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 ($.30 par value) Capital surplus Retained earnings $ 22,500 295,000 658,120 Total owners' equity $975,620 a-1 If Freya stock currently sells for $30 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

Explanation / Answer

The number of common shares = 22500 / 0.30 = 75000
The total shareholders equity stays same when stock dividends are declared.

Just the Common stock increases by the par value*no of new shares,
Capital surplus is increased by (excess market value-par value)*no of new shares,
and retained earnings decreases by share price*no of new shares


Answer a-1.
The share price is $30 and 20% dividend is declared thus 0.2*30 = $6 is the dividend amount
and the number of shares to eb created = 0.2*75000 = 15000

Answer a-2.
Common Stock = 22500+(0.3*15000) = 27000
Capital Surplus = 295000+((30-0.30)*15000) = 740500
Retained Earnings = 658120-(30*15000) = 208120
Total Owners Equity = 27000+740500+208120 = 975620


Answer b-1.
The share price is $30 and 25% dividend is declared thus 0.25*30 = $7.5 is the dividend amount
and the number of shares to eb created = 0.25*75000 = 18750

Answer b-2.
Common Stock = 22500+(0.3*18750) = 28125
Capital Surplus = 295000+((30-0.30)*18750) = 851875
Retained Earnings = 658120-(30*18750) = 95620
Total Owners Equity = 28125+851875+95620 = 975620

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