Stock Dividends The Stockholders\' Equity section of Worthy Company\'s balance s
ID: 2572378 • Letter: S
Question
Stock Dividends
The Stockholders' Equity section of Worthy Company's balance sheet as of January 1, 2017, appeared as follows:
The following transactions occurred during 2017:
Declared a 10% stock dividend to common stockholders on January 15. At the time of the dividend, the common stock was selling for $30 per share. The stock dividend was to be issued to stockholders on January 30, 2017.
Distributed the stock dividend to the stockholders on January 30, 2017.
Required:
1. Identify and analyze the effect of each transaction.
a. Declared a 10% stock dividend to common stockholders on January 15. At the time of the dividend, the common stock was selling for $30 per share. The stock dividend was to be issued to stockholders on January 30, 2017.
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Identify and analyze the transaction by using the following steps:
1. Determine activity – operating, investing or financing.
2. Determine accounts affected and the amount of increases/decreases.
3. Determine the financial statements affected – balance sheet, income statement.
The accounting equation must balance for each transaction.
A stock dividend is the issuance of additional shares of stock to existing shareholders. Although the components of stockholders' equity change, the declaration of a stock dividend does not affect the total stockholders' equity. There is no cash involved in a stock dividend.
Common Stock Dividend Distributable account represents shares of stock to be issued and is therefore an equity account, not a liability account. When a stock dividend is actually distributed, the amount from the Common Stock Dividend Distributable must be transferred to the appropriate stock account.
It must be determined if the stock dividend is a large or small stock dividend. A large stock dividend is a dividend of more than 20 to 25% of the number of shares of stock outstanding. In a large stock dividend, the stock dividend is reported at par value. In a small stock dividend, the stock dividend is reported at fair market value on the date of declaration.
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
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Incorrect
b. Distributed the stock dividend to the stockholders on January 30, 2017.
Feedback
Identify and analyze the transaction by using the following steps:
1. Determine activity – operating, investing or financing.
2. Determine accounts affected and the amount of increases/decreases.
3. Determine the financial statements affected – balance sheet, income statement.
The accounting equation must balance for each transaction.
A stock dividend is the issuance of additional shares of stock to existing shareholders. Although the components of stockholders' equity change, the declaration of a stock dividend does not affect the total stockholders' equity. There is no cash involved in a stock dividend.
Common Stock Dividend Distributable account represents shares of stock to be issued and is therefore an equity account, not a liability account. When a stock dividend is actually distributed, the amount from the Common Stock Dividend Distributable must be transferred to the appropriate stock account.
It must be determined if the stock dividend is a large or small stock dividend. A large stock dividend is a dividend of more than 20 to 25% of the number of shares of stock outstanding. In a large stock dividend, the stock dividend is reported at par value. In a small stock dividend, the stock dividend is reported at fair market value on the date of declaration.
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
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Incorrect
2. Develop the Stockholders' Equity category of Worthy Company's balance sheet as of January 31, 2017, after the stock dividend was issued.
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There are two main components of equity: contributed capital and retained earnings. Both of these components get affected when a stock dividend is declared and issued. However, as one category gets increased; the other gets decreased and the overall effect to equity is none.
These transactions did not change total stockholders' equity. They reclassified some equity from the retained earnings category to the contributed capital category.
Common stock, $10 par, 40,000 shares issued and outstanding $400,000 Additional paid-in capital 100,000 Retained earnings 400,000 Total stockholders’ equity $900,000Explanation / Answer
Activity Finaning Accounts Common stock Increase Additional Paid in Capital Increase Retained Eranings/ Decraese Statement(s) Balance Sheet Balance Sheet Income Statement Stockholders' arrow1.jpg Net Assets = Liabilities + Equity Revenues – Expenses = Income 0 -120000 0 0 0 40000 80000 Dr Cr Common stock dividend Distributable 120000 40000*10%*30 Common stock 40000 Additional Paid in Capital 80000 Retained earnings 120000 Common stock dividend Distributable 120000 After stock dividend the stockholder equity remains same as retained earnings is decreased and common stock and additional capital increases Worth Company Partial Balance Sheet 31-Jan-17 Stockholders' equity Common stock, $10 par, 44,000 shares issued and outstanding 440000 Additional paid-in capital-common stock 180000 Retained earnings 780000 Total stockholders' equity 1400000
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