Question

The stockholders’ equity of TVX Company at the beginning of the day on February 5 follows:

Common stock—\(10 par value, 150,000 shares

authorized, 60,000 shares issued and outstanding . . . . . . . . . . . . . . \) 600,000

Paid-in capital in excess of par value, common stock . . . . . . . . . . . . . . . 425,000

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550,000

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(1,575,000

On February 5, the directors declare a 20% stock dividend distributable on February 28 to the February 15 stockholders of record. The stock’s market value is \)40 per share on February 5 before the stock dividend. The stock’s market value is $33.40 per share on February 28.

1. Prepare entries to record both the dividend declaration and its distribution.

2. One stockholder owned 800 shares on February 5 before the dividend. Compute the book value per share and total book value of this stockholder’s shares immediately before and after the stock dividend of February 5.

3. Compute the total market value of the investor’s shares in part 2 as of February 5 and February 28

Short answer

1. (a) Retained earnings are debited by $480,000 and; Common stock and Paid-in capital are credited by $120,000 and $360,000.

(b) Common Stock Dividend Distributable is debited by $120,000 and; Common stock is credited by $360,000.

2. Book value before a dividend is $21,000

Book value after a dividend is $21,000

3. Market value before a dividend is $32,000

Market value after a dividend is $32,064

Step-by-step solution

Meaning of Retained Earnings

Retained earnings refer to the part of net profit set aside for reinvestment purposes or the declaration of dividends.

Recording of Journal entries

a) Dividend Declaration

Date	Account and Explanation	Debit ($)	Credit ($)
Feb 05	Retained Earnings$\left(12,000\times \$40\right)$	480,000
	Common Stock Dividend Distributable$\left(12,000\times \$10\right)$		120,000
	Paid-In Capital in Excess of Par Value, Common Stock		360,000
	(Declared a 20% stock dividend of 60,000 shares)

Working note:

data-custom-editor="chemistry" $\begin{array}{rcl}\mathbf{Shares}\mathbf{}\mathbf{to}\mathbf{}\mathbf{be}\mathbf{}\mathbf{issued}& \mathbf{=}& \mathbf{60}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{20}\mathbf{\%}\\ & \mathbf{=}& \mathbf{12}\mathbf{,}\mathbf{000}\mathbf{}\mathbf{shares}\end{array}$

b) Date of Payment

Date	Account and Explanation	Debit ($)	Credit ($)
Feb 28	Common Stock Dividend Distributable	120,000
	Common Stock, $10 Par Value		120,000
	(Record issuance of common stock dividend)

Computation of total book Value and book value per share

$\mathrm{Book}\mathrm{Value}\mathrm{Per}\mathrm{Share}=\frac{\mathrm{Stockholder}\text{'}\mathrm{s}\mathrm{equity}\mathrm{applicable}\mathrm{to}\mathrm{common}\mathrm{shares}}{\mathrm{No}\mathrm{of}\mathrm{common}\mathrm{shares}}$

Particulars	Before Dividend	After Dividend
Total shareholders’ equity (A)	$1,575,000	$1,575,000
Issued and distributable shares (B)	60,000	72,000
Book value per share (A/B)	$26.25	$21.875
Shares owned	x800	x960
Total book value of shares	$21,000	$21,000

Working note:

$\begin{array}{rcl}\mathbf{Shares}\mathbf{}\mathbf{owned}\mathbf{}\mathbf{after}& \mathbf{=}& \left(800\times 120\%\right)\\ & \mathbf{=}& \mathbf{960}\end{array}$

Computation of market value

1. Before Dividend – Feb 05

$\begin{array}{rcl}\mathbf{Total}\mathbf{}\mathbf{Market}\mathbf{}\mathbf{value}& \mathbf{=}& \mathbf{shares}\mathbf{}\mathbf{owned}\mathbf{\times }\mathbf{Market}\mathbf{}\mathbf{value}\mathbf{}\mathbf{per}\mathbf{}\mathbf{share}\\ & \mathbf{=}& \mathbf{800}\mathbf{\times }\mathbf{\$}\mathbf{40}\\ & \mathbf{=}& \mathbf{\$}\mathbf{32}\mathbf{,}\mathbf{000}\end{array}$

2. After Dividend – February 28

$\begin{array}{rcl}\mathbf{Total}\mathbf{}\mathbf{Market}\mathbf{}\mathbf{value}& \mathbf{=}& \mathbf{shares}\mathbf{}\mathbf{owned}\mathbf{\times }\mathbf{Market}\mathbf{}\mathbf{value}\mathbf{}\mathbf{per}\mathbf{}\mathbf{share}\\ & \mathbf{=}& \mathbf{960}\mathbf{\times }\mathbf{\$}\mathbf{33}\mathbf{.}\mathbf{40}\\ & \mathbf{=}& \mathbf{\$}\mathbf{32}\mathbf{,}\mathbf{064}\end{array}$