The owners\' equity accounts for Freya International are shown here: Common stoc

Question

The owners' equity accounts for Freya International are shown here: Common stock ($.60 par value) Capital surplus Retained earnings 37,500 325,000 718,120 Total owners' equity $1,080,620 a-1 If Freya stock currently sells for $20 per share and a 20 percent stock dividend is declared, how many new shares will be distributed? (Do not round intermediate calculations.) New shares issued a-2 Show how the equity accounts would change. (Do not round intermediate calculations.) Common stock Capital surplus Retained earnings Total owners' equity b-1 If instead Freya declared a 25 percent stock dividend, how many new shares will be distributed? (Do not round intermediate calculations.) New shares issued

Explanation / Answer

a-1) New Shares Issue = 12,500 Shares

Working:

No. of Common Stock Out standing = 37,500 / 0.60 = 62,500 Shares

New Shares to be issue = 62500 * 20% = 12,500 Shares

a-2) New Equity Account

Working:

New common Equity = (62500 + 12500) * 0.60 = 45,000

Capital Surplus = 325,000 + (12500 * 19.40) = 567,500

Retained Earning = 718,120 - (12500 * 20) = 468,120

a-1) New Shares Issue = 15,625 Shares

Working:

No. of Common Stock Out standing = 37,500 / 0.60 = 62,500 Shares

New Shares to be issue = 62500 * 25% = 15625 Shares

a-2) New Equity Account

Working:

New common Equity = (62500 + 15625) * 0.60 = 46,875

Capital Surplus = 325,000 + (15625 * 19.40) = 628,125

Retained Earning = 718,120 - (15625 * 20) = 405,620

Common Stock 45,000 Capital Surplus 567,500 Retained Earning 468,120 Total Owners' Equity 1,080,620

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