Identifying and Analyzing Financial Statement Effects of Dividends The stockhold

Question

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 4% 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, 28,000 shares authorized; 13,000 shares issued and outstanding $1,300,000 Common stock, $5 par value, 320,000 shares authorized; 80,000 shares issued and outstanding 400,000 Paid-in capital in excess of par value—preferred stock 40,000 Paid-in capital in excess of par value—common stock 480,000 Retained earnings 656,000 Total stockholders' equity $2,876,000

Explanation / Answer

Solution a:

Stock dividend distributed on April 1 is large stock dividend and accounted at par value = 80000*100%*$5 = $400,000

Stock dividend distributed on Dec 7 is small stock dividend and accounted at market value = (80000+80000)*4%*$14 = $89,600

Cash dividend paid on Dec 20 = Preference dividend + Common stock dividend

= ($1,300,000*5%) + (166400*0.80) = $198,120

Solution b:

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

= $656,000 + $253,000 - $400,000 - $89,600 - $198,120 = $221,280

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 $400,000.00 -$400,000.00 7-Dec $0.00 $0.00 $0.00 $89,600.00 -$89,600.00 20-Dec -$198,120.00 $0.00 $0.00 $0.00 -$198,120.00

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