Question

The stockholders equity accounts of G.K. Chesterton Company have the following balances on December 31, 2014.

Common stock, $10 par, 343,000 shares issued and outstanding $3,430,000

Paid-in capital in excess of common stock 1,299,000

Retained earnings 5,676,000

Shares of G.K. Chesterton Company stock are currently selling on the Midwest Stock Exchange at $39.

Prepare the appropriate journal entries for each of the following cases. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

(a) A stock dividend of 6% is (1) declared and (2) issued.

(b) A stock dividend of 100% is (1) declared and (2) issued.

(c) A 2-for-1 stock split is (1) declared and (2) issued.

Answer 1

Concepts and reason

Journal entry: The Journal entries means to keep the records of the accounting transactions in the order in which they occur. The accounting transactions of a business are recorded through journal entries. After recording of the journal entry the posting is done to different accounts.

The debit and credit rules that are to be followed to record the journal entry are:

Debit the receiver and Credit the giver: This rule is used when transactions relates to the personal account. When there is receipt of something by a person then the receiver is to be debited and when something is given then the giver is to be credited.

Debit all expenses and losses and Credit all incomes and gains: This rule is used when transactions relates to the nominal accounts. There should be debit of expense or loss when a company incurs expense or loss. There should be credit of income or gain when the company earns income or gain.

Debit what comes in and Credit what goes out: This rule is used when transactions relates to the real account. When the thing or asset is received or purchased by the company then it is to be debited. When the thing or asset is sold by the company then it is to be credited.

Fundamentals

Stock dividend:

When stock dividend is declared by a company then the stockholders of the company receive some additional stocks on the basis of the stocks hold by the stockholders in the company. So, in the stock dividend the stockholders of the company receive dividend as stocks and not in cash form.

When the form of dividend declared is stock dividend then there is no decline in the company’s assets and the stockholders’ equity whereas when a company declares cash dividend then it results in the decline in the assets of the company and the stockholders’ equity also decline.

Stock split:

When there is increase in the price of the common stock in such a way that the investors find the stock to be expensive, then in such a situation the company may decide to split the stock.

The number of stocks of the company increase when there is splitting of stock. The objective due to which a company decide to split its stock is the reduction of the stock’s market value so that investors can afford to buy such stocks. There is no change in the balance of accounts due to stock split.

Record the journal entry for the declaration of stock dividend.

Following schedule shows the journal entry for the declaration of stock dividend:

Record the journal entry for the issuance of stock dividend.

Following schedule shows the journal entry for the issuance of stock dividend:

Record the journal entry for the declaration of stock dividend.

Following schedule shows the journal entry for the declaration of stock dividend:

Record the journal entry for the issuance of stock dividend.

Following schedule shows the journal entry for the issuance of stock dividend:

Record the journal entry for the declaration of stock split.

Following schedule shows the journal entry for the declaration of stock split:

Record the journal entry for the issuance of stock split.

Following schedule shows the journal entry for the issuance of stock split:

Ans: Part a.1

Part a.2

Part b.1

Part b.2

Part c.1

Part c.2