Identifying and Analyzing Financial Statement Effects of Dividends The stockhold

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Identifying and Analyzing Financial Statement Effects of Dividends
The stockholders' equity of Kinney Company at December 31, 2011, is shown below.

The following transactions, among others, occurred during 2012:
Apr. 1 Declared and issued a 100% stock dividend on all outstanding shares of common stock. The market value of the stock was $11 per share.
Dec. 7 Declared and issued a 3% stock dividend on all outstanding shares of common stock. The market value of the stock was $14 per share.
Dec. 20 Declared and paid (1) the annual cash dividend on the preferred stock and (2) a cash dividend of 80 cents per common share.

(a) Use the financial statement effects template to indicate the effects of these separate transactions.

Use negative signs with your answers, when appropriate.

Balance Sheet

Contributed

Capital

Earned

Capital

Income Statement

Net

Income

(b) Compute retained earnings for 2012 assuming that the company reports 2012 net income of $253,000.
$Answer

5% preferred stock, $100 par value, 12,000 shares authorized; 5,000 shares issued and outstanding $ 500,000 Common stock, $5 par value, 400,000 shares authorized; 100,000 shares issued and outstanding 500,000 Paid-in capital in excess of par value—preferred stock 40,000 Paid-in capital in excess of par value—common stock 600,000 Retained earnings 656,000 Total stockholders' equity $2,296,000

Explanation / Answer

Solution a:

A small stock dividend is accounted for at market price on the date of declaration. A large stock dividend is accounted for at par value.

Therefore 100% stock dividend will be accounted at par value and 3% stock dividend will be accounted for market value

Solution b:

Retained earnings for 2012 = Opening retained earnings + Net Income - Stock Dividend distributed - Cash dividend distributed

= $656,000 + $253,000 - $584,000 - $189,800 = $135,200

Financial Statement Effect - Kinney Company Balance Sheet Transaction Cash Assets + Non Cash Assets = Liabilities + Contributed Capital + Earned Capital 1-Apr $0.00 $0.00 $0.00 $500,000.00 -$500,000.00 7-Dec $0.00 $0.00 $0.00 $84,000.00 -$84,000.00 20-Dec -$189,800.00 $0.00 $0.00 $0.00 -$189,800.00

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