On December 31, 2015, the shareholders’ equity section of the statement of finan
ID: 2453029 • Letter: O
Question
On December 31, 2015, the shareholders’ equity section of the statement of financial position of R & B Corporation reflected the following:
On February 1, 2016, the board of directors declared a 10 percent stock dividend to be issued April 30, 2016. The market value per share was $18 on the declaration date.
For comparative purposes, prepare the shareholders’ equity section of the statement of financial position (a) before the stock dividend and (b) after the stock dividend.
2. Determine the effects of this stock dividend on the company’s assets, liabilities, and shareholders’ equity. (Indicate the direction of the effect by selecting increase, decrease, or "No change" for no effect from the dropdown menu.)
On December 31, 2015, the shareholders’ equity section of the statement of financial position of R & B Corporation reflected the following:
Explanation / Answer
As per the information R & B has 30000 shares of common stock outstanding when it declares a 10% stock dividend. This means that 3000 (30000 shares times 10%) new shares of stock will be issued to existing stockholders. Assuming the stock has value accoding to financial statements is $ 12 per share(360000/30000) and a market value of $18 per share on the declaration date, the following entry is made on the declaration date:
Retained Earning a/c(3000* $18) dr 54000
Common Stock dividend distributable (3000*$12) 36000
Paid in capital in excess of value mentioned in financial statements(3000*(18-12)) 18000
when distributed to stockholder
Common Stock dividend distributable (3000*$12) dr 36000
Common Stock 36000
Before Stock Dividend
Common shares (no par value, authorized 60,000 shares,
After Stock Dividend
Common shares (no par value, authorized 60,000 shares,
Paid-in capital in excess of par $18000 Contributed Surplus
When there is a stock dividend, the related accounting is to transfer from retained earnings to the capital stock and additional paid-in capital accounts an amount equal to the fair value of the additional shares issued. The fair value of the additional shares issued is based on their market value after the dividend is declared.A stock dividend does not increase the wealth of the recipient nor does it reduce the net assets of the firm. It is a permanent capitalization of retained earnings to contributed capital. So there is NO EFFECT/CHANGE
Before Stock Dividend
Common shares (no par value, authorized 60,000 shares,
outstanding 30,000 shares) $ 360,000 Contributed surplus 12,000 Retained earnings 175,000 Accumulated other comprehensive income 28,000Related Questions
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