Question

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

Common stock ($1 par value)		$	80,000
Capital surplus			200,000
Retained earnings			660,000
Total owners’ equity		$	940,000

   
a. Assume the company's stock currently sells for $47 per share and a stock dividend of 8 percent is declared.
  
How many new shares will be distributed? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
  
New shares issued            
  
Show the new balance for each equity account. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)
  

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

  
b. Now assume that instead the company declares a stock dividend of 13 percent.

How many new shares will be distributed? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

New shares issued            

Show the new balance for each equity account. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

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

Answer 1

a)

Market price of share= $47

Given stock dividend = 8%

New shares issued = (common stock value/ par value of share) * Dividend

80,000/1 * 8% = 6,400 shares

So number of new shares issued = 6,400 shares

Given Market price of share= $47

Increase in par value = 6,400 * $1 = $6,400

Increase in capital surplus = 6,400* (47-1) = $294,400

Reduction in retained earnings = $6,400+ $294,400= $300,800

Therefore new balance

Common stock $80,000 + $6,400 = $16,400

Capital surplus $200,000 + $294,400 = $494,400

Retained earnings $660,000 – $300,800 = $359,200

Total owners’ equity = $870,000

Common stock	$16,400
Capital surplus	$494,400
Retained earnings	$359,200
Total owners’ equity	$870,000

b)

Now Given stock dividend = 13%

New shares issued = (common stock value/ par value of share) * Dividend

80,000/1 * 13% = 10,400 shares

So number of new shares issued = 10,400 shares

Given Market price of share= $47

Increase in par value = 10,400 * $1 = $10,400

Increase in capital surplus = 10,400* (47-1) = $478,400

Reduction in retained earnings = $10,400+ $478,400= $488,800

Therefore new balance

Common stock $80,000 + $10,400 = $90,400

Capital surplus $200,000 + $478,400 = $678,400

Retained earnings $660,000 – $488,800 = $171,200

Total owners’ equity = $940,000

Common stock	$90,400
Capital surplus	$678,400
Retained earnings	$171,200
Total owners’ equity	$940,000