show the new equity account balances after the stock dividend is paid. (Do not round intermediate calculations.)

  

Common stock	$
Capital surplus
Retained earnings
Total owners’ equity	$

b-1.	If the company declared a 25 percent stock dividend, how many new shares will be distributed? (Do not round intermediate calculations.)

New shares issued

b-2.	Show the new equity account balances after the stock dividend is paid. (Do not round intermediate calculations.)

  

Common stock	$
Capital surplus
Retained earnings
Total owners’ equity	$

Answer 1

Before stock dividend:

Number of shares outstanding = Common stock / Par value per share
Number of shares outstanding = $42,500 / $0.50
Number of shares outstanding = 85,000

Answer a.

If 15% stock dividend is declared:

Number of shares issued as dividend = 15% * 85,000
Number of shares issued as dividend = 12,750

After stock dividend:

Number of shares outstanding = 85,000 + 12,750
Number of shares outstanding = 97,750

Price per share = $20.00

Increase in common stock = $0.50 * 12,750
Increase in common stock = $6,375

Increase in capital surplus = ($20.00 - $0.50) * 12,750
Increase in capital surplus = $248,625

Decrease in retained earnings = $20.00 * 12,750
Decrease in retained earnings = $255,000

Answer b.

If 25% stock dividend is declared:

Number of shares issued as dividend = 25% * 85,000
Number of shares issued as dividend = 21,250

After stock dividend:

Number of shares outstanding = 85,000 + 21,250
Number of shares outstanding = 106,250

Price per share = $20.00

Increase in common stock = $0.50 * 21,250
Increase in common stock = $10,625

Increase in capital surplus = ($20.00 - $0.50) * 21,250
Increase in capital surplus = $414,375

Decrease in retained earnings = $20.00 * 21,250
Decrease in retained earnings = $425,000