Stock Dividend Augusta Corporation reported the following information: 35,000 sh

Question

Stock Dividend

Augusta Corporation reported the following information: 35,000 shares of $3 par value common stock authorized, 30,000 shares common stock issued, 10,000 shares treasury stock.

Required:

1. What is the appropriate journal entry to record a 5% stock dividend if the market price of the common stock is $40 per share when the dividend is declared? For a compound transaction, if an amount box does not require an entry, leave it blank.

   

  

  

  

  

  

  

  

  

  

2. What is the appropriate journal entry to record a 20% stock dividend if the market price of the common stock is $40 per share when the dividend is declared?

   

  

  

  

  

3. Conceptual Connection: How do these transactions affect Augusta's total stockholders' equity?

Total stockholders’ equity is Selectincreased decreased unaffected Correct 1 of Item 3 by these transactions.

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1. What is the appropriate journal entry to record a 5% stock dividend if the market price of the common stock is $40 per share when the dividend is declared? For a compound transaction, if an amount box does not require an entry, leave it blank.

   

  

  

  

  

  

  

  

  

  

Explanation / Answer

Total Outstanding shares = 30,000

Treasury shares do not have Voting rights and Dividend rights

Dividend is given on Par value of the common stock and not the Market price

Journal Entries

1. If Dividend is 5%

Dividends Payable A/c / (Dividends) A/c Dr 4,500

To Cash A/c (30,000 x 3 x5%) 4,500

2. If Dividend is 20%

Dividends Payable A/c / (Dividends) A/c Dr 18,000

To Cash A/c (30,000 x 3 x 20%) 18,000

3.

When a corporation declares a cash dividend on its stock, its retained earnings are decreased and its current liabilities (Dividends Payable) are increased. When the cash dividend is paid, the Dividends Payable account is decreased and the corporation's Cash account is decreased.

The net result of the declaration and payment of the dividend is that the corporation's assets and stockholders' equity have decreased. Specifically, the balance sheet accounts Cash and Retained Earnings were decreased.

Therefore, a cash dividend results in a straight reduction of retained earnings resulting the reduction in Stock Holders Equity

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